10-Q 1 a09301810-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 September 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 October 31, 2018, there were 121,770,415 shares of the registrant's common stock outstanding, excluding 1,487,013 shares of unvested restricted stock.


1



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


2


PART I
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
AFX
American Financial Exchange
 
FRBSF
Federal Reserve Bank of San Francisco
ALM
Asset Liability Management
 
IPO
Initial Public Offering
ASC
Accounting Standards Codification
 
IRR
Interest Rate Risk
ASU
Accounting Standards Update
 
LIHTC
Low Income Housing Tax Credit
Basel III
A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013.
 
MBS
Mortgage-Backed Securities
BHCA
Bank Holding Company Act of 1956, as amended
 
MVE
Market Value of Equity
BOLI
Bank Owned Life Insurance
 
NII
Net Interest Income
C&I
Commercial and Industrial
 
NIM
Net Interest Margin
CDI
Core Deposit Intangible Assets
 
Non-PCI
Non-Purchased Credit Impaired
CECL
Current Expected Credit Loss
 
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 interest on certain loans and municipal securities
Efficiency Ratio
Noninterest expense (less intangible asset amortization, net foreclosed assets income/expense, and acquisition, integration and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)
 
TCJA
Tax Cuts and Jobs Act
El Dorado
El Dorado Savings Bank, F.S.B.
 
TDRs
Troubled Debt Restructurings
FASB
Financial Accounting Standards Board
 
TRSAs
Time-Based Restricted Stock Awards
FDIC
Federal Deposit Insurance Corporation
 
U.S. GAAP
U.S. Generally Accepted Accounting Principles
FHLB
Federal Home Loan Bank of San Francisco
 
VIE
Variable Interest Entity
FRB
Board of Governors of the Federal Reserve System
 
 
 


3



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
 
December 31,
 
2018
 
2017
 
(Unaudited)
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
196,502

 
$
233,215

Interest-earning deposits in financial institutions
185,284

 
165,222

Total cash, cash equivalents, and restricted cash
381,786

 
398,437

Securities available-for-sale, at fair value
3,820,333

 
3,774,431

Federal Home Loan Bank stock, at cost
31,077

 
20,790

Total investment securities
3,851,410

 
3,795,221

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

 
481,100

Gross loans and leases held for investment
17,295,589

 
17,032,221

Deferred fees, net
(65,443
)
 
(59,478
)
Allowance for loan and lease losses
(141,920
)
 
(139,456
)
Total loans and leases held for investment, net
17,088,226

 
16,833,287

Equipment leased to others under operating leases
275,707

 
284,631

Premises and equipment, net
34,012

 
31,852

Foreclosed assets, net
4,407

 
1,329

Deferred tax asset, net
41,280

 

Goodwill
2,548,670

 
2,548,670

Core deposit and customer relationship intangibles, net
62,106

 
79,626

Other assets
494,522

 
540,723

Total assets
$
24,782,126

 
$
24,994,876

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
7,834,480

 
$
8,508,044

Interest-bearing deposits
10,045,063

 
10,357,492

Total deposits
17,879,543

 
18,865,536

Borrowings
1,513,166

 
467,342

Subordinated debentures
452,944

 
462,437

Accrued interest payable and other liabilities
194,788

 
221,963

Total liabilities
20,040,441

 
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 September 30, 2018 and
 
 
 
December 31, 2017; 125,132,237 and 130,491,108 shares issued, respectively, includes
 
 
 
1,529,273 and 1,436,120 shares of unvested restricted stock, respectively)
1,251

 
1,305

Additional paid-in capital
3,789,893

 
4,287,487

Retained earnings
1,067,633

 
723,471

Treasury stock, at cost (1,848,787 and 1,708,230 shares at September 30, 2018 and December 31, 2017)
(73,238
)
 
(65,836
)
Accumulated other comprehensive (loss) income, net
(43,854
)
 
31,171

Total stockholders' equity
4,741,685

 
4,977,598

Total liabilities and stockholders' equity
$
24,782,126

 
$
24,994,876

See Notes to Condensed Consolidated Financial Statements.

4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
 
 
 
 
Loans and leases
$
264,062

 
$
260,300

 
$
235,666

 
$
775,447

 
$
694,462

Investment securities
28,061

 
27,730

 
24,762

 
81,929

 
72,490

Deposits in financial institutions
519

 
484

 
538

 
1,555

 
967

Total interest income
292,642

 
288,514

 
260,966

 
858,931

 
767,919

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
21,121

 
16,367

 
13,071

 
51,306

 
31,653

Borrowings
3,814

 
2,649

 
188

 
7,383

 
2,272

Subordinated debentures
7,390

 
7,166

 
6,017

 
21,093

 
17,379

Total interest expense
32,325

 
26,182

 
19,276

 
79,782

 
51,304

Net interest income
260,317

 
262,332

 
241,690

 
779,149

 
716,615

Provision for credit losses
11,500

 
17,500

 
15,119

 
33,000

 
51,346

Net interest income after provision for credit losses
248,817

 
244,832

 
226,571

 
746,149

 
665,269

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges on deposit accounts
3,979

 
4,265

 
3,465

 
12,418

 
10,733

Other commissions and fees
12,397

 
11,767

 
9,944

 
34,429

 
30,917

Leased equipment income
9,120

 
9,790

 
8,332

 
28,497

 
29,442

Gain on sale of loans and leases

 
106

 
2,848

 
4,675

 
4,209

Gain on sale of securities
826

 
253

 
1,236

 
7,390

 
2,788

Other income
10,590

 
13,457

 
5,557

 
27,700

 
23,689

Total noninterest income
36,912

 
39,638

 
31,382

 
115,109

 
101,778

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation
72,333

 
69,913

 
64,413

 
213,269

 
194,581

Occupancy
13,069

 
13,575

 
12,729

 
39,867

 
36,148

Data processing
6,740

 
6,896

 
6,459

 
20,295

 
19,811

Other professional services
6,058

 
5,257

 
4,213

 
15,754

 
11,567

Insurance and assessments
5,446

 
5,330

 
4,702

 
16,503

 
14,349

Intangible asset amortization
5,587

 
5,587

 
3,049

 
17,520

 
9,178

Leased equipment depreciation
5,001

 
5,237

 
4,862

 
15,613

 
15,719

Foreclosed assets (income) expense, net
(257
)
 
(61
)
 
2,191

 
(440
)
 
2,177

Acquisition, integration and reorganization costs
800

 

 
1,450

 
800

 
3,650

Loan expense
2,249

 
3,058

 
3,421

 
7,578

 
10,692

Other expense
11,127

 
11,657

 
11,053

 
35,238

 
34,921

Total noninterest expense
128,153

 
126,449

 
118,542

 
381,997

 
352,793

Earnings before income taxes
157,576

 
158,021

 
139,411

 
479,261

 
414,254

Income tax expense
(41,289
)
 
(42,286
)
 
(37,945
)
 
(128,963
)
 
(140,473
)
Net earnings
$
116,287

 
$
115,735

 
$
101,466

 
$
350,298

 
$
273,781

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.94

 
$
0.92

 
$
0.84

 
$
2.79

 
$
2.26

Diluted
$
0.94

 
$
0.92

 
$
0.84

 
$
2.79

 
$
2.26


See Notes to Condensed Consolidated Financial Statements.

5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Unaudited)
 
(In thousands)
Net earnings
$
116,287

 
$
115,735

 
$
101,466

 
$
350,298

 
$
273,781

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
Unrealized net holding (losses) gains on securities
 
 
 
 
 
 
 
 
 
available-for-sale arising during the period
(29,267
)
 
(14,325
)
 
7,812

 
(106,261
)
 
49,336

Income tax benefit (expense) related to net unrealized
 
 
 
 
 
 
 
 
 
holding (losses) gains arising during the period
8,344

 
4,102

 
(3,198
)
 
30,377

 
(20,055
)
Unrealized net holding (losses) gains on securities
 
 
 
 
 
 
 
 
 
available-for-sale, net of tax
(20,923
)
 
(10,223
)
 
4,614

 
(75,884
)
 
29,281

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings (1)
(826
)
 
(253
)
 
(1,236
)
 
(7,390
)
 
(2,788
)
Income tax expense (benefit) related to reclassification
 
 
 
 
 
 
 
 
 
adjustment
235

 
72

 
506

 
2,113

 
1,138

Reclassification adjustment for net (gains) losses
 
 
 
 
 
 
 
 
 
included in net earnings, net of tax
(591
)
 
(181
)
 
(730
)
 
(5,277
)
 
(1,650
)
Other comprehensive (loss) income, net of tax
(21,514
)
 
(10,404
)
 
3,884

 
(81,161
)
 
27,631

Comprehensive income
$
94,773

 
$
105,331

 
$
105,350

 
$
269,137

 
$
301,412

___________________________________ 
(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 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
Nine Months Ended September 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

 

 

 
118,276

 

 

 
118,276

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

 

 

 

 

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

 
1

 
7,198

 

 

 

 
7,199

Restricted stock surrendered
(55,186
)
 

 

 

 
(2,858
)
 

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

 

 

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

 

 
(63,689
)
 

 

 

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

 
1,283

 
4,111,226

 
835,611

 
(68,694
)
 
(11,936
)
 
4,867,490

Net earnings

 

 

 
115,735

 

 

 
115,735

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

 

 

 

 

 
(10,404
)
 
(10,404
)
Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
398,132

 
4

 
7,542

 

 

 

 
7,546

Restricted stock surrendered
(81,172
)
 

 

 

 
(4,332
)
 

 
(4,332
)
Common stock repurchased under
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Repurchase Program
(2,286,881
)
 
(23
)
 
(122,001
)
 

 

 

 
(122,024
)
Cash dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.60/share

 

 
(76,052
)
 

 

 

 
(76,052
)
Balance, June 30, 2018
124,567,950

 
1,264

 
3,920,715

 
951,346

 
(73,026
)
 
(22,340
)
 
4,777,959

Net earnings

 

 

 
116,287

 

 

 
116,287

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

 

 

 

 

 
(21,514
)
 
(21,514
)
Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
(3,803
)
 

 
8,137

 

 

 

 
8,137

Restricted stock surrendered
(4,199
)
 

 

 

 
(212
)
 

 
(212
)
Common stock repurchased under
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Repurchase Program
(1,276,498
)
 
(13
)
 
(64,564
)
 

 

 

 
(64,577
)
Cash dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.60/share

 

 
(74,395
)
 

 

 

 
(74,395
)
Balance, September 30, 2018
123,283,450

 
$
1,251

 
$
3,789,893

 
$
1,067,633

 
$
(73,238
)
 
$
(43,854
)
 
$
4,741,685

________________________
(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 CHANGES IN STOCKHOLDERS' EQUITY

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

 
$
1,228

 
$
4,162,132

 
$
366,073

 
$
(56,360
)
 
$
5,982

 
$
4,479,055

Cumulative effect of change in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principle (1)

 

 
711

 
(420
)
 

 

 
291

Net earnings

 

 

 
78,668

 

 

 
78,668

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

 

 

 

 

 
6,736

 
6,736

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

 
2

 
6,468

 

 

 

 
6,470

Restricted stock surrendered
(41,184
)
 

 

 

 
(2,281
)
 

 
(2,281
)
Cash dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.50/share

 

 
(60,833
)
 

 

 

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

 
1,230

 
4,108,478

 
444,321

 
(58,641
)
 
12,718

 
4,508,106

Net earnings

 

 

 
93,647

 

 

 
93,647

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

 

 

 

 

 
17,011

 
17,011

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
147,850

 
1

 
7,248

 

 

 

 
7,249

Restricted stock surrendered
(107,662
)
 

 

 

 
(5,277
)
 

 
(5,277
)
Cash dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.50/share

 

 
(60,831
)
 

 

 

 
(60,831
)
Balance, June 30, 2017
121,448,321

 
1,231

 
4,054,895

 
537,968

 
(63,918
)
 
29,729

 
4,559,905

Net earnings

 

 

 
101,466

 

 

 
101,466

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

 

 

 

 

 
3,884

 
3,884

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
6,365

 

 
6,479

 

 

 

 
6,479

Restricted stock surrendered
(4,892
)
 

 

 

 
(235
)
 

 
(235
)
Cash dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.50/share

 

 
(60,831
)
 

 

 

 
(60,831
)
Balance, September 30, 2017
121,449,794

 
$
1,231

 
$
4,000,543

 
$
639,434

 
$
(64,153
)
 
$
33,613

 
$
4,610,668

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


8



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2018
 
2017
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
350,298

 
$
273,781

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
25,788

 
23,798

Amortization of net premiums on securities available-for-sale
19,489

 
30,238

Amortization of intangible assets
17,520

 
9,178

Provision for credit losses
33,000

 
51,346

Loss (gain) on sale of foreclosed assets
35

 
(282
)
Provision for losses on foreclosed assets
65

 
2,138

Gain on sale of loans and leases
(4,675
)
 
(4,209
)
Gain on sale of premises and equipment
(13
)
 
(388
)
Gain on sale of securities
(7,390
)
 
(2,788
)
Gain on BOLI death benefit
(437
)
 
(1,050
)
Unrealized loss (gain) on derivatives and foreign currencies, net
76

 
(449
)
Earned stock compensation
22,882

 
20,198

(Increase) decrease in deferred income taxes, net
(8,790
)
 
10,164

Decrease (increase) in other assets
52,275

 
(32,765
)
Decrease in accrued interest payable and other liabilities
(36,303
)
 
(20,738
)
Net cash provided by operating activities
463,820

 
358,172

 
 
 
 
Cash flows from investing activities:
 
 
 
Net increase in loans and leases
(446,880
)
 
(567,291
)
Proceeds from sales of loans and leases
646,587

 
293,808

Proceeds from maturities and paydowns of securities available-for-sale
231,474

 
329,876

Proceeds from sales of securities available-for-sale
500,101

 
185,533

Purchases of securities available-for-sale
(910,298
)
 
(804,710
)
Net (purchases) redemptions of Federal Home Loan Bank stock
(10,287
)
 
4,620

Proceeds from sales of foreclosed assets
57

 
1,455

Purchases of premises and equipment, net
(9,250
)
 
(5,892
)
Proceeds from sales of premises and equipment
49

 
10,306

Proceeds from BOLI death benefit
1,901

 
2,478

Net decrease in equipment leased to others under operating leases
(6,000
)
 
(17,956
)
Net cash used in investing activities
(2,546
)
 
(567,773
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net (decrease) increase in noninterest-bearing deposits
(671,016
)
 
255,874

Net (decrease) increase in interest-bearing deposits
(312,429
)
 
649,776

Net increase (decrease) in borrowings
1,045,824

 
(655,413
)
Net decrease in subordinated debentures
(12,372
)
 

Common stock repurchased and restricted stock surrendered
(313,796
)
 
(7,793
)
Cash dividends paid
(214,136
)
 
(182,495
)
Net cash (used in) provided by financing activities
(477,925
)
 
59,949

 
 
 
 
Net decrease in cash, cash equivalents, and restricted cash
(16,651
)
 
(149,652
)
Cash, cash equivalents, and restricted cash, beginning of period
398,437

 
419,670

Cash, cash equivalents, and restricted cash, end of period
$
381,786

 
$
270,018



See Notes to Condensed Consolidated Financial Statements.


9



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2018
 
2017
 
(Unaudited)
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
78,884

 
$
48,402

Cash paid for income taxes
62,525

 
146,321

Loans transferred to foreclosed assets
3,235

 
580

Transfers from loans held for investment to loans held for sale

 
175,158

  

See Notes to Condensed Consolidated Financial Statements.


10



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


NOTE 1.  ORGANIZATION    
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. At September 30, 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 numerous 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 September 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.
El Dorado Savings Bank Merger Announcement
On September 11, 2018, PacWest entered into a definitive agreement and plan of merger (the “Agreement”) whereby PacWest will acquire El Dorado Savings Bank, F.S.B. (“El Dorado”) in a transaction valued at approximately $466.7 million.
El Dorado, headquartered in Placerville, California, is a federally chartered savings bank founded in 1958, with approximately $2.2 billion in assets and 35 branches located primarily in eight Northern California counties and two Northern Nevada counties. In connection with the transaction, El Dorado will be merged into the Bank.
The transaction, which was approved by the PacWest and El Dorado boards of directors, is expected to close in the first quarter of 2019 and is subject to customary closing conditions, including obtaining approval by bank regulatory authorities and El Dorado’s shareholders.

