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Section 1: 10-K (10-K)

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Common Stock, par value $0.01 per share
 
The Nasdaq Stock Market, LLC
(Title of Each Class) 
 
(Name of Exchange on Which Registered) 
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    þ  Yes     o  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    o  Yes    þ  No
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.    þ  Yes     o  No
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).    þ  Yes     o  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   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 Act).    o  Yes    þ  No
As of June 30, 2017, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the average high and low sales prices on The Nasdaq Global Select Market as of the close of business on June 30, 2017, was approximately $5.7 billion. Registrant does not have any nonvoting common equities.
As of February 22, 2018, there were 125,777,985 shares of registrant's common stock outstanding, excluding treasury shares and 1,438,804 shares of unvested restricted stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive proxy statement for its 2018 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and such information is incorporated herein by this reference.


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PACWEST BANCORP
2017 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
PART I
 
Forward‑Looking Information
 
Available Information
 
Glossary of Acronyms, Abbreviations, and Terms
Item 1.
Business
 
General
 
Our Business Strategy
 
Loan Concentrations
 
Current Developments
 
Financing
 
Information Technology Systems
 
Risk Oversight and Management
 
Competition
 
Employees
 
Financial and Statistical Disclosure
 
Supervision and Regulation
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosure
 
PART II
 
 
 
ITEM 5.
Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
Marketplace Designation, Sales Price Information and Holders
 
Dividends
 
Securities Authorized for Issuance under Equity Compensation Plans
 
Recent Sales of Unregistered Securities and Use of Proceeds
 
Repurchases of Common Stock
 
Five‑Year Stock Performance Graph
ITEM 6.
Selected Financial Data
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
Recent Events
 
Key Performance Indicators
 
Critical Accounting Policies
 
Non-GAAP Measurements
 
Results of Operations
 
Balance Sheet Analysis
 
Regulatory Matters
 
Liquidity
 
Contractual Obligations
 
Off-Balance Sheet Arrangements
 
Recent Accounting Pronouncements

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PACWEST BANCORP
2017 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 8.
Financial Statements and Supplementary Data
 
Contents
 
Management’s Report on Internal Control Over Financial Reporting
 
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets as of December 31, 2017 and 2016
 
Consolidated Statements of Earnings for the Years Ended December 31, 2017, 2016 and 2015
 
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
 
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
 
Notes to Consolidated Financial Statements
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9A.
Controls and Procedures
ITEM 9B.
Other Information
PART III
 
ITEM 10.
Directors, Executive Officers and Corporate Governance
ITEM 11.
Executive Compensation
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
ITEM 14.
Principal Accountant Fees and Services
PART IV
 
ITEM 15.
Exhibits and Financial Statement Schedules
ITEM 16.
Form 10-K Summary
SIGNATURES


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PART I
Forward-Looking Information
This Form 10-K contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our operating expenses, profitability, allowance for loan and lease losses, net interest margin, net interest income, deposit growth, loan and lease portfolio growth and production, acquisitions, maintaining capital adequacy, liquidity, goodwill, interest rate risk management, and estimated impacts of the Tax Cuts and Jobs Act. All statements contained in this Form 10-K that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these statements as they involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those expressed in them. Actual results could differ materially from those anticipated in such forward-looking statements as a result of risks and uncertainties more fully described under "Item 1A. Risk Factors." Factors that might cause such differences include, but are not limited to:
our ability to compete effectively against other financial service providers in our markets;
the effect of the current low interest rate environment or impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolios;
economic deterioration or a recession that may affect the ability of borrowers to make contractual payments on loans and may affect the value of real property or other property held as collateral for such loans;
changes in credit quality and the effect of credit quality on our provision for credit losses and allowance for loan and lease losses;
our ability to attract and retain deposits and other sources of funding or liquidity;
the need to retain capital for strategic or regulatory reasons;
the impact of the Dodd-Frank Act on our business, business strategies and cost of operations;
compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases and/or asset mix;
reduced demand for our services due to strategic or regulatory reasons;
our ability to successfully execute on initiatives relating to enhancements of our technology infrastructure, including client-facing systems and applications;
our ability to complete future acquisitions and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
legislative or regulatory requirements or changes, including an increase to capital requirements, and increased political and regulatory uncertainty;
the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
higher than anticipated increases in operating expenses;
lower than expected dividends paid from the Bank to the holding company;
a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge;
the effectiveness of our risk management framework and quantitative models;
the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
the impact of the Tax Cuts and Jobs Act on our business and business strategies, or if other changes are made to tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and
our success at managing risks involved in the foregoing items and all other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-K and other documents filed or furnished by PacWest with the SEC.


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All forward-looking statements included in this Form 10-K are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.
Available Information
We maintain a corporate website at http://www.pacwestbancorp.com and a website for the Bank at http://www.pacificwesternbank.com. At http://www.pacwestbancorp.com and via the “Investor Relations” link at the Bank’s website, our Annual Report on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1‑800‑SEC‑0330. The SEC also maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You may obtain copies of the Company’s filings on the SEC website. These documents may also be obtained in print upon request by our stockholders to our Investor Relations Department.
We have adopted a written code of ethics that applies to all directors, officers and employees of the Company, including our principal executive officer and senior financial officers, in accordance with Section 406 of the Sarbanes‑Oxley Act of 2002 and the rules of the SEC promulgated thereunder. The code of ethics, which we call our Code of Business Conduct and Ethics, is available on our corporate website, http://www.pacwestbancorp.com in the section entitled “Corporate Governance.” Any changes in, or waivers from, the provisions of this code of ethics that the SEC requires us to disclose are posted on our corporate website in such section. In the Corporate Governance section of our corporate website, we have also posted the charters for our Audit Committee, Compensation, Nominating and Governance Committee, Asset/Liability Management Committee, and Risk Committee, as well as our Corporate Governance Guidelines. In addition, information concerning purchases and sales of our equity securities by our executive officers and directors is posted on our website.
Our Investor Relations Department can be contacted at PacWest Bancorp, 9701 Wilshire Blvd., Suite 700, Beverly Hills, CA 90212, Attention: Investor Relations, telephone (310) 887‑8521, or via e‑mail to investor‑relations@pacwestbancorp.com.
All website addresses given in this document are for information only and are not intended to be an active link or to incorporate any website information into this document.

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Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-K, including "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."
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
 
FSOC
Financial Stability Oversight Council
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
 
OFAC
U.S Treasury Department of Office of Foreign Assets Control
CDI
Core Deposit Intangible Assets
 
OREO
Other Real Estate Owned
CET1
Common Equity Tier 1
 
PWEF
Pacific Western Equipment Finance
CFPB
Consumer Financial Protection Bureau
 
PATRIOT Act
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
CMOs
Collateralized Mortgage Obligations
 
PCI
Purchased Credit Impaired
CRA
Community Reinvestment Act of 1977
 
PRSUs
Performance-Based Restricted Stock Units
CRI
Customer Relationship Intangible Assets
 
S1AM
Square 1 Asset Management, Inc.
CUB
CU Bancorp (a company acquired on October 20, 2017)
 
SBA
Small Business Administration
CU Bank
California United Bank (a wholly-owned subsidiary of CUB)
 
SEC
Securities and Exchange Commission
DBO
California Department of Business Oversight
 
SNCs
Shared National Credits
DGCL
Delaware General Corporation Law
 
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
DTAs
Deferred Tax Assets
 
Tax Equivalent Net Interest Income
Net interest income adjusted for tax-equivalent adjustments related to tax-exempt income on municipal securities
Efficiency Ratio
Noninterest expense (less intangible asset amortization, net foreclosed assets income/expense, and acquisition, integration and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)
 
Tax Equivalent NIM
NIM adjusted for tax-equivalent adjustments related to tax-exempt income on municipal securities
FASB
Financial Accounting Standards Board
 
TCJA
Tax Cuts and Jobs Act
FCAL
First California Financial Group, Inc. (a company acquired on May 31, 2013)
 
TDRs
Troubled Debt Restructurings
FDIA
Federal Deposit Insurance Act
 
TRSAs
Time-Based Restricted Stock Awards
FDIC
Federal Deposit Insurance Corporation
 
TruPS
Trust Preferred Securities
FDICIA
Federal Deposit Insurance Corporation Improvement Act
 
U.S. GAAP
U.S. Generally Accepted Accounting Principles
FHLB
Federal Home Loan Bank of San Francisco
 
 
 




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ITEM 1. BUSINESS
General
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 deposit products and services through 76 full-service branches located throughout the state of California, one branch located in Durham, North Carolina, and 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, real estate, equipment and 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.  
PacWest Bancorp was established in October 1999 and has achieved strong market positions by developing and maintaining extensive local relationships in the communities we serve. By leveraging our business model, service-driven focus, and presence in attractive markets, as well as maintaining a highly efficient operating model and robust approach to risk management, we have achieved significant and profitable growth, both organically and through disciplined acquisitions. We have successfully completed 29 acquisitions since 2000 which have contributed to our growth and expanded our market presence throughout the United States.
As of December 31, 2017, we had total assets of $25.0 billion, total loans and leases, net of deferred fees, of $17.5 billion, total deposits of $18.9 billion, and stockholders’ equity of $5.0 billion.
Our Business Strategy
General Overview
We believe that stable, long-term growth and profitability are the result of building strong customer relationships while maintaining disciplined credit underwriting standards. We continue to focus on originating high-quality loans and leases and growing our low-cost deposit base through our relationship-based business lending. These core strengths enable us to maintain operational efficiency, increase profitability, increase core deposits, and grow loans and leases in a sound manner.
Our loan and lease portfolio consists primarily of real estate mortgage loans, real estate construction and land loans, and C&I loans and leases. We pursue attractive growth opportunities to expand and enter new markets aligned with our business model and strategic plans. Additionally, we focus on cultivating strong relationships with private equity and venture capital firms nationwide, many of which are also our clients and/or may invest in our clients.
Our reputation, expertise and relationship-based business banking model enable us to deepen our relationships with our customers. We leverage our relationships with existing customers by cross-selling our products and services, including attracting deposits from and offering cash management solutions to our loan and lease customers. We price our deposit products with a view to maximizing our share of each customer's financial services business and prudently managing our cost of funds.
Focusing on operational efficiency is critical to our profitability and future growth. We carefully manage our cost structure and continuously refine and implement internal processes and systems to create further efficiencies and enhance our earnings. We have substantially completed our efforts to adjust the mix of our deposit base by reducing the proportion of certificates of deposit, a strategic initiative that was undertaken following the CapitalSource Inc. merger in April 2014. The acquisition of Square 1 in October 2015 accelerated this process as substantially all of the $3.8 billion of acquired deposits were core deposits. The Square 1 Bank Division's core deposits increased to over $6.1 billion at December 31, 2017. With the acquisition of CUB on October 20, 2017, we added $2.7 billion of core deposits and the ratio of our core deposits to total deposits was 85% at December 31, 2017.

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Our management team has extensive expertise and a successful track record in evaluating, executing and integrating attractive, franchise-enhancing acquisitions. We have successfully completed 29 acquisitions since 2000, including the CUB acquisition on October 20, 2017 and the Square 1 acquisition in October 2015. We will continue to consider acquisitions that are consistent with our business strategy and financial model as opportunities arise.
Depository Products and Services
Deposits are our primary source of funds to support our interest-earning assets and provide a source of stable low-cost funds and deposit-related fee income. We offer traditional deposit products to businesses and other customers with a variety of rates and terms, including demand, money market, and time deposits. We also provide international banking services, multi-state deposit services, and asset management services. The Bank’s deposits are insured by the FDIC up to statutory limits.
Our branch network allows us to gather deposits, expand our brand presence and service our customers’ banking and cash management needs. In addition, as the banking industry continues to experience broader customer acceptance of on-line and mobile banking tools for conducting basic banking functions we are able to serve our customers through a wide range of non-branch channels, including on-line, mobile, remote deposit, and telephone banking platforms, all of which allows us to expand our service area to attract new depositors without a commensurate increase in branch locations or branch traffic.
At December 31, 2017, we had ATMs at 61 of our branches and one off-site location located in California. We are part of the MoneyPass network that enables our customers to withdraw cash surcharge-free and service charge-free at over 25,000 ATM locations across the country. We provide access to customer accounts via a 24 hour seven-day-a-week, toll-free, automated telephone customer service and secure on-line banking services.
The composition of our deposit mix changed as a result of the CapitalSource Inc. merger in April 2014, which lowered the proportion of core deposits and increased the proportion of more expensive time deposits. Since the CapitalSource Inc. merger, we have focused on shifting the mix of deposits to include a higher proportion of core deposits. Our dedicated team of professionals has been successful in growing our low-cost, core deposit base by attracting deposits from our business customers and offering alternative cash management solutions intended to help retain business customers. The Square 1 acquisition completed in October 2015 accelerated this shift in deposit mix as the percentage of core deposits increased to 79% at the end of 2016. The CUB acquisition completed on October 20, 2017 also contributed to this shift in deposit mix and the percentage of core deposits increased to 85% at December 31, 2017.
At December 31, 2017, our total deposits consisted of $15.9 billion in core deposits, $2.1 billion in time deposits and $0.9 billion in non-core non-maturity deposits. Core deposits represented 85% of total deposits at December 31, 2017, and were comprised of $8.5 billion in noninterest-bearing deposits, $2.2 billion in interest-bearing checking accounts, $4.5 billion in money market accounts and $0.7 billion in savings accounts. Our deposit base is also diversified by client type. As of December 31, 2017, no individual depositor represented more than 1.6% of our total deposits, and our top ten depositors represented 8.9% of our total deposits.
We face strong competition in gathering deposits. Our most direct competition for deposits comes from nationwide, regional, and community banks, credit unions, money market funds, brokerage firms and other non-bank financial services companies that target the same customers as we do. We compete actively for deposits and emphasize solicitation of noninterest-bearing deposits. We seek to provide a higher level of personal service than our larger competitors, many of whom have more assets, capital and resources than we do and who may be able to conduct more intensive and broader based promotional efforts to reach potential customers. Our cost of funds fluctuates with market interest rates and may be affected by higher rates being offered by other financial institutions. In certain interest rate environments, additional significant competition for deposits may be expected to arise from corporate and government debt securities and money market mutual funds. Competition for deposits is also affected by the ease with which customers can transfer deposits from one institution to another.
Client Investment Funds
In addition to deposit products, we also offer select clients non-depository cash investment options through S1AM, our registered investment adviser subsidiary, and third-party money market sweep products. S1AM provides customized investment advisory and asset management solutions. At December 31, 2017, total off-balance sheet client investment funds were $2.1 billion, of which $1.7 billion was managed by S1AM.

