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Section 1: 10-Q (10-Q)

Document



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
 
PACW
 
The Nasdaq Stock Market, LLC
(Title of Each Class)
 
(Trading Symbol)
 
(Name of Exchange on Which Registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ      No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  þ      No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
þ Large accelerated filer
o Accelerated filer
o Non-accelerated filer
 
 
 
o Smaller reporting company
o Emerging growth company
 
 
 
 
o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o      No  þ
As of April 30, 2019, there were 118,833,032 shares of the registrant's common stock outstanding, excluding 1,235,264 shares of unvested restricted stock.


1



PACWEST BANCORP
MARCH 31, 2019 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
Condensed Consolidated Statements of Earnings (Unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Index to Exhibits
Signatures


2


PART I
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
AFX
American Financial Exchange
 
FRBSF
Federal Reserve Bank of San Francisco
ALLL
Allowance for Loan and Lease Losses
 
IPO
Initial Public Offering
ALM
Asset Liability Management
 
IRR
Interest Rate Risk
ASC
Accounting Standards Codification
 
LIHTC
Low Income Housing Tax Credit
ASU
Accounting Standards Update
 
MBS
Mortgage-Backed Securities
Basel III
A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013
 
MVE
Market Value of Equity
BHCA
Bank Holding Company Act of 1956, as amended
 
NII
Net Interest Income
BOLI
Bank Owned Life Insurance
 
NIM
Net Interest Margin
C&I
Commercial and Industrial
 
Non-PCI
Non-Purchased Credit Impaired
CDI
Core Deposit Intangible Assets
 
NSF
Non-Sufficient Funds
CECL
Current Expected Credit Loss
 
OREO
Other Real Estate Owned
CET1
Common Equity Tier 1
 
PD/LGD
Probability of Default/Loss Given Default
CMOs
Collateralized Mortgage Obligations
 
PCI
Purchased Credit Impaired
CPI
Consumer Price Index
 
PRSUs
Performance-Based Restricted Stock Units
CRA
Community Reinvestment Act
 
PWAM
Pacific Western Asset Management Inc.
CRI
Customer Relationship Intangible Assets
 
ROU
Right-of-use
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
 
Square 1
Square 1 Financial, Inc. (a company acquired on October 6, 2015)
DTAs
Deferred Tax Assets
 
Tax Equivalent Net Interest Income
Net interest income adjusted for tax equivalent adjustments related to tax-exempt interest on certain loans and investment securities
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
 
Tax Equivalent NIM
NIM adjusted for tax equivalent adjustments related to tax-exempt interest on certain loans and investment securities
Efficiency Ratio
Noninterest expense (less intangible asset amortization, net foreclosed assets income/expense, and acquisition, integration and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)
 
TCJA
Tax Cuts and Jobs Act
FASB
Financial Accounting Standards Board
 
TDRs
Troubled Debt Restructurings
FDIC
Federal Deposit Insurance Corporation
 
TRSAs
Time-Based Restricted Stock Awards
FHLB
Federal Home Loan Bank of San Francisco
 
U.S. GAAP
U.S. Generally Accepted Accounting Principles
FRB
Board of Governors of the Federal Reserve System
 
VIE
Variable Interest Entity


3



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
 
December 31,
 
2019
 
2018
 
(Unaudited)
 
(Dollars in thousands, except par value amounts)
ASSETS:
 
 
 
Cash and due from banks
$
224,758

 
$
175,830

Interest-earning deposits in financial institutions
332,124

 
209,937

Total cash, cash equivalents, and restricted cash
556,882

 
385,767

Securities available-for-sale, at fair value
3,994,708

 
4,009,431

Federal Home Loan Bank stock, at cost
29,430

 
32,103

Total investment securities
4,024,138

 
4,041,534

Loans held for sale
25,124

 

Gross loans and leases held for investment
18,371,295

 
18,026,365

Deferred fees, net
(63,598
)
 
(68,652
)
Allowance for loan and lease losses
(136,281
)
 
