Edgar Filing: PACWEST BANCORP

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

Commission File No. 001-36408

PACWEST BANCORP

(Exact name of registrant as specified in its charter)



Delaware		33-0885320
(State of Incorporation)		(I.R.S. Employer Identification No.)

9701 Wilshire Blvd., Suite 700

Beverly Hills, CA 90212

(Address of Principal Executive Offices, Including Zip Code)

(310) 887-8500

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



þ Large accelerated filer		o Accelerated filer

o Non-accelerated filer	(Do not check if a smaller reporting company)	o Smaller reporting company

		o Emerging growth company

o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 27, 2017, there were 120,048,067 shares of the registrant's common stock outstanding, excluding 1,397,993 shares of unvested restricted stock.

PACWEST BANCORP

JUNE 30, 2017 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



		Page

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets (Unaudited)	4
	Condensed Consolidated Statements of Earnings (Unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	6
	Condensed Consolidated Statement Changes in Stockholders' Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	71
Item 4.	Controls and Procedures	74

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 6.	Index to Exhibits	76
Signatures		77

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."



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

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	June 30,			December 31,
	2017			2016
	(Unaudited)
	(Dollars in thousands, except par value amounts)
ASSETS:
Cash and due from banks	$	180,330		$	337,965
Interest-earning deposits in financial institutions	107,150			81,705
Total cash and cash equivalents	287,480			419,670
Securities available-for-sale, at fair value	3,474,560			3,223,830
Federal Home Loan Bank stock, at cost	22,059			21,870
Total investment securities	3,496,619			3,245,700
Loans held for sale, at lower of cost or fair value	175,158			—
Gross loans and leases held for investment	15,609,180			15,520,537
Deferred fees, net	(65,723		)	(64,583		)
Allowance for loan and lease losses	(145,958		)	(157,238		)
Total loans and leases held for investment, net	15,397,499			15,298,716
Equipment leased to others under operating leases	203,212			229,905
Premises and equipment, net	29,108			38,594
Foreclosed assets, net	13,278			12,976
Deferred tax asset, net	70,354			94,112
Goodwill	2,173,949			2,173,949
Core deposit and customer relationship intangibles, net	30,237			36,366
Other assets	369,983			319,779
Total assets	$	22,246,877		$	21,869,767

LIABILITIES:
Noninterest-bearing deposits	$	6,701,039		$	6,659,016
Interest-bearing deposits	10,173,938			9,211,595
Total deposits	16,874,977			15,870,611
Borrowings	217,454			905,812
Subordinated debentures	445,743			440,744
Accrued interest payable and other liabilities	148,798			173,545
Total liabilities	17,686,972			17,390,712

Commitments and contingencies (Note 7)

STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)	—			—
Common stock ($0.01 par value, 200,000,000 shares authorized at June 30, 2017 and
December 31, 2016, 123,116,527 and 122,803,029 shares issued, respectively, including
1,400,254 and 1,476,132 shares of unvested restricted stock, respectively)	1,231			1,228
Additional paid-in capital	4,054,895			4,162,132
Retained earnings	537,968			366,073
Treasury stock, at cost (1,668,206 and 1,519,360 shares at June 30, 2017 and December 31, 2016)	(63,918		)	(56,360		)
Accumulated other comprehensive income, net	29,729			5,982
Total stockholders' equity	4,559,905			4,479,055
Total liabilities and stockholders' equity	$	22,246,877		$	21,869,767