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Lending Activities
We conduct commercial lending activities that include real estate mortgage loans, real estate construction and land loans, and C&I loans and leases. Our commercial real estate loans are secured by a range of property types. Our C&I loan offerings are diverse and generally include various asset-secured loans, equipment-secured loans and leases, loans to security alarm monitoring companies, and venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial companies during the various phases of their life cycle. Until December 2017, we actively originated cash flow (leveraged) loans to finance business acquisitions and recapitalizations. In December 2017, we announced that we were exiting certain cash flow lending business lines, and we agreed to sell $1.5 billion of cash flow loans (of which $481.1 million were held for sale at December 31, 2017 and were subsequently sold in the first quarter of 2018). We price loans to preserve our interest spread and maintain our net interest margin. Loan interest rates may be floating, fixed, or a combination thereof (“hybrid”) throughout the loan term. The rates on hybrid loans typically are fixed until a “reset” date when the rates then become floating. While we do not actively solicit direct consumer loans, we hold consumer loans, consisting primarily of purchased private student loans originated and serviced by third-party lenders.
Some of our loans are participations in larger loans, and these participations may be deemed a SNC. A SNC is any loan or commitment to extend credit, or group of commitments, aggregating $20 million or more at origination ($100 million or more beginning January 1, 2018), committed under a formal lending arrangement, and shared by three or more unaffiliated supervised institutions. The SNC program is governed by an inter-agency agreement among the FRB, the FDIC, and the Office of the Comptroller of the Currency. These agencies review a selection of SNCs periodically, with such review conducted at the lead or agent bank, and deliver a credit risk rating to the participants holding the loans. At December 31, 2017 and 2016, we had SNC loans held for investment to 55 borrowers that totaled $1.2 billion and to 116 borrowers that totaled $2.3 billion. The decline in SNC loans in 2017 was due to the sale of $1.5 billion of cash flow loans in December 2017.
Real Estate Loans
Our real estate lending activities focus primarily on loans to professional developers and real estate investors for the acquisition, construction, refinancing, or renovation, and on-going operation of commercial real estate. We also provide commercial real estate loans to borrowers operating businesses at these sites (owner occupied commercial real estate loans). Our real estate loans generally are collateralized by first deeds of trust on specific commercial properties. The most prevalent types of properties securing our real estate loans are multi-family properties, office properties, various healthcare properties such as skilled nursing facilities and assisted living facilities, industrial properties, hotels, and retail properties. The properties are located across the United States, primarily in central business districts, but a majority of our real estate collateral is in California. Our real estate loans typically either have interest and principal payments due on an amortization schedule ranging from 25 to 30 years with a lump sum balloon payment due in one to ten years or may have an initial interest-only period followed by an amortization schedule with a lump sum balloon payment due in one to ten years. Construction loans typically finance from 50% to 70% of the costs to construct commercial or multi-family residential properties. The terms are generally one to three years with short-term, performance-based extension options. We do not currently originate first trust deed home mortgage loans, although we do purchase these types of loans from a third-party lender.
We also provide real estate secured loans under the SBA’s 7(a) Program and 504 Program. Compliant SBA 7(a) loans have an SBA guaranty for 75% of the principal balance. SBA 504 loans are 50% loan-to-value first deed of trust mortgage loans on owner occupied commercial real estate where a second deed of trust is also provided by a nonprofit certified development company. The SBA 7(a) and SBA 504 mortgage loans repay on a twenty-five year amortization schedule.
Our real estate portfolio is subject to certain risks including, but not limited to, the following:
increased competition in pricing and loan structure;
the economic conditions of the United States;
interest rate increases;
decreased real estate values in the markets where we lend;
the borrower's inability to repay our loan due to decreased cash flow or operating losses;
the borrower’s inability to refinance or payoff our loan upon maturity;
loss of our loan principal stemming from a collateral foreclosure; and
various environmental risks, including natural disasters.

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In addition to the points above, construction loans are also subject to project-specific risks including, but not limited to, the following:
construction costs being more than anticipated;
construction taking longer than anticipated;
failure by developers and contractors to meet project specifications;
disagreement between contractors, subcontractors and developers;
demand for completed projects being less than anticipated; and
buyers of the completed projects not being able to secure permanent financing.
We specialize in real estate loans secured by healthcare properties, primarily skilled nursing facilities. In addition to the points above, for a healthcare real estate loan, we evaluate facility clinical compliance and quality of care, assess the loan-to- value using per bed limitations based on market information, and analyze the payor mix and state and federal revenue sources.
Many of the risks outlined above result from market conditions and are not controllable by us. When considering the markets in which to pursue real estate loans, we consider the market conditions, our current loan portfolio concentrations by property type and by market, and our past experiences with the borrower, within the specific market, and with the property type.
When underwriting real estate loans, we seek to mitigate risk by using the following framework:
requiring borrowers to invest and maintain a meaningful cash equity interest in the properties securing our loans;
reviewing each loan request and renewal individually;
using a credit committee approval process for the approval of each loan request (or aggregated credit exposures) over a certain dollar amount;
adhering to written loan acceptance standards, including among other factors, maximum loan to acquisition or construction cost ratios, maximum loan to as-is or stabilized value ratios, and minimum operating cash flow requirements;
considering market rental rates relative to our underwritten or projected rental rates;
considering the experience of our borrowers and our borrowers’ abilities to operate and manage the properties securing our loans;
evaluating the supply of comparable real estate and new supply under construction in the collateral's market area;
obtaining independent third-party appraisals that are reviewed by our appraisal department;
obtaining environmental risk assessments; and
obtaining seismic studies where appropriate.
With respect to construction loans, in addition to the foregoing, we attempt to mitigate project-specific risks by:
considering the experience of our borrowers and our borrowers’ abilities to manage the properties during construction and into the stabilization periods;
implementing a controlled disbursement process for loan proceeds in accordance with an agreed upon schedule which usually results in the borrowers' equity being invested before loan advances commence;
conducting project site visits and using construction consultants who review the progress of the project; and
monitoring the construction costs compared to the budgeted costs and the remaining costs to complete.
SBA 7(a) and 504 program loans are subject to the risks outlined above and the risk that an SBA 7(a) guaranty may be invalid if SBA specific procedures are not followed. We seek to mitigate this risk by maintaining and adhering to additional policies specific to SBA loans which align with SBA requirements.




10



C&I Loans and Leases
Our C&I loan offerings are diverse and generally include various asset-secured loans, equipment-secured loans and leases, loans to security alarm monitoring companies, and venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial companies during the various phases of their life cycle.
Our C&I loans include the following specific lending products:
Asset-based loans. These loans are used for working capital and are secured by finance receivables, trade accounts receivable, and/or inventory. This loan segment includes lender finance loans, which include loans to finance companies and timeshare operators. These loans are used to purchase finance receivables or extend finance receivables to the underlying obligors and are secured primarily by the finance receivables owed to our borrowers. The primary sources of repayment are the operating income of the borrower, the collection of the receivables securing the loan, and/or the sale of the inventory securing the loan. The loans are typically revolving lines of credit with terms of one to three years. Also included in this segment are loans used to finance annual life insurance premiums and are fully secured by the corresponding cash surrender value of life insurance contracts and other liquid collateral with one year terms that generally renew annually. In conjunction with our healthcare real estate loans, we may provide healthcare operators with asset-based loans secured by healthcare accounts receivable to support working capital needs.
Venture capital loans. These loans are to venture-backed companies to support their operations, including operating losses, working capital requirements and fixed asset acquisitions. Our borrowers are at various stages in their development and are generally reporting operating losses. The primary sources of repayment are future additional venture capital equity investments, or the sale of the company or its assets. This loan segment also includes loans directly to venture capital firms, venture capital funds, and venture capital management companies to provide a bridge to the receipt of capital calls and to support the borrowers' working capital needs, such as the cost of raising a new venture fund or leasehold improvements for new office space. The primary sources of repayment are receipt of capital calls, exits from portfolio company investments, or management fees. The loan terms for venture loans are generally one to four years.
Cash flow loans. Cash flow loans include loans to security monitoring companies, loans to tax-exempt government/non-profit borrowers, and SBA 7(a) loans for small business expansion. Until December 2017, we actively originated cash flow (leveraged) loans to finance business acquisitions and recapitalizations. In December 2017, we announced that we were exiting certain cash flow lending business lines, and agreed to sell $1.5 billion of cash flow loans. At December 31, 2017, cash flow loans included the remaining balances of the technology, healthcare, and general cash flow lending businesses that we exited in December 2017. The balance of loans held for investment remaining from these exited lending businesses after the $1.5 billion loan sale was $249.3 million at December 31, 2017.
Equipment-secured loans and leases. These loans and leases are used to purchase equipment essential to the operations of our borrower or lessee and are secured by the specific equipment financed. The primary source of repayment is the operating income of the borrower or lessee. The loan and lease terms are two to ten years and generally amortize to either a full repayment or residual balance or investment that is expected to be collected through a sale of the equipment to the lessee or a third party.
Our portfolio of C&I loans and leases is subject to certain risks including, but not limited to, the following:
the economic conditions of the United States;
interest rate increases;
deterioration of the value of the underlying collateral;
increased competition in pricing and loan structure;
the deterioration of a borrower’s or guarantor’s financial capabilities; and
various environmental risks, including natural disasters, which can negatively affect a borrower’s business.

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When underwriting C&I loans and leases, we seek to mitigate risk by using the following framework:
considering the prospects for the borrower's industry and the borrower's competition;
considering our past experience with the borrower, the collateral type, and the collectability of the collateral relative to underwritten expectations and norms;
considering our current loan and lease portfolio concentration by loan type and collateral type;
reviewing each loan request and renewal individually;
using our credit committee approval process for the approval of each loan request (or aggregate credit exposure) over a certain dollar amount; and
adhering to written loan underwriting policies and procedures including, among other factors, loan structures and covenants.
We actively manage real estate and C&I loans and seek to mitigate credit risk on most loans by using the following framework.
monitoring the economic conditions in the regions or areas in which our borrowers are operating;
measuring operating performance of our borrower or collateral and comparing it to our underwriting expectations;
assessing compliance with financial and operating covenants as set forth in our loan agreements and considering the effects of incidences of noncompliance and taking corrective actions;
assigning a credit risk rating to each loan and ensuring the accuracy of our credit risk ratings by using an independent credit review function to assess the appropriateness of the credit risk ratings assigned to loans;
conducting loan portfolio review meetings where senior management and members of credit administration discuss the credit status and related action plans on loans with unfavorable credit risk ratings; and
subjecting loan modifications and loan renewal requests to underwriting and assessment standards similar to the underwriting and assessment standards applied before closing the loans.
Consumer Loans
Consumer loans include personal loans, auto loans, home equity lines of credit, revolving lines of credit, other loans typically made by banks to individual borrowers, and purchased private student loans originated and serviced by third-party lenders. Home equity lines of credit are revolving lines of credit collateralized by junior deeds of trust on residential real estate properties. We purchase student loans that are not guaranteed by any program of the U.S. Government. These loans refinanced the outstanding student loan debt of borrowers who met certain underwriting criteria, with terms that fully amortize the debt over terms ranging from five to twenty years.
Our consumer loan portfolio is subject to certain risks, including, but not limited to, the following:
the economic conditions of the United States and the levels of unemployment;
the amount of credit offered to consumers in the market;
interest rate increases;
consumer bankruptcy laws which allow consumers to discharge certain debts (excluding student loans);
compliance with consumer lending regulations;
additional regulations and oversight by the CFPB; and
the ability of the sub-servicers of the Bank’s student loans to service the loans in accordance with the terms of the loan purchase agreements.
We seek to mitigate the exposure to such risks through the direct approval of all internally originated consumer loans by reviewing each new loan request and each renewal individually and adhering to written credit policies. For all purchased student loans, we monitor the performance of the originator and the enforcement of our rights under the loan purchase agreement.

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Loan Concentrations
The following table presents the composition of our loans and leases held for investment as of the dates indicated:
 
December 31, 2017
 
December 31, 2016
 
 
 
% of
 
 
 
% of
 
Amount
 
Total
 
Amount
 
Total
 
(Dollars in thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
5,385,740

 
32
%
 
$
4,396,696

 
28
%
Residential
2,466,894

 
14
%
 
1,314,036

 
9
%
Total real estate mortgage
7,852,634

 
46
%
 
5,710,732

 
37
%
Real estate construction and land:
 
 
 
 
 
 
 
Commercial
769,075

 
5
%
 
581,246

 
4
%
Residential
822,154

 
5
%
 
384,001

 
2
%
Total real estate construction and land
1,591,229

 
10
%
 
965,247

 
6
%
Total real estate
9,443,863

 
56
%
 
6,675,979

 
43
%
Commercial:
 
 
 
 
 
 
 
Asset-based
3,011,779

 
18
%
 
2,611,796

 
17
%
Venture capital
2,122,735

 
12
%
 
1,987,900

 
13
%
Cash flow (1)
1,327,570

 
8
%
 
3,112,890

 
20
%
Equipment finance
656,995

 
4
%
 
691,967

 
4
%
Total commercial
7,119,079

 
42
%
 
8,404,553

 
54
%
Consumer
409,801

 
2
%
 
375,422

 
3
%
Total loans and leases held for investment,
 
 
 
 
 
 
 
net of deferred fees (2) (3)
$
16,972,743

 
100
%
 
$
15,455,954

 
100
%
_______________________________________ 
(1)
Includes leveraged loans of $620.8 million and $2.3 billion at December 31, 2017 and 2016. At December 31, 2017, the remaining balances of the technology, healthcare, and general cash flow loans held for investment of the lending businesses that we exited in December 2017 totaled $249.3 million. At December 31, 2016, technology cash flow, healthcare cash flow, and general cash flow loans totaled $2.3 billion.
(2)
Includes PCI loans of $58.0 million and $108.4 million at December 31, 2017 and 2016, of which the majority are included in the "Real estate mortgage" category in this table.
(3)
Excludes loans held for sale carried at lower of cost or fair value at December 31, 2017.
Real estate mortgage loans and real estate construction and land loans (which are predominantly commercial real estate loans) together comprised 56% and 43% of our total loans and leases held for investment at December 31, 2017 and 2016. Real estate mortgage loans increased to 46% of total loans and leases held for investment at December 31, 2017 from 37% at December 31, 2016, while real estate construction and land loans increased to 10% of total loans and leases held for investment at December 31, 2017 from 6% at December 31, 2016.
The growth in real estate loans during 2017 as a percentage of total loans and leases was attributable mainly to the real estate loans acquired in the CUB acquisition on October 20, 2017, the increase in real estate multi-family and construction loans, and the fourth quarter of 2017 sale of $1.5 billion of cash flow loans. For additional information regarding the CUB acquisition and the cash flow loan sale, see "Current Developments - CU Bancorp Acquisition" and "Current Developments - Loan Sales and Loans Held for Sale - Fourth Quarter 2017."

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More specifically, the increase in real estate loans as a percentage of total loans and leases reflected the following:
Total commercial loans significantly decreased to $7.1 billion or 42% of total loans and leases held for investment at December 31, 2017 from $8.4 billion or 54% at December 31, 2016 primarily due to the sale of $1.5 billion of cash flow loans in the fourth quarter of 2017.
Residential real estate mortgage loans increased to $2.5 billion or 14% of total loans and leases held for investment at December 31, 2017 from $1.3 billion or 9% at December 31, 2016. During 2017, we continued our emphasis on originated multi-family secured real estate loans due primarily to the favorable credit risk profile.
Real estate construction and land loans increased to $1.6 billion or 10% of total loans and leases held for investment at December 31, 2017 from $965.2 million or 6% at December 31, 2016. This increase was primarily attributable to an increase in the number of multi-family property construction loans.
Real estate mortgage loans are diversified among various property types. At December 31, 2017 and 2016, 14% and 12% of the total real estate mortgage loans were owner occupied (i.e. our borrowers were operating businesses on the premises that collateralize our loans). At December 31, 2017, real estate mortgage loans secured by multi-family properties, industrial properties, and office properties comprised 27%, 15%, and 14% of our real estate mortgage loans, respectively. At December 31, 2016, real estate mortgage loans secured by multi-family properties, office properties, and hospitality properties comprised 18%, 17%, and 12% of our real estate mortgage loans, respectively.
Certain of our real estate mortgage loans are secured by various types of healthcare real estate that include skilled nursing facilities, assisted living facilities, independent living facilities, and other healthcare facilities. At December 31, 2017 and 2016, real estate mortgage loans secured by healthcare real estate comprised 11% and 17% of our real estate mortgage loans. The decrease of healthcare real estate loans in 2017 as a percentage of total real estate mortgage loans was primarily due to the growth of other products such as multi-family and residential mortgage loans, while the balance of healthcare real estate declined in 2017.
Real estate construction and land loans are diversified among various property types. At December 31, 2017, real estate construction and land loans for the construction of multi-family properties, condominium properties, and office properties comprised 27%, 10%, and 10% of our real estate construction and land loans, respectively. At December 31, 2016, real estate construction and land loans for the construction of condominium properties, multi-family properties, and office properties comprised 17%, 16%, and 16% of our real estate construction and land loans, respectively.
Commercial loans and leases comprised 42% and 54% of our total loans and leases held for investment at December 31, 2017 and 2016. Commercial loans and leases are diversified among various loan types and industries. At December 31, 2017, our largest commercial loan type concentration was asset-based loans, totaling $3.0 billion or 18% of our total loans and leases held for investment compared to $2.6 billion or 17% at December 31, 2016. Other significant commercial concentrations at December 31, 2017 were venture capital loans, cash flow loans, and equipment finance loans and leases at 12%, 8%, and 4%, respectively, of total loans and leases held for investment. At December 31, 2016, venture capital loans, cash flow loans, and equipment finance loans and leases were 13%, 20%, and 4%, respectively, of total loans and leases held for investment. The decrease in cash flow loans during 2017 as a percentage of total loans and leases held for investment was due primarily to the fourth quarter of 2017 sale of $1.5 billion of cash flow loans. For additional information regarding the cash flow loan sale, see "Current Developments - Loan Sales and Loans Held for Sale - Fourth Quarter 2017."
At December 31, 2017, our ten largest individual loan commitments totaled $908.9 million and had corresponding outstanding balances that totaled $516.2 million. These ten largest commitments ranged from $75.0 million to $110.0 million. These commitments primarily are secured by commercial real estate with borrowers that are experienced operators with proven track records or are lender finance loans secured by portfolios of finance receivables originated and serviced by finance companies. At December 31, 2016, our ten largest individual loan commitments totaled $803.9 million and had corresponding outstanding balances that totaled $588.7 million. These ten largest commitments ranged from $67.0 million to $100.0 million.