11



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


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.
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.

12



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


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.
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.

13



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


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 three quarters 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 three quarters 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.
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.








14



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


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.
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 nine months ended September 30, 2018 and year ended December 31, 2017 were $76.9 million and $77.6 million. As of September 30, 2018 and December 31, 2017, we pledged cash collateral for our derivative contracts of $2.3 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 the 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 our current 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.

15



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


The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
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

 

 
(2,190
)
 

 
(2,190
)
Balance, end of period
119,497

 
119,497

 
61,997

 
119,497

 
61,997

Accumulated Amortization:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
(51,804
)
 
(46,217
)
 
(33,950
)
 
(39,871
)
 
(27,821
)
Amortization
(5,587
)
 
(5,587
)
 
(3,049
)
 
(17,520
)
 
(9,178
)
Fully amortized portion

 

 
2,190

 

 
2,190

Balance, end of period
(57,391
)
 
(51,804
)
 
(34,809
)
 
(57,391
)
 
(34,809
)
Net CDI and CRI, end of period
$
62,106

 
$
67,693

 
$
27,188

 
$
62,106

 
$
27,188

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:
 
September 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
$
251,150

 
$
1,971

 
$
(3,290
)
 
$
249,831

 
$
243,375

 
$
3,743

 
$
(844
)
 
$
246,274

Agency CMOs
583,062

 
220

 
(13,677
)
 
569,605

 
277,638

 
968

 
(2,897
)
 
275,709

Private label CMOs
110,353

 
2,699

 
(2,602
)
 
110,450

 
122,816

 
3,813

 
(642
)
 
125,987

Municipal securities
1,272,501

 
10,974

 
(11,892
)
 
1,271,583

 
1,627,707

 
53,700

 
(1,339
)
 
1,680,068

Agency commercial MBS
1,117,749

 

 
(40,744
)
 
1,077,005

 
1,169,969

 
2,758

 
(8,758
)
 
1,163,969

U.S. Treasury securities
400,591

 

 
(2,960
)
 
397,631

 

 

 

 

SBA securities
69,999

 

 
(2,413
)
 
67,586

 
160,214

 
695

 
(575
)
 
160,334

Asset-backed securities
59,322

 
18

 
(888
)
 
58,452

 
89,425

 
159

 
(874
)
 
88,710

Corporate debt securities
17,000

 
1,190

 

 
18,190

 
17,000

 
2,295

 

 
19,295

Collateralized loan obligations

 

 

 

 
6,960

 
55

 

 
7,015

Equity investments (1)

 

 

 

 
6,421

 
779

 
(130
)
 
7,070

Total
$
3,881,727

 
$
17,072

 
$
(78,466
)
 
$
3,820,333

 
$
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 September 30, 2018, securities available-for-sale with a fair value of $427.8 million were pledged as collateral for borrowings, public deposits, and other purposes as required by various statutes and agreements.

16



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


Realized Gains and Losses on Securities Available-for-Sale
During the three months ended September 30, 2018, we sold $130.5 million of securities available-for-sale for a gross realized gain of $958,000 and a gross realized loss of $132,000. During the three months ended September 30, 2017, we sold $98.3 million of securities available-for-sale for a gross realized gain of $1.3 million and a gross realized loss of $119,000.
During the nine months ended September 30, 2018, we sold $492.7 million of securities available-for-sale for a gross realized gain of $8.1 million and a gross realized loss of $707,000. During the nine months ended September 30, 2017, we sold $182.7 million of securities available-for-sale for a gross realized gain of $3.3 million and a gross realized loss of $498,000.
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:
 
September 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
$
76,238

 
$
(1,332
)
 
$
51,861

 
$
(1,958
)
 
$
128,099

 
$
(3,290
)
Agency CMOs
401,795

 
(6,418
)
 
140,997

 
(7,259
)
 
542,792

 
(13,677
)
Private label CMOs
46,713

 
(1,101
)
 
34,654

 
(1,501
)
 
81,367

 
(2,602
)
Municipal securities
436,012

 
(8,743
)
 
55,402

 
(3,149
)
 
491,414

 
(11,892
)
Agency commercial MBS
784,452

 
(26,454
)
 
292,553

 
(14,290
)
 
1,077,005

 
(40,744
)
U.S. Treasury securities
397,631

 
(2,960
)
 

 

 
397,631

 
(2,960
)
SBA securities
32,867

 
(1,143
)
 
34,719

 
(1,270
)
 
67,586

 
(2,413
)
Asset-backed securities
20,815

 
(147
)
 
35,278

 
(741
)
 
56,093

 
(888
)
Total
$
2,196,523

 
$
(48,298
)
 
$
645,464

 
$
(30,168
)
 
$
2,841,987

 
$
(78,466
)
 
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.



17



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


We reviewed the securities that were in an unrealized loss position at September 30, 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:
 
September 30, 2018
 
Amortized
 
Fair
Maturities
Cost
 
Value
 
(In thousands)
Due in one year or less
$
39,300

 
$
39,272

Due after one year through five years
716,172

 
707,368

Due after five years through ten years
970,758

 
937,317

Due after ten years
2,155,497

 
2,136,376

Total securities available-for-sale
$
3,881,727

 
$
3,820,333

Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Taxable interest
$
17,618

 
$
17,106

 
$
13,576

 
$
49,323

 
$
39,257

Non-taxable interest
10,127

 
10,276

 
10,795

 
31,510

 
31,926

Dividend income
316

 
348

 
391

 
1,096

 
1,307

Total interest income on investment securities
$
28,061

 
$
27,730

 
$
24,762

 
$
81,929

 
$
72,490


18



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:
 
September 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
$
7,695,182

 
$
7,815,355

 
$
53,658

 
$
7,869,013

Real estate construction and land
2,026,645

 
1,611,287

 

 
1,611,287

Commercial
7,175,310

 
7,137,978

 
4,158

 
7,142,136

Consumer
398,452

 
409,551

 
234

 
409,785

Total gross loans and leases held for investment
17,295,589

 
16,974,171

 
58,050

 
17,032,221

Deferred fees, net
(65,443
)
 
(59,464
)
 
(14
)
 
(59,478
)
Total loans and leases held for investment,
 
 
 
 
 
 
 
net of deferred fees
17,230,146

 
16,914,707

 
58,036

 
16,972,743

Allowance for loan and lease losses
(141,920
)
 
(133,012
)
 
(6,444
)
 
(139,456
)
Total loans and leases held for investment, net
$
17,088,226

 
$
16,781,695

 
$
51,592

 
$
16,833,287



19



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:
 
September 30, 2018
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
2,221

 
$
8,949

 
$
11,170

 
$
4,921,653

 
$
4,932,823

Residential
5,647

 
445

 
6,092

 
2,739,745

 
2,745,837

Total real estate mortgage
7,868

 
9,394

 
17,262

 
7,661,398

 
7,678,660

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
854,346

 
854,346

Residential
8,498

 

 
8,498

 
1,138,113

 
1,146,611

Total real estate construction and land
8,498

 

 
8,498

 
1,992,459

 
2,000,957

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based

 
655

 
655

 
3,221,656

 
3,222,311

Venture capital
1,028

 
497

 
1,525

 
2,030,370

 
2,031,895

Other commercial
222

 
3,724

 
3,946

 
1,893,906

 
1,897,852

Total commercial
1,250

 
4,876

 
6,126

 
7,145,932

 
7,152,058

Consumer
605

 
45

 
650

 
397,821

 
398,471

Total
$
18,221

 
$
14,315

 
$
32,536

 
$
17,197,610

 
$
17,230,146


 
December 31, 2017 (1)
 
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.

20



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:  
 
September 30, 2018
 
December 31, 2017 (1)
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
29,723

 
$
4,903,100

 
$
4,932,823

 
$
65,563

 
$
5,295,924

 
$
5,361,487

Residential
3,259

 
2,742,578

 
2,745,837

 
3,350

 
2,434,154

 
2,437,504

Total real estate mortgage
32,982

 
7,645,678

 
7,678,660

 
68,913

 
7,730,078

 
7,798,991

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
854,346

 
854,346

 

 
769,075

 
769,075

Residential

 
1,146,611

 
1,146,611

 

 
822,154

 
822,154

Total real estate construction and land

 
2,000,957

 
2,000,957

 

 
1,591,229

 
1,591,229

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
34,619

 
3,187,692

 
3,222,311

 
33,553

 
2,891,318

 
2,924,871

Venture capital
35,520

 
1,996,375

 
2,031,895

 
29,424

 
2,093,287

 
2,122,711

Other commercial
9,579

 
1,888,273

 
1,897,852

 
23,874

 
2,043,464

 
2,067,338

Total commercial
79,718

 
7,072,340

 
7,152,058

 
86,851

 
7,028,069

 
7,114,920

Consumer
272

 
398,199

 
398,471

 
20

 
409,547

 
409,567

Total
$
112,972

 
$
17,117,174

 
$
17,230,146

 
$
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 September 30, 2018, nonaccrual loans and leases totaled $113.0 million and included $14.3 million of loans and leases 90 or more days past due, $1.6 million of loans and leases 30 to 89 days past due, and $97.0 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 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 September 30, 2018, our ten largest loan relationships on nonaccrual status had an aggregate carrying value of $83.2 million and represented 73.7% of total nonaccrual loans and leases.

21



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.
 
September 30, 2018
 
Classified
 
Special Mention
 
Pass
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
64,574

 
$
140,611

 
$
4,727,638

 
$
4,932,823

Residential
11,254

 
12,036

 
2,722,547

 
2,745,837

Total real estate mortgage
75,828

 
152,647

 
7,450,185

 
7,678,660

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
442

 
3,833

 
850,071

 
854,346

Residential

 
24,645

 
1,121,966

 
1,146,611

Total real estate construction and land
442

 
28,478

 
1,972,037

 
2,000,957

Commercial:
 
 
 
 
 
 
 
Asset-based
42,960

 
64,778

 
3,114,573

 
3,222,311

Venture capital
47,230

 
65,295

 
1,919,370

 
2,031,895

Other commercial
93,564

 
47,164

 
1,757,124

 
1,897,852

Total commercial
183,754

 
177,237

 
6,791,067

 
7,152,058

Consumer
435

 
1,696

 
396,340

 
398,471

Total
$
260,459

 
$
360,058

 
$
16,609,629

 
$
17,230,146


 
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.

22



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:
 
September 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
$
32,982

 
$
15,296

 
$
48,278

 
$
68,913

 
$
47,560

 
$
116,473

Real estate construction and land

 
5,533

 
5,533

 

 
5,690

 
5,690

Commercial
79,718

 
1,166

 
80,884

 
86,851

 
3,488

 
90,339

Consumer
272

 
111

 
383

 
20

 
100

 
120

Total
$
112,972

 
$
22,106

 
$
135,078

 
$
155,784

 
$
56,838

 
$
212,622

________________________
(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)


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:
 
September 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
$
1,781

 
$
1,682

 
$
225

 
$
15,750

 
$
16,548

 
$
628

Residential
2,495

 
2,536

 
271

 
2,787

 
2,957

 
342

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Venture capital
34,515

 
36,149

 
19,003

 
16,565

 
17,203

 
4,267

Other commercial
1,360

 
1,361

 
1,360

 
20,404

 
29,951

 
8,368

Consumer

 

 

 
100

 
100

 
16

With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
36,087

 
$
54,497

 
 
 
$
93,827

 
$
105,923

 
 
Residential
7,915

 
10,172

 
 
 
4,109

 
4,481

 
 
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
5,533

 
5,537

 
 
 
5,690

 
5,689

 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
34,618

 
40,085

 
 
 
33,553

 
54,911

 
 
Venture capital
1,421

 
26,853

 
 
 
14,534

 
40,029

 
 
Other commercial
8,970

 
28,343

 
 
 
5,283

 
9,351

 
 
Consumer
383

 
547

 
 
 
20

 
93

 
 
Total Loans and Leases With
 
 
 
 
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Real estate mortgage
$
48,278

 
$
68,887

 
$
496

 
$
116,473

 
$
129,909

 
$
970

Real estate construction and land
5,533

 
5,537

 

 
5,690

 
5,689

 

Commercial
80,884

 
132,791

 
20,363

 
90,339

 
151,445

 
12,635

Consumer
383

 
547

 

 
120

 
193

 
16

Total
$
135,078

 
$
207,762

 
$
20,859

 
$
212,622

 
$
287,236

 
$
13,621

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

24



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


 
Three Months Ended September 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
$
1,781

 
$
18

 
$
14,716

 
$
214

Residential
2,494

 
21

 
3,074

 
14

Commercial:
 
 
 
 
 
 
 
Venture capital
28,322

 

 
18,298

 

Other commercial
1,360

 

 
33,486

 
31

Consumer

 

 
106

 
2

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
34,155

 
$
129

 
$
92,183

 
$
635

Residential
7,906

 
45

 
3,670

 
15

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
5,533

 
95

 
5,764

 
74

Commercial:
 
 
 
 
 
 
 
Asset-based
34,618

 

 
31,086

 

Venture capital
1,421

 

 
2,647

 

Other commercial
8,108

 
25

 
3,695

 
40

Consumer
383

 
2

 
296

 

Total Loans and Leases With
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
46,336

 
$
213

 
$
113,643

 
$
878

Real estate construction and land
5,533

 
95

 
5,764

 
74

Commercial
73,829

 
25

 
89,212

 
71

Consumer
383

 
2

 
402

 
2

Total
$
126,081

 
$
335

 
$
209,021

 
$
1,025

_________________________
(1)
For loans and leases reported as impaired at September 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)


 
Nine Months Ended September 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
$
1,781

 
$
55

 
$
14,716

 
$
634

Residential
2,494

 
62

 
3,074

 
41

Commercial:
 
 
 
 
 
 
 
Venture capital
17,459

 

 
9,621

 

Other commercial
688

 

 
33,193

 
88

Consumer

 

 
106

 
6

With No Related Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
32,098

 
$
376

 
$
90,631

 
$
1,924

Residential
7,845

 
132

 
3,650

 
44

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
5,533

 
283

 
5,764

 
220

Commercial:
 
 
 
 
 
 
 
Asset-based
34,618

 

 
30,682

 

Venture capital
1,330

 

 
1,922

 

Other commercial
7,417

 
70

 
3,044

 
68

Consumer
373

 
6

 
296

 

Total Loans and Leases With
 
 
 
 
 
 
 
and Without an Allowance Recorded:
 
 
 
 
 
 
 
Real estate mortgage
$
44,218

 
$
625

 
$
112,071

 
$
2,643

Real estate construction and land
5,533

 
283

 
5,764

 
220

Commercial
61,512

 
70

 
78,462

 
156

Consumer
373

 
6

 
402

 
6

Total
$
111,636

 
$
984

 
$
196,699

 
$
3,025

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








26



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 September 30,
 
2018
 
2017
 
 
 
Pre-
 
Post-
 
 
 
Pre-
 
Post-
 
 
 
Modification
 
Modification
 
 
 
Modification
 
Modification
 
Number
 
Outstanding
 
Outstanding
 
Number
 
Outstanding
 
Outstanding
 
of
 
Recorded
 
Recorded
 
of
 
Recorded
 
Recorded
Troubled Debt Restructurings
Loans
 
Investment
 
Investment
 
Loans
 
Investment
 
Investment
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
4

 
$
2,889

 
$
712

 
1

 
$
998

 
$
998

Residential
5

 
912

 
912

 
3

 
566

 
10

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based (1)
4

 
28,947

 
33,947

 

 

 

Venture capital
5

 
23,501

 
23,501

 
4

 
15,308

 
15,308

Other commercial
5

 
1,487

 
1,115

 
5

 
12,146

 
2,910

Total
23

 
$
57,736

 
$
60,187

 
13

 
$
29,018

 
$
19,226

 
Nine Months Ended September 30,
 
2018
 
2017
 
 
 
Pre-
 
Post-
 
 
 
Pre-
 
Post-
 
 
 
Modification
 
Modification
 
 
 
Modification
 
Modification
 
Number
 
Outstanding
 
Outstanding
 
Number
 
Outstanding
 
Outstanding
 
of
 
Recorded
 
Recorded
 
of
 
Recorded
 
Recorded
Troubled Debt Restructurings
Loans
 
Investment
 
Investment
 
Loans
 
Investment
 
Investment
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
4

 
$
2,889

 
$
712

 
5

 
$
2,527

 
$
2,463

Residential
8

 
2,616

 
1,557

 
8

 
1,328

 
489

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 
1

 
362

 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based (1)
4

 
28,947

 
33,947

 
2

 
665

 
665

Venture capital
9

 
28,737

 
28,737

 
9

 
28,465

 
28,465

Other commercial
9

 
13,301

 
12,929

 
17

 
30,153

 
20,918

Consumer
1

 
27

 
27

 
1

 
97

 
97

Total
35

 
$
76,517

 
$
77,909

 
43

 
$
63,597

 
$
53,097

_________________________
(1)
One commercial asset-based loan with a pre-modification balance of $27.3 million and a post-modification balance of $32.3 million was a restructuring of a loan secured by oil services equipment that was originally restructured in 2015 after being placed on nonaccrual status. The loan has since been extended four times, the last in the fourth quarter of 2017. As part of the current restructuring, additional funds were advanced in exchange for the receipt of additional equipment collateral and a partial personal guaranty.
 