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS



	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2017			2017			2016			2017			2016
	(Unaudited)
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	234,618		$	224,178		$	224,326		$	458,796		$	460,701
Investment securities	24,689			23,039			22,420			47,728			44,967
Deposits in financial institutions	237			192			308			429			616
Total interest income	259,544			247,409			247,054			506,953			506,284
Interest expense:
Deposits	10,205			8,377			7,823			18,582			16,896
Borrowings	1,066			1,018			352			2,084			933
Subordinated debentures	5,800			5,562			5,122			11,362			10,104
Total interest expense	17,071			14,957			13,297			32,028			27,933
Net interest income	242,473			232,452			233,757			474,925			478,351
Provision for credit losses	11,499			24,728			13,903			36,227			34,043
Net interest income after provision for credit losses	230,974			207,724			219,854			438,698			444,308
Noninterest income:
Service charges on deposit accounts	3,510			3,758			3,633			7,268			7,489
Other commissions and fees	10,583			10,390			11,073			20,973			22,562
Leased equipment income	11,635			9,475			8,523			21,110			16,767
Gain on sale of loans and leases	649			712			388			1,361			633
Gain (loss) on sale of securities	1,651			(99		)	478			1,552			8,588
FDIC loss sharing expense, net	—			—			(6,502		)	—			(8,917		)
Other income	7,254			10,878			4,528			18,132			9,538
Total noninterest income	35,282			35,114			22,121			70,396			56,660
Noninterest expense:
Compensation	65,288			64,880			62,174			130,168			123,239
Occupancy	11,811			11,608			12,193			23,419			24,825
Data processing	6,337			7,015			5,644			13,352			11,548
Other professional services	3,976			3,378			3,401			7,354			6,973
Insurance and assessments	4,856			4,791			4,951			9,647			9,916
Intangible asset amortization	3,065			3,064			4,371			6,129			9,117
Leased equipment depreciation	5,232			5,625			5,286			10,857			10,310
Foreclosed assets (income) expense, net	(157		)	143			(3		)	(14		)	(564		)
Acquisition, integration and reorganization costs	1,700			500			—			2,200			200
Loan expense	3,884			3,387			2,145			7,271			4,300
Other expense	11,715			12,153			9,919			23,868			20,905
Total noninterest expense	117,707			116,544			110,081			234,251			220,769
Earnings before income taxes	148,549			126,294			131,894			274,843			280,199
Income tax expense	(54,902		)	(47,626		)	(49,726		)	(102,528		)	(107,575		)
Net earnings	$	93,647		$	78,668		$	82,168		$	172,315		$	172,624

Earnings per share:
Basic	$	0.77		$	0.65		$	0.68		$	1.42		$	1.42
Diluted	$	0.77		$	0.65		$	0.68		$	1.42		$	1.42
Dividends declared per share	$	0.50		$	0.50		$	0.50		$	1.00		$	1.00

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2017			2017			2016			2017			2016
	(Unaudited)
	(In thousands)
Net earnings	$	93,647		$	78,668		$	82,168		$	172,315		$	172,624
Other comprehensive income (loss), net of tax:
Unrealized net holding gains on securities
available-for-sale arising during the period	30,340			11,184			56,514			41,524			99,607
Income tax expense related to net unrealized
holding gains arising during the period	(12,350		)	(4,507		)	(22,965		)	(16,857		)	(40,620		)
Unrealized net holding gains on securities
available-for-sale, net of tax	17,990			6,677			33,549			24,667			58,987
Reclassification adjustment for net (gains) losses
included in net earnings ⁽¹⁾	(1,651		)	99			(478		)	(1,552		)	(8,588		)
Income tax expense (benefit) related to reclassification
adjustment	672			(40		)	194			632			3,517
Reclassification adjustment for net (gains) losses
included in net earnings, net of tax	(979		)	59			(284		)	(920		)	(5,071		)
Other comprehensive income, net of tax	17,011			6,736			33,265			23,747			53,916
Comprehensive income	$	110,658		$	85,404		$	115,433		$	196,062		$	226,540

^{___________________________________}


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

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY



	Six Months Ended June 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	—		—		—			172,315			—			—		172,315
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax	—		—		—			—			—			23,747		23,747
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	313,498		3		13,716			—			—			—		13,719
Restricted stock surrendered	(148,846	)	—		—			—			(7,558		)	—		(7,558		)
Cash dividends paid	—		—		(121,664		)	—			—			—		(121,664		)
Balance, June 30, 2017	121,448,321		$	1,231	$	4,054,895		$	537,968		$	(63,918	)	$	29,729	$	4,559,905

________________________


(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.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended
	June 30,
	2017			2016
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net earnings	$	172,315		$	172,624
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	15,980			16,522
Amortization of net premiums on securities available-for-sale	20,227			18,174
Amortization of intangible assets	6,129			9,117
Provision for credit losses	36,227			34,043
Gain on sale of foreclosed assets	(282		)	(534		)
Provision for losses on foreclosed assets	14			—
Gain on sale of loans and leases	(1,361		)	(633		)
Gain on sale of premises and equipment	(565		)	(23		)
Gain on sale of securities	(1,552		)	(8,588		)
Gain on BOLI death benefit	(1,050		)	(538		)
Unrealized gain on derivatives and foreign currencies, net	(253		)	(569		)
Earned stock compensation	13,719			11,600
Loss on sale of PWEF leasing unit	—			720
Tax effect included in stockholders' equity of restricted stock vesting	—			(3,683		)
Decrease in accrued and deferred income taxes, net	7,823			68,466
Increase in other assets	(50,973		)	(3,031		)
Decrease in accrued interest payable and other liabilities	(31,195		)	(40,683		)
Net cash provided by operating activities	185,203			272,984