14



Current Developments
CU Bancorp Acquisition
On October 20, 2017, PacWest completed the acquisition of CUB in a transaction valued at $670.6 million. As part of the acquisition, CU Bank, a wholly-owned subsidiary of CUB, was merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank.
CU Bank was a commercial bank headquartered in Los Angeles, California with nine branches located in Los Angeles, Orange, Ventura, and San Bernardino counties. We completed the acquisition to, among other things, enhance our Southern California community bank franchise by adding a $2.1 billion loan portfolio and $2.7 billion of core deposits.
We recorded the acquired assets and liabilities, both tangible and intangible, at their estimated fair values as of the acquisition date and increased total assets by $3.5 billion. The application of the acquisition method of accounting resulted in goodwill of $374.7 million.
Loan Sales and Loans Held for Sale
Fourth Quarter 2017
In the fourth quarter of 2017, we agreed to sell $1.5 billion of cash flow loans (of which $481.1 million were held for sale at December 31, 2017 and were subsequently sold in the first quarter of 2018) (the "Cash Flow Loan Sale"). Of the $1.5 billion in loans sold, none were on nonaccrual and $4.7 million were classified, and we also exited our CapitalSource Division origination operations related to general, technology, and healthcare cash flow loans. These actions were taken to lower the Company's credit risk profile and improve its funding mix. As of December 31, 2017, $1.0 billion of the loans sold had settled, while $481.1 million were classified as held for sale. The loans held for sale at December 31, 2017 settled in the first quarter of 2018. As a result of the Cash Flow Loan Sale, our cash flow portfolio held for investment decreased from $2.7 billion at September 30, 2017 to $1.3 billion at December 31, 2017.
In connection with the Cash Flow Loan 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.
Second Quarter 2017
In the second quarter of 2017, we sold $46.0 million of loans consisting primarily of loans from our healthcare portfolios. Additionally, 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 held for sale at June 30, 2017 and the sales were completed in July 2017. As a result of the second quarter loan sales and transfers to loans held for sale, our healthcare cash flow portfolio held for investment decreased from $740.6 million at March 31, 2017 to $514.7 million at June 30, 2017, which included two non-pass rated credits of $26.1 million.
In connection with the transfer of loans to held for sale, we recognized $7.2 million in charge-offs to record the loans at the lower of cost or fair value. Additionally, our nonaccrual loans held for investment decreased by $5.3 million and our classified loans held for investment decreased by $44.8 million as a result of the loans transferred to held for sale.
Federal Tax Reform
The TCJA was signed into law on December 22, 2017 and represents the first major overhaul of the United States federal income tax system in more than 30 years. The TCJA reduces the federal corporate tax rate from 35% to 21% effective as of January 1, 2018. Other changes affecting us include immediate deductions for certain new investments instead of deductions for bonus depreciation expense over time, modification of the deduction for performance based executive compensation and limiting the amount of FDIC insurance assessments that are deductible. We are continuing to evaluate the requirements of the TCJA and its impact on our effective tax rate as well as possible changes to our business practices to benefit from the TCJA. We currently estimate that our 2018 effective tax rate will range from 27% to 29%.

15



Stock Repurchase Program
Our Stock Repurchase Program was initially authorized by PacWest's Board of Directors on October 17, 2016, pursuant to which the Company could, until December 31, 2017, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. On November 15, 2017, PacWest's Board of Directors amended the Stock Repurchase Program to reduce the authorized purchase amount to $150 million and extend the maturity date to December 31, 2018. On February 14, 2018, PacWest's Board of Directors amended the Stock Repurchase Program to increase the authorized purchase amount to $350 million and extend the maturity date to February 28, 2019.
The common stock repurchases may be effected through open market purchases or in privately negotiated transactions and may utilize derivatives or similar instrument to effect share repurchase transactions (including, without limitation, accelerated share repurchase contracts, equity forward transactions, equity option transactions, equity swap transactions, cap transactions, collar transactions, floor transactions or other similar transactions or any combination of the foregoing transactions).
The amount and exact timing of any repurchases will depend upon market conditions and other factors. The Stock Repurchase Program may be suspended or discontinued at any time. During the fourth quarter of 2016, the Company repurchased 652,835 shares of common stock for a total amount of $27.9 million. During 2017, the Company repurchased 2,081,227 shares of common stock for a total amount of $99.7 million. All shares repurchased under the Stock Repurchase Program were retired upon settlement. At December 31, 2017, the remaining amount that could be used to repurchase shares under the Stock Repurchase Program was $112.5 million. After the amendment on February 14, 2018, the remaining amount that could be used to repurchase shares under the Stock Repurchase Program is $350 million.
Sale/Leaseback Transaction
In the first quarter of 2017, the Company sold four properties with an aggregate book value of $9.7 million to a third party and simultaneously leased back the properties under one lease with an initial term of five years and three leases with initial terms of ten years. The aggregate purchase price was $12.1 million which resulted in a gain of $0.6 million recognized in the first quarter and a deferred gain of $1.8 million to be recognized over the respective terms of the leases.
Financing
We depend on deposits and external financing sources to fund our operations. We employ a variety of financing arrangements, including term debt, subordinated debt, and equity. As a member of the FHLB, the Bank had secured financing capacity with the FHLB as of December 31, 2017 of $3.8 billion, collateralized by a blanket lien on $5.5 billion of certain qualifying loans. The Bank also had secured financing capacity with the FRBSF of $1.8 billion as of December 31, 2017 collateralized by liens on $2.3 billion of qualifying loans.
Information Technology Systems
We devote significant resources to maintain stable, reliable, efficient and scalable information technology systems. Where possible, we utilize third-party software systems that are hosted and supported by nationally recognized vendors.  We selectively employ proprietary software systems to support our specialty lending products.  We work with our third-party vendors to monitor and maximize the efficiency of our use of their applications. We use integrated systems to originate and process loans and deposit accounts, which reduces processing time, automates numerous internal controls, improves customer experiences and reduces costs. Most customer records are maintained digitally. We also provide on-line, mobile, and telephone banking services to further improve the overall client experience. We are migrating in-house and outsourced systems for managing customer accounts to an alternative platform hosted by a new data processing vendor with the initial phase completed during the second quarter of 2016 and the additional phases scheduled to be completed during the second quarter of 2018.
We use an enterprise data warehouse system in order to capture, analyze and report key metrics associated with our customers and products. Data is collected across multiple systems so that standard and ad hoc reports are available to assist with managing our business.

16



We maintain a strategic plan with respect to information technology. The information technology strategic plan outlines how specific solutions support our overall goals, analyzes infrastructure for capacity planning, details migration plans to replace aging hardware and software, provides baseline projections for allocating information technology staff, discusses information security trends and measures, considers future technologies, and provides details on information technology initiatives over the next several years.
 Protecting our systems to ensure the safety of our customers’ information is critical to our business. We use multiple layers of protection to control access, detect unusual activity, and reduce risk, including conducting a variety of audits and vulnerability and penetration tests on our platforms, systems and applications, and maintain comprehensive incident response plans to minimize potential risk to operations, and reduce the risk that cyber-attacks would be successful. To protect our business operations against disasters, we have a backup off-site core processing system and comprehensive recovery plans.
Risk Oversight and Management
We believe risk management is another core competency of our business. We have a comprehensive risk management process that measures, monitors, evaluates and manages the risks we assume in conducting our activities. Our oversight of this risk management process is conducted by the Company’s Board of Directors (the “Board”) and its standing committees. The committees each report to the Board and the Board has overall oversight responsibility for risk management.
Our risk framework is structured to guide decisions regarding the appropriate balance between risk and return considerations in our business. Our risk framework is based upon our business strategy, risk appetite and financial plans approved by our Board. Our risk framework is supported by an enterprise risk management program. Our enterprise risk management program integrates all risk efforts under one common framework. This framework includes risk policies, procedures, measured and reported limits and targets, and reporting. Our Board approves our risk appetite statement, which sets forth the amount and type of risks we are willing to accept in pursuit of achieving our strategic, business and financial objectives. Our risk appetite statement provides the context for our risk management tools, including, among others, risk policies, delegated authorities, limits, portfolio composition, underwriting standards and operational processes.
Competition
The banking business is highly competitive. We compete nationwide with other commercial banks and financial services institutions for loans and leases, deposits and employees. Some of these competitors are larger in total assets and capitalization, with more offices over a wider geographic area and offer a broader range of financial services than our operations. Our most direct competition for loans comes from larger regional and national banks, diversified finance companies, venture debt funds and service-focused community banks that target the same customers as we do. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and bank holding companies. Those competitors include non-bank specialty lenders, insurance companies, private investment funds, investment banks, financial technology companies and other financial and non-financial institutions.
Competition is based on a number of factors, including interest rates charged on loans and leases and paid on deposits, the scope and type of banking and financial services offered, convenience of our branch locations, customer service, technological changes and regulatory constraints. Many of our competitors are large companies that have substantial capital, technological and marketing resources. Some of our competitors have substantial market positions and have access to a lower cost of capital or a less expensive source of funds. Because of economies of scale, our larger, nationwide competitors may offer loan pricing that is more attractive that what we may be able to offer.
Economic factors, along with legislative and technological changes, will have an ongoing impact on the competitive environment within the financial services industry. We work to anticipate and adapt to dynamic competitive conditions whether it is by developing and marketing innovative products and services, adopting or developing new technologies that differentiate our products and services, cross marketing, or providing highly personalized banking services. We strive to distinguish ourselves from other banks and financial services providers in our marketplace by providing an extremely high level of service to enhance customer loyalty and to attract and retain business.

17



We differentiate ourselves in the marketplace through the quality of service we provide to borrowers while maintaining competitive interest rates, loan fees and other loan terms. We emphasize personalized relationship banking services and the efficient decision-making of our lending business units. We compete effectively based on our in-depth knowledge of our borrowers' industries and their business needs based upon information received from our borrowers' key decision-makers, analysis by our experienced professionals and interaction between these two groups; our breadth of loan product offerings and flexible and creative approach to structuring products that meet our borrowers' business and timing needs; and our dedication to superior client service. However, we can provide no assurance as to the effectiveness of these efforts on our future business or results of operations, as to our continued ability to anticipate and adapt to changing conditions, and as to sufficiently improving our services and/or banking products in order to successfully compete in the marketplace.
Employees
As of January 31, 2018, we had 1,786 full time equivalent employees.
Financial and Statistical Disclosure
Certain of our statistical information is presented within “Item 6. Selected Financial Data,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 7A. Quantitative and Qualitative Disclosure About Market Risk.” This information should be read in conjunction with the consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”

18



Supervision and Regulation
General
The Company and Bank are subject to extensive regulation under federal and state banking laws that establish a comprehensive framework for our operations. Such regulation is intended to, among other things, protect the interests of customers, including depositors, and the federal deposit insurance fund, as well as to minimize risk to the banking system as a whole. These regulations are not, however, generally charged with protecting the interests of our stockholders or creditors. Described below are elements of selected laws and regulations applicable to our Company or the Bank. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law or regulations, and in their application by regulatory agencies, cannot be predicted, and they may have a material effect on the business, operations, and results of our Company or the Bank. Recent political developments, including the change in administration in the United States, have added additional uncertainty to the implementation, scope, and timing of regulatory reforms, including those related to the Dodd-Frank Act.
Bank Holding Company Regulation
As a bank holding company, PacWest is registered with and subject to supervision, regulation, and examination by the FRB under the BHCA, and we are required to file with the FRB periodic reports of our operations and additional information regarding the Company and its subsidiaries as the FRB may require.
The Dodd-Frank Act requires the Company to act as a source of financial strength to the Bank including committing resources to support the Bank even at times when the Company may not be in a financial position to do so. Similarly, under the cross‑guarantee provisions of the FDIA, the FDIC can hold any FDIC‑insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (i) the default of a commonly controlled FDIC‑insured depository institution or (ii) any assistance provided by the FDIC to such a commonly controlled institution.
Pursuant to the BHCA, we are required to obtain the prior approval of the FRB before we acquire all or substantially all of the assets of any bank or the ownership or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than 5 percent of such bank. Pursuant to the Bank Merger Act, the prior approval of the FDIC is required for the Bank to merge with another bank or purchase all or substantially all of the assets or assume any of the deposits of another FDIC-insured depository institution. In reviewing certain merger or acquisition transactions, the federal regulators will consider the assessment of the competitive effect and public benefits of the transactions, the capital position and managerial resources of the combined organization, the risks to the stability of the U.S. banking or financial system, our performance record under the CRA, our compliance with fair housing and other consumer protection laws, and the effectiveness of all organizations involved in combating money laundering activities.
Under the BHCA, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries and such other activities that the FRB deems to be so closely related to banking as “to be a proper incident thereto.” We are also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the company is engaged in banking activities or the FRB determines that the activity is so closely related to banking as to be a proper incident to banking. The FRB’s approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.
The federal regulatory agencies also have general authority to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. Further, as discussed below under “-Capital Requirements,” we are required to maintain minimum ratios of Common Equity Tier 1 capital, Tier 1 capital, and total capital to total risk‑weighted assets, and a minimum ratio of Tier 1 capital to total adjusted quarterly average assets as defined in such regulations. The level of our capital ratios may affect our ability to pay dividends or repurchase our shares. See “Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters - Dividends” and Note 18. Dividend Availability and Regulatory Matters of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”