In the three and nine months ended September 30, 2018, there were no loans restructured in the preceding 12-month period which subsequently defaulted after being restructured. In the three and nine months ended September 30, 2017, there were no loans restructured in the preceding 12-month period which subsequently defaulted after being restructured.

27



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 September 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
$
45,467

 
$
26,210

 
$
58,806

 
$
1,656

 
$
132,139

Charge-offs
(726
)
 

 
(2,372
)
 
(210
)
 
(3,308
)
Recoveries
222

 
23

 
1,303

 
41

 
1,589

Net (charge-offs) recoveries
(504
)
 
23

 
(1,069
)
 
(169
)
 
(1,719
)
Provision (negative provision)
1,394

 
(47
)
 
9,907

 
246

 
11,500

Balance, end of period
$
46,357

 
$
26,186

 
$
67,644

 
$
1,733

 
$
141,920


 
Nine Months Ended September 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
(8,071
)
 

 
(25,321
)
 
(304
)
 
(33,696
)
Recoveries
1,999

 
49

 
7,702

 
136

 
9,886

Net (charge-offs) recoveries
(6,072
)
 
49

 
(17,619
)
 
(168
)
 
(23,810
)
Provision (negative provision)
12,378

 
13,082

 
1,241

 
(427
)
 
26,274

Balance, end of period
$
46,357

 
$
26,186

 
$
67,644

 
$
1,733

 
$
141,920

 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
496

 
$

 
$
20,363

 
$

 
$
20,859

Collectively evaluated for impairment
$
45,861

 
$
26,186

 
$
47,281

 
$
1,733

 
$
121,061

 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
44,985

 
$
5,533

 
$
79,493

 
$

 
$
130,011

Collectively evaluated for impairment
7,633,675

 
1,995,424

 
7,072,565

 
398,471

 
17,100,135

Ending balance
$
7,678,660

 
$
2,000,957

 
$
7,152,058

 
$
398,471

 
$
17,230,146


28



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


 
Three Months Ended September 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
$
37,122

 
$
11,318

 
$
88,364

 
$
2,075

 
$
138,879

 
$
7,079

 
$
145,958

Charge-offs
(531
)
 

 
(4,984
)
 
(413
)
 
(5,928
)
 
(79
)
 
(6,007
)
Recoveries
36

 
353

 
4,447

 
29

 
4,865

 
217

 
5,082

Net (charge-offs) recoveries
(495
)
 
353

 
(537
)
 
(384
)
 
(1,063
)
 
138

 
(925
)
Provision (negative provision)
(186
)
 
22

 
14,366

 
752

 
14,954

 
(381
)
 
14,573

Balance, end of period
$
36,441

 
$
11,693

 
$
102,193

 
$
2,443

 
$
152,770

 
$
6,836

 
$
159,606


 
Nine Months Ended September 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
(2,217
)
 

 
(46,965
)
 
(625
)
 
(49,807
)
 
(5,768
)
 
(55,575
)
Recoveries
286

 
370

 
8,848

 
104

 
9,608

 
275

 
9,883

Net (charge-offs) recoveries
(1,931
)
 
370

 
(38,117
)
 
(521
)
 
(40,199
)
 
(5,493
)
 
(45,692
)
Provision (negative provision)
607

 
1,278

 
46,457

 
872

 
49,214

 
(1,154
)
 
48,060

Balance, end of period
$
36,441

 
$
11,693

 
$
102,193

 
$
2,443

 
$
152,770

 
$
6,836

 
$
159,606

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Allowance by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
1,153

 
$

 
$
15,012

 
$
17

 
$
16,182

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
35,288

 
$
11,693

 
$
87,181

 
$
2,426

 
$
136,588

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
6,836

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Loans and Leases by
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairment Methodology:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
$
113,304

 
$
5,764

 
$
94,078

 
$
106

 
$
213,252

 
 
 
 
Collectively evaluated for
 
 
 
 
 
 
 
 
 
 
 
 
 
impairment
6,017,892

 
1,243,458

 
7,767,614

 
385,807

 
15,414,771

 
 
 
 
Acquired loans with
 
 
 
 
 
 
 
 
 
 
 
 
 
deteriorated credit quality
 
 
 
 
 
 
 
 
 
 
$
62,494

 
 
Ending balance
$
6,131,196

 
$
1,249,222

 
$
7,861,692

 
$
385,913

 
$
15,628,023

 
$
62,494

 
$
15,690,517




29



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 and reserve for unfunded loan commitments for the periods indicated:
 
Three Months Ended September 30, 2018
 
Allowance for
 
Reserve for
 
Total
 
Loan and
 
Unfunded Loan
 
Allowance for
 
Lease Losses
 
Commitments
 
Credit Losses
 
(In thousands)
Balance, beginning of period
$
132,139

 
$
35,361

 
$
167,500

Charge-offs
(3,308
)
 

 
(3,308
)
Recoveries
1,589

 

 
1,589

Net charge-offs
(1,719
)
 

 
(1,719
)
Provision
11,500

 

 
11,500

Balance, end of period
$
141,920

 
$
35,361

 
$
177,281

 
Nine Months Ended September 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
(33,696
)
 

 
(33,696
)
Recoveries
9,886

 

 
9,886

Net charge-offs
(23,810
)
 

 
(23,810
)
Provision
26,274

 
6,726

 
33,000

Balance, end of period
$
141,920

 
$
35,361

 
$
177,281


 
Three Months Ended September 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
$
138,879

 
$
20,263

 
$
159,142

 
$
7,079

 
$
166,221

Charge-offs
(5,928
)
 

 
(5,928
)
 
(79
)
 
(6,007
)
Recoveries
4,865

 

 
4,865

 
217

 
5,082

Net (charge-offs) recoveries
(1,063
)
 

 
(1,063
)
 
138

 
(925
)
Provision (negative provision)
14,954

 
546

 
15,500

 
(381
)
 
15,119

Balance, end of period
$
152,770

 
$
20,809

 
$
173,579

 
$
6,836

 
$
180,415


30



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


 
Nine Months Ended September 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
(49,807
)
 

 
(49,807
)
 
(5,768
)
 
(55,575
)
Recoveries
9,608

 

 
9,608

 
275

 
9,883

Net charge-offs
(40,199
)
 

 
(40,199
)
 
(5,493
)
 
(45,692
)
Provision (negative provision)
49,214

 
3,286

 
52,500

 
(1,154
)
 
51,346

Balance, end of period
$
152,770

 
$
20,809

 
$
173,579

 
$
6,836

 
$
180,415

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

 
$
219

Multi‑family
1,059

 

Single family residence
953

 
1,019

Commercial real estate
2,176

 
64

Total other real estate owned, net
4,407

 
1,302

Other foreclosed assets

 
27

Total foreclosed assets, net
$
4,407

 
$
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
3,235

Provision for losses
(65
)
Reductions related to sales
(92
)
Balance, September 30, 2018
$
4,407


31



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:
 
September 30,
 
December 31,
Other Assets
2018
 
2017
 
(In thousands)
Cash surrender value of BOLI
$
195,547

 
$
193,917

Interest receivable
82,980

 
82,935

Taxes receivable
30,491

 
98,998

CRA investments
56,396

 
49,432

LIHTC investments
55,356

 
39,235

Equity investments without readily determinable fair values
14,731

 
14,856

Equity investments with readily determinable fair values
6,552

 

Prepaid expenses
19,341

 
17,800

Other
33,128

 
43,550

Total other assets
$
494,522

 
$
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 nine months ended September 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 September 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, often from the exercise of warrants, 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 $33.1 million at September 30, 2018 consists of, among other things, other receivables, equity warrants, and derivative assets.

32



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:
 
September 30, 2018
 
December 31, 2017
 
 
 
Weighted
 
 
 
Weighted
 
 
 
Average
 
 
 
Average
 
Amount
 
Rate
 
Amount
 
Rate
 
(Dollars in thousands)
Non‑recourse debt
$
166

 
7.23
%
 
$
342

 
6.87
%
FHLB secured advances
1,135,000

 
2.33
%
 
332,000

 
1.41
%
FHLB unsecured overnight advance
143,000

 
2.30
%
 
135,000

 
1.34
%
AFX borrowings
235,000

 
2.34
%
 

 
%
Total borrowings
$
1,513,166

 
 
 
$
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 September 30, 2018, this debt had a weighted average remaining maturity of 1.1 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 September 30, 2018 of $3.6 billion, collateralized by a blanket lien on $5.2 billion of certain qualifying loans. As of September 30, 2018, the balance outstanding was a $1.1 billion 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 September 30, 2018, the Bank had secured borrowing capacity of $2.1 billion collateralized by liens covering $2.8 billion of certain qualifying loans. As of September 30, 2018 and December 31, 2017, there were no balances outstanding.
FHLB Unsecured Line of Credit. The Bank has a $143.0 million unsecured line of credit with the FHLB for the purchase of overnight funds, of which $143.0 million was outstanding at September 30, 2018. At December 31, 2017, the balance outstanding was $135.0 million.
Federal Funds Arrangements with Commercial Banks. As of September 30, 2018, the Bank had unsecured lines of credit of $125.0 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 September 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 September 30, 2018, the balance outstanding was $235.0 million, which consisted of a $225.0 million overnight borrowing and a $10.0 million one-month borrowing with a maturity date of October 29, 2018. As of December 31, 2017, there was no balance outstanding.

33



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:
 
September 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

 
5.38
%
 
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

 
5.09
%
 
61,856

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

 
4.02
%
 
20,619

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

 
3.93
%
 
16,495

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

 
3.88
%
 
10,310

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

 
4.28
%
 
82,475

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

 
4.29
%
 
128,866

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

 
4.29
%
 
51,545

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

 
4.29
%
 
51,550

 
3.33
%
 
9/27/2006
 
10/30/2036
 
3 month LIBOR + 1.95
Trust CS 2006-3 (1)
29,909

 
1.69
%
 
30,986

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

 
4.29
%
 
16,470

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

 
4.29
%
 
6,650

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

 
4.29
%
 
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
541,697

 
 
 
555,146

 
 
 
 
 
 
 
 
Unamortized discount (3)
(88,753
)
 
 
 
(92,709
)
 
 
 
 
 
 
 
 
Net subordinated debentures
$
452,944

 
 
 
$
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.

34



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 that 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:
 
September 30,
 
December 31,
 
2018
 
2017
 
(In thousands)
Loan commitments to extend credit
$
7,055,833

 
$
6,234,061

Standby letters of credit
335,651

 
320,063

Total
$
7,391,484

 
$
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 September 30, 2018 and December 31, 2017, we had commitments to contribute capital to these entities totaling $104.6 million and $62.6 million. We also had commitments to contribute up to an additional $403,000 and $2.5 million to private equity funds at September 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.

35



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


NOTE 11.  FAIR VALUE MEASUREMENTS
ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three‑level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument. This category generally includes municipal securities, agency residential and commercial MBS, collateralized loan obligations, registered publicly rated private label CMOs, corporate debt securities, SBA securities, and asset-backed securitizations.
Level 3: Inputs to a valuation methodology that are unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category also includes observable inputs from a pricing service not corroborated by observable market data, and includes our non-rated private label CMOs, non-rated private label asset-backed securities, and equity warrants.
The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily securities available‑for‑sale and derivatives. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long‑lived assets.
The following tables present information on the assets and liabilities measured and recorded at fair value on a recurring basis as of the dates indicated:
 
Fair Value Measurements as of
 
September 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
$
249,831

 
$

 
$
249,831

 
$

Agency CMOs
569,605

 

 
569,605

 

Private label CMOs
110,450

 

 
97,327

 
13,123

Municipal securities
1,271,583

 

 
1,271,583

 

Agency commercial MBS
1,077,005

 

 
1,077,005

 

U.S. Treasury securities
397,631

 
397,631

 

 

SBA securities
67,586

 

 
67,586

 

Asset-backed securities
58,452

 

 
29,353

 
29,099

Corporate debt securities
18,190

 

 
18,190

 

Total securities available-for-sale
3,820,333

 
397,631

 
3,380,480

 
42,222

Equity warrants
4,962

 

 

 
4,962

Other derivative assets
2,072

 

 
2,072

 

Equity investments with readily determinable fair values
6,552

 
6,552

 

 

Total recurring assets
$
3,833,919

 
$
404,183

 
$
3,382,552

 
$
47,184

Derivative liabilities
$
468

 
$

 
$
468

 
$


36



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 nine months ended September 30, 2018, there was a $75,000 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:
 
September 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
4.8% - 30.5%
 
9.4%
 
5% - 15%
 
14.2%
Annual default rates
0.0% - 25.3%
 
2.2%
 
1% - 2%
 
1.9%
Loss severity rates
5.2% - 135.5%
 
47.3%
 
10% - 60%
 
55.9%
Discount rates
2.2% - 10.5%
 
6.2%
 
3.2% - 4.3%
 
3.6%



37



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:
 
September 30, 2018
 
Equity Warrants
 
Weighted
 
Average
Unobservable Inputs
Input
Volatility
16.3%
Risk-free interest rate
2.9%
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
595

 
(35
)
 
5,291

Total included in other comprehensive income
(511
)
 
220

 

Issuances

 

 
557

Sales and dispositions (1)

 

 
(5,972
)
Net settlements
(9,835
)
 
(13,195
)
 

Transfers to Level 1

 

 
(75
)
Balance, September 30, 2018
$
13,123

 
$
29,099

 
$
4,962

______________________
(1)
Includes the exercise of warrants that upon exercise become equity securities in public companies. These are often subject to lock-up restrictions that must be met before the equity security can be sold, during which time they are reported as equity investments with readily determinable fair values.
The following tables present assets measured at fair value on a non‑recurring basis as of the dates indicated:
 
Fair Value Measurement as of
 
September 30, 2018
Measured on a Non‑Recurring Basis
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Impaired loans
$
41,103

 
$

 
$
15,423

 
$
25,680

OREO
953

 

 
953

 

Total non-recurring
$
42,056

 
$

 
$
16,376

 
$
25,680

 
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


38



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
 
Nine Months Ended
Losses on Assets
September 30,
 
September 30,
Measured on a Non‑Recurring Basis
2018
 
2017
 
2018
 
2017
 
(In thousands)
Impaired loans (1)
$
14,347

 
$
4,427

 
$
31,351

 
$
17,895

OREO

 
2,124

 
65

 
2,124

Total losses
$
14,347

 
$
6,551

 
$
31,416

 
$
20,019

__________________________
(1)
Losses for 2018 periods relate to total loans. Losses for 2017 periods relate 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:
 
 
September 30, 2018
 
 
 
 
Valuation
 
Unobservable
 
 
 
Weighted
Asset
 
Fair Value
 
Technique
 
Inputs
 
Range
 
Average
 
 
(In thousands)
 
 
 
 
 
 
 
 
Impaired loans
 
$
12,531

 
Discounted cash flows
 
Discount rates
 
3.75% - 7.75%
 
6.81%
Impaired loans
 
6,819

 
Internal enterprise value methodology
 
(1)
 
(1)
 
(1)
Impaired loans
 
6,330

 
Third party appraisals
 
No discounts
 
 
 
 
Total non-recurring Level 3
 
$
25,680

 
 
 
 
 
 
 
 
__________________________
(1)
In determining the fair value of these loans, we used different factors related to each borrower. These factors are specific to each borrower and a weighted average value or range of values of the unobservable inputs is not meaningful.
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.

