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 March 31, 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 May 7, 2018, there were 125,133,358 shares of the registrant's common stock outstanding, excluding 1,381,135 shares of unvested restricted stock.


1



PACWEST BANCORP
MARCH 31, 2018 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
Condensed Consolidated Statements of Earnings (Unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
Condensed Consolidated Statement Changes in Stockholders' Equity (Unaudited)
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Index to Exhibits
Signatures


2


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


3



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
 
December 31,
 
2018
 
2017
 
(Unaudited)
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
235,061

 
$
233,215

Interest-earning deposits in financial institutions
312,735

 
165,222

Total cash, cash equivalents, and restricted cash
547,796

 
398,437

Securities available-for-sale, at fair value
3,801,986

 
3,774,431

Federal Home Loan Bank stock, at cost
17,250

 
20,790

Total investment securities
3,819,236

 
3,795,221

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

 
481,100

Gross loans and leases held for investment
16,516,627

 
17,032,221

Deferred fees, net
(61,342
)
 
(59,478
)
Allowance for loan and lease losses
(134,275
)
 
(139,456
)
Total loans and leases held for investment, net
16,321,010

 
16,833,287

Equipment leased to others under operating leases
280,648

 
284,631

Premises and equipment, net
33,686

 
31,852

Foreclosed assets, net
1,236

 
1,329

Deferred tax asset, net
12,584

 

Goodwill
2,548,670

 
2,548,670

Core deposit and customer relationship intangibles, net
73,280

 
79,626

Other assets
511,184

 
540,723

Total assets
$
24,149,330

 
$
24,994,876

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
8,232,140

 
$
8,508,044

Interest-bearing deposits
9,846,648

 
10,357,492

Total deposits
18,078,788

 
18,865,536

Borrowings
575,284

 
467,342

Subordinated debentures
452,223

 
462,437

Accrued interest payable and other liabilities
175,545

 
221,963

Total liabilities
19,281,840

 
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 March 31, 2018 and
 
 
 
December 31, 2017, 126,537,871 and 130,491,108 shares issued, respectively, including
 
 
 
1,383,914 and 1,436,120 shares of unvested restricted stock, respectively)
1,283

 
1,305

Additional paid-in capital
4,111,226

 
4,287,487

Retained earnings
835,611

 
723,471

Treasury stock, at cost (1,763,416 and 1,708,230 shares at March 31, 2018 and December 31, 2017)
(68,694
)
 
(65,836
)
Accumulated other comprehensive income, net
(11,936
)
 
31,171

Total stockholders' equity
4,867,490

 
4,977,598

Total liabilities and stockholders' equity
$
24,149,330

 
$
24,994,876

See Notes to Condensed Consolidated Financial Statements.

4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2018
 
2017
 
2017
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
Loans and leases
$
251,085

 
$
258,309

 
$
224,178

Investment securities
26,138

 
25,712

 
23,039

Deposits in financial institutions
552

 
576

 
192

Total interest income
277,775

 
284,597

 
247,409

Interest expense:
 
 
 
 
 
Deposits
13,818

 
14,041

 
8,377

Borrowings
920

 
1,366

 
1,018

Subordinated debentures
6,537

 
6,234

 
5,562

Total interest expense
21,275

 
21,641

 
14,957

Net interest income
256,500

 
262,956

 
232,452

Provision for credit losses
4,000

 
6,406

 
24,728

Net interest income after provision for credit losses
252,500

 
256,550

 
207,724

Noninterest income:
 
 
 
 
 
Service charges on deposit accounts
4,174

 
4,574

 
3,758

Other commissions and fees
10,265

 
10,505

 
10,390

Leased equipment income
9,587

 
8,258

 
9,475

Gain on sale of loans and leases
4,569

 
1,988

 
712

Gain (loss) on sale of securities
6,311

 
(3,329
)
 
(99
)
Other income
3,653

 
4,799

 
10,878

Total noninterest income
38,559

 
26,795

 
35,114

Noninterest expense:
 
 
 
 
 
