PACWEST BANCORP - FORM 10-Q - November 4, 2016

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - PACWEST BANCORP	a09301610-qexhibit321.htm
EX-32.2 - EXHIBIT 32.2 - PACWEST BANCORP	a09301610-qexhibit322.htm
EX-31.2 - EXHIBIT 31.2 - PACWEST BANCORP	a09301610-qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - PACWEST BANCORP	a09301610-qexhibit311.htm
EX-10.3 - EXHIBIT 10.3 - PACWEST BANCORP	a09301610-qexhibit103.htm
EX-10.2 - EXHIBIT 10.2 - PACWEST BANCORP	a09301610-qexhibit102.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

Commission File No. 001-36408

PACWEST BANCORP

(Exact name of registrant as specified in its charter)



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

9701 Wilshire Blvd., Suite 700

Beverly Hills, CA 90212

(Address of Principal Executive Offices, Including Zip Code)

(310) 887-8500

(Registrant's Telephone Number, Including Area Code)

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

Yes þ No o

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

Yes þ No o

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



þ Large accelerated filer		o Accelerated filer

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

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

As of October 26, 2016, there were 120,279,633 shares of the registrant's common stock outstanding, excluding 1,393,373 shares of unvested restricted stock.

PACWEST BANCORP

TABLE OF CONTENTS



		Page

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Earnings (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	5
	Condensed Consolidated Statement Changes in Stockholders' Equity (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68
Item 4.	Controls and Procedures	71

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	71
Item 1A.	Risk Factors	71
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 6.	Index to Exhibits	72
Signatures		73

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	September 30,			December 31,
	2016			2015
	(Unaudited)
	(Dollars in thousands, except par value amounts)
ASSETS:
Cash and due from banks	$	286,371		$	161,020
Interest-earning deposits in financial institutions	253,994			235,466
Total cash and cash equivalents	540,365			396,486
Securities available-for-sale, at fair value	3,341,335			3,559,437
Federal Home Loan Bank stock, at cost	19,386			19,710
Total investment securities	3,360,721			3,579,147
Gross loans and leases	14,806,427			14,528,165
Deferred fees, net	(63,581		)	(49,911		)
Allowance for loan and lease losses	(147,976		)	(115,111		)
Total loans and leases, net	14,594,870			14,363,143
Equipment leased to others under operating leases	198,931			197,452
Premises and equipment, net	38,977			39,197
Foreclosed assets, net	15,113			22,120
Goodwill	2,173,949			2,176,291
Core deposit and customer relationship intangibles, net	39,542			53,220
Deferred tax asset, net	27,073			126,389
Other assets	325,750			335,045
Total assets	$	21,315,291		$	21,288,490

LIABILITIES:
Noninterest-bearing deposits	$	6,521,946		$	6,171,455
Interest-bearing deposits	9,123,722			9,494,727
Total deposits	15,645,668			15,666,182
Borrowings	541,011			621,914
Subordinated debentures	441,112			436,000
Accrued interest payable and other liabilities	144,905			166,703
Total liabilities	16,772,696			16,890,799

Commitments and contingencies (Note 8)

STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)	—			—
Common stock ($0.01 par value, 200,000,000 shares authorized at September 30, 2016 and December 31,
2015, 123,320,121 and 122,791,729 shares issued, respectively, including 1,397,715 and 1,211,951
shares of unvested restricted stock, respectively)	1,233			1,228
Additional paid-in capital	4,244,521			4,405,775
Retained earnings	280,426			13,907
Treasury stock, at cost (1,502,597 and 1,378,002 shares at September 30, 2016 and December 31, 2015)	(55,658		)	(51,047		)
Accumulated other comprehensive income, net	72,073			27,828
Total stockholders' equity	4,542,595			4,397,691
Total liabilities and stockholders' equity	$	21,315,291		$	21,288,490

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
	(Unaudited)
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	225,370		$	224,326		$	193,539		$	686,071		$	599,417
Investment securities	22,187			22,420			13,955			67,154			40,720
Deposits in financial institutions	298			308			178			914			304
Total interest income	247,855			247,054			207,672			754,139			640,441
Interest expense:
Deposits	7,247			7,823			10,400			24,143			32,112
Borrowings	695			352			72			1,628			395
Subordinated debentures	5,278			5,122			4,680			15,382			13,787
Total interest expense	13,220			13,297			15,152			41,153			46,294
Net interest income	234,635			233,757			192,520			712,986			594,147
Provision for credit losses	8,471			13,903			8,746			42,514			31,709
Net interest income after provision for credit losses	226,164			219,854			183,774			670,472			562,438
Noninterest income:
Service charges on deposit accounts	3,488			3,633			2,601			10,977			7,787
Other commissions and fees	12,528			11,073			6,376			35,090			18,895
Leased equipment income	8,538			8,523			5,475			25,305			16,232
Gain on sale of loans and leases	157			388			27			790			190
Gain on sale of securities	382			478			655			8,970			3,744
FDIC loss sharing expense, net	—			(6,502		)	(4,449		)	(8,917		)	(13,955		)
Other income	1,827			4,528			5,073			11,365			23,359
Total noninterest income	26,920			22,121			15,758			83,580			56,252
Noninterest expense:
Compensation	62,661			62,174			48,152			185,900			144,922
Occupancy	12,010			12,193			10,762			36,835			31,950
Data processing	6,234			5,644			4,322			17,782			13,032
Other professional services	4,625			3,401			3,396			11,598			9,949
Insurance and assessments	4,324			4,951			3,805			14,240			11,546
Intangible asset amortization	4,224			4,371			1,497			13,341			4,500
Leased equipment depreciation	5,298			5,286			3,162			15,608			9,368
Foreclosed assets (income) expense, net	(248		)	(3		)	4,521			(812		)	2,517
Acquisition, integration and reorganization costs	—			—			747			200			3,647
Other expense	11,582			12,064			9,775			36,787			28,344
Total noninterest expense	110,710			110,081			90,139			331,479			259,775
Earnings before income taxes	142,374			131,894			109,393			422,573			358,915
Income tax expense	(48,479		)	(49,726		)	(39,777		)	(156,054		)	(131,137		)
Net earnings	$	93,895		$	82,168		$	69,616		$	266,519		$	227,778

Earnings per share:
Basic	$	0.77		$	0.68		$	0.68		$	2.19		$	2.21
Diluted	$	0.77		$	0.68		$	0.68		$	2.19		$	2.21
Dividends declared per share	$	0.50		$	0.50		$	0.50		$	1.50		$	1.50

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
	(Unaudited)
	(In thousands)
Net earnings	$	93,895		$	82,168		$	69,616		$	266,519		$	227,778
Other comprehensive income (loss), net of tax:
Unrealized net holding gains (losses) on securities
available-for-sale arising during the period	(15,954		)	56,514			14,466			83,653			616
Income tax (expense) benefit related to net unrealized
holding gains (losses) arising during the period	6,509			(22,965		)	(5,873		)	(34,111		)	(364		)
Unrealized net holding gains (losses) on securities
available-for-sale, net of tax	(9,445		)	33,549			8,593			49,542			252
Reclassification adjustment for net (gains) losses
included in net earnings ⁽¹⁾	(382		)	(478		)	(655		)	(8,970		)	(3,744		)
Income tax expense (benefit) related to reclassification
adjustment	156			194			266			3,673			1,571
Reclassification adjustment for net (gains) losses
included in net earnings, net of tax	(226		)	(284		)	(389		)	(5,297		)	(2,173		)
Other comprehensive income (loss), net of tax	(9,671		)	33,265			8,204			44,245			(1,921		)
Comprehensive income	$	84,224		$	115,433		$	77,820		$	310,764		$	225,857

^{___________________________________}


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

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY



	Nine Months Ended September 30, 2016
	Common Stock												Accumulated
					Additional								Other
			Par		Paid-in			Retained		Treasury			Comprehensive
	Shares		Value		Capital			Earnings		Stock			Income		Total
	(Unaudited)
	(Dollars in thousands)
Balance, December 31, 2015	121,413,727		$	1,228	$	4,405,775		$	13,907	$	(51,047	)	$	27,828	$	4,397,691
Net earnings	—		—		—			266,519		—			—		266,519
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax	—		—		—			—		—			44,245		44,245
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	528,392		5		17,270			—		—			—		17,275
Restricted stock surrendered	(124,595	)	—		—			—		(4,611		)	—		(4,611		)
Tax effect from vesting of
restricted stock	—		—		4,226			—		—			—		4,226
Cash dividends paid	—		—		(182,750		)	—		—			—		(182,750		)
Balance, September 30, 2016	121,817,524		$	1,233	$	4,244,521		$	280,426	$	(55,658	)	$	72,073	$	4,542,595