(132,472
)
Total loans and leases held for investment, net
18,171,416

 
17,825,241

Equipment leased to others under operating leases
293,853

 
292,677

Premises and equipment, net
37,783

 
34,661

Foreclosed assets, net
3,291

 
5,299

Deferred tax asset, net

 
17,489

Goodwill
2,548,670

 
2,548,670

Core deposit and customer relationship intangibles, net
52,250

 
57,120

Other assets
610,731

 
522,896

Total assets
$
26,324,138

 
$
25,731,354

 
 
 
 
LIABILITIES:
 
 
 
Noninterest-bearing deposits
$
7,712,409

 
$
7,888,915

Interest-bearing deposits
11,573,518

 
10,981,586

Total deposits
19,285,927

 
18,870,501

Borrowings
1,481,087

 
1,371,114

Subordinated debentures
454,458

 
453,846

Accrued interest payable and other liabilities
311,684

 
210,305

Total liabilities
21,533,156

 
20,905,766

 
 
 
 
Commitments and contingencies


 


 
 
 
 
STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)

 

Common stock ($0.01 par value, 200,000,000 shares authorized at March 31, 2019 and
 
 
 
December 31, 2018; 122,204,565 and 125,079,705 shares issued, respectively, includes
 
 
 
1,241,543 and 1,344,656 shares of unvested restricted stock, respectively)
1,222

 
1,251

Additional paid-in capital
3,535,793

 
3,722,723

Retained earnings
1,296,216

 
1,182,674

Treasury stock, at cost (2,003,416 and 1,889,872 shares at March 31, 2019 and December 31, 2018)
(79,507
)
 
(74,985
)
Accumulated other comprehensive income (loss), net
37,258

 
(6,075
)
Total stockholders' equity
4,790,982

 
4,825,588

Total liabilities and stockholders' equity
$
26,324,138

 
$
25,731,354

See Notes to Condensed Consolidated Financial Statements.

4



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2019
 
2018
 
2018
 
(Unaudited)
 
(Dollars in thousands, except per share amounts)
Interest income:
 
 
 
 
 
Loans and leases
$
274,229

 
$
272,522

 
$
251,085

Investment securities
29,680

 
29,690

 
26,138

Deposits in financial institutions
650

 
527

 
552

Total interest income
304,559

 
302,739

 
277,775

Interest expense:
 
 
 
 
 
Deposits
34,235

 
28,834

 
13,818

Borrowings
7,710

 
4,602

 
920

Subordinated debentures
7,738

 
7,538

 
6,537

Total interest expense
49,683

 
40,974

 
21,275

Net interest income
254,876

 
261,765

 
256,500

Provision for credit losses
4,000

 
12,000

 
4,000

Net interest income after provision for credit losses
250,876

 
249,765

 
252,500

Noninterest income:
 
 
 
 
 
Other commissions and fees
11,008

 
11,114

 
10,265

Leased equipment income
9,282

 
9,384

 
9,587

Service charges on deposit accounts
3,730

 
4,091

 
4,174

Gain on sale of loans and leases

 

 
4,569

Gain on sale of securities
2,161

 
786

 
6,311

Other income
4,883

 
8,151

 
3,653

Total noninterest income
31,064

 
33,526

 
38,559

Noninterest expense:
 
 
 
 
 
Compensation
70,845

 
69,299

 
71,023

Occupancy
14,320

 
13,356

 
13,223

Data processing
6,925

 
6,930

 
6,659

Leased equipment depreciation
5,651

 
5,758

 
5,375

Intangible asset amortization
4,870

 
4,986

 
6,346

Other professional services
4,513

 
6,198

 
4,439

Insurance and assessments
4,038

 
4,202

 
5,727

Loan expense
2,885

 
2,991

 
2,271

Acquisition, integration and reorganization costs
618

 
970

 

Foreclosed assets expense (income), net
29

 
(311
)
 
(122
)
Other expense
11,593

 
14,856

 
12,454

Total noninterest expense
126,287

 
129,235

 
127,395

Earnings before income taxes
155,653

 
154,056

 
163,664

Income tax expense
43,049

 
39,015

 
45,388

Net earnings
$
112,604

 
$
115,041

 
$
118,276

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
Basic
$
0.92

 
$
0.93

 
$
0.93

Diluted
$
0.92

 
$
0.93

 
$
0.93

See Notes to Condensed Consolidated Financial Statements.