Compensation
71,023

 
71,986

 
64,880

Occupancy
13,223

 
12,715

 
11,608

Data processing
6,659

 
6,764

 
7,015

Other professional services
4,439

 
5,786

 
3,378

Insurance and assessments
5,727

 
5,384

 
4,791

Intangible asset amortization
6,346

 
5,062

 
3,064

Leased equipment depreciation
5,375

 
5,048

 
5,625

Foreclosed assets (income) expense, net
(122
)
 
(475
)
 
143

Acquisition, integration and reorganization costs

 
16,085

 
500

Loan expense
2,271

 
3,140

 
3,387

Other expense
12,454

 
11,373

 
12,153

Total noninterest expense
127,395

 
142,868

 
116,544

Earnings before income taxes
163,664

 
140,477

 
126,294

Income tax expense
(45,388
)
 
(56,440
)
 
(47,626
)
Net earnings
$
118,276

 
$
84,037

 
$
78,668

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
Basic
$
0.93

 
$
0.66

 
$
0.65

Diluted
$
0.93

 
$
0.66

 
$
0.65

Dividends declared per share
$
0.50

 
$
0.50

 
$
0.50


See Notes to Condensed Consolidated Financial Statements.

5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2018
 
2017
 
2017
 
(Unaudited)
 
(In thousands)
Net earnings
$
118,276

 
$
84,037

 
$
78,668

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
Unrealized net holding (losses) gains on securities
 
 
 
 
 
available-for-sale arising during the period
(62,669
)
 
(7,146
)
 
11,184

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

 
2,574

 
(4,507
)
Unrealized net holding (losses) gains on securities
 
 
 
 
 
available-for-sale, net of tax
(44,738
)
 
(4,572
)
 
6,677

Reclassification adjustment for net (gains) losses
 
 
 
 
 
included in net earnings (1)
(6,311
)
 
3,329

 
99

Income tax expense (benefit) related to reclassification
 
 
 
 
 
adjustment
1,806

 
(1,199
)
 
(40
)
Reclassification adjustment for net (gains) losses
 
 
 
 
 
included in net earnings, net of tax
(4,505
)
 
2,130

 
59

Other comprehensive (loss) income, net of tax
(49,243
)
 
(2,442
)
 
6,736

Comprehensive income
$
69,033

 
$
81,595

 
$
85,404

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

See Notes to Condensed Consolidated Financial Statements.


6



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

 
Three Months Ended March 31, 2018
 
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, 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 income - net
 
 
 
 
 
 
 
 
 
 
 
 
 
unrealized gain 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

 

 
(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

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




See Notes to Condensed Consolidated Financial Statements.



7



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
118,276

 
$
78,668

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,751

 
8,496

Amortization of net premiums on securities available-for-sale
8,432

 
10,601

Amortization of intangible assets
6,346

 
3,064

Provision for credit losses
4,000

 
24,728

Provision for losses on foreclosed assets
65

 

Gain on sale of loans and leases
(4,569
)
 
(712
)
Loss (gain) on sale of premises and equipment
7

 
(560
)
(Gain) loss on sale of securities
(6,311
)
 
99

Gain on BOLI death benefit

 
(471
)
Unrealized (gain) loss on derivatives and foreign currencies, net
(605
)
 
202

Earned stock compensation
7,199

 
6,470

Decrease in deferred income taxes, net
7,153

 
1,091

Decrease in other assets
38,208

 
661

(Decrease) increase in accrued interest payable and other liabilities
(50,969
)
 
10,852

Net cash provided by operating activities
135,983

 
143,189

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

 
(157,244
)
Proceeds from sales of loans and leases
615,376

 
37,173

Proceeds from maturities and paydowns of securities available-for-sale
75,125

 
92,612

Proceeds from sales of securities available-for-sale
306,253

 
42,996

Purchases of securities available-for-sale
(487,105
)
 
(248,187
)
Net redemptions of Federal Home Loan Bank stock
3,540

 
3,969

Proceeds from sales of foreclosed assets
28

 
212

Purchases of premises and equipment, net
(3,997
)
 
(1,944
)
Proceeds from sales of premises and equipment

 
10,290

Proceeds from BOLI death benefit

 
1,192

Net (increase) decrease in equipment leased to others under operating leases
(1,241
)
 