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Nine Months Ended
	September 30,
	2016			2015
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net earnings	$	266,519		$	227,778
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	66,114			33,239
Provision for credit losses	42,514			31,709
(Gain) loss on sale of foreclosed assets	(837		)	42
Provision for losses on foreclosed assets	—			5,163
Gain on sale of loans and leases	(790		)	(190		)
Gain on sale of premises and equipment	(23		)	(54		)
Gain on sale of securities	(8,970		)	(3,744		)
Unrealized gain on derivatives and foreign currencies, net	(374		)	(909		)
Earned stock compensation	17,275			11,836
Loss on sale of leasing unit	720			—
Tax effect included in stockholders' equity of restricted stock vesting	(4,226		)	(596		)
Decrease in accrued and deferred income taxes, net	74,946			108,553
Decrease in other assets	2,070			15,786
Decrease in accrued interest payable and other liabilities	(23,600		)	(25,336		)
Net cash provided by operating activities	431,338			403,277

Cash flows from investing activities:
Net increase in loans and leases	(514,224		)	(612,008		)
Proceeds from sales of loans and leases	106,109			10,557
Securities available-for-sale:
Proceeds from maturities and paydowns	184,644			93,389
Proceeds from sales	392,841			212,169
Purchases	(303,742		)	(557,769		)
Net redemptions of Federal Home Loan Bank stock	324			23,359
Proceeds from sales of foreclosed assets	7,973			18,772
Purchases of premises and equipment, net	(6,185		)	(5,872		)
Proceeds from sales of premises and equipment	24			108
Proceeds from sale of leasing unit	138,955			—
Proceeds from BOLI death benefit	1,853			—
Net increase of equipment leased to others under operating leases	(15,802		)	(26,174		)
Net cash used in investing activities	(7,230		)	(843,469		)

Cash flows from financing activities:
Net increase (decrease) in deposits:
Noninterest-bearing	352,784			573,101
Interest-bearing	(371,005		)	(216,717		)
Net (decrease) increase in borrowings	(78,873		)	169,095
Common stock repurchased	(4,611		)	(8,391		)
Tax effect included in stockholders' equity of restricted stock vesting	4,226			596
Cash dividends paid	(182,750		)	(154,424		)
Net cash (used in) provided by financing activities	(280,229		)	363,260
Net increase (decrease) in cash and cash equivalents	143,879			(76,932		)
Cash and cash equivalents, beginning of period	396,486			313,226
Cash and cash equivalents, end of period	$	540,365		$	236,294

Supplemental disclosures of cash flow information:
Cash paid for interest	$	41,392		$	51,218
Cash paid for income taxes	82,721			13,760
Loans transferred to foreclosed assets	129			13,472
Partnership interest transferred to equipment leased to others under operating leases	—			20,833

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Organization

PacWest Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our wholly-owned banking subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to “we,” "us," “our,” 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. As of September 30, 2016, the Company had total assets of $21.3 billion, gross loans and leases of $14.8 billion, total deposits of $15.6 billion and total stockholders' equity of $4.5 billion.

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 79 full-service branches located throughout the State of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. The Bank provides commercial banking services, including real estate, construction, and commercial loans and leases, and comprehensive deposit and treasury management services to small and middle-market businesses. Pacific Western offers additional products and services through its CapitalSource and Square 1 Bank divisions. CapitalSource provides cash flow, asset-based, equipment and real estate loans and treasury management services to established middle-market businesses on a national basis. Square 1 Bank 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. When we refer to "CapitalSource Inc." we are referring to the company acquired on April 7, 2014 and when we refer to the "CapitalSource Division" we are referring to a division of Pacific Western.

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

We have completed 28 acquisitions from May 1, 2000 through September 30, 2016, including the acquisition of Square 1 Financial, Inc. ("Square 1") on October 6, 2015. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. See Note 2. Acquisitions, for more information about the Square 1 acquisition.

On March 31, 2016, we sold our Pacific Western Equipment Finance ("PWEF") leasing unit in Midvale, Utah, including approximately $139 million of outstanding lease balances.

Significant Accounting Policies

Except as discussed below, our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission ("Form 10-K").

Basis of Presentation

Our interim consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“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 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.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value and useful lives 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.

As described in Note 2. Acquisitions, the acquired assets and liabilities of Square 1 were measured at their estimated fair values. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period's presentation format. The operating segments previously reported have been aggregated into one segment to conform to the current period's presentation format.

Note 2. Acquisitions

Square 1 Financial, Inc. Acquisition

We acquired Square 1 on October 6, 2015. As part of the acquisition, Square 1 Bank, a wholly-owned subsidiary of Square 1, merged with and into Pacific Western. At closing, we formed the Square 1 Bank Division of Pacific Western to focus on providing a comprehensive suite of financial services to entrepreneurial businesses and their venture capital and private equity investors nationwide. When we refer to "Square 1", we are referring to the company acquired on October 6, 2015, and when we refer to the "Square 1 Bank Division", we are referring to a division of Pacific Western.

We completed this acquisition to increase our core deposits, expand our nationwide lending platform, and increase our presence in the technology and life-sciences credit markets. The Square 1 acquisition has been accounted for under the acquisition method of accounting. We acquired $4.6 billion of assets and assumed $3.8 billion of liabilities upon closing of the acquisition. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and liabilities. The application of the acquisition method of accounting resulted in goodwill of $446.1 million. All of the recognized goodwill is expected to be non-deductible for tax purposes.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 3. Goodwill and Other Intangible Assets

Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Our intangible assets with definite lives are core deposit intangibles ("CDI") and customer relationship intangibles ("CRI").

Goodwill and other intangible assets deemed to have indefinite lives generated from business combinations are not subject to amortization and are instead tested for impairment no less than annually. Impairment exists when the carrying value of goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in “Noninterest expense” in the condensed consolidated statements of earnings.

CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan and lease customers acquired. The weighted average amortization period remaining for all of our CDI and CRI as of September 30, 2016 is 5.6 years. The aggregate CDI and CRI amortization expense is expected to be $16.5 million for 2016. The estimated aggregate amortization expense related to these intangible assets for each of the next five years is $11.5 million for 2017, $8.8 million for 2018, $6.7 million for 2019, $4.7 million for 2020, and $3.0 million for 2021.

The following table presents the changes in the carrying amount of goodwill for the period indicated:



	Goodwill
	(In thousands)
Balance, December 31, 2015	$	2,176,291
Adjustment to acquired Square 1 tax assets	(1,842		)
Reduction due to sale of PWEF leasing unit	(500		)
Balance, September 30, 2016	$	2,173,949

Goodwill adjustments include the finalization of the acquired Square 1 net tax assets and the reduction of goodwill in connection with the sale of the PWEF leasing unit. The finalization of the day 1 fair value of the acquired tax assets is due to completion of the 2015 tax returns. Through the sale of the PWEF leasing unit on March 31, 2016, $0.5 million of goodwill was allocated to this business group; such goodwill reduction is included in the $0.7 million loss on sale of the PWEF leasing unit and included in "Other income" in the condensed consolidated statements of earnings.