Cash flows from investing activities:
Net increase in loans and leases	(388,619		)	(380,289		)
Proceeds from sales of loans and leases	83,798			78,888
Proceeds from maturities and paydowns of securities available-for-sale	217,399			117,684
Proceeds from sales of securities available-for-sale	86,018			353,374
Purchases of securities available-for-sale	(532,849		)	(177,644		)
Net purchases of Federal Home Loan Bank stock	(189		)	(4,504		)
Proceeds from sales of foreclosed assets	1,281			6,602
Purchases of premises and equipment, net	(4,037		)	(3,951		)
Proceeds from sales of premises and equipment	10,306			24
Proceeds from sale of leasing unit	—			138,955
Proceeds from BOLI death benefit	2,478			3,034
Net decrease (increase) of equipment leased to others under operating leases	17,262			(16,060		)
Net cash (used in) provided by investing activities	(507,152		)	116,113

Cash flows from financing activities:
Net increase in noninterest-bearing deposits	44,996			53,387
Net increase (decrease) in interest-bearing deposits	962,343			(569,414		)
Net (decrease) increase in borrowings	(688,358		)	298,324
Restricted stock surrendered	(7,558		)	(4,416		)
Tax effect included in stockholders' equity of restricted stock vesting	—			3,683
Cash dividends paid	(121,664		)	(121,794		)
Net cash provided by (used in) financing activities	189,759			(340,230		)

Net (decrease) increase in cash and cash equivalents	(132,190		)	48,867
Cash and cash equivalents, beginning of period	419,670			396,486
Cash and cash equivalents, end of period	$	287,480		$	445,353

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six Months Ended
	June 30,
	2017		2016
	(Unaudited)
	(In thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest	$	30,478	$	28,558
Cash paid for income taxes	118,878		44,908
Loans transferred to foreclosed assets	580		129
Transfers from loans held for investment to loans held for sale	175,158		—

See Notes to Condensed Consolidated Financial Statements.

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. The Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. We provide commercial banking services, including real estate, construction, and commercial loans, and comprehensive deposit and treasury management services to small and middle-market businesses. We offer additional products and services through our CapitalSource and Square 1 Bank divisions. Our CapitalSource Division provides cash flow, asset-based, equipment, and real estate loans and treasury management services to established middle market businesses on a national basis. Our Square 1 Bank Division offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.

We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are compensation, occupancy, general operating expenses, and the interest paid by the Bank on deposits and borrowings.

We have completed 28 acquisitions from May 1, 2000 through June 30, 2017. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates.

CU Bancorp Merger Announcement

On April 6, 2017, PacWest announced the signing of a definitive agreement and plan of merger (the "Agreement") whereby PacWest will acquire CUB in a transaction valued at approximately $705 million as of the announcement date.

CUB, headquartered in Los Angeles, California, is the parent of CU Bank, a California state-chartered non-member bank, with approximately $3.0 billion in assets and nine branches located in Los Angeles, Orange, Ventura, and San Bernardino counties at June 30, 2017. In connection with the acquisition, CU Bank will be merged into Pacific Western Bank, the principal operating subsidiary of PacWest.

The acquisition, which was approved by the PacWest and CUB boards of directors, is expected to close in the fourth quarter of 2017 and is subject to customary closing conditions, including obtaining approval by CUB’s shareholders and bank regulatory authorities.

Significant Accounting Policies

Except as discussed below, our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission ("Form 10-K").

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Accounting Standard Adopted in 2017

Effective January 1, 2017, the Company adopted ASU 2016-09, "Improvements to Employee Share-Based Accounting." ASU 2016-09 changed aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The recognition of excess tax benefits and tax deficiencies in the income statement was adopted prospectively. Income tax benefits of $1.0 million and $2.1 million were recognized during the three and six months ended June 30, 2017 as a result of the adoption of ASU 2016-09. We expect the requirements of ASU 2016-09 to result in fluctuations in our effective tax rate from period to period based upon the timing of share-based award vestings.