114

Net cash provided by (used in) investing activities
890,569

 
(218,817
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net (decrease) increase in noninterest-bearing deposits
(275,579
)
 
131,170

Net (decrease) increase in interest-bearing deposits
(510,844
)
 
329,605

Net increase (decrease) in borrowings
107,942

 
(445,203
)
Net decrease in subordinated debentures
(12,372
)
 

Common stock repurchased and restricted stock surrendered
(122,651
)
 
(2,281
)
Cash dividends paid
(63,689
)
 
(60,833
)
Net cash (used in) financing activities
(877,193
)
 
(47,542
)
 
 
 
 
Net increase (decrease) in cash, cash equivalents, and restricted cash
149,359

 
(123,170
)
Cash, cash equivalents, and restricted cash, beginning of period
398,437

 
419,670

Cash, cash equivalents, and restricted cash, end of period
$
547,796

 
$
296,500



See Notes to Condensed Consolidated Financial Statements.


8



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(Unaudited)
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
17,515

 
$
14,352

Cash paid for income taxes
3,790

 
2,834

Loans transferred to foreclosed assets

 
78

  

See Notes to Condensed Consolidated Financial Statements.


9



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


NOTE 1.  ORGANIZATION    
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. At March 31, 2018, the Bank offers a broad range of loan and lease and deposit products and services through 75 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. We provide commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and middle-market businesses. We offer additional products and services through our CapitalSource and Square 1 Bank Divisions. Our CapitalSource Division provides asset-based, equipment, real estate, security cash flow loans and treasury management services to established middle-market businesses on a national basis. Our Square 1 Bank Division offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are compensation, occupancy, general operating expenses, and the interest paid by the Bank on deposits and borrowings.
We have completed 29 acquisitions from May 1, 2000 through March 31, 2018. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. See Note 3. Acquisitions, for more information about the CUB acquisition.
Significant Accounting Policies
Our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission ("Form 10-K"). Updates to our significant accounting policies described below reflect the impact of the adoption of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" and ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”
Investment Securities
Our significant accounting policy for investment securities applied to both debt and equity securities in prior periods. Effective January 1, 2018, upon the adoption of ASUs 2016-01 and 2018-03, our significant accounting policy for investment securities applies only to debt securities.

10



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



Equity Investments
Investments in common or preferred stock that are not publicly traded and certain investments in limited partnerships are considered equity investments that do not have a readily determinable fair value. If we have the ability to significantly influence the operating and financial policies of the investee, the investment is accounted for pursuant to the equity method of accounting. This is generally presumed to exist when we own between 20% and 50% of a corporation, or when we own greater than 5% of a limited partnership or similarly structured entity. Our equity investment carrying values are included in other assets and our share of earnings and losses in equity method investees is included in "Noninterest income - other" on the condensed consolidated statements of earnings. Prior to January 1, 2018, if we did not have significant influence over the investee, the cost method was used to account for the equity interest.
Effective January 1, 2018 with the adoption of ASU 2016-01, our accounting treatment for equity investments differs for those with and without readily determinable fair values. Equity investments with readily determinable fair values are recorded at fair value with changes in fair value recorded in “Noninterest income - other.” For equity investments without readily determinable fair values we have elected the “measurement alternative,” and therefore carry these investments at cost, less impairment (if any), plus or minus changes in observable prices. On a quarterly basis, we review our equity investments without readily determinable fair values for impairment. We consider a number of qualitative factors such as whether there is a significant deterioration in earnings performance, credit rating, asset quality, or business prospects of the investee in determining if impairment exists. If the investment is considered impaired, an impairment loss equal to the amount by which the carrying value exceeds its fair value is recorded through a charge to earnings. The impairment loss may be reversed in a subsequent period if there are observable transactions for the identical or similar investment of the same issuer at a higher amount than the carrying amount that was established when the impairment was recognized.
Realized gains or losses resulting from the sale of equity investments are calculated using the specific identification method and are included in "Noninterest income - other."
Comprehensive Income
Comprehensive income consists of net earnings and net unrealized gains (losses) on debt securities available‑for‑sale, net, and is presented in the consolidated statements of comprehensive income.
Accounting Standards Adopted in 2018
Effective January 1, 2018, the Company adopted ASU 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.