5



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2019
 
2018
 
2018
 
(Unaudited)
 
(In thousands)
Net earnings
$
112,604

 
$
115,041

 
$
118,276

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Unrealized net holding gains (losses) on securities
 
 
 
 
 
available-for-sale arising during the period
62,639

 
53,702

 
(62,669
)
Income tax (expense) benefit related to net unrealized
 
 
 
 
 
holding gains (losses) arising during the period
(17,758
)
 
(15,362
)
 
17,931

Unrealized net holding gains (losses) on securities
 
 
 
 
 
available-for-sale, net of tax
44,881

 
38,340

 
(44,738
)
Reclassification adjustment for net gains
 
 
 
 
 
included in net earnings (1)
(2,161
)
 
(786
)
 
(6,311
)
Income tax expense related to reclassification
 
 
 
 
 
adjustment
613

 
225

 
1,806

Reclassification adjustment for net gains
 
 
 
 
 
included in net earnings, net of tax
(1,548
)
 
(561
)
 
(4,505
)
Other comprehensive income (loss), net of tax
43,333

 
37,779

 
(49,243
)
Comprehensive income
$
155,937

 
$
152,820

 
$
69,033

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


6



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
Three Months Ended March 31, 2019
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Par
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
 
Shares
 
Value
 
Capital
 
Earnings
 
Stock
 
Income (Loss)
 
Total
 
(Unaudited)
 
(Dollars in thousands)
Balance, December 31, 2018
123,189,833

 
$
1,251

 
$
3,722,723

 
$
1,182,674

 
$
(74,985
)
 
$
(6,075
)
 
$
4,825,588

Cumulative effect of change in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principle (1)

 

 

 
938

 

 

 
938

Net earnings

 

 

 
112,604

 

 

 
112,604

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

 

 

 

 

 
43,333

 
43,333

Restricted stock awarded and
 
 
 
 
 
 
 
 
 
 
 
 
 
earned stock compensation,
 
 
 
 
 
 
 
 
 
 
 
 
 
net of shares forfeited
195,536

 
2

 
5,806

 

 

 

 
5,808

Restricted stock surrendered
(113,544
)
 

 

 

 
(4,522
)
 

 
(4,522
)
Common stock repurchased under
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock Repurchase Program
(3,070,676
)
 
(31
)
 
(119,556
)
 

 

 

 
(119,587
)
Cash dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.60/share

 

 
(73,180
)
 

 

 

 
(73,180
)
Balance, March 31, 2019
120,201,149

 
$
1,222

 
$
3,535,793

 
$
1,296,216

 
$
(79,507
)
 
$
37,258

 
$
4,790,982

________________________
(1)
Impact due to adoption on January 1, 2019 of ASU 2016-02, "Leases (Topic 842)," and the related amendments.

 
Three Months Ended March 31, 2018
 
Common Stock
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
 
 
Par
 
Paid-in
 
Retained
 
Treasury
 
Comprehensive
 
 
 
Shares
 
Value
 
Capital
 
Earnings
 
Stock
 
Income (Loss)
 
Total
 
(Unaudited)
 
(Dollars in thousands)
Balance, December 31, 2017
128,782,878

 
$
1,305

 
$
4,287,487

 
$
723,471

 
$
(65,836
)
 
$
31,171

 
$
4,977,598

Cumulative effect of changes in
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting principles (2)

 

 

 
(6,136
)
 

 
6,136

 

Net earnings

 

 

 
118,276

 

 

 
118,276

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

 

 

 

 

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

 
1

 
7,198

 

 

 

 
7,199

Restricted stock surrendered
(55,186
)
 

 

 

 
(2,858
)
 

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

 

 

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

 

 
(63,689
)
 

 

 

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

 
$
1,283

 
$
4,111,226

 
$
835,611

 
$
(68,694
)
 
$
(11,936
)
 
$
4,867,490

________________________
(2)
Impact due to adoption on January 1, 2018 of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," and ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income."
See Notes to Condensed Consolidated Financial Statements.