19



The Dodd-Frank Act
The Dodd‑Frank Act, which was enacted in July 2010, significantly restructured the financial regulatory landscape in the United States, including the creation of a new systemic risk oversight body, the FSOC. The FSOC oversees and coordinates the efforts of the primary U.S. financial regulatory agencies (including the FRB, SEC, the Commodity Futures Trading Commission and the FDIC) in establishing regulations to address financial stability concerns. The Dodd-Frank Act and the FRB’s implementing regulations impose increasingly stringent regulatory requirements on financial institutions as their size and scope of activities increases. With the April 7, 2014 CapitalSource Inc. merger, our total consolidated assets exceeded $15 billion, subjecting us to additional regulatory requirements for financial institutions with over $10 billion in total consolidated assets. This substantially increased the regulations we are required to meet, particularly with respect to risk management, capital planning, and stress testing. In addition, the Company and the Bank are now subject to the examination and supervision of the CFPB.
Transactions with Affiliates
Transactions between the Bank and its affiliates are regulated under federal banking law. Subject to certain exceptions set forth in the Federal Reserve Act, a bank may enter into “covered transactions” with its affiliates if the aggregate amount of the covered transactions to any single affiliate does not exceed 10 percent of the Bank’s capital stock and surplus or 20 percent of the Bank’s capital stock and surplus for covered transaction with all affiliates. Covered transactions include, among other things, extension of credit, the investment in securities, the purchase of assets, the acceptance of collateral or the issuance of a guaranty. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization.
Dividends and Share Repurchases
The ability of the Company to pay dividends on or to repurchase its common stock, and the ability of the Bank to pay dividends to the Company, may be restricted due to several factors including: (a) the DGCL (in the case of the Company) and applicable California law (in the case of the Bank), (b) covenants contained in our subordinated debentures and borrowing agreements, and (c) the regulatory authority of the FRB, the DBO and the FDIC. Our ability to pay dividends to our stockholders or to repurchase shares of our common stock is subject to the restrictions set forth in the DGCL. The DGCL provides that a corporation, unless otherwise restricted by its certificate of incorporation, may declare and pay dividends (or repurchase shares) out of its surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year, as long as the amount of capital of the corporation is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. Surplus is defined as the excess of a corporation’s net assets (i.e., its total assets minus its total liabilities) over the capital associated with issuances of its common stock. Moreover, the DGCL permits a board of directors to reduce its capital and transfer such amount to its surplus. In determining the amount of surplus of a Delaware corporation, the assets of the corporation, including stock of subsidiaries owned by the corporation, must be valued at their fair market value as determined by the board of directors, regardless of their historical book value.
Our ability to pay cash dividends to our stockholders or to repurchase shares of our common stock may be limited by certain covenants contained in the indentures governing trust preferred securities issued by us or entities that we have acquired, and the debentures underlying the trust preferred securities. Generally the indentures provide that if an Event of Default (as defined in the indentures) has occurred and is continuing, or if we are in default with respect to any obligations under our guarantee agreement which covers payments of the obligations on the trust preferred securities, or if we give notice of any intention to defer payments of interest on the debentures underlying the trust preferred securities, then we may not, among other restrictions, declare or pay any dividends with respect to our common stock or repurchase shares of our common stock.
In addition, notification to the FRB is required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements. Under such circumstances, we may not pay a dividend should the FRB object until such time as we receive approval from the FRB or no longer need to provide notice under applicable regulations.

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In connection with the decision regarding dividends and share repurchase programs, our Board will take into account general business conditions, our financial results, projected cash flows, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by the Bank to the Company and such other factors as deemed relevant. We can provide no assurance that we will continue to declare dividends on a quarterly basis or otherwise or to repurchase shares of our common stock. The declaration of dividends by the Company is subject to the discretion of our Board.
PacWest’s primary source of liquidity is the receipt of cash dividends from the Bank. Various statutes and regulations limit the availability of cash dividends from the Bank. Dividends paid by the Bank are regulated by the DBO and FDIC under their general supervisory authority as it relates to a bank’s capital requirements. The Bank may declare a dividend without the approval of the DBO and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for three previous fiscal years less any dividend paid during such period. Since the Bank had a retained deficit of $434.8 million at December 31, 2017, for the foreseeable future, any further cash dividends from the Bank to the Company will continue to require DBO and FDIC approval.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Holding Company Liquidity” and Note 18. Dividend Availability and Regulatory Matters of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” for a discussion of other factors affecting the availability of dividends and limitations on the ability to declare dividends.
Capital Requirements
We are subject to the comprehensive capital framework for U.S. banking organizations known as Basel III. Basel III generally implemented the Basel Committee’s December 2010 final capital framework for strengthening international capital standards. Basel III became effective for the Company and the Bank as of January 1, 2015, subject to phase‑in periods for certain of its components and other provisions.
Basel III, among other things, (i) implemented increased capital levels for the Company and the Bank, (ii) introduced a new capital measure called CET1 and related regulatory capital ratio of CET1 to risk‑weighted assets, (iii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iv) mandated that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (v) expanded the scope of the deductions from and adjustments to capital as compared to existing regulations. Under Basel III, for most banking organizations the most common form of Additional Tier 1 capital is non‑cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to Basel III specific requirements.
Pursuant to Basel III, the minimum capital ratios are as follows:
4.5% CET1 to risk‑weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk‑weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk‑weighted assets; and
4% Tier 1 capital to average consolidated assets as reported on regulatory financial statements (known as the “leverage ratio”).
Basel III also introduced a new “capital conservation buffer”, composed entirely of CET1, on top of the minimum risk‑weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk‑weighted assets, Tier 1 to risk‑weighted assets or Total capital to risk‑weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at a 0.625% level and will increase by 0.625% on each subsequent January 1 until it reaches 2.5% on January 1, 2019. When fully phased‑in, the Company and the Bank will be required to maintain such additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk‑weighted assets of at least 7%, (ii) Tier 1 capital to risk‑weighted assets of at least 8.5%, and (iii) total capital to risk‑weighted assets of at least 10.5%.

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Basel III provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non‑consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1 commenced on January 1, 2015 and was phased‑in beginning at 40% in 2015, 60% in 2016, and 80% for 2017 and 2018.
Basel III provides a standardized approach for risk weightings that expands the risk‑weighting categories from the previous four Basel I‑derived categories (0%, 20%, 50% and 100%) to a larger and more risk‑sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, resulting in higher risk weights for a variety of asset classes.
The Company has outstanding subordinated debentures issued to trusts, which, in turn, issued trust preferred securities. The carrying amount of subordinated debentures totaled $462.4 million at December 31, 2017. Under Basel III, none of the Company’s trust preferred securities are included in Tier 1 capital, however $448.8 million of such trust preferred securities was included in Tier 2 capital at December 31, 2017. We believe that, as of December 31, 2017, the Company and the Bank met all capital adequacy requirements under Basel III. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Matters - Capital” for further information on regulatory capital requirements, capital ratios, and deferred tax asset limits as of December 31, 2017 for the Company and the Bank.
Stress Testing
As an institution with total assets in excess of $10 billion, the stress testing rules of the FRB and the FDIC require the Company and the Bank to conduct an annual company-run stress test of capital, consolidated earnings and losses under one base scenario and at least two supervisory stress scenarios provided by the federal bank regulators. Stress test results must be reported to the regulatory agencies, and the stress testing rules require the public disclosure of a summary of the stress test results. The Company’s and Bank’s capital ratios reflected in the stress test calculations are an important factor considered by the FRB and FDIC in evaluating the capital adequacy of the Company and the Bank and whether any proposed payments of dividends or stock repurchases may be deemed an unsafe or unsound practice.
Safety and Soundness Standards
As required by the FDIA, guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and quality, and compensation, fees and benefits. Bank holding companies with total consolidated assets of $10 billion or more are required to establish and maintain risk management committees for their boards of directors to oversee the bank holding companies’ risk management framework.
Deposit Insurance
The Bank is a state‑chartered, “non‑member” bank regulated by the DBO and the FDIC. The Bank accepts deposits, and those deposits have the benefit of FDIC insurance up to the applicable limits. The applicable limit for FDIC insurance for most types of accounts is $250,000.
Under the FDIC's risk-based deposit premium assessment system, the assessment rates for an insured depository institution are determined by an assessment rate calculator, which is based on a number of elements that measure the risk each institution poses to the Deposit Insurance Fund. The calculated assessment rate is applied to average consolidated assets less the average tangible equity of the insured depository institution during the assessment period to determine the dollar amount of the quarterly assessment. Under the current system, premiums are assessed quarterly and could increase if, for example, criticized loans and leases and/or other higher risk assets increase or balance sheet liquidity decreases. In 2010, the FDIC adopted its Deposit Insurance Fund restoration plan to ensure that the fund reserve ratio reaches 1.35% of total deposits by September 30, 2020, and the FDIC's final rule with respect to this became effective July 1, 2016. Insured institutions with assets over $10 billion, such as the Bank, are responsible for funding the increase. For the year ended December 31, 2017, we incurred $15.2 million of FDIC assessment expense.

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Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Incentive Compensation
In 2010, federal banking regulators issued final joint agency guidance on Sound Incentive Compensation Policies. This guidance applies to executive and non-executive incentive plans administered by the Bank. The guidance notes that incentive compensation programs must (i) provide employees incentives that appropriately balance risk and reward, (ii) be compatible with effective controls and risk management and (iii) be supported by strong corporate governance, including oversight by the Board. The FRB reviews, as part of its regular examination process, the Company’s incentive compensation programs.
In addition, the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive based payment arrangements at specified regulated entities having at least $1 billion in total assets, such as the Company and the Bank, that encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure of incentive based compensation arrangements to regulators. The agencies proposed initial regulations in April 2011 and proposed revised regulations during the second quarter of 2016 that would establish general qualitative requirements applicable to all covered entities (and additional specific requirements for entities with total consolidated assets of at least $50 billion). The general qualitative requirements include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate record-keeping.
Consumer Regulation
We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate, and civil money penalties. Failure to comply with consumer protection regulations may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.
The CFPB has broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws. The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities. The Bank is subject to direct oversight and examination by the CFPB. The CFPB has broad supervisory, examination, and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition, or results of operations.

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USA PATRIOT Act and Anti-Money Laundering
The PATRIOT Act, designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The PATRIOT Act, as implemented by various federal regulatory agencies, requires the Company and the Bank to establish and implement policies and procedures with respect to, among other matters, anti‑money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers and prospective customers. The PATRIOT Act and its underlying regulations permit information sharing for counter‑terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB, the FDIC and other federal banking agencies to evaluate the effectiveness of an applicant in combating money laundering activities when considering a bank holding company acquisition and/or a bank merger act application.
We regularly evaluate and continue to enhance our systems and procedures to continue to comply with the PATRIOT Act and other anti‑money laundering initiatives. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, strategic, and reputational consequences for the institution and result in material fines and sanctions.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, designated nationals and others. These rules are based on their administration by OFAC. The OFAC‑administered sanctions targeting designated countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment‑related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, strategic, and reputational consequences, and result in civil money penalties on the Company and the Bank.
Community Reinvestment Act
The CRA generally requires the Bank to identify the communities it serves and to make loans and investments, offer products, make donations in, and provide services designed to meet the credit needs of these communities. The CRA also requires the Bank to maintain comprehensive records of its CRA activities to demonstrate how we are meeting the credit needs of our communities. These documents are subject to periodic examination by the FDIC. During these examinations, the FDIC rates such institutions’ compliance with CRA as “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” The CRA requires the FDIC to take into account the record of a bank in meeting the credit needs of all of the communities served, including low‑and moderate‑income neighborhoods, in determining such rating. Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from undertaking certain activities, including acquisitions. The Bank received a CRA rating of “Satisfactory” as of its most recent examination. In the case of a bank holding company, such as the Company, when applying to acquire a bank, savings association, or a bank holding company, the FRB will assess the CRA record of each depository institution of the applicant bank holding company in considering the application.

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Customer Information Privacy and Cybersecurity
The FRB and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal, non‑public customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. We have adopted a customer information security program to comply with these requirements.
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties. For a further discussion of risks related to cybersecurity, see "Item 1A. Risk Factors" included in this Form 10-K.
Privacy
The Gramm‑Leach‑Bliley Act of 1999 and the California Financial Information Privacy Act require financial institutions to implement policies and procedures regarding the disclosure of non-public personal information about consumers to non‑affiliated third parties. In general, the statutes require disclosures to consumers on policies and procedures regarding the disclosure of such non-public personal information and, except as otherwise required by law, prohibit disclosing such information except as provided in the Bank’s policies and procedures. We have implemented privacy policies addressing these restrictions that are distributed regularly to all existing and new customers of the Bank.
Regulation of Certain Subsidiaries
S1AM is registered with the SEC under the Investment Advisers Act of 1940, as amended, and is subject to its rules and regulations. Following the completion of various studies on investment advisers and broker-dealers required by the Dodd-Frank Act, the SEC has, among other things, recommended to Congress that it consider various means to enhance the SEC’s examination authority over investment advisers, which may have an impact on S1AM that we cannot currently assess.

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ITEM 1A. RISK FACTORS     
In the course of conducting our business operations, we are exposed to a variety of risks, some of which are inherent in the financial services industry and others of which are more specific to our own businesses. The discussion below addresses the most significant factors, of which we are currently aware, that could affect our businesses, results of operations and financial condition. Additional factors that could affect our businesses, results of operations and financial condition are discussed in "Item 1. Business - Forward-Looking Information." However, other factors not discussed below or elsewhere in this Annual Report on Form 10-K could adversely affect our businesses, results of operations and financial condition. Therefore, the risk factors below should not be considered a complete list of potential risks we may face.
Any risk factor described in this Annual Report on Form 10-K or in any of our other SEC filings could by itself, or together with other factors, materially adversely affect our liquidity, cash flows, competitive position, business, reputation, results of operations, capital position or financial condition, including materially increasing our expenses or decreasing our revenues, which could result in material losses.
General Economic and Market Conditions Risk
Our business is adversely affected by unfavorable economic and market conditions.
U.S. economic conditions affect our operating results. The United States economy has been in an eight-year expansion since the Great Recession ended in 2009. This current expansion has been longer than most U.S. expansionary periods in recent history. In the event of an economic recession our operating results could be adversely affected because we could experience higher loan and lease charge-offs and higher operating costs. Global economic conditions also affect our operating results because global economic conditions directly influence the U.S. economic conditions. Various market conditions also affect our operating results. Real estate market conditions directly affect performance of our loans secured by real estate. Debt markets affect the availability of credit which impacts the rates and terms at which we offer loans and leases. Stock market downturns often signal broader economic deterioration and/or a downward trend in business earnings which may adversely affect businesses’ ability to raise capital and/or service their debts.
An economic recession or a downturn in various markets could have one or more of the following adverse effects on our business:
a decrease in the demand for our loans and leases and other products and services offered by us;
a decrease in our deposit balances due to overall reductions in the accounts of customers;
a decrease in the value of our loans and leases;
an increase in the level of nonperforming and classified loans and leases:
an increase in provisions for credit losses and loan and lease charge-offs;
a decrease in net interest income derived from our lending and deposit gathering activities;
a decrease in the Company's stock price;
an impairment of goodwill or certain intangible assets; or
an increase in our operating expenses associated with attending to the effects of the above-listed circumstances.
Our ability to attract and retain qualified employees is critical to our success.
Our employees are our most important resource, and in many areas of the financial services industry, competition for qualified personnel is intense. We endeavor to attract talented and diverse new employees and retain and motivate our existing employees to assist in executing our growth, acquisition, and business strategies. We also seek to retain proven, experienced senior employees with superior talent, augmented from time to time by external hires, to provide continuity of succession of our executive management team. In addition, the Company’s Board oversees succession planning, including review of the succession plans for the Chief Executive Officer and other members of executive management. If for any reason we are unable to continue to attract or retain qualified employees, our performance, including our competitive position, could be materially and adversely affected.