11



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


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 adopted ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." Upon adoption, the Company applied the retrospective transition method to each period presented. ASU 2016-15 addressed eight issues related to the statement of cash flows, the most relevant to the Company being the classification of proceeds from the settlement of BOLI policies. As the Company classified proceeds from the settlement of BOLI policies in the manner required by ASU 2016-15 in the prior periods presented, there was no change to the Company's consolidated financial position, results of operations, or cash flows for both current and prior periods upon adoption.
Effective January 1, 2018, the Company adopted ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." Upon adoption, the Company applied the retrospective transition method to each period presented. As the Company does not present restricted cash as a separate line in the statement of financial position, there is no change to the presentation of cash on the statement of cash flows. The nature and amount of our restricted cash is shown in Note 2. Restricted Cash Balances.
Effective January 1, 2018, the Company adopted ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." ASU 2017-01 provides a new framework for determining whether transactions should be accounted for as acquisitions of assets or businesses. The Company had no acquisitions or purchases of components of a business in the first quarter 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 quarter 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 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.

12



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


Basis of Presentation    
Our interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value of intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period’s presentation format. 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.
In prior periods, 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 period are for total loans and leases, while amounts related to the 2017 period 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 three months ended March 31, 2018 and year ended December 31, 2017 were $80.7 million and $77.6 million. As of March 31, 2018 and December 31, 2017, we pledged cash collateral for our derivative contracts of $3.7 million and $2.7 million.

13



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


NOTE 3.  ACQUISITIONS    
CUB Acquisition
On October 20, 2017, we completed the acquisition of CUB. As part of the acquisition, CU Bank, a wholly-owned subsidiary of CUB, was merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank.
We completed the acquisition to, among other things, enhance our Southern California community bank franchise by adding a $2.1 billion loan portfolio and $2.7 billion of core deposits. The CUB acquisition has been accounted for under the acquisition method of accounting. We acquired $3.5 billion of assets and assumed $2.8 billion of liabilities upon closing of the acquisition. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date.
We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The application of the acquisition method of accounting resulted in goodwill of $374.7 million. All of the recognized goodwill is non-deductible for tax purposes.
NOTE 4.  GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings.
Our other intangible assets with definite lives include CDI and CRI. CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan and lease customers acquired. The aggregate amortization expense is expected to be $22.5 million for 2018. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $18.7 million for 2019, $14.6 million for 2020, $10.8 million for 2021, $7.5 million for 2022, and $1.4 million for 2023.
The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2018
 
2017
 
2017
 
(In thousands)
Gross Amount of CDI and CRI:
 
 
 
 
 
Balance, beginning of period
$
119,497

 
$
61,997

 
$
64,187

Addition from CUB acquisition

 
57,500

 

Balance, end of period
119,497

 
119,497

 
64,187

Accumulated Amortization:
 
 
 
 
 
Balance, beginning of period
(39,871
)
 
(34,809
)
 
(27,821
)
Amortization
(6,346
)
 
(5,062
)
 
(3,064
)
Balance, end of period
(46,217
)
 
(39,871
)
 
(30,885
)
Net CDI and CRI, end of period
$
73,280

 
$
79,626

 
$
33,302


14



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


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:
 
March 31, 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
$
251,585

 
$
2,748

 
$
(2,557
)
 
$
251,776

 
$
243,375

 
$
3,743

 
$
(844
)
 
$
246,274

Agency CMOs
551,021

 
840

 
(5,916
)
 
545,945

 
277,638

 
968

 
(2,897
)
 
275,709

Private label CMOs
114,386

 
3,071

 
(1,212
)
 
116,245

 
122,816

 
3,813

 
(642
)
 
125,987

Municipal securities
1,392,261

 
19,389

 
(8,064
)
 
1,403,586

 
1,627,707

 
53,700

 
(1,339
)
 
1,680,068

Agency commercial MBS
1,114,430

 
121

 
(25,057
)
 
1,089,494

 
1,169,969

 
2,758

 
(8,758
)
 
1,163,969

U.S. Treasury securities
148,217

 
365

 

 
148,582

 

 

 

 

SBA securities
148,787

 
706

 
(1,229
)
 