7



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(Unaudited)
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net earnings
$
112,604

 
$
118,276

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,287

 
8,751

Amortization of net premiums on securities available-for-sale
4,142

 
8,432

Amortization of intangible assets
4,870

 
6,346

Amortization of ROU assets
7,608

 

Provision for credit losses
4,000

 
4,000

Gain on sale of foreclosed assets
(191
)
 

Provision for losses on foreclosed assets

 
65

Gain on sale of loans and leases

 
(4,569
)
Loss on sale of premises and equipment
3

 
7

Gain on sale of securities
(2,161
)
 
(6,311
)
Unrealized loss (gain) on derivatives and foreign currencies, net
16

 
(605
)
Earned stock compensation
5,808

 
7,199

Decrease in deferred income taxes, net
14,714

 
7,153

Decrease in other assets
37,434

 
38,208

Decrease in accrued interest payable and other liabilities
(46,241
)
 
(50,969
)
Net cash provided by operating activities
151,893

 
135,983

 
 
 
 
Cash flows from investing activities:
 
 
 
Net (increase) decrease in loans and leases
(391,621
)
 
382,590

Proceeds from sales of loans and leases
16,937

 
615,376

Proceeds from maturities and paydowns of securities available-for-sale
67,325

 
75,125

Proceeds from sales of securities available-for-sale
407,926

 
306,253

Purchases of securities available-for-sale
(402,030
)
 
(487,105
)
Net redemptions of Federal Home Loan Bank stock
2,673

 
3,540

Proceeds from sales of foreclosed assets
2,236

 
28

Purchases of premises and equipment, net
(5,625
)
 
(3,997
)
Net decrease in equipment leased to others under operating leases
(6,709
)
 
(1,241
)
Net cash (used in) provided by investing activities
(308,888
)
 
890,569

 
 
 
 
Cash flows from financing activities:
 
 
 
Net decrease in noninterest-bearing deposits
(176,506
)
 
(275,579
)
Net increase (decrease) in interest-bearing deposits
591,932

 
(510,844
)
Net increase in borrowings
109,973

 
107,942

Net decrease in subordinated debentures

 
(12,372
)
Common stock repurchased and restricted stock surrendered
(124,109
)
 
(122,651
)
Cash dividends paid
(73,180
)
 
(63,689
)
Net cash provided by (used in) financing activities
328,110

 
(877,193
)
 
 
 
 
Net increase in cash, cash equivalents, and restricted cash
171,115

 
149,359

Cash, cash equivalents, and restricted cash, beginning of period
385,767

 
398,437

Cash, cash equivalents, and restricted cash, end of period
$
556,882

 
$
547,796

See Notes to Condensed Consolidated Financial Statements.


8



PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(Unaudited)
 
(In thousands)
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
46,197

 
$
17,515

Cash paid for income taxes
2,778

 
3,790

Loans transferred to foreclosed assets
37

 

Transfers from loans held for investment to loans held for sale
25,124

 

See Notes to Condensed Consolidated Financial Statements.


9



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


NOTE 1.  ORGANIZATION    
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and numerous loan production offices across the country through its Community Banking, National Lending and Venture Banking groups. Community Banking provides real estate loans, commercial loans, and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices. National Lending provides asset-based, equipment, real estate, and security cash flow loans and treasury management services to established middle-market businesses on a national basis. Venture Banking offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are interest paid by the Bank on deposits and borrowings, compensation, occupancy, and general operating expenses.
We have completed 29 acquisitions from May 1, 2000 through March 31, 2019. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates.
Significant Accounting Policies
Our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission ("Form 10-K").
Accounting Standards Adopted in 2019
Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and the related amendments to this new standard issued in 2018. ASU 2016-02 supersedes Topic 840, “Leases,” and is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the new standard using the optional transition method under ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” and recognized a cumulative effect adjustment to increase retained earnings by $938,000, net of taxes, without restating prior periods and applying the requirements of the new standard prospectively. The Company has elected the following practical expedients: (1) to not separate lease and non-lease components for facilities leases; (2) to not reassess whether any expired or existing contracts are or contain leases and to maintain existing lease classifications; (3) to not record short-term leases (initial term less than 12 months) on the balance sheet; and (4) to elect to present sales tax on a net basis for those transactions in which the Company's the lessor.