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



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
	(In thousands)
Gross Amount of CDI and CRI:
Balance, beginning of period	$	76,513		$	93,824		$	53,090		$	95,524		$	53,090
Fully amortized portion	(2,811		)	(17,311		)	—			(20,122		)	—
Reduction due to sale of PWEF leasing unit	—			—			—			(1,700		)	—
Balance, end of period	73,702			76,513			53,090			73,702			53,090
Accumulated Amortization:
Balance, beginning of period	(32,747		)	(45,687		)	(38,889		)	(42,304		)	(35,886		)
Amortization	(4,224		)	(4,371		)	(1,497		)	(13,341		)	(4,500		)
Fully amortized portion	2,811			17,311			—			20,122			—
Reduction due to sale of PWEF leasing unit	—			—			—			1,363			—
Balance, end of period	(34,160		)	(32,747		)	(40,386		)	(34,160		)	(40,386		)
Net CDI and CRI, end of period	$	39,542		$	43,766		$	12,704		$	39,542		$	12,704

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 4. Investment Securities

Securities Available-for-Sale

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



	September 30, 2016									December 31, 2015
			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 mortgage-backed
securities ("MBS") and collateralized
mortgage obligations ("CMOs"):
Agency MBS	$	518,996	$	10,639	$	(694	)	$	528,941	$	660,069	$	11,517	$	(3,746	)	$	667,840
Agency CMOs	154,216		3,196		(181		)	157,231		193,148		2,633		(1,026		)	194,755
Private label CMOs	133,917		5,377		(669		)	138,625		140,065		5,837		(1,106		)	144,796
Municipal securities	1,437,952		84,571		(29		)	1,522,494		1,508,968		39,435		(1,072		)	1,547,331
Agency commercial MBS	517,163		15,299		(1,189		)	531,273		392,729		1,509		(2,797		)	391,441
Corporate debt securities	47,155		1,856		—			49,011		49,047		327		(950		)	48,424
Collateralized loan obligations	155,373		1,511		(237		)	156,647		133,192		128		(1,131		)	132,189
SBA securities	185,639		1,909		(248		)	187,300		211,946		41		(830		)	211,157
US Treasury securities	—		—		—			—		70,196		—		(816		)	69,380
Agency debt securities	—		—		—			—		36,302		611		—			36,913
Asset-backed and other securities	69,189		722		(98		)	69,813		116,723		119		(1,631		)	115,211
Total	$	3,219,600	$	125,080	$	(3,345	)	$	3,341,335	$	3,512,385	$	62,157	$	(15,105	)	$	3,559,437

As of September 30, 2016, securities available-for-sale with a carrying value of $342.2 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

During the three months ended September 30, 2016, we sold $39.1 million of securities available-for-sale for a gross realized gain of $1.0 million and a gross realized loss of $0.6 million. During the three months ended September 30, 2015, we sold $52.0 million of securities available-for-sale for a gross realized gain of $0.7 million.

During the nine months ended September 30, 2016, we sold $383.9 million of securities available-for-sale for a gross realized gain of $10.5 million and a gross realized loss of $1.6 million. During the nine months ended September 30, 2015, we sold $208.4 million of securities available-for-sale for a gross realized gain of $4.4 million and a gross realized loss of $0.7 million.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Unrealized Losses on Securities Available-for-Sale

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



	September 30, 2016
	Less Than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Security Type:	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Residential MBS and CMOs:
Agency MBS	$	33,817	$	(100	)	$	130,786	$	(594	)	$	164,603	$	(694	)
Agency CMOs	18,893		(95		)	26,476		(86		)	45,369		(181		)
Private label CMOs	14,552		(98		)	29,058		(571		)	43,610		(669		)
Municipal securities	5,338		(29		)	—		—			5,338		(29		)
Agency commercial MBS	77,706		(1,189		)	—		—			77,706		(1,189		)
Collateralized loan obligations	2,506		(5		)	39,197		(232		)	41,703		(237		)
SBA securities	2,956		(9		)	39,842		(239		)	42,798		(248		)
Asset-backed and other securities	5		(2		)	14,974		(96		)	14,979		(98		)
Total	$	155,773	$	(1,527	)	$	280,333	$	(1,818	)	$	436,106	$	(3,345	)



	December 31, 2015
	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	$	352,042	$	(3,480	)	$	9,342	$	(266	)	$	361,384	$	(3,746	)
Agency CMOs	117,786		(1,026		)	—		—			117,786		(1,026		)
Private label CMOs	93,533		(1,000		)	1,638		(106		)	95,171		(1,106		)
Municipal securities	126,892		(1,061		)	531		(11		)	127,423		(1,072		)
Agency commercial MBS	236,098		(2,156		)	14,230		(641		)	250,328		(2,797		)
US Treasury securities	69,380		(816		)	—		—			69,380		(816		)
Corporate debt securities	29,379		(950		)	—		—			29,379		(950		)
Collateralized loan obligations	100,993		(1,131		)	—		—			100,993		(1,131		)
SBA securities	179,942		(830		)	—		—			179,942		(830		)
Asset-backed and other securities	71,619		(1,182		)	16,091		(449		)	87,710		(1,631		)
Total	$	1,377,664	$	(13,632	)	$	41,832	$	(1,473	)	$	1,419,496	$	(15,105	)

We reviewed the securities that were in a loss position at September 30, 2016, and concluded their unrealized losses were not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Such unrealized losses were a result of the level of market interest rates and pricing changes caused by shifting supply and demand dynamics relative to the types of securities. Accordingly, we determined the securities were temporarily impaired and we did not recognize such impairment in the condensed consolidated statements of earnings. Although we occasionally sell securities for portfolio management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Contractual Maturities of Securities Available-for-Sale

The following table presents the contractual maturities of our securities available-for-sale portfolio based on amortized cost and carrying value as of the date indicated:



	September 30, 2016
	Amortized		Fair
Maturity:	Cost		Value
	(In thousands)
Due in one year or less	$	8,352	$	8,562
Due after one year through five years	252,427		259,096
Due after five years through ten years	714,467		738,034
Due after ten years	2,244,354		2,335,643
Total securities available-for-sale	$	3,219,600	$	3,341,335

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

Interest Income on Investment Securities

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



	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
	2016		2016		2015		2016		2015
	(In thousands)
Taxable interest	$	11,446	$	11,406	$	7,323	$	34,248	$	22,373
Non-taxable interest	10,333		10,503		6,058		31,562		14,760
Dividend income	408		511		574		1,344		3,587
Total interest income on investment securities	$	22,187	$	22,420	$	13,955	$	67,154	$	40,720

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 5. Loans and Leases

The Company’s loan and lease portfolio includes originated and purchased loans and leases. Originated and purchased loans and leases for which there was no evidence of credit deterioration at their acquisition date and for which it was probable that all contractually required payments would be collected, are referred to collectively as non-purchased credit impaired loans, or "Non-PCI loans." Purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was deemed probable that we would be unable to collect all contractually required payments, are referred to as purchased credit impaired loans, or "PCI loans".

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

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

The following table summarizes the composition of our loan and lease portfolio as of the dates indicated:



	September 30, 2016									December 31, 2015
	Non-PCI									Non-PCI
	Loans			PCI						Loans			PCI
	and Leases			Loans			Total			and Leases			Loans			Total
	(In thousands)
Real estate mortgage	$	5,481,922		$	104,896		$	5,586,818		$	5,706,903		$	168,725		$	5,875,628
Real estate construction and land	843,097			2,423			845,520			534,307			2,656			536,963
Commercial	8,104,711			12,649			8,117,360			7,977,067			17,415			7,994,482
Consumer	256,476			253			256,729			120,793			299			121,092
Total gross loans and leases	14,686,206			120,221			14,806,427			14,339,070			189,095			14,528,165
Deferred fees, net	(63,559		)	(22		)	(63,581		)	(49,861		)	(50		)	(49,911		)
Total loans and leases, net of deferred fees	14,622,647			120,199			14,742,846			14,289,209			189,045			14,478,254
Allowance for loan and lease losses	(136,747		)	(11,229		)	(147,976		)	(105,534		)	(9,577		)	(115,111		)
Total net loans and leases	$	14,485,900		$	108,970		$	14,594,870		$	14,183,675		$	179,468		$	14,363,143

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Non‑Purchased Credit Impaired (Non‑PCI) Loans and Leases

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



	September 30, 2016
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	10,489	$	5,772	$	16,261	$	4,262,571	$	4,278,832
Residential	266		2,520		2,786		1,183,323		1,186,109
Total real estate mortgage	10,755		8,292		19,047		5,445,894		5,464,941
Real estate construction and land:
Commercial	1,245		—		1,245		507,166		508,411
Residential	—		—		—		323,104		323,104
Total real estate construction and land	1,245		—		1,245		830,270		831,515
Commercial:
Cash flow	66		2,128		2,194		3,063,297		3,065,491
Asset-based	6,644		15		6,659		2,565,142		2,571,801
Venture capital	—		1,095		1,095		1,760,517		1,761,612
Equipment finance	3,304		350		3,654		667,129		670,783
Total commercial	10,014		3,588		13,602		8,056,085		8,069,687
Consumer	—		4		4		256,500		256,504
Total Non-PCI loans and leases	$	22,014	$	11,884	$	33,898	$	14,588,749	$	14,622,647



	December 31, 2015
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	3,947	$	13,075	$	17,022	$	4,534,936	$	4,551,958
Residential	3,391		905		4,296		1,131,809		1,136,105
Total real estate mortgage	7,338		13,980		21,318		5,666,745		5,688,063
Real estate construction and land:
Commercial	—		—		—		343,360		343,360
Residential	—		—		—		184,360		184,360
Total real estate construction and land	—		—		—		527,720		527,720
Commercial:
Cash flow	2,048		1,427		3,475		3,058,793		3,062,268
Asset-based	1		—		1		2,547,532		2,547,533
Venture capital	250		700		950		1,451,477		1,452,427
Equipment finance	359		94		453		889,896		890,349
Total commercial	2,658		2,221		4,879		7,947,698		7,952,577
Consumer	626		1,307		1,933		118,916		120,849
Total Non-PCI loans and leases	$	10,622	$	17,508	$	28,130	$	14,261,079	$	14,289,209

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

It is the Company's policy to discontinue accruing interest 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 or 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. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.