In connection with the adoption of ASU 2016-09, we elected to recognize forfeitures on stock-based compensation awards when they occur, instead of estimating forfeitures at the grant date of the awards and throughout the vesting period. The modified retrospective application of this change in accounting principle resulted in a cumulative adjustment charge to retained earnings of $420,000, net of income taxes. We elected to present the classification of excess tax benefits on the statement of cash flows using a prospective transition method and the prior period has not been adjusted.

Basis of Presentation

Our interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.

Use of Estimates

We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value of intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period’s presentation format. On the condensed consolidated statements of earnings we are presenting a new line for "Loan expense", as that category has exceeded the disclosure materiality threshold, which previously had been included as part of "Other expense." Included in loan expense are costs related to servicing our loans including legal fees. Regarding time deposits disclosures, prior to 2017 we presented the categories as: (1) under $100,000, and (2) $100,000 or more, but now are using the current FDIC insurance limit of $250,000 and presenting the categories as: (1) $250,000 and under, and (2) over $250,000.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings.

Our other intangible assets with definite lives include CDI and CRI. CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan and lease customers acquired. The weighted average amortization period remaining for all of our CDI and CRI as of June 30, 2017 is 4.9 years. The aggregate CDI and CRI amortization expense is expected to be $11.5 million for 2017. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $8.8 million for 2018, $6.7 million for 2019, $4.7 million for 2020, $3.0 million for 2021, and $1.7 million for 2022.

The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:



	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2017			2017			2016			2017			2016
	(In thousands)
Gross Amount of CDI and CRI:
Balance, beginning of period	$	64,187		$	64,187		$	93,824		$	64,187		$	95,524
Fully amortized portion	—			—			(17,311		)	—			(17,311		)
Reduction due to sale of PWEF leasing unit	—			—			—			—			(1,700		)
Balance, end of period	64,187			64,187			76,513			64,187			76,513
Accumulated Amortization:
Balance, beginning of period	(30,885		)	(27,821		)	(45,687		)	(27,821		)	(42,304		)
Amortization	(3,065		)	(3,064		)	(4,371		)	(6,129		)	(9,117		)
Fully amortized portion	—			—			17,311			—			17,311
Reduction due to sale of PWEF leasing unit	—			—			—			—			1,363
Balance, end of period	(33,950		)	(30,885		)	(32,747		)	(33,950		)	(32,747		)
Net CDI and CRI, end of period	$	30,237		$	33,302		$	43,766		$	30,237		$	43,766

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 3. INVESTMENT SECURITIES

Securities Available-for-Sale

The following table presents amortized cost, gross unrealized gains and losses, and fair values of securities available-for-sale as of the dates indicated:



	June 30, 2017									December 31, 2016
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
Security Type	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(In thousands)
Residential MBS and CMOs:
Agency MBS	$	402,654	$	4,318	$	(2,652	)	$	404,320	$	499,185	$	6,222	$	(2,964	)	$	502,443
Agency CMOs	132,494		1,698		(400		)	133,792		145,258		1,528		(497		)	146,289
Private label CMOs	157,187		3,372		(858		)	159,701		122,707		4,199		(1,437		)	125,469
Municipal securities	1,492,834		43,688		(1,968		)	1,534,554		1,447,064		15,406		(6,011		)	1,456,459
Agency commercial MBS	919,696		5,656		(7,142		)	918,210		555,552		1,798		(9,658		)	547,692
Corporate debt securities	17,000		2,185		—			19,185		47,100		680		(271		)	47,509
Collateralized loan obligations	65,521		820		(40		)	66,301		155,440		1,685		(238		)	156,887
SBA securities	177,171		1,112		(227		)	178,056		179,085		510		(750		)	178,845
Asset-backed and other securities	59,856		685		(100		)	60,441		62,264		358		(385		)	62,237
Total	$	3,424,413	$	63,534	$	(13,387	)	$	3,474,560	$	3,213,655	$	32,386	$	(22,211	)	$	3,223,830

As of June 30, 2017, securities available-for-sale with a fair value of $430.2 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

During the three months ended June 30, 2017, we sold $41.4 million of securities available-for-sale for a gross realized gain of $1.7 million and a gross realized loss of $76,000. During the three months ended June 30, 2016, we sold $9.9 million of securities available-for-sale for a gross realized gain of $0.6 million and a gross realized loss of $0.1 million.