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Credit Risk
Credit Risk is the Risk of Loss Arising from the Inability or Failure of a Borrower or Counterparty to Meet its Obligation.
We may not recover all amounts that are contractually owed to us by our borrowers.
We are dependent on loan and lease principal, interest, and fee collections to partially fund our operations. A shortfall in collections and proceeds may impair our ability to fund our operations or to repay our existing debt.
When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk. The credit quality of our portfolio can have a significant impact on our earnings. We expect to experience charge-offs and delinquencies on our loans and leases in the future. Our clients' actual operating results may be worse than our underwriting indicated when we originated the loans and leases, and in these circumstances, if timely corrective actions are not taken, we could incur substantial impairment or loss of the value on these loans and leases. We may fail to identify problems because our client did not report them in a timely manner or, even if the client did report the problem, we may fail to address it quickly enough or at all. Even if clients provide us with full and accurate disclosure of all material information concerning their businesses, we may misinterpret or incorrectly analyze this information. Mistakes may cause us to make loans and leases that we otherwise would not have made or to fund advances that we otherwise would not have funded, either of which could result in losses on loans and leases, or necessitate that we significantly increase our allowance for loan and lease losses. As a result, we could suffer loan losses and have nonperforming loans and leases, which could have a material adverse effect on our net earnings and results of operations and financial condition, to the extent the losses exceed our allowance for loan and lease losses.
Additionally, some of our loans and leases are secured by a lien on specified collateral of the borrower and we may not obtain or properly perfect our liens or the value of the collateral securing any particular loan may not protect us from suffering a partial or complete loss if the loan becomes nonperforming and we proceed to foreclose on or repossess the collateral. In such event, we could suffer loan losses, which could have a material adverse effect on our net earnings, allowance for loan and lease losses, financial condition, and results of operations.
Our allowance for credit losses may not be adequate to cover actual losses.
In accordance with U.S. GAAP, we maintain an allowance for loan and lease losses to provide for loan and lease defaults and non-performance and a reserve for unfunded loan commitments, which, when combined, we refer to as the allowance for credit losses. Our allowance for credit losses may not be adequate to absorb actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results. Our allowance for credit losses is based on prior experience and an evaluation of the risks inherent in the current portfolio. The amount of future losses is influenced by changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Our federal and state regulators, as an integral part of their examination process, review our loans and leases and allowance for credit losses. While we believe our allowance for credit losses is appropriate for the risk identified in our loan and lease portfolio, we cannot provide assurance that we will not further increase the allowance for credit losses, that it will be sufficient to address losses, or that regulators will not require us to increase this allowance. Any of these occurrences could materially and adversely affect our financial condition and results of operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.
Our concentration of loans and leases to privately owned small and medium-sized companies and our concentration of lending to particular market sectors and industries could expose us to greater lending risk if the privately owned small or medium-sized company, market sector or industry were to experience economic difficulties or changes in the regulatory environment.
Our portfolio consists primarily of real estate and commercial loans and leases to small and medium-sized privately owned businesses in a limited number of industries throughout the United States. Loans and leases made to these types of clients entail higher risks than loans and leases made to larger, publicly owned firms that are able to access a broader array of credit sources and thus more easily weather an economic downturn.

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Real estate mortgage loans and real estate construction and land loans (which are predominantly commercial real estate loans) together comprised 56% of our total loans and leases held for investment at December 31, 2017 and our largest property type concentration was multi-family properties, totaling 27% of real estate mortgage loans. Other significant real estate mortgage loan property type concentrations were industrial properties at 15% and office properties at 14% of our real estate mortgage loans at December 31, 2017. In addition, 55% of our loans secured by real estate were in California at December 31, 2017. Commercial loans and leases comprised 42% of our total loans and leases held for investment at December 31, 2017. Significant commercial loan concentrations by loan type included asset-based loans at 18%, venture capital loans at 12%, cash flow loans at 8%, and equipment finance loans and leases at 4% of total loans and leases held for investment at December 31, 2017.
If any particular industry or market sector were to experience economic difficulties, the overall timing and amount of collections on our loans to clients operating in those industries may differ from what we expected, which could have a material adverse impact on our financial condition or results of operations.
We have a number of large credit relationships and individual commitments.
At December 31, 2017, we had ten credit relationships with aggregate commitments greater than $100 million. These ten relationships had commitments that totaled $1.9 billion and corresponding outstanding balances of $1.2 billion. These relationships represent loans to borrowers under common ownership and also loans aggregated due to a common institutional investor or private equity sponsor. The aggregated loans typically are not cross collateralized and each borrower's performance does not usually impact the collectability of the other loans in the aggregation.
At December 31, 2017, our ten largest individual loan commitments totaled $908.9 million and had corresponding outstanding balances that totaled $516.2 million. These ten largest individual commitments ranged from $75.0 million to $110.0 million. These commitments primarily are secured by commercial real estate with borrowers that are experienced operators with proven track records or are lender finance loans secured by portfolios of loan receivables originated by finance companies.
We are potentially vulnerable to significant loan losses in the event that the value of one of our larger borrower’s collateral rapidly declines or one of our larger borrowers becomes unable to repay its loans due to a decline in its business. A significant loss related to one of our large lending relationships or individual commitments could have a material adverse effect on our financial condition and results of operations.
A slowdown in venture capital investment levels may reduce the market for venture capital investment in our Square 1 Bank Division clients, which could adversely affect our business, results of operations, or financial condition.
Our Square 1 Bank Division's strategy is focused on providing banking products and credit to entrepreneurial businesses, including in particular early- and expansion-stage companies that receive financial support from sophisticated investors, including venture capital or private equity firms, and corporate investors. We derive a meaningful share of deposits, including large deposits, from these companies and provide them with loans as well as other banking products and services. In many cases, our credit decisions are based on our analysis of the likelihood that our venture capital-backed client will receive additional rounds of equity capital from investors. If the amount of capital available to such companies decreases, we could suffer loan losses, which could have a material adverse effect on our net earnings, allowance for loan and lease losses, financial condition, and results of operations.

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Market Risk
Market Risk is the Risk that Market Conditions May Adversely Impact the Value of Assets or Liabilities or Otherwise Negatively Impact Earnings. Market Risk is Inherent to the Financial Instruments Associated with our Operations, Including Loans, Deposits, Securities, Short-term Borrowings, Long-term Debt, and Derivatives.
Our business is subject to interest rate risk, and variations in interest rates may materially and adversely affect our financial performance.
Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or "spread" between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. Changes in market interest rates generally affect loan volume, loan yields, funding sources and funding costs. Our net interest spread depends on many factors that are partly or completely out of our control, including competition, federal economic monetary and fiscal policies, and general economic conditions.
While an increase in interest rates may increase our loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the contractual interest and principal due to us. Following an increase in interest rates, our ability to maintain a positive net interest spread is dependent on our ability to increase our loan offering rates, replace loans that mature and repay or that prepay before maturity with new originations, minimize increases on our deposit rates, and maintain an acceptable level and composition of funding. We cannot provide assurances that we will be able to increase our loan offering rates and continue to originate loans due to the competitive landscape in which we operate. Additionally, we cannot provide assurances that we can minimize the increases in our deposit rates while maintaining an acceptable level of deposits. Finally, we cannot provide any assurances that we can maintain our current levels of noninterest-bearing deposits as customers may seek higher-yielding products when interest rates increase.
Accordingly, changes in levels of interest rates could materially and adversely affect our net interest spread, net interest margin, cost of deposits, asset quality, loan origination volume, average loan portfolio balance, liquidity, and overall profitability.
The value of our securities in our investment portfolio may decline in the future.
The fair value of our investment securities may be adversely affected by market conditions, including changes in interest rates, implied credit spreads, and the occurrence of any events adversely affecting the issuer of particular securities in our investments portfolio or any given market segment or industry in which we are invested. We analyze our securities on a quarterly basis to determine if an other-than-temporary impairment has occurred. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairment in future periods, which could have a material adverse effect on our business, financial condition, or results of operations.

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Liquidity Risk
Liquidity Risk is the Potential Inability to Meet our Contractual and Contingent Financial Obligations, On- or Off-balance Sheet, as they Become Due.
We are subject to liquidity risk, which could adversely affect our financial condition and results of operations.
Effective liquidity management is essential for the operation of our business. Although we have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, an inability to raise funds through deposits, borrowings, the sale of investment securities and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market disruption, a decrease in the borrowing capacity assigned to our pledged assets by our secured creditors, or adverse regulatory action against us. Deterioration in economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit our access to some of our customary sources of liquidity, including, but not limited to, inter-bank borrowings, repurchase agreements and borrowings from the discount window of the FRBSF. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry generally as a result of conditions faced by banking organizations in the domestic and international credit markets.
We may be adversely affected by changes in the actual or perceived soundness or condition of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial and financial soundness of other financial institutions. Financial institutions are closely related as a result of trading, investment, liquidity management, clearing, counterparty and other relationships. Loss of public confidence in any one institution, including through default, could lead to liquidity and credit problems, losses, or defaults for other institutions. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity and credit problems, losses, or defaults by various institutions. This systemic risk may adversely affect financial intermediaries, such as clearing agencies, banks and exchanges we interact with on a daily basis or key funding providers such as the Federal Home Loan Banks, any of which could have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our business, financial condition, or results of operations.
The primary source of the holding company's liquidity from which, among other things, we pay dividends is the receipt of dividends from the Bank.
The holding company, PacWest, is a legal entity separate and distinct from the Bank and our other subsidiaries. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the FRB, the FDIC and/or the DBO could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event the Bank is unable to pay dividends to the holding company, it is likely that we, in turn, would have to discontinue capital distributions in the form of dividends or share repurchases and may have difficulty meeting our other financial obligations, including payments in respect of any outstanding indebtedness or subordinated debentures. Since the Bank had an accumulated deficit of $434.8 million at December 31, 2017, for the foreseeable future, any cash dividends from the Bank to the holding company will continue to require DBO and FDIC approval. The inability of the Bank to pay dividends to the holding company could have a material adverse effect on our business, including the market price of our common stock.

30



We may reduce or discontinue the payment of dividends on common stock.
Our stockholders are only entitled to receive such dividends as our Board may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. Our ability to pay dividends to our stockholders is subject to the restrictions set forth in Delaware law, by the FRB, and by certain covenants contained in our subordinated debentures. Notification to the FRB is also required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. We may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, now or in the future, from paying dividends to our stockholders. We cannot provide assurance that we will continue paying dividends on our common stock at current levels or at all. A reduction or discontinuance of dividends on our common stock could have a material adverse effect on our business, including the market price of our common stock.
Capital Risk
We are subject to capital adequacy standards, and a failure to meet these standards could adversely affect our financial condition.
The Company and the Bank are each subject to capital adequacy and liquidity rules and other regulatory requirements specifying minimum amounts and types of capital that must be maintained. From time to time, the regulators implement changes to these regulatory capital adequacy and liquidity guidelines. If we fail to meet these minimum capital and liquidity guidelines and other regulatory requirements, we and our subsidiaries may be restricted in the types of activities we may conduct and may be prohibited from taking certain capital actions, such as paying dividends and repurchasing or redeeming capital securities.
We may need to raise additional capital in the future and such capital may not be available when needed or at all.
We are required by federal and state regulators to maintain adequate levels of capital. We may need to raise additional capital in the future to provide us with sufficient capital resources to meet regulatory requirements. As a publicly traded company, a likely source of additional funds is the capital markets, accomplished generally through the issuance of equity, both common and preferred stock, and the issuance of subordinated debentures. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance.
We cannot provide any assurance that access to such capital will be available to us on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers or counter-parties participating in the capital markets, may materially and adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. The inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition, or results of operations.

31



Regulatory, Compliance and Legal Risk
We are subject to extensive regulation, which could materially and adversely affect our business.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, federal deposit insurance funds and the banking system as a whole, not for the protection of our stockholders and creditors. The Company is subject to regulation and supervision by the FRB, and the Bank is subject to regulation and supervision by the FDIC, DBO and CFPB. The laws and regulations applicable to us govern a variety of matters, including, but not limited to, permissible types, amounts and terms of loans and investments we make, the maximum interest rate that may be charged, consumer disclosures on the products and services we offer, the amount of reserves we must hold against our customers' deposits, the types of deposits we may accept and the rates we may pay on such deposits, maintenance of adequate capital and liquidity, restrictions on dividends and establishment of new offices by the Bank. We must obtain approval from our regulators before engaging in certain activities, including certain acquisitions, and there can be no assurance that any regulatory approvals we may require will be obtained, or obtained without conditions, either in a timely manner or at all. Our regulators have the ability to compel us to, or restrict us from, taking certain actions entirely, such as actions that our regulators deem to constitute unsafe or unsound banking practice. While we have policies and procedures designed to prevent violations of the extensive federal and state regulations we are subject to, our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in orders from our regulators, civil monetary penalties, or damage to our reputation, all of which could have a material adverse effect on our business, financial condition, or results of operation.
Regulations affecting banks and other financial institutions, such as the Dodd-Frank Act, are undergoing continuous review and change frequently. The ultimate effect of such changes cannot be predicted. Because our business is highly regulated, compliance with such regulations and laws may increase our costs and limit our ability to pursue business opportunities. Also, participation in any future specific government stabilization programs may subject us to additional restrictions. There can be no assurance that laws, rules and regulations will not be proposed or adopted in the future, which could (i) make compliance much more difficult or expensive, (ii) restrict our ability to originate, broker or sell loans or accept certain deposits, (iii) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (iv) otherwise materially and adversely affect our business or prospects for business. While there is proposed federal legislation that would scale back portions of the Dodd-Frank Act and the current administration in the United States may ultimately roll back or modify certain of the regulations adopted since the financial crisis, including those adopted under the Dodd-Frank Act, uncertainty about the timing and scope of any such changes as well as the cost of complying with a new regulatory regime, may negatively impact our business, at least in the short term, even if the long-term impact of any such changes are positive for our business.
In October 2012, as required by the Dodd-Frank Act, the FRB and FDIC published final rules regarding company-run stress testing. As a result of these final rules we invest a significant amount of time and resources into conducting an annual company-run stress test of capital, consolidated earnings and losses under various stress scenarios provided by our regulators. Our stress test results are considered by the FRB and FDIC in evaluating our capital adequacy and could have a negative impact on our ability to make capital distributions in the form of dividends or share repurchases.
The Company and its subsidiaries are subject to changes in federal and state tax laws, interpretation of existing laws and examinations and challenges by taxing authorities.
Our financial performance is impacted by federal and state tax laws. Given the current economic and political environment, and ongoing budgetary pressures, the enactment of new federal or state tax legislation or new interpretations of existing tax laws could occur. The enactment of such legislation, or changes in the interpretation of existing law, including provisions impacting income tax rates, apportionment, consolidation or combination, income, expenses, and credits, may have a material adverse effect on our financial condition, results of operations, and liquidity.
In the normal course of business, we are routinely subjected to examinations and audits from federal and state taxing authorities regarding tax positions taken by us and the determination of the amount of tax due. These examinations may relate to income, franchise, gross receipts, payroll, property, sales and use, or other tax returns filed, or not filed, by us. The challenges made by taxing authorities may result in adjustments to the amount of taxes due, and may result in the imposition of penalties and interest. If any such challenges are not resolved in our favor, they could have a material adverse effect on our financial condition, results of operations, and liquidity.