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



	September 30, 2016						December 31, 2015
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
	(In thousands)
Real estate mortgage:
Commercial	$	74,606	$	4,204,226	$	4,278,832	$	52,363	$	4,499,595	$	4,551,958
Residential	5,089		1,181,020		1,186,109		4,914		1,131,191		1,136,105
Total real estate mortgage	79,695		5,385,246		5,464,941		57,277		5,630,786		5,688,063
Real estate construction and land:
Commercial	1,245		507,166		508,411		—		343,360		343,360
Residential	366		322,738		323,104		372		183,988		184,360
Total real estate construction and land	1,611		829,904		831,515		372		527,348		527,720
Commercial:
Cash flow	27,831		3,037,660		3,065,491		15,800		3,046,468		3,062,268
Asset-based	4,044		2,567,757		2,571,801		2,505		2,545,028		2,547,533
Venture capital	10,782		1,750,830		1,761,612		124		1,452,303		1,452,427
Equipment finance	46,916		623,867		670,783		51,410		838,939		890,349
Total commercial	89,573		7,980,114		8,069,687		69,839		7,882,738		7,952,577
Consumer	206		256,298		256,504		1,531		119,318		120,849
Total Non-PCI loans and leases	$	171,085	$	14,451,562	$	14,622,647	$	129,019	$	14,160,190	$	14,289,209

At September 30, 2016, nonaccrual loans and leases totaled $171.1 million and included $11.9 million of loans and leases 90 or more days past due, $13.2 million of loans and leases 30 to 89 days past due, and $146.0 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. Nonaccrual loans and leases totaled $129.0 million at December 31, 2015, including $16.8 million of the loans and leases 90 or more days past due, $3.6 million of loans and leases 30 to 89 days past due, and $108.6 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents the credit risk rating categories for Non‑PCI loans and leases by portfolio segment and class as of the dates indicated. Nonclassified loans and leases are those with a credit risk rating of either pass or special mention, while classified loans and leases are those with a credit risk rating of either substandard or doubtful.



	September 30, 2016						December 31, 2015
	Classified		Nonclassified		Total		Classified		Nonclassified		Total
	(In thousands)
Real estate mortgage:
Commercial	$	104,914	$	4,173,918	$	4,278,832	$	98,436	$	4,453,522	$	4,551,958
Residential	15,876		1,170,233		1,186,109		12,627		1,123,478		1,136,105
Total real estate mortgage	120,790		5,344,151		5,464,941		111,063		5,577,000		5,688,063
Real estate construction and land:
Commercial	1,839		506,572		508,411		571		342,789		343,360
Residential	366		322,738		323,104		1,395		182,965		184,360
Total real estate construction and land	2,205		829,310		831,515		1,966		525,754		527,720
Commercial:
Cash flow	174,490		2,891,001		3,065,491		183,726		2,878,542		3,062,268
Asset-based	34,791		2,537,010		2,571,801		19,340		2,528,193		2,547,533
Venture capital	37,986		1,723,626		1,761,612		19,105		1,433,322		1,452,427
Equipment finance	46,916		623,867		670,783		54,054		836,295		890,349
Total commercial	294,183		7,775,504		8,069,687		276,225		7,676,352		7,952,577
Consumer	363		256,141		256,504		2,500		118,349		120,849
Total Non-PCI loans and leases	$	417,541	$	14,205,106	$	14,622,647	$	391,754	$	13,897,455	$	14,289,209

In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s loan and lease risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in higher allowances for credit losses.

Non‑PCI nonaccrual loans and leases and performing troubled debt restructured loans are considered impaired for reporting purposes. The following table presents the composition of our impaired loans and leases as of the dates indicated:



	September 30, 2016						December 31, 2015
			Performing		Total				Performing		Total
	Nonaccrual		Troubled		Impaired		Nonaccrual		Troubled		Impaired
	Loans		Debt		Loans		Loans		Debt		Loans
	and		Restructured		and		and		Restructured		and
	Leases		Loans		Leases		Leases		Loans		Leases
	(In thousands)
Real estate mortgage	$	79,695	$	59,793	$	139,488	$	57,277	$	27,133	$	84,410
Real estate construction and land	1,611		7,089		8,700		372		7,631		8,003
Commercial	89,573		3,250		92,823		69,839		5,221		75,060
Consumer	206		216		422		1,531		197		1,728
Total	$	171,085	$	70,348	$	241,433	$	129,019	$	40,182	$	169,201

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following tables present information regarding our Non‑PCI impaired loans and leases by portfolio segment and class as of and for the dates indicated:



	September 30, 2016						December 31, 2015
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With An Allowance Recorded:
Real estate mortgage:
Commercial	$	67,821	$	68,852	$	7,055	$	17,967	$	19,219	$	777
Residential	2,517		2,573		244		2,278		2,435		681
Real estate construction and land:
Residential	736		736		11		747		747		26
Commercial:
Cash flow	25,936		26,971		4,686		14,072		20,312		7,079
Asset-based	4,136		4,584		2,899		3,901		4,423		2,511
Venture capital	10,781		10,856		3,331		—		—		—
Equipment finance	46,916		52,908		12,715		11,193		11,894		8,032
Consumer	346		355		179		365		372		157
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	59,090	$	68,390			$	58,678	$	68,333
Residential	10,060		15,309				5,487		11,406
Real estate construction and land:
Commercial	7,964		7,964				7,256		7,256
Commercial:
Cash flow	2,519		4,783				2,825		5,121
Asset-based	2,535		2,575				2,729		2,726
Venture capital	—		—				124		125
Equipment finance	—		11,709				40,216		44,194
Consumer	76		146				1,363		1,945
Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
Real estate mortgage	$	139,488	$	155,124	$	7,299	$	84,410	$	101,393	$	1,458
Real estate construction and land	8,700		8,700		11		8,003		8,003		26
Commercial	92,823		114,386		23,631		75,060		88,795		17,622
Consumer	422		501		179		1,728		2,317		157
Total	$	241,433	$	278,711	$	31,120	$	169,201	$	200,508	$	19,263

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)



	Three Months Ended September 30,
	2016				2015
	Weighted		Interest		Weighted		Interest
	Average		Income		Average		Income
	Balance⁽¹⁾		Recognized		Balance⁽¹⁾		Recognized
	(In thousands)
With An Allowance Recorded:
Real estate mortgage:
Commercial	$	18,580	$	262	$	13,230	$	152
Residential	2,505		15		2,478		9
Real estate construction and land:
Residential	736		4		751		4
Commercial:
Cash flow	25,933		9		13,653		13
Asset-based	2,730		5		4,906		48
Venture capital	6,878		—		—		—
Equipment finance	42,913		—		9,654		—
Consumer	346		3		394		4
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	59,090	$	518	$	36,534	$	243
Residential	9,573		70		6,061		14
Real estate construction and land:
Commercial	7,870		57		7,193		62
Commercial:
Cash flow	2,330		1		2,942		1
Asset-based	2,535		37		1,487		21
Equipment finance	—		—		43,406		—
Consumer	76		—		3,208		—
Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
Real estate mortgage	$	89,748	$	865	$	58,303	$	418
Real estate construction and land	8,606		61		7,944		66
Commercial	83,319		52		76,048		83
Consumer	422		3		3,602		4
Total	$	182,095	$	981	$	145,897	$	571

_________________________


(1)	For Non-PCI loans and leases reported as impaired at September 30, 2016 and 2015, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)