10



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


The standard had a significant impact on our condensed consolidated balance sheet, but did not have a significant impact on our condensed consolidated statement of earnings. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the accounting for leases as a lessor remained substantially unchanged. The ROU asset is included within "Other assets," while the ROU liability is included within "Accrued interest payable and other liabilities". See Note 8. Leases and Note 7. Other Assets for further details.
Effective January 1, 2019, the Company early-adopted any removed or modified disclosures as permitted by ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurements,” but will defer adoption of the additional disclosures until the effective date of January 1, 2020 as permitted in the transition guidance in ASU 2018-13.
Effective January 1, 2019, the Company early-adopted ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FASB Emerging Issues Task Force)," which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The Company opted to apply ASU 2018-15 prospectively. The primary effect of the provisions is to capitalize eligible implementation costs during the application development phase and to amortize those costs over the life of the agreement. There was no significant impact to our condensed consolidated financial statements from the adoption of this new standard.
Basis of Presentation    
Our interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses (the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments), the carrying value of intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
Reclassifications
None.

11



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


NOTE 2. RESTRICTED CASH BALANCES
The Company is required to maintain reserve balances with the FRBSF. Such reserve requirements are based on a percentage of deposit liabilities and may be satisfied by cash on hand. The average reserves required to be held at the FRBSF for the three months ended March 31, 2019 and year ended December 31, 2018 were $92.2 million and $77.0 million. As of March 31, 2019 and December 31, 2018, we pledged cash collateral for our derivative contracts of $2.3 million and $2.6 million.
NOTE 3. INVESTMENT SECURITIES     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and fair values of securities available-for-sale as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
 
 
 
Gross
 
Gross
 
 
 
 
 
Gross
 
Gross
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
Security Type
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
340,184

 
$
3,990

 
$
(998
)
 
$
343,176

 
$
281,486

 
$
1,902

 
$
(2,300
)
 
$
281,088

Agency CMOs
712,090

 
8,625

 
(2,939
)
 
717,776

 
634,774

 
3,448

 
(5,372
)
 
632,850

Private label CMOs
121,981

 
2,205

 
(939
)
 
123,247

 
101,313

 
1,985

 
(2,093
)
 
101,205

Municipal securities
1,145,963

 
40,748

 
(1,710
)
 
1,185,001

 
1,298,514

 
21,000

 
(7,320
)
 
1,312,194

Agency commercial MBS
1,079,816

 
4,460

 
(5,365
)
 
1,078,911

 
1,133,846

 
383

 
(21,525
)
 
1,112,704

U.S. Treasury securities
287,721

 
2,996

 

 
290,717

 
401,056

 
2,437

 
(88
)
 
403,405

Asset-backed securities
185,592

 
80

 
(516
)
 
185,156

 
81,762

 
104

 
(481
)
 
81,385

SBA securities
52,361

 
2

 
(339
)
 
52,024

 
68,158

 

 
(1,111
)
 
67,047

Corporate debt securities
17,000

 
1,700

 

 
18,700

 
17,000

 
553

 

 
17,553

Total
$
3,942,708

 
$
64,806

 
$
(12,806
)
 
$
3,994,708

 
$
4,017,909

 
$
31,812

 
$
(40,290
)
 
$
4,009,431

See Note 11. Fair Value Measurements for information on fair value measurements and methodology.
As of March 31, 2019, securities available-for-sale with a fair value of $495.4 million were pledged as collateral for borrowings, public deposits, and other purposes as required by various statutes and agreements.
Realized Gains and Losses on Securities Available-for-Sale
During the three months ended March 31, 2019, we sold $405.8 million of securities available-for-sale for a gross realized gain of $4.1 million and a gross realized loss of $1.9 million. During the three months ended March 31, 2018, we sold $299.9 million of securities available-for-sale for a gross realized gain of $6.8 million and a gross realized loss of $515,000.