32



We are subject to claims and litigation which could adversely affect our cash flows, financial condition and results of operations, or cause us significant reputational harm.
We and certain of our subsidiaries and certain of our and their directors and officers may be involved, from time to time, in reviews, investigations, litigation, and other proceedings pertaining to our business activities. If claims or legal actions, whether founded or unfounded, are not resolved in a favorable manner to us, they may result in significant financial liability. Although we establish accruals for legal matters when and as required by U.S. GAAP and certain expenses and liabilities in connection with such matters may be covered by insurance, the amount of loss ultimately incurred in relation to those matters may be substantially higher than the amounts accrued and/or insured. Substantial legal liability could adversely affect our business, financial condition, results of operations, and reputation.
Risk of the Competitive Environment in which We Operate
We face strong competition from financial services companies and other companies that offer banking services, which could materially and adversely affect our business.
The financial services industry has become even more competitive as a result of legislative, regulatory and technological changes and continued banking consolidation, which may increase in connection with current economic, market and political conditions. We face substantial competition in all phases of our operations from a variety of competitors, including national banks, regional banks, community banks and, more recently, financial technology (or "fintech") companies. Many of our competitors offer the same banking services that we offer and our success depends on our ability to adapt our products and services to evolving industry standards. Increased competition in our market may result in reduced new loan and lease production and/or decreased deposit balances or less favorable terms on loans and leases and/or deposit accounts. We also face competition from many other types of financial institutions, including without limitation, non-bank specialty lenders, insurance companies, private investment funds, investment banks, and other financial intermediaries. While there are a limited number of direct competitors in the venture banking market, some of our competitors have long-standing relationships with venture firms and the companies that are funded by such firms. The market for our Square 1 Bank Division is extremely competitive and several of our competitors have significantly greater resources, established customer bases, more locations, and longer operating histories.
We also face competition from financial intermediaries that have opened production offices or that solicit deposits in our market areas. Should competition in the financial services industry intensify, our ability to market our products and services may be adversely affected. If we are unable to attract and retain banking customers, we may be unable to grow or maintain the levels of our loans and deposits and our results of operations and financial condition may be adversely affected as a result. Ultimately, we may not be able to compete successfully against current and future competitors.
Our ability to maintain, attract and retain customer relationships and investors is highly dependent on our reputation.
Damage to our reputation could undermine the confidence of our current and potential customers and investors in our ability to provide high-quality financial services. Such damage could also impair the confidence of our counterparties and vendors and ultimately affect our ability to effect transactions. Maintenance of our reputation depends not only on our success in maintaining our service-focused culture and controlling and mitigating the various risks described herein, but also on our success in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-money laundering, client personal information and privacy issues, customer and other third-party fraud, record-keeping, technology-related issues including but not limited to cyber fraud, regulatory investigations and any litigation that may arise from the failure or perceived failure to comply with legal and regulatory requirements. Maintaining our reputation also depends on our ability to successfully prevent third parties from infringing on our brands and associated trademarks and our other intellectual property. Defense of our reputation, trademarks and other intellectual property, including through litigation, could result in costs that could have a material adverse effect on our business, financial condition, or results of operations.

33



Risks Related to Risk Management
Our acquisitions may subject us to unknown risks.
As an active acquirer having successfully completed 29 acquisitions since 2000, certain events may arise after the date of an acquisition, or we may learn of certain facts, events or circumstances after the closing of an acquisition, that may affect our financial condition or performance or subject us to risk of loss. These events include, but are not limited to: litigation resulting from circumstances occurring at the acquired entity prior to the date of acquisition; loan downgrades and credit loss provisions resulting from deterioration in the credit quality of the acquired loans; personnel changes that cause instability within a department; delays in implementing new policies or procedures or the failure to apply new policies or procedures; and other events relating to the performance of our business. Acquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstances that could result in loss or increased costs or give assurances that our due diligence or mitigation efforts will be sufficient to protect against any such loss or increased costs.
Our ability to execute our strategic initiatives successfully will depend on a variety of factors. These factors likely will vary based on the nature of the initiative but may include our success in integrating the operations, services, products, personnel and systems of an acquired company into our business, operating effectively with any partner with whom we elect to do business, retaining key employees, achieving anticipated synergies, meeting expectations and otherwise realizing the undertaking's anticipated benefits. Our ability to address these matters successfully cannot be assured. In addition, our strategic initiatives may divert resources or management's attention from ongoing business operations and may subject us to additional regulatory scrutiny. If we do not successfully execute a strategic undertaking, it could adversely affect our business, financial condition, results of operations, reputation, regulatory relationships and growth prospects. In addition, if we determined that the value of an acquired business had decreased and that the related goodwill is impaired, an impairment of goodwill charge to earnings would be recognized. To the extent we issue capital stock in connection with future acquisitions, these transactions may be dilutive to book value and earnings per share and will dilute share ownership.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry experiences continuous technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. To keep pace with technology and provide sufficient scalability for growth, we began our conversion to a new core processing system related to managing customer accounts during 2016 and the additional phases are scheduled to be completed during the second quarter of 2018. Many of our competitors, however, have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. In addition, we depend on internal and outsourced technology to support all aspects of our business operations. Interruption or failure of these systems creates a risk of business loss as a result of adverse customer experiences and possible diminishing of our reputation, damage claims or civil fines. Failure to successfully keep pace with technological change affecting the financial services industry or to successfully implement core processing strategies could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
A breach in the security of our systems, or those of contracted partners, could disrupt our business, result in the disclosure of confidential information, damage our reputation, and create significant financial and legal exposure.
Although we devote significant resources to maintain and regularly update our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to us and our customers, there is no assurance that all of our security measures will provide absolute security.

34



 Many financial institutions, including the Company, have been subjected to attempts to infiltrate the security of their websites or other systems, some involving sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, including through the introduction of computer viruses or malware, cyber-attacks and other means. We have been targeted by individuals and groups using phishing campaigns, pretext calling, malicious code and viruses, and have experienced distributed denial-of-service attacks with the objective of disrupting on-line banking services and expect to be subject to such attacks in the future.
Despite efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate, detect or recognize threats to our systems or to implement effective preventive measures against all security breaches of these types inside or outside our business, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including individuals or groups who are associated with external service providers or who are or may be involved in organized crime or linked to terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers, third-party service providers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. These risks may increase in the future as our web-based product offerings grow or we expand internal usage of web-based applications.
A successful penetration or circumvention of the security of our systems, the systems of another market participant, or a third-party provider of products and services could cause serious negative consequences, including significant disruption of our operations, misappropriation of confidential information, or damage to computers or systems, and may result in violations of applicable privacy and other laws, financial loss, loss of confidence in our security measures, customer dissatisfaction, increased insurance premiums, significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on our business, financial condition, results of operations, and future prospects.
We rely on other companies to provide key components of our business infrastructure.
We rely on certain third parties to provide products and services necessary to maintain day-to-day operations, such as data processing and storage, recording and monitoring transactions, on-line banking interfaces and services, Internet connections, telecommunications, and network access. Even though we have a vendor management program to help us carefully select and monitor the performance of third parties, we do not control their actions. The failure of a third-party to perform in accordance with the contracted arrangements under service level agreements as a result of changes in the third party’s organizational structure, financial condition, support for existing products and services, strategic focus, system interruption or breaches, or for any other reason, could be disruptive to our operations, which could have a material adverse effect on our business, financial condition and results of operations. Replacing these third parties could also create significant delays and expense. Accordingly, use of such third parties creates an inherent risk to our business operations.
Our controls and procedures may fail or be circumvented.
We regularly review and update our internal controls, disclosure controls and procedures, compliance monitoring activities and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, reputation and financial condition. In addition, if we identify material weaknesses or significant deficiencies in our internal control over financial reporting or are required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures. We could lose investor confidence in the accuracy and completeness of our financial reports and potentially subject us to litigation. Any material weaknesses or significant deficiencies in our internal control over financial reporting or restatement of our financial statements could have a material adverse effect on our business, results of operations, reputation, and financial condition.

35



Severe weather, natural disasters, acts of war or terrorism or other adverse external events could harm the Company's business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. The nature and level of severe weather and/or natural disasters cannot be predicted and may be exacerbated by global climate change. Severe weather and natural disasters could harm our operations through interference with communications, including the interruption or loss of our computer systems, which could prevent or impede us from gathering deposits, originating loans and processing and controlling the flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. California, in which a substantial portion of our business and a substantial portion of our loan collateral is located, is susceptible to severe weather and natural disasters such as earthquakes, floods, droughts and wildfires. Additionally, the United States remains a target for potential acts of war or terrorism. Such severe weather, natural disasters, acts of war or terrorism or other adverse external events could negatively impact our business operations or the stability of our deposit base, cause significant property damage, adversely impact the values of collateral securing our loans and/or interrupt our borrowers' abilities to conduct their business in a manner to support their debt obligations, which could result in losses and increased provisions for credit losses. There is no assurance that our business continuity and disaster recovery program can adequately mitigate the risks of such business disruptions and interruptions.
Risk from Accounting Estimates
Our decisions regarding the fair value of assets acquired could be inaccurate which could materially and adversely affect our business, financial condition, results of operations, and future prospects.
To comply with U.S. GAAP, management must exercise judgment in selecting, determining, and applying accounting methods, assumptions, and estimates. Management makes various estimates and judgments about the collectability of acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. If the actual performance of the acquired loans and/or the value of the collateral differs materially from management's estimates, any resulting losses or increased credit loss provisions could have a negative effect on our business, financial condition, or results of operations.

36



ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of January 31, 2018, we had a total of 155 properties consisting of 77 full-service branch offices and 78 other offices. We own four locations and the remaining properties are leased. Our properties are located throughout the United States, however, approximately 76% are located in California. We lease our principal office, which is located at 9701 Wilshire Blvd., Suite 700, Beverly Hills, CA 90212.
For additional information regarding properties of the Company and Pacific Western, see Note 8. Premises and Equipment, Net of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
ITEM 3. LEGAL PROCEEDINGS
See Note 11. Commitments and Contingencies of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." That information is incorporated into this item by reference.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.

37


PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Marketplace Designation, Sales Price Information and Holders
Our common stock is listed on The Nasdaq Global Select Market and is traded under the symbol “PACW.” The following table summarizes the high and low sale prices for each quarterly period during the last two years for our common stock, as quoted and reported by The Nasdaq Stock Market, or Nasdaq:
 
 
 
 
 
Dividends
 
 
 
 
 
Declared
 
Stock Sales Prices
 
During
 
High
 
Low
 
Quarter
2016
 
 
 
 
 
First quarter
$43.45
 
$29.05
 
$0.50
Second quarter
$42.14
 
$35.56
 
$0.50
Third quarter
$43.86
 
$36.89
 
$0.50
Fourth quarter
$56.07
 
$41.10
 
$0.50
 
 
 
 
 
 
2017
 
 
 
 
 
First quarter
$57.53
 
$49.21
 
$0.50
Second quarter
$53.57
 
$45.09
 
$0.50
Third quarter
$51.56
 
$43.08
 
$0.50
Fourth quarter
$50.83
 
$43.61
 
$0.50
As of February 13, 2018, the closing price of our common stock on Nasdaq was $52.30 per share. As of that date, based on the records of our transfer agent, there were approximately 1,810 record holders of our common stock.
Dividends
The table above shows the dividends we declared and paid during the two most recent fiscal years. For a discussion of dividend restrictions on the Company's common stock, or of dividends from the Company's subsidiaries to the Company, see “Item 1. Business - Supervision and Regulation - Dividends and Share Repurchases” and Note 18. Dividend Availability and Regulatory Matters of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”

38



Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2017, regarding securities issued and to be issued under our equity compensation plans in effect during fiscal year 2017:
 
 
 
 
Number of Securities
 
 
 
Number of Securities
 
 
 
 
to be Issued
 
Weighted Average
 
Remaining Available
 
 
 
 
Upon Exercise of
 
Exercise Price of
 
for Future Issuance Under
 
 
 
 
Outstanding
 
Outstanding
 
Equity Compensation Plans
 
 
 
 
Options, Warrants
 
Options, Warrants
 
(Excluding Securities
 
 
 
 
and Rights
 
and Rights
 
Reflected in Column (a))
Plan Category
 
Plan Name
 
(a)
 
(b)
 
(c)
Equity compensation plans
 
PacWest Bancorp 2017
 
 
 
 
 
 
 
 
approved by security holders
 
Stock Incentive Plan (1)
 

(2) 
 
$

 
3,638,497

(3) 
 
 
PacWest Bancorp 2003
 
 
 
 
 
 
 
 
 
 
Stock Incentive Plan (1)
 

(4) 
 

 

(5) 
Equity compensation plans
 
 
 
 
 
 
 
 
 
 
not approved by security holders
 
None
 

 
 

 

 
Total
 
 
 

 
 
$

 
3,638,497

 
__________________________________     
(1)
The PacWest Bancorp 2017 Stock Incentive Plan (the “2017 Incentive Plan”) was approved by our stockholders at our May 15, 2017 Stockholders Meeting. The authorized number of shares available for issuance under the 2017 Incentive Plan was 4,000,000 shares. Upon approval of the 2017 Incentive Plan by our stockholders, the PacWest 2003 Stock Incentive Plan (the "2003 Incentive Plan") was frozen and no new awards will be granted under the 2003 Incentive Plan.
(2)
Amount does not include 348,842 shares of unvested time-based restricted stock outstanding under the 2017 Incentive Plan with a zero exercise price as of December 31, 2017.
(3)
The 2017 Incentive Plan permits these remaining shares to be issued in the form of options, restricted stock, or stock appreciation rights.
(4) Amount does not include 1,087,278 shares of unvested time-based restricted stock outstanding under the 2003 Incentive Plan with a zero exercise price as of December 31, 2017.
(5) The 2003 Incentive Plan was frozen on May 15, 2017 and no new awards will be granted under the 2003 Incentive Plan. However, the 2016 and 2017 PRSU awards were granted from the 2003 Incentive Plan and at the end of their three-year performance periods, if performance is achieved and awards are earned, they will be issued from the 2003 Incentive Plan. The number of shares to be issued, if any, is unknown at this time.
Recent Sales of Unregistered Securities and Use of Proceeds
None.
Repurchases of Common Stock
The following table presents stock repurchases we made during the fourth quarter of 2017:
 
 
 
 
 
Total Number of
 
Maximum Dollar
 
 
 
Average
 
Shares Purchased
 
Value of Shares That
 
Total Number of
 
Price Paid
 
as Part of Publicly
 
May Yet Be Purchased
Purchase Dates
Shares Purchased (1)
 
 Per Share
 
Announced Program (2)
 
Under the Program (2)
 
 
 
 
 
 
 
(In thousands)

October 1 – October 31, 2017
542,721

 
$
48.44

 
534,221

 
$
336,197

November 1 – November 30, 2017
814,335

 
$
46.17

 
787,703

 
$
150,000

December 1 – December 31, 2017
759,303

 
$
49.35

 
759,303

 
$
112,529

Total
2,116,359

 
$
47.89

 
2,081,227

 
 
___________________________________ 
(1)
Includes shares repurchased pursuant to net settlement by employees and directors in satisfaction of income tax withholding obligations incurred through the vesting of Company stock awards, and shares repurchased pursuant to the Company's publicly announced Stock Repurchase Program.
(2)
The Stock Repurchase Program was initially authorized by PacWest's Board of Directors on October 17, 2016, pursuant to which the Company could, until December 31, 2017, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. On November 15, 2017 PacWest's Board of Directors amended the Stock Repurchase Program to reduce the authorized purchase amount to $150 million and extend the maturity date to December 31, 2018. On February 14, 2018, PacWest's Board of Directors amended the Stock Repurchase Program to increase the authorized purchase amount to $350 million and extend the maturity date to February 28, 2019. All shares repurchased under the Stock Repurchase Program were retired upon settlement.

39



Five‑Year Stock Performance Graph
The following chart compares the yearly percentage change in the cumulative stockholder return on our common stock based on the closing price during the five years ended December 31, 2017, with (1) the Total Return Index for U.S. companies traded on The Nasdaq Stock Market (the “NASDAQ Composite Index”), and (2) the Total Return Index for KBW NASDAQ Regional Bank Stocks (the “KBW Regional Banking Index”). This comparison assumes $100 was invested on December 31, 2012, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. The Company's total cumulative gain was 148.4% over the five year period ending December 31, 2017 compared to gains of 142.3% and 131.8% for the NASDAQ Composite Index and KBW Regional Banking Index.
392407613_a12311710-k_chartx17801a01.jpg
___________________________________
* $100 invested on December 31, 2012 in stock or index, including reinvestment of dividends.
 