148,264

 
160,214

 
695

 
(575
)
 
160,334

Asset-backed securities
81,022

 
11

 
(1,299
)
 
79,734

 
89,425

 
159

 
(874
)
 
88,710

Corporate debt securities
17,000

 
1,360

 

 
18,360

 
17,000

 
2,295

 

 
19,295

Collateralized loan obligations

 

 

 

 
6,960

 
55

 

 
7,015

Equity investments

 

 

 

 
6,421

 
779

 
(130
)
 
7,070

Total
$
3,818,709

 
$
28,611

 
$
(45,334
)
 
$
3,801,986

 
$
3,721,525

 
$
68,965

 
$
(16,059
)
 
$
3,774,431

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 March 31, 2018, securities available-for-sale with a fair value of $433.3 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.
During the three months ended March 31, 2018, we sold $299.9 million of securities available-for-sale for a gross realized gain of $6.8 million and a gross realized loss of $515,000. During the three months ended March 31, 2017, we sold $43.1 million of securities available-for-sale for a gross realized gain of $204,000 and a gross realized loss of $303,000.


15



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


Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
March 31, 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
$
104,277

 
$
(1,649
)
 
$
24,518

 
$
(908
)
 
$
128,795

 
$
(2,557
)
Agency CMOs
251,805

 
(5,359
)
 
18,377

 
(557
)
 
270,182

 
(5,916
)
Private label CMOs
92,396

 
(1,105
)
 
4,446

 
(107
)
 
96,842

 
(1,212
)
Municipal securities
364,270

 
(6,320
)
 
30,973

 
(1,744
)
 
395,243

 
(8,064
)
Agency commercial MBS
1,006,897

 
(21,302
)
 
67,387

 
(3,755
)
 
1,074,284

 
(25,057
)
SBA securities
87,303

 
(1,229
)
 

 

 
87,303

 
(1,229
)
Asset-backed securities
64,382

 
(1,199
)
 
7,630

 
(100
)
 
72,012

 
(1,299
)
Total
$
1,971,330

 
$
(38,163
)
 
$
153,331

 
$
(7,171
)
 
$
2,124,661

 
$
(45,334
)

 
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
1,039

 
(130
)
 

 

 
1,039

 
(130
)
Total
$
1,026,780

 
$
(8,928
)
 
$
223,832

 
$
(7,131
)
 
$
1,250,612

 
$
(16,059
)
We reviewed the securities that were in an unrealized loss position at March 31, 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.

16



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


Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our securities available-for-sale portfolio based on amortized cost and carrying value as of the date indicated:
 
March 31, 2018
 
Amortized
 
Fair
Maturity
Cost
 
Value
 
(In thousands)
Due in one year or less
$
10,384

 
$
10,517

Due after one year through five years
486,326

 
483,913

Due after five years through ten years
1,053,610

 
1,035,714

Due after ten years
2,268,389

 
2,271,842

Total securities available-for-sale
$
3,818,709

 
$
3,801,986

Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2018
 
2017
 
2017
 
(In thousands)
Taxable interest
$
14,599

 
$
13,724

 
$
12,166

Non-taxable interest
11,107

 
11,429

 
10,381

Dividend income
432

 
559

 
492

Total interest income on investment securities
$
26,138

 
$
25,712

 
$
23,039


17



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


NOTE 6.  LOANS AND LEASES
Our loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are sold.
Prior to January 1, 2018, our loan and lease portfolio consisted of Non-PCI loans and leases and PCI loans. Non-PCI loans and leases were those we originated or those we acquired that were not credit impaired at the dates of acquisition. PCI loans were purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was probable that collection of all contractually required payments was unlikely. As our gross PCI loan portfolio represented less than 0.4% of total loans as of the end of 2017, beginning in 2018 the PCI loans were accounted for as Non-PCI loans. Accordingly, in the credit quality tables below under "Loans and leases held for investment," amounts related to the 2018 period are for total loans and leases, and amounts related to the 2017 period are for Non-PCI loans and leases.
Loans Held for Sale
In the fourth quarter of 2017, we sold $1.5 billion of cash flow loans and exited our CapitalSource Division 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.
Loans and Leases Held for Investment
The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:
 