39



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:
 
September 30, 2018
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
196,502

 
$
196,502

 
$
196,502

 
$

 
$

Interest‑earning deposits in financial institutions
185,284

 
185,284

 
185,284

 

 

Securities available‑for‑sale
3,820,333

 
3,820,333

 
397,631

 
3,380,480

 
42,222

Investment in FHLB stock
31,077

 
31,077

 

 
31,077

 

Loans and leases held for investment, net
17,088,226

 
16,876,611

 

 
15,423

 
16,861,188

Equity warrants
4,962

 
4,962

 

 

 
4,962

Other derivative assets
2,072

 
2,072

 

 
2,072

 

Equity investments with readily determinable fair values
6,552

 
6,552

 
6,552

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Core deposits
15,512,742

 
15,512,742

 

 
15,512,742

 

Non-core non-maturity deposits
483,528

 
483,528

 

 
483,528

 

Time deposits
1,883,273

 
1,894,024

 

 
1,894,024

 

Borrowings
1,513,166

 
1,513,163

 
1,503,000

 
10,163

 

Subordinated debentures
452,944

 
435,505

 

 
435,505

 

Derivative liabilities
468

 
468

 

 
468

 


 
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

 


40



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 September 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
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share data)
Basic Earnings Per Share:
 
 
 
 
 
 
 
 
 
Net earnings
$
116,287

 
$
115,735

 
$
101,466

 
$
350,298

 
$
273,781

Less: Earnings allocated to unvested restricted stock(1)
(1,428
)
 
(1,348
)
 
(1,149
)
 
(3,899
)
 
(3,239
)
Net earnings allocated to common shares
$
114,859

 
$
114,387

 
$
100,317

 
$
346,399

 
$
270,542

 
 
 
 
 
 
 
 
 
 
Weighted-average basic shares and unvested restricted
 
 
 
 
 
 
 
 
 
stock outstanding
123,657

 
126,082

 
121,447

 
125,728

 
121,405

Less: Weighted-average unvested restricted stock
 
 
 
 
 
 
 
 
 
outstanding
(1,537
)
 
(1,466
)
 
(1,394
)
 
(1,473
)
 
(1,450
)
Weighted-average basic shares outstanding
122,120

 
124,616

 
120,053

 
124,255

 
119,955

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.94

 
$
0.92

 
$
0.84

 
$
2.79

 
$
2.26

 
 
 
 
 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
 
Net earnings allocated to common shares
$
114,859

 
$
114,387

 
$
100,317

 
$
346,399

 
$
270,542

 
 
 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
122,120

 
124,616

 
120,053

 
124,255

 
119,955

 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.94

 
$
0.92

 
$
0.84

 
$
2.79

 
$
2.26

________________________
(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.

41



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 September 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.

42



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 September 30, 2018
 
Nine Months Ended September 30, 2018
 
Total
 
Revenue from
 
Total
 
Revenue from
 
Recorded
 
Contracts with
 
Recorded
 
Contracts with
 
Revenue
 
Customers
 
Revenue
 
Customers
 
(In thousands)
Total interest income
$
292,642

 
$

 
$
858,931

 
$

Noninterest income:
 
 
 
 
 
 
 
   Service charges on deposit accounts
3,979

 
3,979

 
12,418

 
12,418

   Other commissions and fees
12,397

 
4,767

 
34,429

 
14,519

   Leased equipment income
9,120

 

 
28,497

 

   Gain on sale of loans

 

 
4,675

 

   Gain on sale of securities
826

 

 
7,390

 

   Other income
10,590

 
444

 
27,700

 
1,341

      Total noninterest income
36,912

 
9,190

 
115,109

 
28,278

Total revenue
$
329,554

 
$
9,190

 
$
974,040

 
$
28,278

The following table presents revenue from contracts with customers based on the timing of revenue recognition for the period indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2018
 
(In thousands)
Products and services transferred at a point in time
$
4,604

 
$
14,195

Products and services transferred over time
4,586

 
14,083

Total revenue from contracts with customers
$
9,190

 
$
28,278

Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
 
September 30, 2018
 
(In thousands)
Receivables, which are included in "Other assets"
$
1,701

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

Contract liabilities, which are included in "Interest payable and other liabilities"
$
654

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 nine months ended September 30, 2018 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $98,000.

43



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 September 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 September 30, 2018, there were 3,138,923 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 $8.1 million, $6.9 million, and $6.5 million for the three months ended September 30, 2018, June 30, 2018, and September 30, 2017, and $22.3 million and $19.6 million for the nine months ended September 30, 2018 and 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 September 30, 2018 totaled $59.3 million.
Time-Based Restricted Stock Awards
At September 30, 2018, there were 1,529,273 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 September 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.

44



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 allows 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 and will elect the optional transition method and recognize a cumulative-effect adjustment to retained earnings upon adoption. In addition, the Company will be electing a number of practical expedients permitted under the new standard including carrying forward the historical lease classification and accounting for non-lease and lease components together as a single lease component, and not recognizing a right-of-use asset and lease liability for short-term leases.
The primary impact of the new standard to the Company relates to 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 changes to our processes, procedures, and internal controls. While the ultimate quantitative impact of adoption will not be known until adoption, based on the lease population as of September 30, 2018, the Company anticipates recording lease right-of-use assets and liabilities of approximately $120 to $140 million on its consolidated balance sheet, with no material impact to its consolidated statements of earnings. However, the ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease population and discount rates as of the adoption date. From a lessor perspective, the Company anticipates recognizing more sales-type leases that are currently accounted for as direct financing leases. The change in the definition of initial direct costs to include only incremental direct costs will also result in an acceleration of certain operating costs. Given the limited changes to lessor accounting, the Company does not expect material changes to its consolidated financial statements for the lessor accounting changes.
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 past and current events and conditions along with reasonable and supportable forecasts that may affect expected collectability. The new standard will add new disclosure requirements and impact the Company’s processes and internal controls over financial reporting.
The Company has established a multidisciplinary project team and implementation plan, selected a software solution, developed a conceptual framework, and is engaged in the implementation phase of the project. The Company, with the assistance of a third party adviser, continues to work on: (1) developing a new expected loss model with supportable assumptions, (2) identifying data, reporting, and drafting future disclosures, (3) assessing updates to accounting policies, and (4) documenting new processes and controls.
The Company expects to begin testing and sensitivity analysis on its initial modeling assumptions and results in the first quarter of 2019. 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.

45



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


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.
In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which simplifies the accounting for share-based payments granted to nonemployees for goods and services by aligning with the requirements for share-based payments granted to employees. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial position or results of operations.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurements,” which changes the fair value measurement disclosure requirements of ASC 820. ASU 2018-13 must be applied prospectively and is effective for the Company on January 1, 2020. Early adoption is permitted. The Company does not expect ASU 2018-13 to have a material impact on its consolidated financial position or results of operations.
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FASB Emerging Issues Task Force)," which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. ASU 2018-15 is effective for the Company on January 1, 2020 and the Company has the option to adopt the new standard either prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. Early adoption is permitted. The Company does not expect ASU 2018-15 to have a material impact on its consolidated financial position or results of operations.
NOTE 16. SUBSEQUENT EVENTS
Common Stock Dividends
On November 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 November 30, 2018 to stockholders of record at the close of business on November 20, 2018.
The Company has evaluated events that have occurred subsequent to September 30, 2018 and have concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.


46



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This Form 10-Q contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our pending acquisition of El Dorado, capital management, including reducing excess capital, intentions to expand the Bank’s lending business; net interest income, net interest margin, allowance for loan and lease losses, deposit growth, loan and lease portfolio growth and production, liquidity, profitability, goodwill and intangible assets, interest rate risk management, and effective tax rates. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:
our ability to complete future acquisitions, including the pending El Dorado acquisition, and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
our ability to obtain regulatory approvals and meet other closing conditions to the pending El Dorado acquisition on the expected terms and schedule;
changes in our stock price before completion of the pending El Dorado acquisition, including as a result of the financial performance of the Company or El Dorado prior to closing;
the reaction to the pending El Dorado acquisition of the companies' customers, employees and counterparties;
our ability to compete effectively against other financial service providers in our markets;
the impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolios;
deterioration, weaker than expected improvement, or other changes in the state of the economy or the markets in which we conduct business (including the levels of initial public offerings and mergers and acquisitions), which may affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans;
changes in credit quality and the effect of credit quality on our provision for credit losses and allowance for loan and lease losses;
our ability to attract deposits and other sources of funding or liquidity;
the need to retain capital for strategic or regulatory reasons;
compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases, 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 of capital requirements, and increased political and regulatory uncertainty;
the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
higher than anticipated increases in operating expenses;
lower than expected dividends paid from the Bank to the holding company;
a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge;
the effectiveness of our risk management framework and quantitative models;

47


the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
the impact of changes made to tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and
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 September 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 numerous 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 87.1% of our net revenue (net interest income plus noninterest income).
At September 30, 2018, we had total assets of $24.8 billion, including $17.2 billion of total loans and leases, net of deferred fees, and $3.8 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 $212.8 million decrease in total assets since year-end was due primarily to a $223.7 million decrease in loans and leases, offset partially by a $45.9 million increase in securities available-for-sale. The decrease in loans and leases was driven mostly by payoffs and paydowns of $5.8 billion and sales of $641.9 million, including settlement of the loans held for sale at December 31, 2017, offset partially by production of $3.3 billion and disbursements of $2.9 billion. The increase in securities available-for-sale was due mainly to purchases exceeding sales, principal paydowns, maturities, and other reductions.

48



At September 30, 2018, we had total liabilities of $20.0 billion, including total deposits of $17.9 billion and borrowings of $1.5 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 $23.2 million increase in total liabilities since year-end was due mainly to a $1.0 billion increase in borrowings, primarily short-term FHLB advances, offset partially by a $424.3 million decrease in core deposits, a $379.7 million decrease in non-core non-maturity deposits, and a $182.0 million decrease in time deposits. At September 30, 2018, core deposits totaled $15.5 billion, or 87% of total deposits, and time deposits totaled $1.9 billion, or 10% of total deposits.
At September 30, 2018, we had total stockholders' equity of $4.7 billion compared to $5.0 billion at December 31, 2017. The $235.9 million decrease in stockholders' equity since year-end was due mainly to $306.4 million of common stock repurchased under the Stock Repurchase Program, $214.1 million of cash dividends paid, and a $75.0 million decline in accumulated other comprehensive income, offset partially by $350.3 million in net earnings. Consolidated capital ratios remained strong with Tier 1 capital and total capital ratios of 10.18% and 13.03% at September 30, 2018.
Recent Events
El Dorado Savings Bank Merger Announcement
On September 11, 2018, PacWest entered into a definitive agreement and plan of merger (the “Agreement”) whereby PacWest will acquire El Dorado Savings Bank, F.S.B. (“El Dorado”) in a transaction valued at approximately $466.7 million.
El Dorado, headquartered in Placerville, California, is a federally chartered savings bank founded in 1958, with approximately $2.2 billion in assets and 35 branches located primarily in eight Northern California counties and two Northern Nevada counties. In connection with the transaction, El Dorado will be merged into the Bank.
The transaction, which was approved by the PacWest and El Dorado boards of directors, is expected to close in the first quarter of 2019 and is subject to customary closing conditions, including obtaining approval by bank regulatory authorities and El Dorado’s shareholders.
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 third quarter of 2018, we repurchased 1,276,498 shares of common stock for a total amount of $64.6 million at an average price of $50.59. During the nine months ended September 30, 2018, we repurchased 5,849,234 shares of common stock for a total amount of $306.4 million at an average price of $52.38. All shares repurchased under the Stock Repurchase Program were retired upon settlement. At September 30, 2018, the remaining amount that could be used to repurchase shares under the Stock Repurchase Program was $110.1 million.

49



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 the 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 entered into an agreement to sell $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.

50


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.
Net interest income is affected by changes in both interest rates and the volume of average interest‑earning assets and interest‑bearing liabilities. Our primary interest‑earning assets are loans and investment securities, and our primary interest‑bearing liabilities are deposits. Contributing to our high net interest margin is our high yield on loans and leases and competitive cost of deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we seek to minimize the impact of these variances by attracting a high percentage of noninterest‑bearing deposits.
Loan and Lease Growth
We actively seek new lending opportunities under an array of lending products. Our lending activities include real estate mortgage loans, real estate construction and land loans, commercial loans and leases, and a small amount of consumer lending. Our commercial real estate loans and real estate construction loans are secured by a range of property types. Our commercial loans are diverse and generally include various asset-secured loans, equipment-secured loans and leases, venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial companies during the various phases of their early life cycles, secured business loans originated through our community banking 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. At September 30, 2018, our largest commitment was $155.0 million and we had six commitments each of $150.0 million. These commitments were for equity fund loans, lender finance loans, and commercial construction loans. We price loans to preserve our interest spread and maintain our net interest margin. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified and nonperforming assets and net charge‑offs. We maintain an allowance for credit losses on loans and leases, which is the sum of our allowance for loan and lease losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off‑balance sheet credit exposure. Loans and leases which are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology which considers various credit performance measures such as historical and current net charge‑offs, the levels and trends of 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.


51


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
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Efficiency Ratio
2018
 
2018
 
2017
 
2018
 
2017
 
 
(Dollars in thousands)
Noninterest expense
$
128,153

 
$
126,449

 
$
118,542

 
$
381,997

 
$
352,793

Less:
Intangible asset amortization
5,587

 
5,587

 
3,049

 
17,520

 
9,178

 
Foreclosed assets (income) expense, net
(257
)
 
(61
)
 
2,191

 
(440
)
 
2,177

 
Acquisition, integration and reorganization costs
800

 

 
1,450

 
800

 
3,650

      Noninterest expense used for efficiency ratio
$
122,023

 
$
120,923

 
$
111,852

 
$
364,117

 
$
337,788

 
 
 
 
 
 
 
 
 
 
 
Net interest income (tax equivalent)
$
262,276

 
$
264,798

 
$
246,575

 
$
785,546

 
$
731,132

Noninterest income
36,912

 
39,638

 
31,382

 
115,109

 
101,778

Net revenues
299,188

 
304,436

 
277,957

 
900,655

 
832,910

Less:
Gain on sale of securities
826

 
253

 
1,236

 
7,390

 
2,788

Net revenues used for efficiency ratio
$
298,362

 
$
304,183

 
$
276,721

 
$
893,265

 
$
830,122

 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio
40.9
%
 
39.8
%
 
40.4
%
 
40.8
%
 
40.7
%
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates relate to the allowance for credit losses on loans and leases held for investment, accounting for business combinations, and the realization of deferred income tax assets and liabilities. For further information, refer to our Annual Report on Form 10‑K for the year ended December 31, 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.

52


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, 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 look-back period was extended to capture 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.
The methodology to estimate specific reserves for individually evaluated impaired loans did not change. The 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 ALLL estimate.

 









53



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
 
Nine Months Ended
 
 
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Return on Average Tangible Equity
2018
 
2018
 
2017
 
2018
 
2017
 
 
 
(Dollars in thousands)
Net earnings
 
$
116,287

 
$
115,735

 
$
101,466

 
$
350,298

 
$
273,781

 
 
 
 
 
 
 
 
 
 
 
 
Average stockholders' equity
 
$
4,748,819

 
$
4,832,480

 
$
4,592,489

 
$
4,826,944

 
$
4,547,472

Less:
Average intangible assets
 
2,614,055

 
2,619,351

 
2,202,922

 
2,619,624

 
2,205,927

Average tangible common equity
 
$
2,134,764

 
$
2,213,129

 
$
2,389,567

 
$
2,207,320

 
$
2,341,545

 
 
 
 
 
 
 
 
 
 
 
 
Return on average equity (1)
 
9.72
%
 
9.61
%
 
8.77
%
 
9.70
%
 
8.05
%
Return on average tangible equity (2)
 
21.61
%
 
20.98
%
 
16.85
%
 
21.22
%
 
15.63
%
___________________________________
(1)
Annualized net earnings divided by average stockholders' equity.
(2)
Annualized net earnings divided by average tangible common equity.