Year Ended December 31,
Index
2012
 
2013
 
2014
 
2015
 
2016
 
2017
PacWest Bancorp
$
100.00

 
$
176.01

 
$
195.22

 
$
193.37

 
$
257.37

 
$
248.43

NASDAQ Composite Index
100.00

 
141.63

 
162.09

 
173.33

 
187.19

 
242.29

KBW Regional Banking Index
100.00

 
135.82

 
153.86

 
154.21

 
190.20

 
231.76


40



ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain of our financial and statistical information for each of the years in the five‑year period ended December 31, 2017. The selected financial data should be read in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations," our audited consolidated financial statements as of December 31, 2017 and 2016, and for each of the years in the three‑year period ended December 31, 2017 and the related Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.” Our acquisitions may materially affect the comparability of the information reflected in the selected financial data presented in Item 6. Further information regarding our acquisitions can be found in Note 3. Acquisitions to our consolidated financial statements.
 
At or For the Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per share amounts and percentages)
Results of Operations (1):
 
 
 
 
 
 
 
 
 
Interest income
$
1,052,516

 
$
1,015,912

 
$
883,938

 
$
704,775

 
$
309,914

Interest expense
(72,945
)
 
(54,621
)
 
(60,592
)
 
(42,398
)
 
(12,201
)
Net interest income
979,571

 
961,291

 
823,346

 
662,377

 
297,713

(Provision) negative provision for credit losses
(57,752
)
 
(65,729
)
 
(45,481
)
 
(11,499
)
 
4,210

(Loss) gain on securities
(541
)
 
9,485

 
3,744

 
4,841

 
5,359

FDIC loss sharing expense, net

 
(8,917
)
 
(18,246
)
 
(31,730
)
 
(26,172
)
Other noninterest income
129,114

 
111,907

 
98,812

 
69,076

 
25,057

Total noninterest income
128,573

 
112,475

 
84,310

 
42,187

 
4,244

Foreclosed assets (expense) income, net
(1,702
)
 
(1,881
)
 
668

 
(5,401
)
 
1,503

Acquisition, integration and reorganization costs
(19,735
)
 
(200
)
 
(21,247
)
 
(101,016
)
 
(40,812
)
Other noninterest expense
(474,224
)
 
(448,020
)
 
(361,460
)
 
(299,175
)
 
(188,856
)
Total noninterest expense
(495,661
)
 
(450,101
)
 
(382,039
)
 
(405,592
)
 
(228,165
)
Earnings from continuing operations before
 
 
 
 
 
 
 
 
 
income tax expense
554,731

 
557,936

 
480,136

 
287,473

 
78,002

Income tax expense
(196,913
)
 
(205,770
)
 
(180,517
)
 
(117,005
)
 
(32,525
)
Net earnings from continuing operations
357,818

 
352,166

 
299,619

 
170,468

 
45,477

Loss from discontinued operations before
 
 
 
 
 
 
 
 
 
income tax benefit

 

 

 
(2,677
)
 
(620
)
Income tax benefit

 

 

 
1,114

 
258

Net loss from discontinued operations

 

 

 
(1,563
)
 
(362
)
Net earnings
$
357,818

 
$
352,166

 
$
299,619

 
$
168,905

 
$
45,115

 
 
 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share (EPS):
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
2.91

 
$
2.90

 
$
2.79

 
$
1.94

 
$
1.09

Net earnings
$
2.91

 
$
2.90

 
$
2.79

 
$
1.92

 
$
1.08

Dividends declared during year
$
2.00

 
$
2.00

 
$
2.00

 
$
1.25

 
$
1.00

Book value per share (2)(3)
$
38.65

 
$
36.93

 
$
36.22

 
$
34.03

 
$
17.65

Tangible book value per share (2)(3)
$
18.24

 
$
18.71

 
$
17.86

 
$
17.17

 
$
12.72

Shares outstanding at year-end (3)
128,783

 
121,284

 
121,414

 
103,022

 
45,823

Average shares outstanding for basic and diluted EPS
121,613

 
120,239

 
106,327

 
86,853

 
40,823



41



 
At or For the Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands, except per share amounts and percentages)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
24,994,876

 
$
21,869,767

 
$
21,288,490

 
$
16,234,605

 
$
6,533,168

Cash and cash equivalents
398,437

 
419,670

 
396,486

 
313,226

 
147,422

Investment securities
3,795,221

 
3,245,700

 
3,579,147

 
1,607,786

 
1,522,684

Non-PCI loans and leases
16,974,171

 
15,412,092

 
14,339,070

 
11,613,832

 
3,930,539

Allowance for credit losses, Non-PCI loans and leases
161,647

 
161,278

 
122,268

 
76,767

 
67,816

PCI loans
58,050

 
108,445

 
189,095

 
290,852

 
382,796

Goodwill
2,548,670

 
2,173,949

 
2,176,291

 
1,720,479

 
208,743

Core deposit and customer relationship intangibles
79,626

 
36,366

 
53,220

 
17,204

 
17,248

Deposits
18,865,536

 
15,870,611

 
15,666,182

 
11,755,128

 
5,280,987

Borrowings
467,342

 
905,812

 
621,914

 
383,402

 
113,726

Subordinated debentures
462,437

 
440,744

 
436,000

 
433,583

 
132,645

Stockholders’ equity
4,977,598

 
4,479,055

 
4,397,691

 
3,506,230

 
808,898

 
 
 
 
 
 
 
 
 
 
Performance Ratios:
 
 
 
 
 
 
 
 
 
Return on average assets
1.58
%
 
1.66
%
 
1.70
%
 
1.27
%
 
0.74
%
Return on average equity
7.71
%
 
7.85
%
 
7.99
%
 
6.11
%
 
6.28
%
Return on average tangible equity (2)
15.15
%
 
15.52
%
 
15.76
%
 
11.88
%
 
8.25
%
Net interest margin
5.10
%
 
5.40
%
 
5.60
%
 
6.01
%
 
5.48
%
Efficiency ratio
40.8
%
 
39.8
%
 
38.5
%
 
41.6
%
 
60.7
%
Stockholders’ equity to total assets ratio (2)
19.9
%
 
20.5
%
 
20.7
%
 
21.6
%
 
12.4
%
Tangible common equity ratio (2)
10.5
%
 
11.5
%
 
11.4
%
 
12.2
%
 
9.2
%
Average equity to average assets
20.5
%
 
21.2
%
 
21.3
%
 
20.7
%
 
11.8
%
Dividend payout ratio
69.1
%
 
69.1
%
 
71.8
%
 
67.7
%
 
90.9
%
 
 
 
 
 
 
 
 
 
 
Capital Ratios (consolidated):
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
10.66
%
 
11.91
%
 
11.67
%
 
12.34
%
 
11.22
%
Tier 1 capital ratio
10.91
%
 
12.31
%
 
12.60
%
 
13.16
%
 
15.12
%
Total capital ratio
13.75
%
 
15.56
%
 
15.65
%
 
16.07
%
 
16.38
%
 
 
 
 
 
 
 
 
 
 
Non-PCI Credit Quality Metrics:
 
 
 
 
 
 
 
 
 
Non-PCI nonaccrual loans and leases
$
155,784

 
$
170,599

 
$
129,019

 
$
83,621

 
$
46,774

Non-PCI accruing loan past due 90 days or more

 

 
700

 

 

Foreclosed assets
1,329

 
12,976

 
22,120

 
43,721

 
55,891

Total nonperforming assets
157,113

 
183,575

 
151,839

 
127,342

 
102,665

Non-PCI nonaccrual loans and leases to Non-PCI
 
 
 
 
 
 
 
 
 
loans and leases
0.92
%
 
1.11
%
 
0.90
%
 
0.72
%
 
1.19
%
Nonperforming assets to Non-PCI loans and leases
 
 
 
 
 
 
 
 
 
and foreclosed assets
0.93
%
 
1.19
%
 
1.06
%
 
1.09
%
 
2.58
%
Allowance for credit losses to Non-PCI loans and leases
0.95
%
 
1.05
%
 
0.85
%
 
0.66
%
 
1.73
%
Allowance for credit losses to Non-PCI nonaccrual
 
 
 
 
 
 
 
 
 
loans and leases
103.8
%
 
94.5
%
 
94.8
%
 
91.8
%
 
145.0
%
Net charge-offs to average Non-PCI loans and leases
0.40
%
 
0.15
%
 
0.06
%
 
0.02
%
 
0.12
%
________________________________
(1)
Operating results of acquired companies are included from the respective acquisition dates. See Note 3. Acquisitions of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
(2)
For information regarding this calculation, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Non‑GAAP Measurements.”
(3)
Includes 1,436,120 shares, 1,476,132 shares, 1,211,951 shares, 1,108,505 shares, and 1,216,524 shares of unvested restricted stock outstanding at December 31, 2017, 2016, 2015, 2014, and 2013.


42


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 deposit products and services through 76 full-service branches located throughout the state of California, one branch in Durham, North Carolina, and 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, real estate, equipment and 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.
At December 31, 2017, we had total assets of $25.0 billion, including $17.5 billion of total loans and leases, net of deferred fees, and $3.8 billion of securities available-for-sale, compared to $21.9 billion of total assets, including $15.5 billion of loans and leases, net of deferred fees, and $3.2 billion of securities available-for-sale at December 31, 2016. The $3.1 billion increase in total assets during 2017 was due primarily to a $2.0 billion increase in loans and leases, driven mainly by the CUB acquisition on October 20, 2017, a $550.6 million increase in securities available-for-sale, due mainly to net purchases, and a $374.7 million increase in goodwill resulting from the CUB acquisition.
At December 31, 2017, we had total liabilities of $20.0 billion, including total deposits of $18.9 billion and borrowings of $467.3 million compared to $17.4 billion of total liabilities, including total deposits of $15.9 billion and borrowings of $905.8 million at December 31, 2016. The $2.6 billion increase in total liabilities during 2017 was due primarily to a $3.4 billion increase in lower-cost core deposits attributable mainly to the CUB acquisition, offset by a $438.5 million decrease in borrowings, primarily overnight FHLB advances, a $311.3 million decrease in non-core non-maturity deposits, and a $107.0 million decrease in higher-cost time deposits. At December 31, 2017, core deposits totaled $15.9 billion, or 85% of total deposits, and time deposits totaled $2.1 billion, or 11% of total deposits.
At December 31, 2017, we had total stockholders' equity of $5.0 billion compared to $4.5 billion at December 31, 2016. During 2017, stockholders’ equity increased $498.5 million, due mainly to the issuance of $446.2 million in common stock in connection with the CUB acquisition and $357.8 million in net earnings, offset by $247.4 million in dividends paid. Consolidated capital ratios remained strong with Tier 1 capital and total capital ratios of 10.91% and 13.75% at December 31, 2017.
Recent Events
CU Bancorp Acquisition
On October 20, 2017, PacWest completed the acquisition of CUB in a transaction valued at $670.6 million. As part of the acquisition, CU Bank, a wholly-owned subsidiary of CUB, was merged with and into PacWest's wholly-owned banking subsidiary, Pacific Western Bank.
CU Bank was a commercial bank headquartered in Los Angeles, California with nine branches located in Los Angeles, Orange, Ventura, and San Bernardino counties. We completed the acquisition to, among other things, enhance our Southern California community bank franchise by adding a $2.1 billion loan portfolio and $2.7 billion of core deposits.

43



We recorded the acquired assets and liabilities, both tangible and intangible, at their estimated fair values as of the acquisition date and increased total assets by $3.5 billion. The application of the acquisition method of accounting resulted in goodwill of $374.7 million. For further information, see Note 3. Acquisitions of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
Loan Sales and Loans Held for Sale
Fourth Quarter 2017
In the fourth quarter of 2017, we agreed to sell $1.5 billion of cash flow loans (of which $481.1 million were held for sale at December 31, 2017 and were subsequently sold in the first quarter of 2018) (the "Cash Flow Loan Sale"). Of the $1.5 billion in loans sold, none were on nonaccrual and $4.7 million were classified, and we also exited our CapitalSource Division origination operations related to general, technology, and healthcare cash flow loans. These actions were taken to lower the Company's credit risk profile and improve its funding mix. As of December 31, 2017, $1.0 billion of the loans sold had settled, while $481.1 million were classified as held for sale. The loans held for sale at December 31, 2017 settled in the first quarter of 2018. As a result of the Cash Flow Loan Sale, our cash flow portfolio held for investment decreased from $2.7 billion at September 30, 2017 to $1.3 billion at December 31, 2017.
In connection with the Cash Flow Loan 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.
Second Quarter 2017
In the second quarter of 2017, we sold $46.0 million of loans consisting primarily of loans from our healthcare portfolios. Additionally, 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 held for sale at June 30, 2017 and the sales were completed in July 2017. As a result of the second quarter loan sales and transfers to loans held for sale, our healthcare cash flow portfolio held for investment decreased from $740.6 million at March 31, 2017 to $514.7 million at June 30, 2017, which included two non-pass rated credits of $26.1 million.
In connection with the transfer of loans to held for sale, we recognized $7.2 million in charge-offs to record the loans at the lower of cost or fair value. Additionally, our nonaccrual loans held for investment decreased by $5.3 million and our classified loans held for investment decreased by $44.8 million as a result of the loans transferred to held for sale.
Federal Tax Reform
The TCJA was signed into law on December 22, 2017 and represents the first major overhaul of the United States federal income tax system in more than 30 years. The TCJA reduces the federal corporate tax rate from 35% to 21% effective as of January 1, 2018. Other changes affecting us include immediate deductions for certain new investments instead of deductions for bonus depreciation expense over time, modification of the deduction for performance based executive compensation and limiting the amount of FDIC insurance assessments that are deductible. We are continuing to evaluate the requirements of the TCJA and its impact on our effective tax rate as well as possible changes to our business practices to benefit from the TCJA. We currently estimate that our 2018 effective tax rate will range from 27% to 29%.
Stock Repurchase Program
Our Stock Repurchase Program was initially authorized by PacWest's Board of Directors on October 17, 2016, pursuant to which the Company could, until December 31, 2017, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. On November 15, 2017, PacWest's Board of Directors amended the Stock Repurchase Program to reduce the authorized purchase amount to $150 million and extend the maturity date to December 31, 2018. On February 14, 2018, PacWest's Board of Directors amended the Stock Repurchase Program to increase the authorized purchase amount to $350 million and extend the maturity date to February 28, 2019.

44



The common stock repurchases may be effected through open market purchases or in privately negotiated transactions and may utilize derivatives or similar instrument to effect share repurchase transactions (including, without limitation, accelerated share repurchase contracts, equity forward transactions, equity option transactions, equity swap transactions, cap transactions, collar transactions, floor transactions or other similar transactions or any combination of the foregoing transactions).
The amount and exact timing of any repurchases will depend upon market conditions and other factors. The Stock Repurchase Program may be suspended or discontinued at any time. During the fourth quarter of 2016, the Company repurchased 652,835 shares of common stock for a total amount of $27.9 million. During 2017, the Company repurchased 2,081,227 shares of common stock for a total amount of $99.7 million. All shares repurchased under the Stock Repurchase Program were retired upon settlement. At December 31, 2017, the remaining amount that could be used to repurchase shares under the Stock Repurchase Program was $112.5 million. After the amendment on February 14, 2018, the remaining amount that could be used to repurchase shares under the Stock Repurchase Program is $350 million.
Sale/Leaseback Transaction
In the first quarter of 2017, the Company sold four properties with an aggregate book value of $9.7 million to a third party and simultaneously leased back the properties under one lease with an initial term of five years and three leases with initial terms of ten years. The aggregate purchase price was $12.1 million which resulted in a gain of $0.6 million recognized in the first quarter and a deferred gain of $1.8 million to be recognized over the respective terms of the leases.
Key Performance Indicators
Among other factors, our operating results generally depend on the following key performance indicators:
The Level of Net Interest Income
Net interest income is the excess of interest earned on our interest‑earning assets over the interest paid on our interest‑bearing liabilities. Net interest margin is net interest income (annualized if related to a quarterly period) expressed as a percentage of average interest‑earning assets. Tax equivalent net interest income is net interest income increased by an adjustment for tax-exempt interest on certain loans and municipal securities based on a 35% federal statutory tax rate. As a result of the TCJA, the tax equivalent adjustment will be based on a 21% federal statutory tax rate for 2018 and thereafter. Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets.
Our primary interest‑earning assets are loans and investment securities, and our primary interest‑bearing liabilities are deposits. Contributing to our high net interest margin is our high yield on loans and leases and competitive cost of deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we seek to minimize the impact of these variances by attracting a high percentage of noninterest‑bearing deposits.
Loan and Lease Growth
We actively seek new lending opportunities under an array of commercial real estate loans and C&I lending products. Our targeted collateral for our real estate loan offerings includes multi-family properties, office properties, industrial properties, healthcare properties, hospitality properties, and retail properties. Our C&I loan products include equipment-secured loans and leases, asset-secured loans, loans to finance companies, cash flow loans primarily to security monitoring companies, and venture capital-backed loans to entrepreneurial companies to support the various stages of their operations. Our loan origination process emphasizes credit quality. We foster lending relationships with borrowers that have proven loan repayment performance. Our commitment sizes vary by loan product and have ranged up to $110 million for certain asset-based lending arrangements and select real estate loans. We price loans to preserve our interest spread and maintain our net interest margin. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.