	Nine Months Ended September 30,
	2016				2015
	Weighted		Interest		Weighted		Interest
	Average		Income		Average		Income
	Balance⁽¹⁾		Recognized		Balance⁽¹⁾		Recognized
	(In thousands)
With An Allowance Recorded:
Real estate mortgage:
Commercial	$	18,220	$	781	$	13,155	$	449
Residential	2,325		42		2,334		24
Real estate construction and land:
Residential	736		11		751		12
Commercial:
Cash flow	20,417		26		13,225		35
Asset-based	2,278		14		3,906		67
Venture capital	2,542		—		—		—
Equipment finance	41,587		—		6,905		—
Consumer	330		8		375		11
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	54,747	$	1,209	$	33,263	$	674
Residential	6,990		130		5,046		26
Real estate construction and land:
Commercial	7,106		169		7,021		176
Commercial:
Cash flow	2,232		1		2,917		86
Asset-based	1,828		77		1,238		51
Equipment finance	—		—		29,088		—
Consumer	74		1		3,208		—
Total Non-PCI Loans and Leases With and Without an Allowance Recorded:
Real estate mortgage	$	82,282	$	2,162	$	53,798	$	1,173
Real estate construction and land	7,842		180		7,772		188
Commercial	70,884		118		57,279		239
Consumer	404		9		3,583		11
Total	$	161,412	$	2,469	$	122,432	$	1,611

_________________________


(1)	For Non-PCI loans and leases reported as impaired at September 30, 2016 and 2015, amounts were calculated based on the period of time such loans and leases were impaired during the reported period.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Troubled debt restructurings are a result of rate reductions, term extensions, fee concessions, and debt forgiveness or a combination thereof. The following tables present new troubled debt restructurings of Non-PCI loans for the periods indicated:



	Three Months Ended September 30,
	2016					2015
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number	Recorded		Recorded		Number	Recorded		Recorded
Troubled Debt Restructurings:	of Loans	Investment		Investment		of Loans	Investment		Investment
	(Dollars in thousands)
Real estate mortgage:
Commercial	2	$	1,147	$	1,147	3	$	574	$	574
Residential	1	93		93		2	382		382
Real estate construction and land:
Commercial	1	1,245		1,245		3	7,333		7,333
Commercial:
Cash flow	2	25		25		9	883		883
Asset-based	1	25		25		1	3,431		3,431
Equipment finance	1	39,912		39,912		—	—		—
Consumer	1	21		21		1	106		106
Total	9	$	42,468	$	42,468	19	$	12,709	$	12,709



	Nine Months Ended September 30,
	2016					2015
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number	Recorded		Recorded		Number	Recorded		Recorded
Troubled Debt Restructurings:	of Loans	Investment		Investment		of Loans	Investment		Investment
	(Dollars in thousands)
Real estate mortgage:
Commercial	7	$	5,287	$	5,287	15	$	7,080	$	7,031
Residential	7	5,136		5,136		14	2,426		2,260
Real estate construction and land:
Commercial	1	1,245		1,245		6	16,947		16,947
Commercial:
Cash flow	12	30,582		30,582		17	1,756		1,577
Asset-based	5	2,158		2,158		13	8,139		8,139
Equipment finance	7	44,196		42,572		9	53,338		53,338
Consumer	4	819		111		2	197		197
Total	43	$	89,423	$	87,091	76	$	89,883	$	89,489

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following tables present troubled debt restructurings that subsequently defaulted for the periods indicated:



	Three Months Ended September 30,
	2016				2015
Troubled Debt Restructurings	Number	Recorded			Number	Recorded
That Subsequently Defaulted:	of Loans	Investment⁽¹⁾			of Loans	Investment⁽¹⁾
	(Dollars in thousands)
Real estate mortgage:
Commercial	—	$	—		1	$	1,761
Residential	—	—			2	276
Real estate construction:
Commercial	1	1,245			—	—
Commercial:
Asset-based	1	2			—	—
Total	2	$	1,247	(2)	3	$	2,037	(3)

_________________________


(1)	The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. The table excludes defaulted troubled restructurings in those classes for which the recorded investment was zero at the end of the period.


(2)	Represents the balance at September 30, 2016, and there were no charge-offs.


(3)	Represents the balance at September 30, 2015, and there were no charge-offs.



	Nine Months Ended September 30,
	2016				2015
Troubled Debt Restructurings	Number	Recorded			Number	Recorded
That Subsequently Defaulted:	of Loans	Investment⁽¹⁾			of Loans	Investment⁽¹⁾
	(Dollars in thousands)
Real estate mortgage:
Commercial	—	$	—		2	$	2,710
Residential	—	—			3	530
Real estate construction and land:
Commercial	1	1,245			—	—
Commercial:
Asset-based	1	2			—	—
Equipment finance	1	39,912		(4)	—	—
Total	3	$	41,159	(2)	5	$	3,240	(3)

_________________________


(1)	The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. The table excludes defaulted troubled restructurings in those classes for which the recorded investment was zero at the end of the period.


(2)	Represents the balance at September 30, 2016, and there were no charge-offs.


(3)	Represents the balance at September 30, 2015, and there were no charge-offs.


(4)	The term of the modification for this loan expired in the second quarter of 2016 and was not renewed until the third quarter of 2016. Thus, the loan was in payment default under the loan's original terms at June 30, 2016.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Allowance for Loan and Lease Losses

The following tables present a summary of the activity in the allowance for loan and lease losses on Non‑PCI loans and leases by portfolio segment and PCI loans for the periods indicated:



	Three Months Ended September 30, 2016
				Real Estate
	Real Estate			Construction								Total			Total
	Mortgage			and Land		Commercial			Consumer			Non-PCI			PCI			Total
	(In thousands)
Allowance for Loan and
Lease Losses:
Balance, beginning of period	$	29,331		$	7,853	$	93,404		$	1,412		$	132,000		$	11,289		$	143,289
Charge-offs	(302		)	—		(9,606		)	(16		)	(9,924		)	(531		)	(10,455		)
Recoveries	2,414			27		3,553			56			6,050			—			6,050
Provision	5,498			803		2,240			80			8,621			471			9,092
Balance, end of period	$	36,941		$	8,683	$	89,591		$	1,532		$	136,747		$	11,229		$	147,976



	Nine Months Ended September 30, 2016
				Real Estate
	Real Estate			Construction								Total			Total
	Mortgage			and Land		Commercial			Consumer			Non-PCI			PCI			Total
	(In thousands)
Allowance for Loan and
Lease Losses:
Balance, beginning of period	$	36,654		$	7,137	$	61,082		$	661		$	105,534		$	9,577		$	115,111
Charge-offs	(1,905		)	—		(14,306		)	(798		)	(17,009		)	(862		)	(17,871		)
Recoveries	4,352			185		4,179			95			8,811			—			8,811
Provision (negative provision)	(2,160		)	1,361		38,636			1,574			39,411			2,514			41,925
Balance, end of period	$	36,941		$	8,683	$	89,591		$	1,532		$	136,747		$	11,229		$	147,976

Amount of the allowance
applicable to loans and leases:
Individually evaluated for impairment	$	7,299		$	11	$	23,631		$	179		$	31,120
Collectively evaluated for impairment	$	29,642		$	8,672	$	65,960		$	1,353		$	105,627
Acquired loans with deteriorated credit quality															$	11,229

The ending balance of the
loan and lease portfolio is
composed of loans and leases:
Individually evaluated for impairment	$	139,059		$	8,700	$	92,637		$	376		$	240,772
Collectively evaluated for impairment	$	5,325,882		$	822,815	$	7,977,050		$	256,128		$	14,381,875
Acquired loans with deteriorated credit quality															$	120,199
Ending balance of
loans and leases	$	5,464,941		$	831,515	$	8,069,687		$	256,504		$	14,622,647		$	120,199		$	14,742,846

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)



	Three Months Ended September 30, 2015
				Real Estate
	Real Estate			Construction								Total			Total
	Mortgage			and Land		Commercial			Consumer			Non-PCI			PCI			Total
	(In thousands)
Allowance for Loan and
Lease Losses:
Balance, beginning of period	$	29,908		$	3,908	$	50,531		$	700		$	85,047		$	14,328		$	99,375
Charge-offs	(252		)	—		(4,035		)	(25		)	(4,312		)	(1,119		)	(5,431		)
Recoveries	288			390		239			164			1,081			—			1,081
Provision (negative provision)	4,355			93		6,137			(85		)	10,500			(2,254		)	8,246
Balance, end of period	$	34,299		$	4,391	$	52,872		$	754		$	92,316		$	10,955		$	103,271