Tangible Common Equity Ratio/
September 30,
 
December 31,
Tangible Book Value Per Share
2018
 
2017
 
(Dollars in thousands, except per share data)
Stockholders’ equity
$
4,741,685

 
$
4,977,598

Less: Intangible assets
2,610,776

 
2,628,296

Tangible common equity
$
2,130,909

 
$
2,349,302

 
 
 
 
Total assets
$
24,782,126

 
$
24,994,876

Less: Intangible assets
2,610,776

 
2,628,296

Tangible assets
$
22,171,350

 
$
22,366,580

 
 
 
 
Equity to assets ratio
19.13
%
 
19.91
%
Tangible common equity ratio (1)
9.61
%
 
10.50
%
Book value per share
$
38.46

 
$
38.65

Tangible book value per share (2)
$
17.28

 
$
18.24

Shares outstanding
123,283,450

 
128,782,878

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


54


Results of Operations
Earnings Performance
The following table presents performance metrics for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands, except per share data)
Earnings Summary:
 
 
 
 
 
 
 
 
 
Net interest income
$
260,317

 
$
262,332

 
$
241,690

 
$
779,149

 
$
716,615

Provision for credit losses
(11,500
)
 
(17,500
)
 
(15,119
)
 
(33,000
)
 
(51,346
)
Noninterest income
36,912

 
39,638

 
31,382

 
115,109

 
101,778

Noninterest expense
(128,153
)
 
(126,449
)
 
(118,542
)
 
(381,997
)
 
(352,793
)
Earnings before income taxes
157,576

 
158,021

 
139,411

 
479,261

 
414,254

Income tax expense
(41,289
)
 
(42,286
)
 
(37,945
)
 
(128,963
)
 
(140,473
)
Net earnings
$
116,287

 
$
115,735

 
$
101,466

 
$
350,298

 
$
273,781

 
 
 
 
 
 
 
 
 
 
Performance Measures:
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.94

 
$
0.92

 
$
0.84

 
$
2.79

 
$
2.26

Annualized return on:
 
 
 
 
 
 
 
 
 
Average assets
1.89
%
 
1.93
%
 
1.82
%
 
1.94
%
 
1.67
%
Average tangible equity (1)(2)
21.61
%
 
20.98
%
 
16.85
%
 
21.22
%
 
15.63
%
Net interest margin (tax equivalent)
4.99
%
 
5.18
%
 
5.08
%
 
5.09
%
 
5.15
%
Efficiency ratio
40.9
%
 
39.8
%
 
40.4
%
 
40.8
%
 
40.7
%
_____________________________
(1)
Calculation reduces average stockholder's equity by average intangible assets.
(2)
See "- Non-GAAP Measurements."
Third Quarter of 2018 Compared to Second Quarter of 2018
Net earnings for the third quarter of 2018 were $116.3 million, or $0.94 per diluted share, compared to net earnings for the second quarter of 2018 of $115.7 million, or $0.92 per diluted share. The $0.6 million increase in net earnings from the prior quarter was due primarily to a lower provision for credit losses, offset partially by lower net interest income and lower noninterest income. The provision for credit losses decreased by $6.0 million in the third quarter of 2018 compared to the second quarter of 2018 due mainly to a lower level of loans rated special mention and a decrease in the provision related to the reserve for unfunded loan commitments. Net interest income declined by $2.0 million in the third quarter of 2018 compared to the second quarter of 2018 due mostly to higher deposit costs and a lower yield on average loans and leases, offset partially by a higher balance of average loans and leases. Noninterest income decreased by $2.7 million in the third quarter of 2018 compared to the second quarter of 2018 due primarily to a $6.4 million decline in other income, offset partially by a $2.6 million increase in warrant income and a $0.9 million increase in dividends and gains on equity investments.

55


Third Quarter of 2018 Compared to Third Quarter of 2017
Net earnings for the third quarter of 2018 were $116.3 million, or $0.94 per diluted share, compared to net earnings for the third quarter of 2017 of $101.5 million, or $0.84 per diluted share. The $14.8 million increase in net earnings was due mainly to higher net interest income of $18.6 million, higher noninterest income of $5.5 million, and a lower provision for credit losses of $3.6 million, offset partially by higher noninterest expense of $9.6 million. The increase in net interest income was due mostly to higher balances of average loans and leases and average investment securities 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 warrant income of $3.1 million and higher other commissions and fees of $2.5 million. The decrease in the provision for credit losses was due principally to the reduction in special mention loans during the third quarter of 2018, while special mention loans increased during the third quarter of 2017. The increase in noninterest expense was due mainly to higher compensation expense of $7.9 million and higher intangible asset amortization of $2.5 million attributable to the intangible assets added from the CUB acquisition.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net earnings for the nine months ended September 30, 2018 were $350.3 million, or $2.79 per diluted share, compared to net earnings for the nine months ended September 30, 2017 of $273.8 million, or $2.26 per diluted share. The $76.5 million increase in net earnings was due primarily to higher net interest income of $62.5 million, a lower provision for credit losses of $18.3 million, higher noninterest income of $13.3 million, and lower income tax expense of $11.5 million, offset partially by higher noninterest expense of $29.2 million. The increase in net interest income was due mainly to higher balances of average loans and leases and average investment securities 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 the provision for credit losses was due primarily to lower general reserve provisions for the first nine months of 2018 attributable to a lower level of cash flow loans in the portfolio during 2018 due mostly to the exit of cash flow lending at the end of 2017. The increase in noninterest income was due mainly to a higher gain on sale of securities of $4.6 million, higher warrant income of $3.6 million, and higher other commissions and fees of $3.5 million. The decrease in income tax expense was due primarily to the TCJA which reduced our effective tax rate to 26.9% for the nine months ended September 30, 2018 from 33.9% for the nine months ended September 30, 2017. The increase in noninterest expense was due mostly to higher compensation expense of $18.7 million, higher intangible asset amortization of $8.3 million, attributable to the intangible assets added from the CUB acquisition, and higher other professional services expense of $4.2 million.

56


Net Interest Income
The following tables summarize the distribution of average assets, liabilities and stockholders’ equity, as well as interest income and yields earned on average interest‑earning assets and interest expense and rates paid on average interest‑bearing liabilities, presented on a tax equivalent basis, for the periods indicated:
 
Three Months Ended
 
September 30, 2018
 
June 30, 2018
 
September 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)
$
16,913,792

$
264,371

6.20
%
 
$
16,576,361

$
260,529

6.30
%
 
$
15,575,030

$
235,818

6.01
%
Investment securities (3)
3,844,201

29,711

3.07
%
 
3,803,590

29,967

3.16
%
 
3,510,956

29,495

3.33
%
Deposits in financial institutions
108,485

519

1.90
%
 
112,170

484

1.73
%
 
171,455

538

1.24
%
Total interest‑earning assets (4)
20,866,478

294,601

5.60
%
 
20,492,121

290,980

5.70
%
 
19,257,441

265,851

5.48
%
Other assets
3,491,293

 
 
 
3,507,516

 
 
 
2,880,433

 
 
Total assets
$
24,357,771

 
 
 
$
23,999,637

 
 
 
$
22,137,874

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Interest checking deposits
$
2,433,837

5,135

0.84
%
 
$
2,243,767

3,932

0.70
%
 
$
2,146,125

2,960

0.55
%
Money market deposits
5,270,297

10,689

0.80
%
 
5,013,119

8,072

0.65
%
 
4,914,803

6,307

0.51
%
Savings deposits
629,241

233

0.15
%
 
656,310

245

0.15
%
 
707,367

289

0.16
%
Time deposits
1,778,552

5,064

1.13
%
 
1,790,415

4,118

0.92
%
 
2,256,259

3,515

0.62
%
Total interest‑bearing deposits
10,111,927

21,121

0.83
%
 
9,703,611

16,367

0.68
%
 
10,024,554

13,071

0.52
%
Borrowings
720,449

3,814

2.10
%
 
549,665

2,649

1.93
%
 
61,071

188

1.22
%
Subordinated debentures
452,312

7,390

6.48
%
 
451,973

7,166

6.36
%
 
447,012

6,017

5.34
%
Total interest‑bearing liabilities
11,284,688

32,325

1.14
%
 
10,705,249

26,182

0.98
%
 
10,532,637

19,276

0.73
%
Noninterest‑bearing demand deposits
8,120,306

 
 
 
8,253,413

 
 
 
6,858,816

 
 
Other liabilities
203,958

 
 
 
208,495

 
 
 
153,932

 
 
Total liabilities
19,608,952

 
 
 
19,167,157

 
 
 
17,545,385

 
 
Stockholders’ equity
4,748,819

 
 
 
4,832,480

 
 
 
4,592,489

 
 
Total liabilities and
 
 
 
 
 
 
 
 
 
 
 
stockholders' equity
$
24,357,771

 
 
 
$
23,999,637

 
 
 
$
22,137,874

 
 
Net interest income (4)
 
$
262,276

 
 
 
$
264,798

 
 
 
$
246,575

 
Net interest rate spread (4)
 
 
4.46
%
 
 
 
4.72
%
 
 
 
4.75
%
Net interest margin (4)
 
 
4.99
%
 
 
 
5.18
%
 
 
 
5.08
%
 
 
 
 
 
 
 
 
 
 
 
 
Total deposits (5)
$
18,232,233

$
21,121

0.46
%
 
$
17,957,024

$
16,367

0.37
%
 
$
16,883,370

$
13,071

0.31
%
Funding sources (6)
$
19,404,994

$
32,325

0.66
%
 
$
18,958,662

$
26,182

0.55
%
 
$
17,391,453

$
19,276

0.44
%
_____________________
(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 $6.1 million, $8.7 million, and $5.5 million for the three months ended September 30, 2018, June 30, 2018, and September 30, 2017, respectively.
(3)
Includes tax-equivalent adjustments of $1.5 million, $2.1 million, and $4.7 million for the three months ended September 30, 2018, June 30, 2018, and September 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.

57


 
Nine Months Ended
 
September 30, 2018
 
September 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)
$
16,724,942

$
776,160

6.20
%
 
$
15,457,683

$
694,614

6.01
%
Investment securities (3)
3,779,007

87,613

3.10
%
 
3,402,658

86,855

3.41
%
Deposits in financial institutions
123,622

1,555

1.68
%
 
123,023

967

1.05
%
Total interest‑earning assets (4)
20,627,571

865,328

5.61
%
 
18,983,364

782,436

5.51
%
Other assets
3,516,331

 
 
 
2,925,110

 
 
Total assets
$
24,143,902

 
 
 
$
21,908,474

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Interest checking deposits
$
2,330,310

12,117

0.70
%
 
$
1,789,435

5,824

0.44
%
Money market deposits
5,108,029

25,573

0.67
%
 
4,896,639

15,710

0.43
%
Savings deposits
656,703

736

0.15
%
 
709,080

883

0.17
%
Time deposits
1,830,444

12,880

0.94
%
 
2,289,771

9,236

0.54
%
Total interest‑bearing deposits
9,925,486

51,306

0.69
%
 
9,684,925

31,653

0.44
%
Borrowings
504,898

7,383

1.96
%
 
369,953

2,272

0.82
%
Subordinated debentures
455,277

21,093

6.19
%
 
444,117

17,379

5.23
%
Total interest‑bearing liabilities
10,885,661

79,782

0.98
%
 
10,498,995

51,304

0.65
%
Noninterest‑bearing demand deposits
8,227,576

 
 
 
6,701,135

 
 
Other liabilities
203,721

 
 
 
160,872

 
 
Total liabilities
19,316,958

 
 
 
17,361,002

 
 
Stockholders’ equity
4,826,944

 
 
 
4,547,472

 
 
Total liabilities and
 
 
 
 
 
 
 
stockholders' equity
$
24,143,902

 
 
 
$
21,908,474

 
 
Net interest income (4)
 
$
785,546

 
 
 
$
731,132

 
Net interest rate spread (4)
 
 
4.63
%
 
 
 
4.86
%
Net interest margin (4)
 
 
5.09
%
 
 
 
5.15
%
 
 
 
 
 
 
 
 
Total deposits (5)
$
18,153,062

$
51,306

0.38
%
 
$
16,386,060

$
31,653

0.26
%
Funding sources (6)
$
19,113,237

$
79,782

0.56
%
 
$
17,200,130

$
51,304

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 $22.4 million and $19.4 million for the nine months ended September 30, 2018 and 2017, respectively.
(3)
Includes tax-equivalent adjustments of $5.4 million and $14.4 million for the nine months ended September 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.

58


Third Quarter of 2018 Compared to Second Quarter of 2018
Net interest income decreased by $2.0 million to $260.3 million for the third quarter of 2018 compared to $262.3 million for the second quarter of 2018 due to interest expense growth exceeding interest income growth. Interest expense increased due mainly to higher deposit costs and one additional day in the third quarter. Interest income increased due primarily to a higher balance of average loans and leases and one additional day in the third quarter, offset partially by a lower yield on average loans and leases. The tax equivalent yield on average loans and leases was 6.20% for the third quarter of 2018 compared to 6.30% for the second quarter of 2018. The decrease in the yield on average loans and leases was due principally to lower discount accretion on acquired loans (14 basis points in the third quarter of 2018 compared to 21 basis points in the second quarter of 2018).
The tax equivalent NIM was 4.99% for the third quarter of 2018 compared to 5.18% for the second quarter of 2018. The decrease in the tax equivalent NIM was due mainly to higher deposit costs and a lower yield on average loans and leases resulting from lower discount accretion on acquired loans. The taxable equivalent adjustment for tax-exempt interest income on municipal securities contributed three basis points to the tax equivalent NIM for the third quarter of 2018 and four basis points for the second quarter of 2018.
The cost of average total deposits increased to 0.46% for the third quarter of 2018 from 0.37% for the second quarter of 2018 due to higher rates paid on deposits in conjunction with increased market interest rates.
Third Quarter of 2018 Compared to Third Quarter of 2017
Net interest income increased by $18.6 million to $260.3 million for the third quarter of 2018 compared to $241.7 million for the third quarter of 2017 due mainly to higher balances of average loans and leases and average investment securities 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 6.20% for the third quarter of 2018 compared to 6.01% 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 three increases in market interest rates during the first nine months of 2018 and three increases in market interest rates during 2017.
The tax equivalent NIM was 4.99% for the third quarter of 2018 compared to 5.08% 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 five 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. The taxable equivalent adjustment for tax-exempt interest income on municipal securities contributed three basis points to the tax equivalent NIM for the third quarter of 2018 and 10 basis points for the third quarter of 2017.
The cost of average total deposits increased to 0.46% for the third quarter of 2018 from 0.31% for the third quarter of 2017 due to higher rates paid on deposits from competitive pressure and increased market interest rates.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Net interest income increased by $62.5 million to $779.1 million for the nine months ended September 30, 2018 compared to $716.6 million for the nine months ended September 30, 2017 due mainly to higher balances of average loans and leases and average investment securities 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 6.20% for the nine months ended September 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 three increases in market interest rates during the first nine months of 2018 and three increases in market interest rates during 2017.

59


The tax equivalent NIM for the nine months ended September 30, 2018 was 5.09% compared to 5.15% 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. The taxable equivalent adjustment for tax-exempt interest income on municipal securities contributed three basis points to the tax equivalent NIM for the nine months ended September 30, 2018 and 10 basis points for the for the nine months ended September 30, 2017.
The cost of average total deposits increased to 0.38% for the nine months ended September 30, 2018 from 0.26% for the nine months ended September 30, 2017 due to higher rates paid on deposits in conjunction with increased market interest rates.
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
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Provision For Credit Losses:
 
 
 
 
 
 
 
 
 
Addition to allowance for loan and lease losses
$
11,500

 
$
15,000

 
$
14,573

 
$
26,274

 
$
48,060

Addition to reserve for unfunded loan commitments

 
2,500

 
546

 
6,726

 
3,286

Total provision for credit losses
$
11,500

 
$
17,500

 
$
15,119

 
$
33,000

 
$
51,346

 
 
 
 
 
 
 
 
 
 
Credit Quality Metrics (1):
 
 
 
 
 
 
 
 
 
Net charge‑offs on loans and leases held for
 
 
 
 
 
 
 
 
 
investment (2)
$
1,719

 
$
17,136

 
$
1,063

 
$
23,810

 
$
40,199

Annualized net charge‑offs to average loans and leases
0.04
%
 
0.41
%
 
0.03
%
 
0.19
%
 
0.35
%
At period end:
 
 
 
 
 
 
 
 
 
Allowance for credit losses
$
177,281

 
$
167,500

 
$
173,579

 
 
 
 
Allowance for credit losses to loans and leases
 
 
 
 
 
 
 
 
 
held for investment
1.03
%
 
0.99
%
 
1.11
%
 
 
 
 
Allowance for credit losses to nonaccrual
 
 
 
 
 
 
 
 
 
loans and leases held for investment
156.9
%
 
147.3
%
 
110.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans and leases held for investment
$
112,972

 
$
113,745

 
$
157,697

 
 
 
 
Performing TDRs held for investment
22,106

 
58,148

 
56,552

 
 
 
 
Total impaired loans and leases
$
135,078

 
$
171,893

 
$
214,249

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Classified loans and leases held for investment 
$
260,459

 
$
236,292

 
$
344,777

 
 
 
 
______________________
(1)
Amounts and ratios related to 2018 periods are for total loans and leases held for investment, net of deferred fees. Amounts and ratios related to 2017 periods are for Non-PCI loans and leases held for investment, net of deferred fees.
(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.