During the six months ended June 30, 2017, we sold $84.5 million of securities available-for-sale for a gross realized gain of $1.9 million and a gross realized loss of $379,000. During the six months ended June 30, 2016, we sold $344.8 million of securities available-for-sale for a gross realized gain of $9.5 million and a gross realized loss of $0.9 million.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Unrealized Losses on Securities Available-for-Sale

The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:



	June 30, 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	$	87,541	$	(802	)	$	118,268	$	(1,850	)	$	205,809	$	(2,652	)
Agency CMOs	20,041		(259		)	11,446		(141		)	31,487		(400		)
Private label CMOs	63,938		(588		)	21,851		(270		)	85,789		(858		)
Municipal securities	97,296		(1,968		)	—		—			97,296		(1,968		)
Agency commercial MBS	304,470		(5,643		)	48,714		(1,499		)	353,184		(7,142		)
Collateralized loan obligations	9,662		(13		)	6,930		(27		)	16,592		(40		)
SBA securities	55,951		(227		)	—		—			55,951		(227		)
Asset-backed and other securities	7,208		(73		)	5,958		(27		)	13,166		(100		)
Total	$	646,107	$	(9,573	)	$	213,167	$	(3,814	)	$	859,274	$	(13,387	)



	December 31, 2016
	Less Than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Security Type	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Residential MBS and CMOs:
Agency MBS	$	149,281	$	(1,691	)	$	122,902	$	(1,273	)	$	272,183	$	(2,964	)
Agency CMOs	44,111		(416		)	25,316		(81		)	69,427		(497		)
Private label CMOs	49,067		(906		)	30,155		(531		)	79,222		(1,437		)
Municipal securities	644,424		(6,011		)	—		—			644,424		(6,011		)
Agency commercial MBS	349,550		(9,658		)	—		—			349,550		(9,658		)
Corporate debt securities	29,829		(271		)	—		—			29,829		(271		)
Collateralized loan obligations	12,450		(37		)	39,231		(201		)	51,681		(238		)
SBA securities	69,293		(407		)	39,024		(343		)	108,317		(750		)
Asset-backed and other securities	18,213		(309		)	7,851		(76		)	26,064		(385		)
Total	$	1,366,218	$	(19,706	)	$	264,479	$	(2,505	)	$	1,630,697	$	(22,211	)

We reviewed the securities that were in a loss position at June 30, 2017, and concluded their 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.

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:



	June 30, 2017
	Amortized		Fair
Maturity	Cost		Value
	(In thousands)
Due in one year or less	$	12,649	$	12,997
Due after one year through five years	255,563		259,332
Due after five years through ten years	1,005,595		1,013,932
Due after ten years	2,150,606		2,188,299
Total securities available-for-sale	$	3,424,413	$	3,474,560

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

Interest Income on Investment Securities

The following table presents the composition of our interest income on investment securities for the periods indicated:



	Three Months Ended						Six Months Ended
	June 30,		March 31,		June 30,		June 30,
	2017		2017		2016		2017		2016
	(In thousands)
Taxable interest	$	13,517	$	12,166	$	11,406	$	25,683	$	22,802
Non-taxable interest	10,750		10,381		10,503		21,131		21,229
Dividend income	422		492		511		914		936
Total interest income on investment securities	$	24,689	$	23,039	$	22,420	$	47,728	$	44,967

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 4. LOANS AND LEASES

Our loan and lease portfolio includes originated and purchased loans and leases. Originated and purchased loans and leases for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that we would be able to collect all contractually required payments, are referred to collectively as Non-PCI loans. Generally, PCI loans are purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was probable that collection of all contractually required payments was unlikely.

Non-PCI loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are sold.

PCI loans are accounted for in accordance with ASC Subtopic 310‑30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality." For PCI loans, at the time of acquisition we (i) calculate the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimate the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The difference between the undiscounted cash flows expected to be collected and the estimated fair value of the acquired loans is the accretable yield. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the PCI loan portfolio; such amount is subject to change over time based on the performance of such loans. The carrying value of PCI loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.

Loans Held for Sale

In the second quarter of 2017, we entered into two agreements to sell loans with balances totaling $175.2 million and the associated unfunded commitments of $19.3 million, primarily from our healthcare portfolios. The $175.2 million of loans were reported as loans held for sale at June 30, 2017 and the sales were completed in July. In connection with the transfer of loans to held for sale, we recognized $7.2 million in charge-offs related to our healthcare portfolio loans in order to record the loans at the lower of cost or fair value.