12



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


Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions, for which other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
 
March 31, 2019
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$

 
$

 
$
80,472

 
$
(998
)
 
$
80,472

 
$
(998
)
Agency CMOs

 

 
148,729

 
(2,939
)
 
148,729

 
(2,939
)
Private label CMOs
10,003

 
(6
)
 
74,242

 
(933
)
 
84,245

 
(939
)
Municipal securities

 

 
119,130

 
(1,710
)
 
119,130

 
(1,710
)
Agency commercial MBS

 

 
611,315

 
(5,365
)
 
611,315

 
(5,365
)
Asset-backed securities
80,287

 
(321
)
 
19,136

 
(195
)
 
99,423

 
(516
)
SBA securities

 

 
50,239

 
(339
)
 
50,239

 
(339
)
Total
$
90,290

 
$
(327
)
 
$
1,103,263

 
$
(12,479
)
 
$
1,193,553

 
$
(12,806
)
 
December 31, 2018
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
Security Type
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
 
(In thousands)
Residential MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
60,164

 
$
(169
)
 
$
85,245

 
$
(2,131
)
 
$
145,409

 
$
(2,300
)
Agency CMOs
69,859

 
(326
)
 
164,097

 
(5,046
)
 
233,956

 
(5,372
)
Private label CMOs
32,170

 
(831
)
 
49,237

 
(1,262
)
 
81,407

 
(2,093
)
Municipal securities
52,386

 
(238
)
 
284,915

 
(7,082
)
 
337,301

 
(7,320
)
Agency commercial MBS
40,641

 
(341
)
 
1,020,684

 
(21,184
)
 
1,061,325

 
(21,525
)
U.S. Treasury securities
49,729

 
(88
)
 

 

 
49,729

 
(88
)
Asset-backed securities
11,548

 
(38
)
 
35,859

 
(443
)
 
47,407

 
(481
)
SBA securities
249

 
(1
)
 
66,798

 
(1,110
)
 
67,047

 
(1,111
)
Total
$
316,746

 
$
(2,032
)
 
$
1,706,835

 
$
(38,258
)
 
$
2,023,581

 
$
(40,290
)



13



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


We reviewed the securities that were in an unrealized loss position at March 31, 2019, and concluded their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.
Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our securities available-for-sale portfolio based on amortized cost and carrying value as of the date indicated:
 
March 31, 2019
 
Amortized
 
Fair
Maturities
Cost
 
Value
 
(In thousands)
Due in one year or less
$
28,716

 
$
28,703

Due after one year through five years
539,423

 
543,189

Due after five years through ten years
1,010,453

 
1,013,236

Due after ten years
2,364,116

 
2,409,580

Total securities available-for-sale
$
3,942,708

 
$
3,994,708

Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
 
Three Months Ended
 
March 31,
 
December 31,
 
March 31,
 
2019
 
2018
 
2018
 
(In thousands)
Taxable interest
$
19,742

 
$
19,181

 
$
14,599

Non-taxable interest
9,593

 
9,866

 
11,107

Dividend income
345

 
643

 
432

Total interest income on investment securities
$
29,680

 
$
29,690

 
$
26,138


14



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


NOTE 4.  LOANS AND LEASES
Our loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are sold.
Loans and Leases Held for Investment
The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:
 
March 31,
 
December 31,
 
2019
 
2018
 
(In thousands)
Real estate mortgage
$
8,172,992

 
$
7,933,859

Real estate construction and land
2,379,560

 
2,262,710

Commercial
7,446,612

 
7,428,500

Consumer
372,131

 
401,296

Total gross loans and leases held for investment
18,371,295

 
18,026,365

Deferred fees, net
(63,598
)
 