45



The Magnitude of Credit Losses
We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified and nonperforming assets and net charge‑offs. We maintain an allowance for credit losses on loans and leases, which is the sum of our allowance for loan and lease losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off‑balance sheet credit exposure. Loans and leases which are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology which considers various credit performance measures such as historical and current net charge‑offs, the levels and trends of classified loans and leases, the migration of loans and leases into various risk classifications, and the overall level of outstanding loans and leases. For originated and acquired non‑impaired loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively. For PCI loans, a provision for credit losses may be recorded to reflect decreases in expected cash flows on such loans compared to those previously estimated.
We regularly review our loans and leases to determine whether there has been any deterioration in credit quality resulting from borrower operations or changes in collateral value or other factors which may affect collectability of our loans and leases. Changes in economic conditions, such as the rate of economic growth, the rate of inflation, the unemployment rate, increases in the general level of interest rates, declines in real estate values, changes in commodity prices, and adverse conditions in borrowers’ businesses, could negatively impact our borrowers and cause us to adversely classify loans and leases. An increase in classified loans and leases generally results in increased provisions for credit losses and an increased allowance for credit losses. Any deterioration in the commercial real estate market may lead to increased provisions for credit losses because our loans are concentrated in commercial real estate loans.
The Level of Noninterest Expense
Our noninterest expense includes fixed and controllable overhead, the major components of which are compensation, occupancy, data processing, and other professional services. It also includes costs that tend to vary based on the volume of activity, such as loan and lease production and the number and complexity of foreclosed assets. We measure success in controlling both fixed and variable costs through monitoring of the efficiency ratio. We calculate the efficiency ratio by dividing noninterest expense (less intangible asset amortization, net foreclosed assets expense (income), and acquisition, integration and reorganization costs) by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain (loss) on sale of securities and gain (loss) on sales of assets other than loans and leases).
The following table presents the calculation of our efficiency ratio for the years indicated:
 
 
Year Ended December 31,
Efficiency Ratio
2017
 
2016
 
2015
 
 
(Dollars in thousands)
Noninterest expense
$
495,661

 
$
450,101

 
$
382,039

Less:
Intangible asset amortization
14,240

 
16,517

 
9,410

 
Foreclosed assets expense (income), net
1,702

 
1,881

 
(668
)
 
Acquisition, integration and reorganization costs
19,735

 
200

 
21,247

Noninterest expense used for efficiency ratio
$
459,984

 
$
431,503

 
$
352,050

 
 
 
 
 
 
 
Net interest income (tax equivalent)
$
999,362

 
$
980,811

 
$
834,814

Noninterest income
128,573

 
112,475

 
84,310

Net revenues
1,127,935

 
1,093,286

 
919,124

Less:
(Loss) gain on sale of securities
(541
)
 
9,485

 
3,744

Net revenues used for efficiency ratio
$
1,128,476

 
$
1,083,801

 
$
915,380

 
 
 
 
 
 
 
Efficiency ratio(1)
40.8
%
 
39.8
%
 
38.5
%
_______________________________________ 
(1)
Noninterest expense used for efficiency ratio divided by net revenues used for efficiency ratio.

46



Critical Accounting Policies
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.
Our significant accounting policies and practices are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." We have identified several policies as being critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses on Non-PCI loans and leases held for investment, accounting for business combinations, and the realization of deferred income tax assets and liabilities.
Allowance for Credit Losses on Non-PCI Loans and Leases Held for Investment
The allowance for credit losses on Non-PCI loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of outstanding loan and lease balances and the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the consolidated balance sheets. The following discussion is for Non-PCI loans and leases and the related allowance for credit losses. Refer to "—Allowance for Loan Losses on PCI Loans Held for Investment" for the policy on PCI loans. For loans and leases acquired and measured at fair value and deemed non-impaired on the acquisition date, our allowance methodology measures deterioration in credit quality or other inherent risks related to these acquired assets that may occur after the acquisition date.
The allowance for credit losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan and lease portfolio and other extensions of credit at the balance sheet date. The allowance is based upon our review of the credit quality of the loan and lease portfolio, which includes loan and lease payment trends, borrowers' compliance with loan agreements, borrowers' current and budgeted financial performance, collateral valuation trends, and current economic factors and external conditions that may affect our borrowers' ability to make payments to us in accordance with their contractual loan agreements. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for loan and lease losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses has a general reserve component for loans and leases with no credit impairment and a specific reserve component for loans and leases determined to be impaired.
A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. We assess our loans and leases for impairment on an ongoing basis using certain criteria such as payment performance, borrower reported financial results and budgets, and other external factors when appropriate. We measure impairment of a loan or lease based upon the fair value of the underlying collateral if the loan or lease is collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease is not collateral-dependent. To the extent a loan or lease balance exceeds the estimated collectable value, a specific reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan is collateral-dependent. Smaller balance loans (under $250,000), with a few exceptions for certain loan types, are generally not individually assessed for impairment but are evaluated collectively.

47



Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors which are applied to the population of unimpaired loans and leases to estimate our general reserves. The quantitative loss factors are the average charge-offs experienced over a prescribed historical look-back period on loans and leases pooled both by loan or lease type and credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors.
The qualitative criteria we consider when establishing the loss factors include the following:
current economic trends and forecasts;
current collateral values, performance trends, and overall outlook in the markets where we lend;
legal and regulatory matters that could impact our borrowers’ ability to repay our loans and leases;
loan and lease portfolio composition and any loan concentrations;
current lending policies and the effects of any new policies or policy amendments;
loan and lease production volume and mix;
loan and lease portfolio credit performance trends;
results of our independent credit review; and
changes in management related to credit administration functions.
We estimate the reserve for unfunded commitments using the same loss factors as used for the allowance for loan and lease losses. The reserve for unfunded commitments is computed using expected future usage of the unfunded commitments based on historical usage of unfunded commitments for the various loan types.
The allowance for credit losses is directly correlated to the credit risk ratings of our loans. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans on a regular basis. The credit risk ratings assigned to every loan and lease are either “pass,” “special mention,” “substandard,” or “doubtful” and defined as follows:
Pass: Loans and leases classified as "pass" are not adversely classified and collection and repayment in full are expected.
Special Mention: Loans and leases classified as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
Substandard: Loans and leases classified as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
Doubtful: Loans and leases classified as "doubtful" have all the weaknesses of those classified as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
In addition, we may refer to the loans and leases with assigned credit risk ratings of "substandard" and "doubtful" together as "classified" loans and leases. For further information on classified loans and leases, see Note 6. Loans and Leases of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
Management believes the allowance for credit losses is appropriate for the known and inherent risks in our Non-PCI loan and lease portfolio and the credit risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements. In addition, current credit risk ratings are subject to change as we continue to monitor our loans and leases. To the extent we experience, for example, increased levels of borrower loan defaults, borrowers’ noncompliance with our loan agreements, adverse changes in collateral values, or changes in economic and business conditions that adversely affect our borrowers, our classified loans and leases may increase. Higher levels of classified loans and leases generally result in increased provisions for credit losses and an increased allowance for credit losses. Although we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the established allowance will be sufficient to absorb future losses.

48



Business Combinations
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, "Business Combinations." Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceeds the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed which involve contingencies must also be recognized at their estimated fair value, provided such fair value can be determined during the measurement period. Acquisition-related costs, including severance, conversion and other restructuring charges, such as abandoned space accruals, are expensed. Results of operations of an acquired business are included in the statement of earnings from the date of acquisition.
Deferred Income Tax Assets and Liabilities
Our deferred income tax assets and liabilities arise from differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We determine whether a deferred tax asset is realizable based on facts and circumstances, including our current and projected future tax position, the historical level of our taxable income, and estimates of our future taxable income. In most cases, the realization of deferred tax assets is based on our future profitability. If we were to experience either reduced profitability or operating losses in a future period, the realization of our deferred tax assets may no longer be considered more likely than not and, accordingly, we could be required to record a valuation allowance on our deferred tax assets by charging earnings.

49



Non-GAAP Measurements
We use certain non‑GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. We use the following non-GAAP measures in this Form 10-K:
Return on average tangible equity, tangible common equity ratio, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to the related GAAP measures of return on average equity, equity to assets ratio, and book value per share, respectively. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.
 
 
Year Ended December 31,
Return on Average Tangible Equity
2017
 
2016
 
2015
 
 
(Dollars in thousands)
Net earnings
$
357,818

 
$
352,166

 
$
299,619

 
 
 
 
 
 
 
Average stockholders' equity
$
4,641,495

 
$
4,488,862

 
$
3,751,995

Less:
Average intangible assets
2,279,010

 
2,219,756

 
1,850,988

Average tangible common equity
$
2,362,485

 
$
2,269,106

 
$
1,901,007

 
 
 
 
 
 
 
Return on average equity (1)
7.71
%
 
7.85
%
 
7.99
%
Return on average tangible equity (2)
15.15
%
 
15.52
%
 
15.76
%
_____________________________
(1)
Net earnings divided by average stockholders' equity.
(2)
Net earnings divided by average tangible common equity.

Tangible Common Equity Ratio/
December 31,
Tangible Book Value Per Share
2017
 
2016
 
2015
 
(Dollars in thousands, except per share data)
Stockholders’ equity
$
4,977,598

 
$
4,479,055

 
$
4,397,691

Less: Intangible assets
2,628,296

 
2,210,315

 
2,229,511

Tangible common equity
$
2,349,302

 
$
2,268,740

 
$
2,168,180

 
 
 
 
 
 
Total assets
$
24,994,876

 
$
21,869,767

 
$
21,288,490

Less: Intangible assets
2,628,296

 
2,210,315

 
2,229,511

Tangible assets
$
22,366,580

 
$
19,659,452

 
$
19,058,979

 
 
 
 
 
 
Equity to assets ratio
19.91
%
 
20.48
%
 
20.66
%
Tangible common equity ratio (1)
10.50
%
 
11.54
%
 
11.38
%
Book value per share
$
38.65

 
$
36.93

 
$
36.22

Tangible book value per share (2)
$
18.24

 
$
18.71

 
$
17.86

Shares outstanding
128,782,878

 
121,283,669

 
121,413,727

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




50



Results of Operations
Acquisitions Impact Earnings Performance
The comparability of financial information is affected by our acquisitions. During the three years ended December 31, 2017, we completed the acquisitions of CU Bancorp on October 20, 2017 and Square 1 on October 6, 2015. These acquisitions have been accounted for using the acquisition method of accounting and, accordingly, their operating results have been included in the consolidated financial statements from their respective acquisition dates.
Earnings Performance
2017 Compared to 2016
Net earnings for the year ended December 31, 2017 were $357.8 million, or $2.91 per diluted share, compared to net earnings for the year ended December 31, 2016 of $352.2 million, or $2.90 per diluted share. The $5.7 million increase in net earnings was due to higher net interest income of $18.3 million, higher noninterest income of $16.1 million, a lower provision for credit losses of $8.0 million, and lower income tax expense of $8.9 million, offset by higher noninterest expense of $45.6 million. The increase in net interest income was attributable to higher average interest-earning asset balances, offset by lower discount accretion on acquired loans, lower yields on average loans and leases, and higher interest expense. The increase in noninterest income was due mainly to higher leased equipment income, higher gain on sale of loans and leases, lower FDIC loss sharing expense and higher other income, partially offset by lower gains on the sale of securities. The lower provision for credit losses was primarily due to a decrease in loans and leases held for investment at December 31, 2017 as compared to December 31, 2016, when the loans and leases acquired from CUB are excluded as they are not subject to the allowance for credit losses. The increase in noninterest expense is primarily due to a $19.5 million increase in acquisition, integration and reorganization expense related to the CUB acquisition and incremental operating expenses of approximately $10 million for CUB's operations post-acquisition, primarily compensation expense.
2016 Compared to 2015
Net earnings for the year ended December 31, 2016 were $352.2 million, or $2.90 per diluted share, compared to net earnings for the year ended December 31, 2015 of $299.6 million, or $2.79 per diluted share. The $52.5 million increase in net earnings was due to higher net interest income of $137.9 million and higher noninterest income of $28.2 million, offset by higher noninterest expense of $68.1 million and a higher provision for credit losses of $20.2 million. These increases were due primarily to including the operations of Square 1 for the entire 2016 period and only subsequent to the October 6, 2015 acquisition date for the 2015 period. The increase in net interest income was attributable to higher average interest-earning asset balances and lower interest expense, offset by lower discount accretion on acquired loans and lower yields on average loans and leases and investment securities. The increase in noninterest income was due mainly to higher other commissions and fees, higher leased equipment income, higher gain on sale of securities, lower FDIC loss sharing expense, and higher service charges on deposit accounts, offset by lower dividends and realized gains on equity investments.
Net Interest Income
Net interest income, which is our principal source of revenue, represents the difference between interest earned on interest‑earning assets and interest paid on interest‑bearing liabilities. Net interest margin is net interest income expressed as a percentage of average interest‑earning assets. Net interest income is affected by changes in both interest rates and the volume of average interest‑earning assets and interest‑bearing liabilities.

51



The following table summarizes the distribution of average assets, liabilities and stockholders’ equity, as well as interest income and yields earned on average interest‑earning assets and interest expense and rates paid on average interest‑bearing liabilities, presented on a tax equivalent basis for the years indicated:
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
Average
Balance
 
Interest
Income/
Expense
 
Yields
and
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Yields
and
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Yields
and
Rates
 
(Dollars in thousands)
ASSETS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-PCI loans and leases
$
15,886,397

 
$
938,464

 
5.91
%
 
$
14,487,467

 
$
872,389

 
6.02
%
 
$
12,368,432

 
$
787,185

 
6.36
%
PCI loans
67,629

 
14,736

 
21.79
%
 
134,101

 
51,905

 
38.71
%
 
212,630

 
31,909

 
15.01
%
Total loans and leases (1)
15,954,026

 
953,200

 
5.97
%
 
14,621,568

 
924,294

 
6.32
%
 
12,581,062

 
819,094

 
6.51
%
Investment securities(2)
3,504,808

 
117,564

 
3.35
%
 
3,344,920

 
110,077

 
3.29
%
 
2,150,408

 
75,836

 
3.53
%
Deposits in financial institutions
137,228

 
1,543

 
1.12
%
 
206,404

 
1,061

 
0.51
%
 
182,804

 
476

 
0.26
%
Total interest‑earning assets (2)
19,596,062

 
1,072,307

 
5.47
%
 
18,172,892

 
1,035,432

 
5.70
%
 
14,914,274

 
895,406

 
6.00
%
Other assets
3,038,673

 
 
 
 
 
3,002,178

 
 
 
 
 
2,664,570

 
 
 
 
Total assets
$
22,634,735

 
 
 
 
 
$