Loans and Leases Held for Investment

The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:



	June 30, 2017									December 31, 2016
	Non-PCI									Non-PCI
	Loans			PCI						Loans			PCI
	and Leases			Loans			Total			and Leases			Loans			Total
	(In thousands)
Real estate mortgage	$	6,089,209		$	65,950		$	6,155,159		$	5,635,675		$	92,793		$	5,728,468
Real estate construction and land	1,179,616			1,774			1,181,390			975,032			2,409			977,441
Commercial	7,869,706			4,479			7,874,185			8,426,236			12,994			8,439,230
Consumer	398,204			242			398,446			375,149			249			375,398
Total gross loans and leases held for
investment	15,536,735			72,445			15,609,180			15,412,092			108,445			15,520,537
Deferred fees, net	(65,704		)	(19		)	(65,723		)	(64,562		)	(21		)	(64,583		)
Total loans and leases held for investment,
net of deferred fees	15,471,031			72,426			15,543,457			15,347,530			108,424			15,455,954
Allowance for loan and lease losses	(138,879		)	(7,079		)	(145,958		)	(143,755		)	(13,483		)	(157,238		)
Total loans and leases held for
investment, net	$	15,332,152		$	65,347		$	15,397,499		$	15,203,775		$	94,941		$	15,298,716

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Non‑PCI Loans and Leases Held for Investment

The following tables present an aging analysis of our Non‑PCI loans and leases held for investment by portfolio segment and class as of the dates indicated:



	June 30, 2017
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	4,421	$	4,008	$	8,429	$	4,379,267	$	4,387,696
Residential	444		1,898		2,342		1,681,760		1,684,102
Total real estate mortgage	4,865		5,906		10,771		6,061,027		6,071,798
Real estate construction and land:
Commercial	—		—		—		690,058		690,058
Residential	—		—		—		473,282		473,282
Total real estate construction and land	—		—		—		1,163,340		1,163,340
Commercial:
Cash flow	1,360		10,040		11,400		2,819,212		2,830,612
Asset-based	—		203		203		2,391,921		2,392,124
Venture capital	23,171		6,531		29,702		1,971,679		2,001,381
Equipment finance	690		169		859		612,691		613,550
Total commercial	25,221		16,943		42,164		7,795,503		7,837,667
Consumer	298		44		342		397,884		398,226
Total⁽¹⁾	$	30,384	$	22,893	$	53,277	$	15,417,754	$	15,471,031

________________________


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



	December 31, 2016
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	8,590	$	3,303	$	11,893	$	4,341,740	$	4,353,633
Residential	5,694		1,999		7,693		1,256,630		1,264,323
Total real estate mortgage	14,284		5,302		19,586		5,598,370		5,617,956
Real estate construction and land:
Commercial	—		—		—		578,838		578,838
Residential	364		—		364		383,637		384,001
Total real estate construction and land	364		—		364		962,475		962,839
Commercial:
Cash flow	191		1,821		2,012		3,105,380		3,107,392
Asset-based	1,500		2		1,502		2,607,543		2,609,045
Venture capital	13,589		5,769		19,358		1,963,798		1,983,156
Equipment finance	1,417		3,051		4,468		687,499		691,967
Total commercial	16,697		10,643		27,340		8,364,220		8,391,560
Consumer	224		—		224		374,951		375,175
Total	$	31,569	$	15,945	$	47,514	$	15,300,016	$	15,347,530

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more unless the loan is both well secured and in the process of collection or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.

The following table presents our nonaccrual and performing Non‑PCI loans and leases held for investment by portfolio segment and class as of the dates indicated:



	June 30, 2017 ⁽¹⁾						December 31, 2016
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
	(In thousands)
Real estate mortgage:
Commercial	$	65,599	$	4,322,097	$	4,387,696	$	62,454	$	4,291,179	$	4,353,633
Residential	5,229		1,678,873		1,684,102		6,881		1,257,442		1,264,323
Total real estate mortgage	70,828		6,000,970		6,071,798		69,335		5,548,621		5,617,956
Real estate construction and land:
Commercial	—		690,058		690,058		—		578,838		578,838
Residential	—		473,282		473,282		364		383,637		384,001
Total real estate construction and land	—		1,163,340		1,163,340		364		962,475		962,839
Commercial:
Cash flow	43,169		2,787,443		2,830,612		53,908		3,053,484		3,107,392
Asset-based	1,718		2,390,406		2,392,124		2,118		2,606,927		2,609,045
Venture capital	25,278		1,976,103		2,001,381		11,687		1,971,469		1,983,156
Equipment finance	31,111		582,439		613,550		32,848