	Nine Months Ended September 30, 2015
				Real Estate
	Real Estate			Construction									Total			Total
	Mortgage			and Land			Commercial			Consumer			Non-PCI			PCI			Total
	(In thousands)
Allowance for Loan and
Lease Losses:
Balance, beginning of period	$	25,097		$	4,248		$	39,858		$	1,253		$	70,456		$	13,999		$	84,455
Charge-offs	(1,767		)	—			(12,964		)	(115		)	(14,846		)	(1,698		)	(16,544		)
Recoveries	1,783			1,034			2,393			392			5,602			112			5,714
Provision (negative provision)	9,186			(891		)	23,585			(776		)	31,104			(1,458		)	29,646
Balance, end of period	$	34,299		$	4,391		$	52,872		$	754		$	92,316		$	10,955		$	103,271

Amount of the allowance
applicable to loans and leases:
Individually evaluated for impairment	$	1,443		$	31		$	10,343		$	158		$	11,975
Collectively evaluated for impairment	$	32,856		$	4,360		$	42,529		$	596		$	80,341
Acquired loans with deteriorated credit quality																$	10,955

The ending balance of the
loan and lease portfolio is
composed of loans and leases:
Individually evaluated for impairment	$	58,393		$	8,047		$	76,088		$	3,540		$	146,068
Collectively evaluated for impairment	$	5,446,694		$	364,433		$	6,175,440		$	126,281		$	12,112,848
Acquired loans with deteriorated credit quality																$	193,289
Ending balance of
loans and leases	$	5,505,087		$	372,480		$	6,251,528		$	129,821		$	12,258,916		$	193,289		$	12,452,205

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 6. Foreclosed Assets

The following table summarizes foreclosed assets as of the dates indicated:



	September 30,		December 31,
Property Type:	2016		2015
	(In thousands)
Commercial real estate	$	—	$	487
Construction and land development	13,800		13,801
Single family residence	—		952
Total other real estate owned, net	13,800		15,240
Other foreclosed assets	1,313		6,880
Total foreclosed assets, net	$	15,113	$	22,120

The following table presents the changes in foreclosed assets, net of the valuation allowance, for the period indicated:



	Foreclosed
	Assets
	(In thousands)
Balance, December 31, 2015	$	22,120
Foreclosures	129
Reductions related to sales	(7,136		)
Balance, September 30, 2016	$	15,113

Note 7. Borrowings and Subordinated Debentures

Borrowings

The following table summarizes our borrowings as of the dates indicated:



	September 30, 2016				December 31, 2015
	Amount		Rate		Amount		Rate
	(Dollars in thousands)
Non‑recourse debt	$	1,011	6.31	%	$	3,914	5.49	%
FHLB secured advances	410,000		0.37	%	618,000		0.27	%
FHLB unsecured overnight advance	90,000		0.35	%	—		—	%
American Financial Exchange overnight borrowing	40,000		0.55	%	—		—	%
Total borrowings	$	541,011			$	621,914

The non‑recourse debt represents the payment stream of certain equipment leases sold to third parties. The debt is secured by the leased equipment and all interest rates are fixed. As of September 30, 2016, this debt had a weighted average remaining maturity of 2.0 years.

The Bank has established secured and unsecured lines of credit under which it may borrow funds from time to time on a term or overnight basis from the FHLB, the Federal Reserve Bank of San Francisco (“FRBSF”), and other financial institutions.

FHLB Secured Lines of Credit. The borrowing arrangement with the FHLB is based on an FHLB program collateralized by a blanket lien on certain qualifying loans that are not pledged to the FRBSF. As of September 30, 2016, the borrowing capacity under the FHLB secured borrowing lines was $2.0 billion. As of September 30, 2016, the balance outstanding was $410.0 million, which consisted of a $210.0 million overnight advance and a $200.0 million one-month advance with an October 31, 2016 maturity date. As of December 31, 2015, the entire outstanding balance of $618.0 million was an overnight advance.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of September 30, 2016, the Bank had secured borrowing capacity of $2.4 billion collateralized by liens covering $3.3 billion of certain qualifying loans. As of September 30, 2016 and December 31, 2015, there were no balances outstanding.

Federal Funds Arrangements with Commercial Banks. As of September 30, 2016, the Bank had uncommitted unsecured lines of credit of $80.0 million with correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and have no unused commitment fees. As of September 30, 2016 and December 31, 2015, there were no balances outstanding. In March 2016, the Bank became a member of the American Financial Exchange, through which it may either borrow or lend funds on an overnight basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2016, the balance outstanding was $40.0 million.

FHLB Unsecured Line of Credit. The Bank has a $99.0 million unsecured line of credit with the FHLB for the purchase of overnight funds of which $90.0 million was outstanding at September 30, 2016. There was no balance outstanding at December 31, 2015.

Subordinated Debentures

The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:



	September 30, 2016					December 31, 2015					Date	Maturity	Rate Index
Series:	Amount			Rate		Amount			Rate		Issued	Date	(Quarterly Reset)
	(Dollars in thousands)
Trust V	$	10,310		3.96	%	$	10,310		3.63	%	8/15/2003	9/17/2033	3 month LIBOR + 3.10
Trust VI	10,310			3.90	%	10,310			3.39	%	9/3/2003	9/15/2033	3 month LIBOR + 3.05
Trust CII	5,155			3.81	%	5,155			3.35	%	9/17/2003	9/17/2033	3 month LIBOR + 2.95
Trust VII	61,856			3.51	%	61,856			3.07	%	2/5/2004	4/23/2034	3 month LIBOR + 2.75
Trust CIII	20,619			2.54	%	20,619			2.20	%	8/15/2005	9/15/2035	3 month LIBOR + 1.69
Trust FCCI	16,495			2.45	%	16,495			2.11	%	1/25/2007	3/15/2037	3 month LIBOR + 1.60
Trust FCBI	10,310			2.40	%	10,310			2.06	%	9/30/2005	12/15/2035	3 month LIBOR + 1.55
Trust CS 2005-1	82,475			2.80	%	82,475			2.46	%	11/21/2005	12/15/2035	3 month LIBOR + 1.95
Trust CS 2005-2	128,866			2.71	%	128,866			2.27	%	12/14/2005	1/30/2036	3 month LIBOR + 1.95
Trust CS 2006-1	51,545			2.71	%	51,545			2.27	%	2/22/2006	4/30/2036	3 month LIBOR + 1.95
Trust CS 2006-2	51,550			2.71	%	51,550			2.27	%	9/27/2006	10/30/2036	3 month LIBOR + 1.95
Trust CS 2006-3 ⁽¹⁾	28,940			1.75	%	28,007			1.98	%	9/29/2006	10/30/2036	3 month EURIBOR + 2.05
Trust CS 2006-4	16,470			2.71	%	16,470			2.27	%	12/5/2006	1/30/2037	3 month LIBOR + 1.95
Trust CS 2006-5	6,650			2.71	%	6,650			2.27	%	12/19/2006	1/30/2037	3 month LIBOR + 1.95
Trust CS 2007-2	39,177			2.71	%	39,177			2.27	%	6/13/2007	7/30/2037	3 month LIBOR + 1.95
Gross subordinated debentures	540,728					539,795
Unamortized discount ⁽²⁾	(99,616		)			(103,795		)
Net subordinated debentures	$	441,112				$	436,000

___________________


(1)	Denomination is in Euros with a value of €25.8 million.


(2)	Amount represents the fair value adjustment on subordinated debentures assumed in acquisitions.

Interest payments made by the Company on subordinated debentures are considered dividend payments under the Board of Governors of the Federal Reserve System (“FRB”) regulations. Bank holding companies, such as PacWest, are required to notify the FRB prior to declaring and paying a dividend during any period in which quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 8. Commitments and Contingencies

Lending Commitments

The Company is a party to financial instruments with off‑balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commitments to purchase equipment being acquired for lease to others. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The following table presents a summary of the financial instruments described above as of the dates indicated:



	September 30,		December 31,
	2016		2015
	(In thousands)
Loan commitments to extend credit	$	4,156,147	$	3,580,655
Standby letters of credit	204,616		210,292
Commitments to purchase equipment being acquired for lease to others	—		6,663
	$	4,360,763	$	3,797,610

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. We provide standby letters of credit in conjunction with several of our lending arrangements and property lease obligations. Most guarantees expire within one year from the date of issuance. If a borrower defaults on its commitments subject to any letter of credit issued under these arrangements, we would be required to meet the borrower's financial obligation but would seek repayment of that financial obligation from the borrower. In some cases, borrowers have pledged cash and investment securities as collateral with us under these arrangements.