60


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.
We recorded a provision for credit losses of $11.5 million in the third quarter of 2018, $17.5 million in the second quarter of 2018, and $15.1 million in the third quarter of 2017. The provision for credit losses was $33.0 million for the nine months ended September 30, 2018 compared to $51.3 million for the nine months ended September 30, 2017.
The decrease in the provision for credit losses for the third quarter of 2018 compared to the second quarter of 2018 was due mainly to a lower level of special mention loans at September 30, 2018 compared to June 30, 2018 and a $2.5 million decrease in the provision related to the reserve for unfunded loan commitments. Loans rated special mention have a higher general reserve amount than loans rated pass.
The decrease in the provision for credit losses for the third quarter of 2018 compared to the third quarter of 2017 was due mostly to the reduction in special mention loans during the third quarter of 2018, while special mention loans increased during the third quarter of 2017.
The decrease in the provision for credit losses for the first nine months of 2018 compared to the same period last year was due primarily to lower general reserve provisions for the first nine months of 2018 attributable to a lower level of cash flow loans due 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.

61


Noninterest Income
The following table summarizes noninterest income by category for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Noninterest Income
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Service charges on deposit accounts
$
3,979

 
$
4,265

 
$
3,465

 
$
12,418

 
$
10,733

Other commissions and fees
12,397

 
11,767

 
9,944

 
34,429

 
30,917

Leased equipment income
9,120

 
9,790

 
8,332

 
28,497

 
29,442

Gain on sale of loans and leases

 
106

 
2,848

 
4,675

 
4,209

Gain on sale of securities
826

 
253

 
1,236

 
7,390

 
2,788

Other income:
 
 
 
 
 
 
 
 
 
Dividends and gains on equity investments
2,895

 
1,992

 
1,845

 
5,138

 
4,777

Warrant income
3,818

 
1,225

 
731

 
5,291

 
1,701

Other
3,877

 
10,240

 
2,981

 
17,271

 
17,211

Total noninterest income
$
36,912

 
$
39,638

 
$
31,382

 
$
115,109

 
$
101,778

Third Quarter of 2018 Compared to Second Quarter of 2018
Noninterest income decreased by $2.7 million to $36.9 million for the third quarter of 2018 compared to $39.6 million for the second quarter of 2018 due mainly to decreases of $6.4 million in other income and $0.7 million in leased equipment income, offset partially by increases of $2.6 million in warrant income, $0.9 million in dividends and gains on equity investments, and $0.6 million in other commissions and fees. Other income and leased equipment income decreased in the third quarter due to lower gains on early lease terminations. Warrant income increased due to higher realized gains on exercised warrants resulting primarily from a $3.1 million gain on a warrant in a company that completed its IPO. Dividends and gains on equity investments increased due to higher realized gains on investments sold. The increase in other commissions and fees was attributable to higher loan-related fees.
Third Quarter of 2018 Compared to Third Quarter of 2017
Noninterest income increased by $5.5 million to $36.9 million for the third quarter of 2018 compared to $31.4 million for the third quarter of 2017 due mainly to increases of $3.1 million in warrant income, $2.5 million in higher other commissions and fees, $1.1 million in dividends and gains on equity investments, $0.9 million in other income, and $0.8 million in leased equipment income, offset partially by a $2.8 million decrease in gain on sale of loans and leases. Warrant income increased due mostly to a $3.1 million realized gain on an exercised warrant in a company that completed its IPO. Other commissions and fees increased due primarily to higher loan-related fees of $1.3 million, higher foreign exchange fees of $0.8 million, and higher credit card fee income of $0.3 million. Dividends and gains on equity investments increased due mostly to higher realized gains on investments sold. Other income increased due mainly to higher BOLI income. Leased equipment income increased due primarily to higher gains on early lease terminations. There was no gain on sale of loans and leases in the third quarter of 2018 compared to $2.8 million in the third quarter of 2017.


62


Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Noninterest income increased by $13.3 million to $115.1 million for the nine months ended September 30, 2018 compared to $101.8 million for the nine months ended September 30, 2017 due mainly to increases of $4.6 million in gain on sale of securities, $3.6 million in warrant income, $3.5 million in other commissions and fees, and $1.7 million in service charges on deposit accounts. The increase in gain on sale of securities was attributable to a net gain of $7.4 million on sales of $492.7 million of securities during the nine months ended September 30, 2018 compared to a net gain of $2.8 million on sales of $182.7 million of securities during the nine months ended September 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. Warrant income increased due mostly to a third quarter of 2018 $3.1 million realized gain on an exercised warrant in a company that completed its IPO. Other commissions and fees increased due primarily to higher foreign exchange fees of $2.7 million and higher credit card fee income of $1.5 million. Service charges on deposit accounts increased due mainly to higher analysis charges as a result of the CUB acquisition.
Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Noninterest Expense
2018
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Compensation
$
72,333

 
$
69,913

 
$
64,413

 
$
213,269

 
$
194,581

Occupancy
13,069

 
13,575

 
12,729

 
39,867

 
36,148

Data processing
6,740

 
6,896

 
6,459

 
20,295

 
19,811

Other professional services
6,058

 
5,257

 
4,213

 
15,754

 
11,567

Insurance and assessments
5,446

 
5,330

 
4,702

 
16,503

 
14,349

Intangible asset amortization
5,587

 
5,587

 
3,049

 
17,520

 
9,178

Leased equipment depreciation
5,001

 
5,237

 
4,862

 
15,613

 
15,719

Foreclosed assets (income) expense, net
(257
)
 
(61
)
 
2,191

 
(440
)
 
2,177

Acquisition, integration and reorganization costs
800

 

 
1,450

 
800

 
3,650

Loan expense
2,249

 
3,058

 
3,421

 
7,578

 
10,692

Other
11,127

 
11,657

 
11,053

 
35,238

 
34,921

Total noninterest expense
$
128,153

 
$
126,449

 
$
118,542

 
$
381,997

 
$
352,793

Third Quarter of 2018 Compared to Second Quarter of 2018
Noninterest expense increased by $1.7 million to $128.2 million for the third quarter of 2018 compared to $126.4 million for the second quarter of 2018 due mainly to increases of $2.4 million in compensation expense, $0.8 million in other professional services, and $0.8 million in acquisition, integration and reorganization costs, offset partially by decreases in most other expense categories. Compensation expense increased due mostly to higher stock compensation expense for our performance-based restricted stock units as we now expect to achieve a higher level of certain performance metrics, and higher commissions expense related to the increased warrant income. Other professional services increased due principally to higher legal and consulting expense. The increase in acquisition costs related to the recently announced pending acquisition of El Dorado.

63


Third Quarter of 2018 Compared to Third Quarter of 2017
Noninterest expense increased by $9.6 million to $128.2 million for the third quarter of 2018 compared to $118.5 million for the third quarter of 2017 due mainly to increases of $7.9 million in compensation expense, $2.5 million in intangible asset amortization, and $1.8 million in other professional services, offset partially by a decrease of $2.4 million in foreclosed assets expense. Compensation expensed increased due mostly to higher salary expense of $3.6 million, higher stock compensation expense of $1.7 million, higher bonus expense of $1.6 million, and higher commissions expense of $1.2 million. The increase in stock compensation expense related principally to performance-based restricted stock units for which the Company now expects to achieve a higher level of certain performance metrics. Intangible asset amortization increased due primarily to the intangible assets added from the CUB acquisition in October 2017. Other professional services increased due principally to higher consulting, legal, and internal audit expense. Foreclosed assets expense decreased due mainly to a $2.1 million write-down on foreclosed property taken in the third quarter of 2017 that did not repeat in the third quarter of 2018.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Noninterest expense increased by $29.2 million to $382.0 million for the nine months ended September 30, 2018 compared to $352.8 million for the nine months ended September 30, 2017 due mainly to increases of $18.7 million in compensation expense, $8.3 million in intangible asset amortization, $4.2 million in other professional services, and $3.7 million in occupancy expense, offset partially by decreases of $3.1 million in loan expense and $2.9 million in acquisition, integration and reorganization costs. Compensation expense increased due mostly to mostly to higher salary expense of $10.7 million, higher bonus expense of $4.3 million, higher stock compensation expense of $2.7 million, and higher commissions expense of $1.2 million. The increase in stock compensation expense related principally to performance-based restricted stock units for which the Company now expects to achieve a higher level of certain performance metrics. Intangible asset amortization increased due primarily to the intangible assets added from the CUB acquisition in October 2017. Other professional services increased due principally to higher consulting, legal, and internal audit expense. Occupancy expense increased due mainly to inclusion of the CUB operations since its acquisition. Loan expense decreased due principally to lower legal-related and other loan expenses. The acquisition, integration and reorganization costs for the nine months ended September 30, 2018 related to the pending El Dorado acquisition, while the costs for the same period last year related to the CUB acquisition.
Income Taxes
The effective tax rate for the third quarter of 2018 was 26.2% compared to 26.8% for the second quarter of 2018 and 27.2% for the third quarter of 2017. The effective tax rate was 26.9% and 33.9% for the nine months ended September 30, 2018 and 2017. The decrease in the effective tax rate for the nine months ended September 30, 2018 compared to the same period in 2017 was due primarily 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, and as a result of the completion of the Company’s 2017 federal income tax return in the third quarter of 2018, the Company considers its accounting for the effects of the TCJA to be 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% and the estimated effective tax rate for the full year 2018 is approximately 27%.

64



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:
 
September 30, 2018
 
June 30, 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
$
249,831

 
7
%
 
3.3

 
$
263,588

 
7
%
 
3.2

 
$
246,274

 
7
%
 
3.0

Agency CMOs
569,605

 
15
%
 
5.0

 
554,891

 
14
%
 
5.0

 
275,709

 
7
%
 
6.8

Private label CMOs
110,450

 
3
%
 
4.6

 
102,236

 
3
%
 
4.8

 
125,987

 
3
%
 
5.1

Municipal securities
1,271,583

 
33
%
 
7.3

 
1,412,092

 
37
%
 
7.3

 
1,680,068

 
45
%
 
7.3

Agency commercial MBS
1,077,005

 
28
%
 
5.1

 
1,097,216

 
28
%
 
5.2

 
1,163,969

 
31
%
 
5.4

U.S. Treasury securities
397,631

 
10
%
 
3.2

 
262,341

 
7
%
 
3.6

 

 
%
 

SBA securities
67,586

 
2
%
 
3.5

 
77,351

 
2
%
 
3.4

 
160,334

 
4
%
 
2.0

Asset-backed securities
58,452

 
2
%
 
2.1

 
69,781

 
2
%
 
2.2

 
88,710

 
2
%
 
3.0

Corporate debt securities
18,190

 
%
 
11.0

 
18,292

 
%
 
11.3

 
19,295

 
1
%
 
11.8

Collateralized loan obligations

 
%
 

 

 
%
 

 
7,015

 
%
 
0.3

Equity investments (1)

 
%
 

 

 
%
 

 
7,070

 
%
 

Total securities available-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
for-sale
$
3,820,333

 
100
%
 
5.4

 
$
3,857,788

 
100
%
 
5.6

 
$
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:
 
September 30, 2018
 
Fair
 
% of
Municipal Securities by State
Value
 
Total
 
(Dollars in thousands)
California
$
280,001

 
22
%
New York
140,528

 
11
%
Washington
130,530

 
10
%
Texas
64,728

 
5
%
Ohio
56,125

 
4
%
Oregon
52,478

 
4
%
Florida
49,945

 
4
%
Massachusetts
47,800

 
4
%
Utah
46,813

 
4
%
Iowa
46,550

 
4
%
Total of ten largest states
915,498

 
72
%
All other states
356,085

 
28
%
Total municipal securities
$
1,271,583

 
100
%

65



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:
 
September 30, 2018
 
June 30, 2018
 
December 31, 2017 (1)
 
 
 
% of
 
 
 
% of
 
 
 
% of
 
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Healthcare real estate
$
482,792

 
3
%
 
$
611,029

 
4
%
 
$
843,653

 
5
%
Hospitality
589,360

 
3
%
 
552,589

 
3
%
 
695,043

 
4
%
SBA program
550,535

 
3
%
 
541,911

 
3
%
 
551,606

 
3
%
Other commercial real estate
3,310,136

 
19
%
 
3,305,151

 
20
%
 
3,295,438

 
20
%
Total commercial real estate
4,932,823

 
28
%
 
5,010,680

 
30
%
 
5,385,740

 
32
%
Income producing residential
2,618,964

 
15
%
 
2,413,760

 
14
%
 
2,245,058

 
13
%
Other residential real estate
126,873

 
1
%
 
141,935

 
1
%
 
221,836

 
1
%
Total residential real estate
2,745,837

 
16
%
 
2,555,695

 
15
%
 
2,466,894

 
14
%
Total real estate mortgage
7,678,660

 
44
%
 
7,566,375

 
45
%
 
7,852,634

 
46
%
Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
854,346

 
5
%
 
831,462

 
5
%
 
769,075

 
5
%
Residential
1,146,611

 
7
%
 
1,042,564

 
6
%
 
822,154

 
5
%
Total real estate construction and land
2,000,957

 
12
%
 
1,874,026

 
11
%
 
1,591,229

 
10
%
Total real estate
9,679,617

 
56
%
 
9,440,401

 
56
%
 
9,443,863

 
56
%
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Lender finance & timeshare
1,817,471

 
11
%
 
1,820,856

 
11
%
 
1,609,937

 
9
%
Equipment finance
682,994

 
4
%
 
663,365

 
4
%
 
656,995

 
4
%
Other asset-based
406,702

 
2
%
 
400,007

 
2
%
 
425,354

 
3
%
Premium finance
315,144

 
2
%
 
300,072

 
2
%
 
232,664

 
1
%
Total asset-based
3,222,311

 
19
%
 
3,184,300

 
19
%
 
2,924,950

 
17
%
Expansion stage
974,569

 
6
%
 
1,009,700

 
6
%
 
953,199

 
6
%
Equity fund loans
628,213

 
4
%
 
551,366

 
3
%
 
471,163

 
3
%
Early stage
293,012

 
2
%
 
291,875

 
2
%
 
443,370

 
3
%
Late stage
136,101

 
%
 
155,264

 
1
%
 
255,003

 
1
%
Total venture capital
2,031,895

 
12
%
 
2,008,205

 
12
%
 
2,122,735

 
13
%
Secured business loans
693,363

 
4
%
 
686,945

 
4
%
 
743,824

 
4
%
Security monitoring
606,639

 
4
%
 
576,823

 
3
%
 
573,066

 
3
%
Other lending
488,422

 
3
%
 
475,443

 
3
%
 
475,584

 
3
%
Cash flow
109,428

 
%
 
134,396

 
1
%
 
278,920

 
2
%
Total other commercial
1,897,852

 
11
%
 
1,873,607

 
11
%
 
2,071,394

 
12
%
Total commercial
7,152,058

 
42
%
 
7,066,112

 
42
%
 
7,119,079

 
42
%
Consumer
398,471

 
2
%
 
378,679

 
2
%
 
409,801

 
2
%
Total loans and leases held for investment,
 
 
 
 
 
 
 
 
 
 
 
net of deferred fees
$
17,230,146

 
100
%
 
$
16,885,192

 
100
%
 
$
16,972,743

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

66



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:
 
September 30, 2018
 
December 31, 2017
 
 
 
% of
 
 
 
% of
Real Estate Loans by State
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
California
$
5,457,244

 
57
%
 
$
5,206,633

 
55
%
New York
768,247

 
8
%
 
697,012

 
7
%
Florida
558,965

 
6
%
 
505,043

 
5
%
Texas
331,097

 
3
%
 
343,799

 
4
%
Arizona
253,381

 
3
%
 
263,621

 
3
%
Illinois
220,710

 
2
%
 
163,662

 
2
%
Oregon
216,492

 
2
%
 
152,849

 
2
%
Virginia
210,673

 
2
%
 
233,654

 
2
%
Washington
210,510

 
2
%
 
208,358

 
2
%
New Jersey
169,019

 
2
%
 
140,150

 
2
%
Total of 10 largest states
8,396,338

 
87
%
 
7,914,781

 
84
%
All other states
1,283,279

 
13
%
 
1,529,082

 
16
%
Total real estate loans held for investment
$
9,679,617

 
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
 
Nine Months Ended
Loans and Leases Held for Investment Roll Forward (1)
September 30, 2018
 
September 30, 2018
 
(Dollars in thousands)
Balance, beginning of period
$
16,885,192

 
$
16,972,743

Additions:
 
 
 
Production
1,315,572

 
3,317,049

Disbursements
966,668

 
2,917,984

Total production and disbursements
2,282,240

 
6,235,033

Reductions:
 
 
 
Payoffs
(1,133,233
)
 
(3,218,606
)
Paydowns
(795,243
)
 
(2,560,364
)
Total payoffs and paydowns
(1,928,476
)
 
(5,778,970
)
Sales
(3,326
)
 
(161,729
)
Transfers to foreclosed assets
(2,176
)
 
(3,235
)
Charge-offs
(3,308
)
 
(33,696
)
Total reductions
(1,937,286
)
 
(5,977,630
)
Balance, end of period
$
17,230,146

 
$
17,230,146

 
 
 
 
Weighted average rate on production (2)
5.17
%
 
5.16
%
_______________________________________ 
(1)
Includes direct financing leases but excludes equipment leased to others under operating leases.
(2)
The weighted average rate on production presents contractual rates on a tax equivalent basis and does not include amortized fees. Amortized fees added approximately 31 basis points to loan yields for the nine months ended September 30, 2018.