(68,652
)
Total loans and leases held for investment,
 
 
 
net of deferred fees
18,307,697

 
17,957,713

Allowance for loan and lease losses
(136,281
)
 
(132,472
)
Total loans and leases held for investment, net
$
18,171,416

 
$
17,825,241

The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:
 
March 31, 2019
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
7,266

 
$
6,464

 
$
13,730

 
$
4,626,780

 
$
4,640,510

Income producing and other residential
1,853

 
309

 
2,162

 
3,516,786

 
3,518,948

Total real estate mortgage
9,119

 
6,773

 
15,892

 
8,143,566

 
8,159,458

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 
430

 
430

 
943,166

 
943,596

Residential
8,949

 

 
8,949

 
1,399,179

 
1,408,128

Total real estate construction and land
8,949

 
430

 
9,379

 
2,342,345

 
2,351,724

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based
3,750

 

 
3,750

 
3,418,452

 
3,422,202

Venture capital
4,500

 
1,194

 
5,694

 
2,021,756

 
2,027,450

Other commercial
3,655

 
3,339

 
6,994

 
1,967,708

 
1,974,702

Total commercial
11,905

 
4,533

 
16,438

 
7,407,916

 
7,424,354

Consumer
614

 
208

 
822

 
371,339

 
372,161

Total
$
30,587

 
$
11,944

 
$
42,531

 
$
18,265,166

 
$
18,307,697



15



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


 
December 31, 2018
 
30 - 89
 
90 or More
 
 
 
 
 
 
 
Days
 
Days
 
Total
 
 
 
 
 
Past Due
 
Past Due
 
Past Due
 
Current
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
Commercial
$
3,487

 
$
7,541

 
$
11,028

 
$
4,813,270

 
$
4,824,298

Income producing and other residential
1,557

 
476

 
2,033

 
3,091,810

 
3,093,843

Total real estate mortgage
5,044

 
8,017

 
13,061

 
7,905,080

 
7,918,141

Real estate construction and land:
 
 
 
 
 
 
 
 
 
Commercial

 
442

 
442

 
912,141

 
912,583

Residential
1,527

 

 
1,527

 
1,319,546

 
1,321,073

Total real estate construction and land
1,527

 
442

 
1,969

 
2,231,687

 
2,233,656

Commercial:
 
 
 
 
 
 
 
 
 
Asset-based
47

 
646

 
693

 
3,304,728

 
3,305,421

Venture capital
4,705

 

 
4,705

 
2,034,043

 
2,038,748

Other commercial
5,181

 
1,285

 
6,466

 
2,053,960

 
2,060,426

Total commercial
9,933

 
1,931

 
11,864

 
7,392,731

 
7,404,595

Consumer
581

 
333

 
914

 
400,407

 
401,321

Total
$
17,085

 
$
10,723

 
$
27,808

 
$
17,929,905

 
$
17,957,713

It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more (unless the loan is both well secured and in the process of collection) or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:  
 
March 31, 2019
 
December 31, 2018
 
Nonaccrual
 
Performing
 
Total
 
Nonaccrual
 
Performing
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
12,750

 
$
4,627,760

 
$
4,640,510

 
$
15,321

 
$
4,808,977

 
$
4,824,298

Income producing and other residential
2,444

 
3,516,504

 
3,518,948

 
2,524

 
3,091,319

 
3,093,843

Total real estate mortgage
15,194

 
8,144,264

 
8,159,458

 
17,845

 
7,900,296

 
7,918,141

Real estate construction and land:
 
 
 
 
 
 
 
 
 
 
 
Commercial
430

 
943,166

 
943,596

 
442

 
912,141

 
912,583

Residential

 
1,408,128

 
1,408,128

 