In addition, we invest in low income housing project partnerships, which provide income tax credits, and in small business investment companies that call for capital contributions up to an amount specified in the partnership agreements. As of September 30, 2016 and December 31, 2015, we had commitments to contribute capital to these entities totaling $25.6 million and $19.2 million. We also had commitments to contribute up to an additional $3.0 million and $2.8 million to private equity funds at September 30, 2016 and December 31, 2015. In addition, at September 30, 2016 we had commitments to purchase approximately $105 million of loans, which commitments terminate in June 2017. The amount purchased will be based, in part, on the amount of portfolio paydowns which occur during the commitment period.

Legal Matters

In the ordinary course of our business, the Company is party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon currently available information, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.

Kinde Durkee Investigation

The United States Attorney's Office for the Eastern District of California is conducting an investigation relating to the handling by First California Bank ("FCB") of its banking relationship with Kinde Durkee. Ms. Durkee, who had maintained certain of her accounts with FCB, was convicted in 2012 of embezzling funds from certain California politicians, among others. FCB was acquired by PacWest Bancorp and merged into Pacific Western Bank in May 2013. We understand that the investigation is focused on whether any civil or criminal laws were violated by FCB or its employees. Pacific Western is cooperating with the investigation.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 9. Fair Value Measurements

ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three‑level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:


•	Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2: Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument. This category generally includes municipal securities, agency residential and commercial MBS, collateralized loan obligations, registered publicly rated private label CMOs and asset-backed securitizations.

•

Level 3: Inputs to a valuation methodology that are unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category also includes observable inputs from a pricing service not corroborated by observable market data, and includes our non-rated private label CMOs, non-rated private label asset-backed securities, and equity warrants.

We use fair value to measure certain assets and liabilities on a recurring basis, primarily securities available‑for‑sale and derivatives. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain assets, such as goodwill, core deposit intangibles, and other long‑lived assets.

The following tables present information on the assets and liabilities measured and recorded at fair value on a recurring basis as of the dates indicated:



	Fair Value Measurements as of
	September 30, 2016
Measured on a Recurring Basis:	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Residential MBS and CMOs:
Agency MBS	$	528,941	$	—	$	528,941	$	—
Agency CMOs	157,231		—		157,231		—
Private label CMOs	138,625		—		75,804		62,821
Municipal securities	1,522,494		—		1,522,494		—
Agency commercial MBS	531,273		—		531,273		—
Corporate debt securities	49,011		—		49,011		—
Collateralized loan obligations	156,647		—		156,647		—
SBA securities	187,300		—		187,300		—
Asset-backed and other securities	69,813		2,177		52,612		15,024
Total securities available-for-sale	3,341,335		2,177		3,261,313		77,845
Derivative assets	1,261		—		1,261		—
Equity warrants	5,108		—		—		5,108
Total recurring assets	$	3,347,704	$	2,177	$	3,262,574	$	82,953
Derivative liabilities	$	1,829	$	—	$	1,829	$	—

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)



	Fair Value Measurements as of
	December 31, 2015
Measured on a Recurring Basis:	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available‑for‑sale:
Residential MBS and CMOs:
Agency MBS	$	667,840	$	—	$	667,840	$	—
Agency CMOs	194,755		—		194,755		—
Private label CMOs	144,796		—		63,555		81,241
Municipal securities	1,547,331		—		1,547,331		—
Agency commercial MBS	391,441		—		391,441		—
Corporate debt securities	48,424		—		48,424		—
Collateralized loan obligations	132,189		—		132,189		—
SBA securities	211,157		—		211,157		—
US Treasury securities	69,380		69,380		—		—
Agency debt securities	36,913		—		36,913		—
Asset-backed and other securities	115,211		2,562		94,449		18,200
Total securities available-for-sale	3,559,437		71,942		3,388,054		99,441
Derivative assets	11,919		—		11,919		—
Equity warrants	4,914		—		—		4,914
Total recurring assets	$	3,576,270	$	71,942	$	3,399,973	$	104,355
Derivative liabilities	$	1,397	$	—	$	1,397	$	—

There were no transfers of assets either between Level 1 and Level 2 nor in or out of Level 3 of the fair value hierarchy for assets measured on a recurring basis during the nine months ended September 30, 2016.

The following table presents information about quantitative inputs and assumptions used to determine the fair values provided by our third party pricing service for our Level 3 private label CMOs and asset-backed securities available-for-sale measured at fair value on a recurring basis as of September 30, 2016:



	Private Label CMOs		Asset-Backed Securities
		Weighted		Weighted
	Range	Average	Range	Average
Unobservable Inputs:	of Inputs	Input	of Inputs	Input
Voluntary annual prepayment speeds	0.0% - 27.6%	11.5%	5% - 40%	14.7%
Annual default rates	0.0% - 15.0%	2.1%	1% - 8%	3.7%
Loss severity rates	0.0% - 94.5%	33.1%	10% - 91%	54.3%
Discount rates	0.9% - 15.0%	3.6%	2.1% - 7.2%	2.9%

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents information about quantitative inputs and assumptions used in the modified Black-Scholes option pricing model to determine the fair value for our Level 3 equity warrants measured at fair value on a recurring basis as of September 30, 2016:



	Equity Warrants
	Weighted
	Average
Unobservable Inputs:	Input
Volatility	19.3%
Risk-free interest rate	1.0%
Remaining life assumption (in years)	3.8

The following table summarizes activity for our Level 3 private label CMOs available-for-sale, asset-backed securities available-for-sale, and equity warrants measured at fair value on a recurring basis for the period indicated:



	Private			Asset-Backed			Equity
	Label CMOs			Securities			Warrants
	(In thousands)
Balance, December 31, 2015	$	81,241		$	18,200		$	4,914
Total included in earnings	1,252			47			301
Total included in other comprehensive income	(1,399		)	(5		)	—
Sales	—			—			(1,597		)
Issuances	—			—			1,490
Net settlements	(18,273		)	(3,218		)	—
Balance, September 30, 2016	$	62,821		$	15,024		$	5,108

The following tables present assets measured at fair value on a non‑recurring basis as of the dates indicated:



	Fair Value Measurement as of
	September 30, 2016
Measured on a Non‑Recurring Basis:	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired Non‑PCI loans	$	131,149	$	—	$	817	$	130,332



	Fair Value Measurement as of
	December 31, 2015
Measured on a Non‑Recurring Basis:	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired Non‑PCI loans	$	40,817	$	—	$	9,367	$	31,450
Other real estate owned	14,101		—		14,101		—
Investments carried at cost	107		—		—		107
Total non-recurring	$	55,025	$	—	$	23,468	$	31,557

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents losses recognized on assets measured on a nonrecurring basis for the periods indicated:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Losses on Assets Measured on a Non‑Recurring Basis:	2016		2015		2016		2015
	(In thousands)
Impaired Non‑PCI loans	$	12,935	$	873	$	27,301	$	7,623
Other real estate owned	—		4,758		—		4,882
Total losses	$	12,935	$	5,631	$	27,301	$	12,505

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2016:

Valuation

Unobservable

Weighted

Asset:

Fair Value

Technique

Inputs

Range

Average

(In thousands)

Impaired Non-PCI loans

45,571

Discounted cash flows

Discount rates

0% - 8.00%

6.12%

73,775

Third party appraisals

Discounts

9.00% - 22.00%

17.17%

10,986

Third party appraisals

No discounts

Total non-recurring Level 3

130,332

ASC Topic 825, “Financial Instruments,” requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

The following tables present a summary of the carrying values and estimated fair values of certain financial instruments as of the dates indicated:



	September 30, 2016
	Carrying or Contract		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	286,371	$	286,371	$	286,371	$	—	$	—
Interest‑earning deposits in financial institutions	253,994		253,994		253,994		—		—
Securities available‑for‑sale	3,341,335		3,341,335		2,177		3,261,313		77,845
Investment in FHLB stock	19,386		19,386		—		19,386		—
Investments carried at cost	1,700		4,408		—		—		4,408
Loans and leases, net	14,594,870		14,707,667		—		817		14,706,850
Derivative assets	1,261		1,261		—		1,261		—
Equity warrants	5,108		5,108		—		—		5,108