67



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.

68



We estimate the reserve for unfunded loan commitments using the same loss factors as used for the allowance for loan and lease losses. The reserve for unfunded loan commitments is computed using expected future usage of the unfunded commitments based on historical usage of unfunded commitments for the various loan types.
The allowance for credit losses is directly correlated to the credit risk ratings of our loans. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans on a regular basis. The credit risk ratings assigned to every loan and lease are either “pass,” “special mention,” “substandard,” or “doubtful” and defined as follows:
Pass: Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
Special Mention: Loans and leases rated as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
Substandard: Loans and leases rated as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
Doubtful: Loans and leases rated as "doubtful" have all the weaknesses of those rated as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
In addition, we may refer to the loans and leases with assigned credit risk ratings of "substandard" and "doubtful" together as "classified" loans and leases. For further information on classified loans and leases, see Note 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:
 
September 30,
 
June 30,
 
December 31,
 
September 30,
Allowance for Credit Losses Data (1)
2018
 
2018
 
2017
 
2017
 
(Dollars in thousands)
Allowance for loan and lease losses
$
141,920

 
$
132,139

 
$
133,012

 
$
152,770

Reserve for unfunded loan commitments
35,361

 
35,361

 
28,635

 
20,809

Total allowance for credit losses
$
177,281

 
$
167,500

 
$
161,647

 
$
173,579

 
 
 
 
 
 
 
 
Allowance for credit losses to loans and leases held for investment
1.03
%
 
0.99
%
 
0.96
%
 
1.11
%
Allowance for credit losses to nonaccrual loans and leases held for investment
156.9
%
 
147.3
%
 
103.8
%
 
110.1
%
____________________________________________
(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.





69



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
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
Allowance for Credit Losses Roll Forward (1)
2018
 
2018
 
2017
 
2018
 
2017
 
(Dollars in thousands)
Balance, beginning of period (2)
$
167,500

 
$
167,136

 
$
159,142

 
$
168,091

 
$
161,278

Provision for credit losses:
 
 
 
 
 
 
 
 
 
Addition to allowance for loan and lease losses
11,500

 
15,000

 
14,954

 
26,274

 
49,214

Addition to reserve for unfunded loan commitments

 
2,500

 
546

 
6,726

 
3,286

Total provision for credit losses
11,500

 
17,500

 
15,500

 
33,000

 
52,500

Loans and leases charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
(726
)
 
(4,747
)
 
(531
)
 
(8,071
)
 
(2,217
)
Real estate construction and land

 

 

 

 

Commercial
(2,373
)
 
(13,424
)
 
(4,984
)
 
(25,321
)
 
(46,965
)
Consumer
(209
)
 
(64
)
 
(413
)
 
(304
)
 
(625
)
Total loans and leases charged off
(3,308
)
 
(18,235
)
 
(5,928
)
 
(33,696
)
 
(49,807
)
Recoveries on loans charged off:
 
 
 
 
 
 
 
 
 
Real estate mortgage
223

 
119

 
36

 
1,999

 
286

Real estate construction and land
22

 
18

 
353

 
49

 
370

Commercial
1,303

 
912

 
4,447

 
7,702

 
8,848

Consumer
41

 
50

 
29

 
136

 
104

Total recoveries on loans charged off
1,589

 
1,099

 
4,865

 
9,886

 
9,608

Net charge-offs
(1,719
)
 
(17,136
)
 
(1,063
)
 
(23,810
)
 
(40,199
)
Balance, end of period
$
177,281

 
$
167,500

 
$
173,579

 
$
177,281

 
$
173,579

 
 
 
 
 
 
 
 
 
 
Annualized net charge-offs to average loans and leases
0.04
%
 
0.41
%
 
0.03
%
 
0.19
%
 
0.35
%
_________________________________________
(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 nine months ended September 30, 2018.




70



The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 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
468

 
111

 
163

 
2,594

 
1,117

Other commercial real estate
258

 
4,492

 
43

 
5,271

 
65

Total commercial real estate
726

 
4,603

 
206

 
7,865

 
1,874

Income producing residential

 
144

 

 
145

 

Other residential real estate

 

 
325

 
61

 
343

Total residential real estate

 
144

 
325

 
206

 
343

Total real estate mortgage
726

 
4,747

 
531

 
8,071

 
2,217

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 

 

Residential

 

 

 

 

Total real estate construction and land

 

 

 

 

Commercial:
 
 
 
 
 
 
 
 
 
Lender finance & timeshare

 

 
202

 
8

 
202

Equipment finance

 
2,934

 

 
2,934

 
19

Other asset-based
673

 

 
400

 
1,033

 
400

Premium finance

 

 

 

 

Total asset-based
673

 
2,934

 
602

 
3,975

 
621

Expansion stage
1,142

 
2,195

 
384

 
5,811

 
6,429

Early stage

 
3,888

 
69

 
3,721

 
10,781

Equity fund loans

 

 

 

 

Late stage

 

 
2,971

 

 
2,971

Total venture capital
1,142

 
6,083

 
3,424

 
9,532

 
20,181

Security monitoring

 

 

 

 

Secured business loans
71

 
88

 
112

 
624

 
610

Other lending
487

 
78

 
1

 
1,251

 
927

Cash flow

 
4,241

 
845

 
9,939

 
24,626

Total other commercial
558

 
4,407

 
958

 
11,814

 
26,163

Total commercial
2,373

 
13,424

 
4,984

 
25,321

 
46,965

Consumer
209

 
64

 
413

 
304

 
625

Total charge-offs
$
3,308

 
$
18,235

 
$
5,928

 
$
33,696

 
$
49,807

_______________________________________________
(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 $3.3 million for the third quarter of 2018 and included $1.1 million for venture capital loans, $0.7 million for real estate mortgage loans, $0.7 million for asset-based loans, and $0.6 million for other commercial loans. This compares to gross charge-offs of $18.2 million for the second quarter of 2018 which included $6.1 million for venture capital loans, $4.7 million for real estate mortgage loans, $4.4 million for other commercial loans, and $2.9 million for asset-based loans.

71



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

 
$

 
$

 
$

 
$

Hospitality

 

 

 

 

SBA program
18

 
19

 
32

 
294

 
63

Other commercial real estate
198

 

 

 
360

 

Total commercial real estate
216

 
19

 
32

 
654

 
63

Income producing residential

 

 

 
1,208

 

Other residential real estate
7

 
100

 
4

 
137

 
223

Total residential real estate
7

 
100

 
4

 
1,345

 
223

Total real estate mortgage
223

 
119

 
36

 
1,999

 
286

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial
22

 
11

 
14

 
42

 
31

Residential

 
7

 
339

 
7

 
339

Total real estate construction and land
22

 
18

 
353

 
49

 
370

Commercial:
 
 
 
 
 
 
 
 
 
Lender finance & timeshare
1

 
1

 

 
2

 

Equipment finance

 

 
1,392

 
90

 
3,377

Other asset-based
68

 
69

 

 
187

 

Premium finance

 

 

 

 

Total asset-based
69

 
70

 
1,392

 
279

 
3,377

Expansion stage
704

 
(9
)
 
(95
)
 
5,115

 
398

Early stage
281

 
65

 
2,692

 
563

 
3,656

Equity fund loans

 

 

 

 

Late stage

 

 

 

 

Total venture capital
985

 
56

 
2,597

 
5,678

 
4,054

Security monitoring

 

 

 

 

Secured business loans
160

 
241

 
146

 
553

 
705

Other lending
80

 
545

 
312

 
1,183

 
712

Cash flow
9

 

 

 
9

 

Total other commercial
249

 
786

 
458

 
1,745

 
1,417

Total commercial
1,303

 
912

 
4,447

 
7,702

 
8,848

Consumer
41

 
50

 
29

 
136

 
104

Total recoveries
$
1,589

 
$
1,099

 
$
4,865

 
$
9,886

 
$
9,608

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

72



Deposits
The following table presents the balance of each major category of deposits as of the dates indicated:
 
September 30, 2018
 
June 30, 2018
 
December 31, 2017
 
 
 
% of
 
 
 
% of
 
 
 
% of
Deposit Category
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Noninterest-bearing demand deposits
$
7,834,480

 
44
%
 
$
8,126,153

 
45
%
 
$
8,508,044

 
45
%
Interest checking deposits
2,277,537

 
13
%
 
2,184,785

 
12
%
 
2,226,885

 
12
%
Money market deposits
4,782,724

 
27
%
 
4,631,658

 
26
%
 
4,511,730

 
24
%
Savings deposits
618,001

 
3
%
 
643,642

 
4
%
 
690,353

 
4
%
Total core deposits
15,512,742

 
87
%
 
15,586,238

 
87
%
 
15,937,012

 
85
%
Non-core non-maturity deposits
483,528

 
3
%
 
607,388

 
3
%
 
863,202

 
4
%
Total non-maturity deposits
15,996,270

 
90
%
 
16,193,626

 
90
%
 
16,800,214

 
89
%
Time deposits $250,000 and under
1,509,214

 
8
%
 
1,394,117

 
8
%
 
1,709,980

 
9
%
Time deposits over $250,000
374,059

 
2
%
 
341,449

 
2
%
 
355,342

 
2
%
Total time deposits
1,883,273

 
10
%
 
1,735,566

 
10
%
 
2,065,322

 
11
%
Total deposits
$
17,879,543

 
100
%
 
$
17,929,192

 
100
%
 
$
18,865,536

 
100
%
Total deposits decreased by $49.6 million during the third quarter to $17.9 billion, due mainly to a decrease in non-core non-maturity deposits of $123.9 million and a decrease in core deposits of $73.5 million, offset partially by an increase in time deposits of $147.7 million. At September 30, 2018, core deposits totaled $15.5 billion, or 87% of total deposits, including $7.8 billion of noninterest-bearing demand deposits, or 44% of total deposits.
The following table summarizes the maturities of time deposits as of the date indicated:
 
Time Deposits
 
$250,000
 
Over
 
 
September 30, 2018
and Under
 
$250,000
 
Total
 
(In thousands)
Maturities:
 
 
 
 
 
Due in three months or less
$
519,676

 
$
112,448

 
$
632,124

Due in over three months through six months
350,276

 
160,295

 
510,571

Due in over six months through twelve months
519,277

 
59,246

 
578,523

Due in over 12 months through 24 months
94,205

 
39,034

 
133,239

Due in over 24 months
25,780

 
3,036

 
28,816

Total
$
1,509,214

 
$
374,059

 
$
1,883,273

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 September 30, 2018, total off-balance sheet client investment funds were $2.0 billion, of which $1.5 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.

73



Nonperforming Assets, Performing TDRs, and Classified Loans and Leases
The following table presents nonperforming assets and performing TDRs information as of the dates indicated:
 
September 30,
 
June 30,
 
December 31,
 
September 30,
 
2018
 
2018
 
2017
 
2017
 
(Dollars in thousands)
Nonaccrual loans and leases held for investment (1)(2)
$
112,972

 
$
113,745

 
157,545

 
$
159,458

Accruing loans contractually past due 90 days or more

 

 

 

Foreclosed assets, net
4,407

 
2,231

 
1,329

 
11,630

Total nonperforming assets
$
117,379

 
$
115,976

 
$
158,874

 
$
171,088

 
 
 
 
 
 
 
 
Performing TDRs held for investment (3)
$
22,106

 
$
58,148

 
$
56,838

 
$
56,552

Nonaccrual loans and leases held for investment to
 
 
 
 
 
 
 
loans and leases held for investment (1)
0.66
%
 
0.67
%
 
0.93
%
 
1.02
%
Nonperforming assets to loans and leases held for investment
 
 
 
 
 
 
 
and foreclosed assets, net
0.68
%
 
0.69
%
 
0.94
%
 
1.09
%
_______________________________________ 
(1)
Amounts and ratios are for total loans and leases held for investment, net of deferred fees.
(2)
Excludes loans held for sale carried at lower of cost or fair value at December 31, 2017.
(3)
Amounts and ratios related to 2018 periods are for total loans and leases held for investment, net of deferred fees. Amounts and ratios related to 2017 periods are for Non-PCI loans and leases held for investment, net of deferred fees.
Nonperforming assets include nonaccrual loans and leases held for investment and foreclosed assets and totaled $117.4 million at September 30, 2018 compared to $116.0 million at June 30, 2018. The ratio of nonperforming assets to loans and leases held for investment and foreclosed assets decreased to 0.68% at September 30, 2018 from 0.69% at June 30, 2018.
Nonaccrual Loans and Leases Held for Investment
During the third quarter of 2018, nonaccrual loan and leases held for investment decreased by $0.8 million to $113.0 million at September 30, 2018 due mainly to $20.6 million in principal payments and other reductions, which included the full repayment of a $10.5 million nonaccrual residential real estate construction loan, offset partially by nonaccrual additions of $19.8 million, which included an $11.9 million venture capital loan. The decrease in nonaccrual loans and leases by loan category was attributable primarily to a $10.5 million decrease in nonaccrual residential real estate construction and land loans and a $3.4 million decrease in nonaccrual commercial real estate mortgage loans, offset partially by a $7.6 million increase in nonaccrual venture capital loans and a $4.9 million increase in nonaccrual asset-based loans. As of September 30, 2018, the Company's ten largest loan relationships on nonaccrual status had an aggregate carrying value of $83.2 million and represented 73.7% of total nonaccrual loans and leases.