 
1,321,073

 
1,321,073

Total real estate construction and land
430

 
2,351,294

 
2,351,724

 
442

 
2,233,214

 
2,233,656

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Asset-based
43,406

 
3,378,796

 
3,422,202

 
32,324

 
3,273,097

 
3,305,421

Venture capital
20,437

 
2,007,013

 
2,027,450

 
20,299

 
2,018,449

 
2,038,748

Other commercial
8,633

 
1,966,069

 
1,974,702

 
7,380

 
2,053,046

 
2,060,426

Total commercial
72,476

 
7,351,878

 
7,424,354

 
60,003

 
7,344,592

 
7,404,595

Consumer
427

 
371,734

 
372,161

 
1,043

 
400,278

 
401,321

Total
$
88,527

 
$
18,219,170

 
$
18,307,697

 
$
79,333

 
$
17,878,380

 
$
17,957,713


16



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


At March 31, 2019, nonaccrual loans and leases totaled $88.5 million and included $11.9 million of loans and leases 90 or more days past due, $2.4 million of loans and leases 30 to 89 days past due, and $74.2 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $79.3 million at December 31, 2018, including $10.7 million of loans and leases 90 or more days past due, $6.6 million of loans and leases 30 to 89 days past due, and $62.0 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of March 31, 2019, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $52.4 million and represented 59% of total nonaccrual loans and leases.
The following tables present the credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated. Classified loans and leases are those with a credit risk rating of either substandard or doubtful.
 
March 31, 2019
 
Classified
 
Special Mention
 
Pass
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
24,542

 
$
67,115

 
$
4,548,853

 
$
4,640,510

Income producing and other residential
9,131

 
452

 
3,509,365

 
3,518,948

Total real estate mortgage
33,673

 
67,567

 
8,058,218

 
8,159,458

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
430

 

 
943,166

 
943,596

Residential

 
2,485

 
1,405,643

 
1,408,128

Total real estate construction and land
430

 
2,485

 
2,348,809

 
2,351,724

Commercial:
 
 
 
 
 
 
 
Asset-based
52,586

 
85,060

 
3,284,556

 
3,422,202

Venture capital
43,128

 
62,514

 
1,921,808

 
2,027,450

Other commercial
59,690

 
74,517

 
1,840,495

 
1,974,702

Total commercial
155,404

 
222,091

 
7,046,859

 
7,424,354

Consumer
798

 
637

 
370,726

 
372,161

Total
$
190,305

 
$
292,780

 
$
17,824,612

 
$
18,307,697





17



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


 
December 31, 2018
 
Classified
 
Special Mention
 
Pass
 
Total
 
(In thousands)
Real estate mortgage:
 
 
 
 
 
 
 
Commercial
$
57,734

 
$
74,785

 
$
4,691,779

 
$
4,824,298

Income producing and other residential
10,521

 
968

 
3,082,354

 
3,093,843

Total real estate mortgage
68,255

 
75,753

 
7,774,133

 
7,918,141

Real estate construction and land:
 
 
 
 
 
 
 
Commercial
442

 
7,041

 
905,100

 
912,583

Residential

 
1,527

 
1,319,546

 
1,321,073

Total real estate construction and land
442

 
8,568

 
2,224,646

 
2,233,656

Commercial:
 
 
 
 
 
 
 
Asset-based
45,957

 
48,338

 
3,211,126

 
3,305,421

Venture capital
28,731

 
77,588

 
1,932,429

 
2,038,748

Other commercial
92,526

 
50,136

 
1,917,764

 
2,060,426

Total commercial
167,214

 
176,062

 
7,061,319

 
7,404,595

Consumer
1,199

 
1,015

 
399,107

 
401,321

Total
$
237,110

 
$
261,398

 
$
17,459,205

 
$
17,957,713


Nonaccrual loans and leases and performing TDRs are considered impaired for reporting purposes. TDRs are a result of rate reductions, term extensions, fee concessions, and debt forgiveness, or a combination thereof.
The following table presents the composition of our impaired loans and leases held for investment, net of deferred fees, by loan portfolio segment as of the dates indicated:
 
March 31, 2019
 
December 31, 2018