March 31, 2018
 
December 31, 2017
 
Total
 
Non-PCI
 
 
 
Total
 
Loans
 
Loans
 
PCI
 
Loans
 
and Leases
 
and Leases
 
Loans
 
and Leases
 
(In thousands)
Real estate mortgage
$
7,570,526

 
$
7,815,355

 
$
53,658

 
$
7,869,013

Real estate construction and land
1,699,630

 
1,611,287

 

 
1,611,287

Commercial
6,848,576

 
7,137,978

 
4,158

 
7,142,136

Consumer
397,895

 
409,551

 
234

 
409,785

Gross loans and leases held for investment
16,516,627

 
16,974,171

 
58,050

 
17,032,221

Deferred fees, net
(61,342
)
 
(59,464
)
 
(14
)
 
(59,478
)
Loans and leases held for investment,
 
 
 
 
 
 
 
net of deferred fees
16,455,285

 
16,914,707

 
58,036

 
16,972,743

Allowance for loan and lease losses
(134,275
)
 
(133,012
)
 
(6,444
)
 
(139,456
)
Total loans and leases held for
 
 
 
 
 
 
 
investment, net
$
16,321,010

 
$
16,781,695

 
$
51,592

 
$
16,833,287



18



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


The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by portfolio segment and class as of the dates indicated:
 
March 31, 2018
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
26,262

 
$
6,849

 
$
33,111

 
$
4,999,895

 
$
5,033,006

Residential
1,512

 
1,976

 
3,488

 
2,517,749

 
2,521,237

Total real estate mortgage
27,774

 
8,825

 
36,599

 
7,517,644

 
7,554,243

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
789,892

 
789,892

Residential
2,605

 

 
2,605

 
884,505

 
887,110

Total real estate construction and land
2,605

 

 
2,605

 
1,674,397

 
1,677,002

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based

 
680

 
680

 
2,957,210

 
2,957,890

Venture capital
737

 
1,492

 
2,229

 
1,918,414

 
1,920,643

Other commercial
5,133

 
1,388

 
6,521

 
1,941,069

 
1,947,590

Total commercial
5,870

 
3,560

 
9,430

 
6,816,693

 
6,826,123

Consumer
1,000

 

 
1,000

 
396,917

 
397,917

Total
$
37,249

 
$
12,385

 
$
49,634

 
$
16,405,651

 
$
16,455,285


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

 
$
9,107

 
$
38,177

 
$
5,323,310

 
$
5,361,487

Residential
6,999

 
2,022

 
9,021

 
2,428,483

 
2,437,504

Total real estate mortgage
36,069

 
11,129

 
47,198

 
7,751,793

 
7,798,991

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 

 

 
769,075

 
769,075

Residential
2,081

 

 
2,081

 
820,073

 
822,154

Total real estate construction and land
2,081

 

 
2,081

 
1,589,148

 
1,591,229

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based
344

 
690

 
1,034

 
2,923,837

 
2,924,871

Venture capital
6,533

 
760

 
7,293

 
2,115,418

 
2,122,711

Other commercial
2,846

 
1,586

 
4,432

 
2,062,906

 
2,067,338

Total commercial
9,723

 
3,036

 
12,759

 
7,102,161

 
7,114,920

Consumer
562

 

 
562

 
409,005

 
409,567

Total (1)
$
48,435

 
$
14,165

 
$
62,600

 
$
16,852,107

 
$
16,914,707

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

19



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


It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more (unless the loan is both well secured and in the process of collection) or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing loans and leases held for investment, net of deferred fees, by portfolio segment and class as of the dates indicated:  
 
March 31, 2018
 
December 31, 2017 (1)
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
19,116

 
$
5,013,890

 
$
5,033,006

 
$
65,563

 
$
5,295,924

 
$
5,361,487

Residential
5,225

 
2,516,012

 
2,521,237

 
3,350

 
2,434,154

 
2,437,504

Total real estate mortgage
24,341

 
7,529,902

 
7,554,243

 
68,913

 
7,730,078

 
7,798,991

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial

 
789,892

 
789,892

 

 
769,075

 
769,075

Residential

 
887,110

 
887,110

 