74



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
 
September 30, 2018
 
June 30, 2018
 
30 - 89 Days Past Due
 
 
 
% of
 
 
 
% of
 
September 30,
 
June 30,
 
 
 
Loan
 
 
 
Loan
 
2018
 
2018
 
Amount
 
Category
 
Amount
 
Category
 
Amount
 
Amount
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
29,723

 
0.6
%
 
$
33,105

 
0.7
%
 
$
824

 
$
2,620

Residential
3,259

 
0.1
%
 
3,527

 
0.1
%
 
5,436

 
2,983

Total real estate mortgage
32,982

 
0.4
%
 
36,632

 
0.5
%
 
6,260

 
5,603

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
%
 

 
%
 

 

Residential

 
%
 
10,450

 
1.0
%
 
8,498

 
5,969

Total real estate construction and land

 
%
 
10,450

 
0.6
%
 
8,498

 
5,969

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
34,619

 
1.1
%
 
29,677

 
0.9
%
 

 

Venture capital
35,520

 
1.7
%
 
27,940

 
1.4
%
 
1,028

 

Other commercial
9,579

 
0.5
%
 
8,782

 
0.5
%
 
222

 
230

Total commercial
79,718

 
1.1
%
 
66,399

 
0.9
%
 
1,250

 
230

Consumer
272

 
0.1
%
 
264

 
0.1
%
 
605

 
75

Total held for investment
$
112,972

 
0.7
%
 
$
113,745

 
0.7
%
 
$
16,613

 
$
11,877

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

 
$
219

 
$
219

 
$
9,319

Multi-family
1,059

 
1,059

 

 

Single family residence
953

 
953

 
1,019

 
1,668

Commercial real estate
2,176

 

 
64

 
65

Total OREO, net
4,407

 
2,231

 
1,302

 
11,052

Other foreclosed assets

 

 
27

 
578

Total foreclosed assets
$
4,407

 
$
2,231

 
$
1,329

 
$
11,630

During the third quarter of 2018, foreclosed assets increased by $2.2 million to $4.4 million at September 30, 2018 due to additions of $2.2 million.

75



Performing TDRs Held for Investment
The following table presents our performing TDRs held for investment by portfolio segment as of the dates indicated:
 
September 30, 2018
 
June 30, 2018
 
December 31, 2017
 
 
 
Number
 
 
 
Number
 
 
 
Number
 
 
 
of
 
 
 
of
 
 
 
of
Performing TDRs (1)
Amount
 
Loans
 
Amount
 
Loans
 
Amount
 
Loans
 
(Dollars in thousands)
Real estate mortgage
$
15,296

 
29

 
$
50,500

 
32

 
$
47,560

 
23

Real estate construction and land
5,533

 
2

 
5,549

 
2

 
5,690

 
2

Commercial
1,166

 
8

 
1,982

 
9

 
3,488

 
11

Consumer
111

 
3

 
117

 
3

 
100

 
2

Total performing TDRs held for investment
$
22,106

 
42

 
$
58,148

 
46

 
$
56,838

 
38

______________________________________
(1)
Amounts related to 2018 periods are for total loans and leases held for investment, net of deferred fees. Amounts related to 2017 are for Non-PCI loans and leases held for investment, net of deferred fees.
During the third quarter of 2018, performing TDRs held for investment decreased by $36.0 million to $22.1 million at September 30, 2018 attributable to $6.6 million in payoffs and other reductions and the removal of a $29.4 million commercial real estate mortgage loan from TDR status due to the loan being restructured at current market terms with no concessions granted and the borrower not experiencing financial difficulties. 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:
 
September 30,
 
June 30,
 
December 31,
 
September 30,
Loan and Lease Credit Risk Ratings (1)
2018
 
2018
 
2017 (2)
 
2017
 
(Dollars in thousands)
Pass
$
16,609,629

 
$
16,142,052

 
$
16,334,134

 
$
14,900,080

Special mention
360,058

 
506,848

 
302,168

 
383,166

Classified
260,459

 
236,292

 
278,405

 
344,777

Total loans and leases held for investment,
 
 
 
 
 
 
 
net of deferred fees
$
17,230,146

 
$
16,885,192

 
$
16,914,707

 
$
15,628,023

 
 
 
 
 
 
 
 
Classified loans and leases held for investment
 
 
 
 
 
 
 
to loans and leases held for investment
1.51
%
 
1.40
%
 
1.65
%
 
2.21
%
______________________________________
(1)
Amounts and ratios related to 2018 periods are for total loans and leases held for investment, net of deferred fees. Amounts and ratios related to 2017 periods are for Non-PCI loans and leases held for investment, net of deferred fees.
(2)
Excludes loans held for sale carried at lower of cost or fair value.
During the third quarter of 2018, classified loans and leases held for investment increased by $24.2 million to $260.5 million at September 30, 2018 due mainly to a $34.4 million security monitoring cash flow loan being downgraded to classified status, offset partially by the full repayment of a $10.5 million classified nonaccrual residential real estate construction loan. The increase in classified loans and leases by loan category was attributable to a $40.7 million increase classified other commercial loans and a $7.5 million increase in classified asset-based loans, offset partially by a $10.5 million decrease in classified residential real estate construction and land loans, a $7.0 million decrease in classified venture capital loans, and a $6.5 million decrease in classified commercial real estate mortgage loans.


76



During the third quarter of 2018, special mention loans and leases decreased by $146.8 million to $360.1 million at September 30, 2018 due principally to a $47.8 million special mention commercial real estate loan being upgraded to pass status, the full repayment of a $33.4 million special mention healthcare real estate loan, and net pay downs, payoffs, and migrations out of the special mention category. The decrease in special mention loans and leases by loan category was attributable to an $102.4 million decrease in special mention commercial real estate mortgage loans, a $34.2 million decrease in special mention venture capital loans, and a $19.5 million decrease in special mention other commercial loans, offset partially by a $9.9 million increase in special mention residential real estate mortgage loans.
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 September 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 September 30, 2018, such disallowed amounts were $669,000 for the Company and $45,000 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 September 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
September 30, 2018
 
 
 
 
 
 
 
 
 
PacWest Bancorp Consolidated
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
10.10%
 
4.00%
 
4.000%
 
N/A
 
4.00%
CET1 capital (to risk weighted assets)
10.18%
 
4.50%
 
6.375%
 
N/A
 
7.00%
Tier 1 capital (to risk weighted assets)
10.18%
 
6.00%
 
7.875%
 
N/A
 
8.50%
Total capital (to risk weighted assets)
13.03%
 
8.00%
 
9.875%
 
N/A
 
10.50%
 
 
 
 
 
 
 
 
 
 
Pacific Western Bank
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets)
10.78%
 
4.00%
 
4.000%
 
5.00%
 
4.00%
CET1 capital (to risk weighted assets)
10.87%
 
4.50%
 
6.375%
 
6.50%
 
7.00%
Tier 1 capital (to risk weighted assets)
10.87%
 
6.00%
 
7.875%
 
8.00%
 
8.50%
Total capital (to risk weighted assets)
11.69%
 
8.00%
 
9.875%
 
10.00%
 
10.50%

77



 
 
 
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 September 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 $452.9 million at September 30, 2018. At September 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 $439.4 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.

78



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 September 30, 2018 of $3.6 billion, collateralized by a blanket lien on $5.2 billion of certain qualifying loans. The Bank also had secured borrowing capacity with the FRBSF of $2.1 billion as of September 30, 2018 collateralized by liens on $2.8 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 $143.0 million with the FHLB and $125.0 million with correspondent banks. As of September 30, 2018, there was a $143.0 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 September 30, 2018, the Bank had $235.0 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:
 
September 30,
 
June 30,
 
December 31,
Primary Liquidity - On-Balance Sheet
2018
 
2018
 
2017
 
(Dollars in thousands)
Cash and due from banks
$
196,502

 
$
245,998

 
$
233,215

Interest-earning deposits in financial institutions
185,284

 
205,567

 
165,222

Securities available-for-sale
3,820,333

 
3,857,788

 
3,774,431

Less: pledged securities
(427,778
)
 
(433,160
)
 
(449,187
)
Total primary liquidity
$
3,774,341

 
$
3,876,193

 
$
3,723,681

 
 
 
 
 
 
Ratio of primary liquidity to total deposits
21.1
%
 
21.6
%
 
19.7
%

Secondary Liquidity - Off-Balance Sheet
September 30,
 
June 30,
 
December 31,
Available Secured Borrowing Capacity
2018
 
2018
 
2017
 
(In thousands)
Secured borrowing capacity with the FHLB
$
3,587,256

 
$
3,504,393

 
$
3,789,949

Less: secured advances outstanding
(1,135,000
)
 
(945,000
)
 
(332,000
)
Net secured borrowing capacity with the FHLB
2,452,256

 
2,559,393

 
3,457,949

Secured borrowing capacity with the FRBSF
2,073,375

 
1,253,347

 
1,766,188

Total secondary liquidity
$
4,525,631

 
$
3,812,740

 
$
5,224,137


79



During the three months ended September 30, 2018, the Company's primary liquidity decreased by $101.9 million due primarily to a $49.5 million decrease in cash and due from banks, a $37.5 million decrease in securities available-for-sale, and a $20.3 million decrease in interest-earning deposits in financial institutions. The Company's secondary liquidity increased by $712.9 million during the third quarter of 2018 due to an $820.0 million increase in the borrowing capacity on the secured credit line with the FRBSF and an $82.9 million increase in the borrowing capacity on the secured borrowing line with the FHLB, offset partially by a $190.0 million increase in the amount borrowed from the secured borrowing line with the FHLB. The increase in the borrowing capacity with the FRBSF in the third quarter was due primarily to an increase in loan collateral resulting from pledging construction loans.
In addition to our primary liquidity, we generate liquidity from cash flows from our loan and securities portfolios and from our large base of core customer deposits, defined as noninterest-bearing demand, interest checking, savings, and non-brokered money market accounts. At September 30, 2018, core deposits totaled $15.5 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 September 30, 2018, brokered deposits totaled $1.1 billion, consisting of $615.8 million of brokered time deposits, $455.6 million of non-maturity brokered accounts, and $5.0 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 September 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 nine months ended September 30, 2018, PacWest received $155.0 million and $604.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $685.3 million at September 30, 2018, for the foreseeable future, any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.
At September 30, 2018, PacWest had $234.0 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.

80



Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
 
September 30, 2018
 
 
 
Due After
 
Due After
 
 
 
 
 
Due
 
One Year
 
Three Years
 
Due
 
 
 
Within
 
Through
 
Through
 
After
 
 
 
One Year
 
Three Years
 
Five Years
 
Five Years
 
Total
 
(In thousands)
Time deposits (1)
$
1,721,218

 
$
147,845

 
$
14,178

 
$
32

 
$
1,883,273

Short-term borrowings
1,513,000

 

 

 

 
1,513,000

Long-term debt obligations (1)
135

 
31

 

 
541,697

 
541,863

Contractual interest (2)
10,642

 
2,394

 
373

 
2

 
13,411

Operating lease obligations
33,053

 
56,859

 
37,357

 
27,728

 
154,997

Other contractual obligations
43,313

 
66,549

 
13,769

 
35,346

 
158,977

Total
$
3,321,361

 
$
273,678

 
$
65,677

 
$
604,805

 
$
4,265,521

_______________________________________ 
(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 September 30, 2018, our loan commitments, including standby letters of credit, totaled $7.4 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)."

81



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 derivatives that hedge those exposures. As of September 30, 2018, the U.S. Dollar notional amounts of loans receivable and subordinated debentures payable denominated in foreign currencies were $48.7 million and $29.9 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures were $50.3 million and $29.2 million. We recognized a foreign currency translation net loss of $0.1 million for the nine months ended September 30, 2018 and a foreign currency translation net gain of $0.4 million for the nine months ended September 30, 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 September 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 NII and MVE, while a liability-sensitive profile would suggest that these amounts would decrease.
Net Interest Income Simulation
We used a NII simulation model to measure the estimated changes in NII that would result over the next 12 months from immediate and sustained changes in interest rates as of September 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 NII forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at September 30, 2018. In order to arrive at the base case, we extend our balance sheet at September 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 September 30, 2018. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.

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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. In the third quarter of 2018, our cost of average total deposits increased by nine basis points, while the average fed funds target rate increased by 21 basis points, resulting in a deposit beta of 45%. This is an increase from our deposit beta of 22% during the second quarter of 2018. We expect the deposit beta to be equal to or slightly higher in the fourth quarter than it was in the third quarter. The IRR model deposit beta assumptions are being updated for recent historical experience and will likely be higher than the current assumptions, which will result in reduced asset sensitivity. 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
September 30, 2018
(Tax Equivalent)
 
From Base
 
(Tax Equivalent)
 
From Base
 
(Dollars in millions)
 
 
 
 
 
 
Interest Rate Scenario:
 
 
 
 
 
 
 
Up 300 basis points
$
1,131.2

 
10.3%
 
5.26%
 
0.49%
Up 200 basis points
$
1,097.2

 
7.0%
 
5.10%
 
0.33%
Up 100 basis points
$
1,061.8

 
3.5%
 
4.94%
 
0.17%
BASE CASE
$
1,025.4

 
 
4.77%
 
Down 100 basis points
$
985.3

 
(3.9)%
 
4.58%
 
(0.19)%
Down 200 basis points
$
944.1

 
(7.9)%
 
4.39%
 
(0.38)%
Down 300 basis points
$
924.0

 
(9.9)%
 
4.30%
 
(0.47)%
Total base case year 1 tax equivalent NII was $1.025 billion at September 30, 2018 compared to $1.019 billion at June 30, 2018. The $6.6 million increase in year 1 tax equivalent NII was attributable to higher yields on assets, offset partially by the growth in interest-bearing deposits and borrowings required to fund asset growth during the third 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 tax equivalent NII increases by 1.26%, and in the “Bull Steepener” scenario, Year 1 tax equivalent NII decreases by 3.20%.
Of the $17.3 billion of total loans in the portfolio, $11.0 billion have variable interest rate terms (excluding hybrid loans discussed below). At September 30, 2018, $10.8 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 53% of the total variable-rate loans have a LIBOR index rate. Of the $184 million of loans with rates below their floor rates at September 30, 2018, $161 million (87.3%) will rise above their floor rates with a 100 basis point increase in market rates.
Additionally, approximately $2.9 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 $203 million, $499 million, and $875 million in the next one, two, and three years.

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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 September 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
September 30, 2018
of Equity
 
From Base
 
From Base
 
Assets
 
to Book Value
 
(Dollars in millions)
 
 
 
 
 
 
Interest Rate Scenario:
 
 
 
 
 
 
 
 
 
Up 300 basis points
$
6,033.4

 
$
(45.5
)
 
(0.7
)%
 
24.3
%
 
127.2
%
Up 200 basis points
$
6,054.7

 
$
(24.2
)
 
(0.4
)%
 
24.4
%
 
127.7
%
Up 100 basis points
$
6,069.6

 
$
(9.3
)
 
(0.2
)%
 
24.5
%
 
128.0
%
BASE CASE
$
6,078.9

 
$

 
 %
 
24.5
%
 
128.2
%
Down 100 basis points
$
6,073.5

 
$
(5.4
)
 
(0.1
)%
 
24.5
%
 
128.1
%
Down 200 basis points
$
6,063.7

 
$
(15.2
)
 
(0.3
)%
 
24.5
%
 
127.9
%
Down 300 basis points
$
5,982.0

 
$
(96.9
)
 
(1.6
)%
 
24.1
%
 
126.2
%
Total base case projected market value of equity was $6.1 billion at September 30, 2018 compared to $6.0 billion at June 30, 2018. The projected market value of equity increased by $73 million, while our overall MVE sensitivity profile has remained relatively unchanged. The increase in base case market value of equity was due primarily to: (1) a $106 million increase in the mark-to-market adjustment for loans and leases resulting from lower credit spreads used in the loan value calculation, and (2) a $2 million decrease in the mark-to-market adjustment for total deposits due to the modest shift in the mix of total deposits as noninterest-bearing deposits decreased to 44% of total deposits at September 30, 2018 from 45% at June 30, 2018, offset partially by (3) a $36 million decrease in the book value of stockholders' equity due mainly to the combination of $74 million in dividends, $65 million in stock repurchases under the Stock Repurchase Program, a $22 million decline in accumulated other comprehensive income, and $116 million in net earnings.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 10. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements (Unaudited) is incorporated herein by reference.
In addition, in the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon information currently available to us, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.
ITEM 1A. RISK FACTORS
For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 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 third 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)

July 1 - July 31, 2018
642,012

 
$
50.14

 
642,012

 
$
142,515

August 1 - August 31, 2018
634,486

 
$
51.05

 
634,486

 
$
110,126

September 1 - September 30, 2018
4,199

 
$
50.47

 

 
$
110,126

Total
1,280,697

 
$
50.59

 
1,276,498

 
 
__________________________
(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.

85



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



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

87