 
822,154

 
822,154

Total real estate construction and land

 
1,677,002

 
1,677,002

 

 
1,591,229

 
1,591,229

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
32,838

 
2,925,052

 
2,957,890

 
33,553

 
2,891,318

 
2,924,871

Venture capital
21,861

 
1,898,782

 
1,920,643

 
29,424

 
2,093,287

 
2,122,711

Other commercial
24,434

 
1,923,156

 
1,947,590

 
23,874

 
2,043,464

 
2,067,338

Total commercial
79,133

 
6,746,990

 
6,826,123

 
86,851

 
7,028,069

 
7,114,920

Consumer
251

 
397,666

 
397,917

 
20

 
409,547

 
409,567

Total
$
103,725

 
$
16,351,560

 
$
16,455,285

 
$
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 March 31, 2018, nonaccrual loans and leases totaled $103.7 million and included $11.9 million of loans and leases 90 or more days past due, $8.7 million of loans and leases 30 to 89 days past due, and $83.1 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $155.8 million at December 31, 2017, including $14.2 million of the loans and leases 90 or more days past due, $3.2 million of loans and leases 30 to 89 days past due, and $138.4 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of March 31, 2018, our ten largest loan relationships on nonaccrual status had an aggregate carrying value of $68.8 million and represented 66.3% of total nonaccrual loans and leases.

20



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


The following table presents the credit risk rating categories for loans and leases held for investment, net of deferred fees, by portfolio segment and class as of the dates indicated. Classified loans and leases are those with a credit risk rating of either substandard or doubtful.
 
March 31, 2018
 
Classified
 
Special Mention
 
Pass
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
44,635

 
$
158,496

 
$
4,829,875

 
$
5,033,006

Residential
12,436

 
1,672

 
2,507,129

 
2,521,237

Total real estate mortgage
57,071

 
160,168

 
7,337,004

 
7,554,243

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
453

 

 
789,439

 
789,892

Residential

 
30,626

 
856,484

 
887,110

Total real estate construction and land
453

 
30,626

 
1,645,923

 
1,677,002

Commercial:
 
 
 
 
 
 
 
Asset-based
49,913

 
54,882

 
2,853,095

 
2,957,890

Venture capital
31,364

 
124,303

 
1,764,976

 
1,920,643

Other commercial
68,813

 
43,681

 
1,835,096

 
1,947,590

Total commercial
150,090

 
222,866

 
6,453,167

 
6,826,123

Consumer
428

 
1,456

 
396,033

 
397,917

Total
$
208,042

 
$
415,116

 
$
15,832,127

 
$
16,455,285


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

 
$
122,488

 
$
5,145,204

 
$
5,361,487

Residential
8,425

 
4,582

 
2,424,497

 
2,437,504

Total real estate mortgage
102,220

 
127,070

 
7,569,701

 
7,798,991

Real estate construction and land:
 
 
 
 
 
 
 
Commercial

 

 
769,075

 
769,075

Residential

 
619

 
821,535

 
822,154

Total real estate construction and land

 
619

 
1,590,610

 
1,591,229

Commercial:
 
 
 
 
 
 
 
Asset-based
51,000

 
37,256

 
2,836,615

 
2,924,871

Venture capital
49,671

 
114,210

 
1,958,830

 
2,122,711

Other commercial
75,251

 
21,883

 
1,970,204

 
2,067,338

Total commercial
175,922

 
173,349

 
6,765,649

 
7,114,920

Consumer
263

 
1,130

 
408,174

 
409,567

Total
$
278,405

 
$
302,168

 
$
16,334,134

 
$
16,914,707

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

21



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


In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s loan and lease risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in increases in the provisions for credit losses and the allowance for credit losses.
Nonaccrual loans and leases and performing troubled debt restructured loans are considered impaired for reporting purposes. Troubled debt restructurings 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:
 
March 31, 2018
 
December 31, 2017 (1)
 
 
 
Performing
 
Total
 
 
 
Performing
 
Total
 
Nonaccrual
 
Troubled
 
Impaired
 
Nonaccrual
 
Troubled
 
Impaired
 
Loans
 
Debt
 
Loans
 
Loans
 
Debt