Financial Liabilities:
Deposits:
Demand, money market, interest checking,
and savings deposits	13,092,753		13,092,753		—		13,092,753		—
Time deposits	2,552,915		2,549,662		—		2,549,662		—
Borrowings	541,011		541,067		340,000		201,067		—
Subordinated debentures	441,112		424,874		—		424,874		—
Derivative liabilities	1,829		1,829		—		1,829		—

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)



	December 31, 2015
	Carrying or Contract		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	161,020	$	161,020	$	161,020	$	—	$	—
Interest‑earning deposits in financial institutions	235,466		235,466		235,466		—		—
Securities available‑for‑sale	3,559,437		3,559,437		71,942		3,388,054		99,441
Investment in FHLB stock	19,710		19,710		—		19,710		—
Investments carried at cost	2,267		6,789		—		—		6,789
Loans and leases, net	14,363,143		14,393,558		—		9,367		14,384,191
Derivative assets	11,919		11,919		—		11,919		—
Equity warrants	4,914		4,914		—		—		4,914

Financial Liabilities:
Deposits:
Demand, money market, interest checking,
and savings deposits	11,513,826		11,513,826		—		11,513,826		—
Time deposits	4,152,356		4,152,920		—		4,152,920		—
Borrowings	621,914		622,438		618,000		4,438		—
Subordinated debentures	436,000		419,762		—		419,762		—
Derivative liabilities	1,397		1,397		—		1,397		—

For information regarding the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825), see Note 1. Nature of Operations and Summary of Significant Accounting Policies, and Note 13. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2015 Annual Report on Form 10-K.

Limitations

Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on what management believes to be reasonable judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of September 30, 2016, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 10. Earnings Per Share

The following table presents the computations of basic and diluted net earnings per share for the periods indicated:



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
	(Dollars in thousands, except per share data)
Basic Earnings Per Share:
Net earnings	$	93,895		$	82,168		$	69,616		$	266,519		$	227,778
Less: Earnings allocated to unvested restricted stock (1)	(1,048		)	(863		)	(649		)	(2,983		)	(2,213		)
Net earnings allocated to common shares	$	92,847		$	81,305		$	68,967		$	263,536		$	225,565

Weighted-average basic shares and unvested restricted
stock outstanding	121,818			121,799			103,048			121,739			103,038
Less: Weighted-average unvested restricted stock
outstanding	(1,401		)	(1,481		)	(985		)	(1,425		)	(1,055		)
Weighted-average basic shares outstanding	120,417			120,318			102,063			120,314			101,983

Basic earnings per share	$	0.77		$	0.68		$	0.68		$	2.19		$	2.21

Diluted Earnings Per Share:
Net earnings allocated to common shares	$	92,847		$	81,305		$	68,967		$	263,536		$	225,565

Weighted-average basic shares outstanding	120,417			120,318			102,063			120,314			101,983

Diluted earnings per share	$	0.77		$	0.68		$	0.68		$	2.19		$	2.21

________________________


(1)	Represents cash dividends paid to holders of unvested restricted stock, net of estimated forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.

Note 11. Stock-Based Compensation

The Company’s 2003 Stock Incentive Plan, or the 2003 Plan, permits stock-based compensation awards to officers, directors, key employees and consultants. As of September 30, 2016, the 2003 Plan authorized grants of stock‑based compensation instruments to purchase or issue up to 19,686,565 shares of Company common stock, subject to adjustments provided by the 2003 Plan. As of September 30, 2016, there were 12,450,068 shares available for grant under the 2003 Plan.

Restricted stock amortization totaled $5.6 million, $6.0 million, and $3.8 million for the three months ended September 30, 2016, June 30, 2016 and September 30, 2015 and, $16.6 million and $11.2 million for the nine months ended September 30, 2016 and 2015. Such amounts are included in "Compensation expense" on the condensed consolidated statements of earnings. The amount of unrecognized compensation expense related to unvested time-based restricted stock awards ("TRSAs") and performance-based restricted stock units ("PRSUs") as of September 30, 2016 totaled $45.7 million.

Time-Based Restricted Stock Awards

At September 30, 2016, there were 1,397,715 shares of unvested TRSAs outstanding. The TRSAs generally vest over a service period of three or four years from the date of the grant or immediately upon the death of an employee. Compensation expense related to TRSAs is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using the straight‑line method.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Performance-Based Restricted Stock Units

At September 30, 2016, there were 153,715 units of unvested PRSUs outstanding. The PRSUs will vest only if performance goals with respect to certain financial metrics are met over a three-year performance period. Compensation expense related to PRSUs is based on the fair value of the underlying stock on the award date and is amortized over the vesting period using the straight-line method unless it is determined that: (1) attainment of the financial metrics is less than probable, in which case a portion of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion of the previously recognized amortization is reversed and also suspended. In the case where the performance target for the PRSU’s is based on a market condition (such as total shareholder return), the amortization is neither reversed nor suspended if it is subsequently determined that the attainment of the performance target is less than probable or improbable.

Note 12. Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue Recognition (Topic 606): Revenue from Contracts with Customers." ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 to annual and interim periods beginning after December 15, 2017, while earlier application is permitted only for annual and interim periods beginning after December 31, 2016. The Company has not yet selected a transition method and does not expect the provisions of ASU 2014-09 to have a material impact on its consolidated financial position or results of operations. The Company will adopt this standard effective January 1, 2018.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which will significantly change the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities when the fair value option is elected. For equity investments with readily determinable fair values, entities must measure these investments at fair value and recognize changes in fair value in net income. For equity investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost, adjusted for changes in observable prices, minus impairment. Changes in measurement under either alternative must be recognized in net income. ASU 2016-01 will be effective for annual and interim periods beginning after December 15, 2017. The Company is evaluating the effect that ASU 2016-01 will have on its financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which, among other things, requires lessees to recognize most leases on-balance sheet, which will result in an increase in their reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes Topic 840, Leases. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. ASU 2016-07 is effective for interim and annual periods in fiscal years beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. ASU 2016-07 does not require additional disclosures at transition. The Company does not expect the effect of ASU 2016-06 to have a material impact on its financial statements and related disclosures.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. If an entity early adopts the amendments after the first interim period, the adoption date is as of the beginning of the year for the issues adopted by the cumulative-effect and prospective methods and any adjustments to previously reported interim periods of that fiscal year should be included in the year-to-date results. If those previously reported interim results appear in any future filings, they are reported on the revised basis. The Company does not expect the effect of ASU 2016-09 to have a material impact on its financial statements and related disclosures in the period of adoption. In subsequent periods, we expect the requirements of ASU 2016-09 to result in fluctuations in our effective tax rate from period to period based upon the timing of share-based award vestings.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. ASU 2016-13 is effective for interim and annual periods in fiscal years beginning after December 15, 2019. The Company is evaluating the effect that ASU 2016-13 will have on its financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addressed eight issues related to the statement of cash flows, including proceeds from the settlement of bank-owned life insurance ("BOLI") policies. ASU 2016-15 is effective for interim and annual periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2016-15 in an interim period, adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendment in the same period. Entities should apply ASU 2016-15 using a retrospective transition method to each period presented. If it is impracticable for an entity to apply ASU 2016-15 retrospectively for some of the issues, it may apply the amendments for those issues prospectively as of the earliest date practicable. ASU 2016-15 will result in some changes in classification in the consolidated statements of cash flows, which the Company does not expect will be significant, and will not have any impact on its consolidated financial position or results of operations.

Note 13. Subsequent Events

Stock Repurchase Program

On October 17, 2016, PacWest’s Board of Directors authorized a new stock repurchase program (the “Stock Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. The common stock repurchases may be effected through open market purchases or in privately negotiated transactions, and may utilize any derivative 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 Stock Repurchase Program expires on December 31, 2017. 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.

Common Stock Dividends

On November 1, 2016, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.50 per common share. The cash dividend is payable on November 30, 2016 to stockholders of record at the close of business on November 15, 2016.

We have evaluated events that have occurred subsequent to September 30, 2016 and have concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Form 10-Q contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our acquisition of Square 1, capital management, including reducing excess capital, intentions to expand the Bank’s lending business; net interest income, net interest margin, allowance for loan and lease losses, deposit growth, loan and lease portfolio growth and production, liquidity, profitability, goodwill, interest rate risk management, realization of deferred tax assets, and effective tax rates. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:


•	our ability to complete future acquisitions and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames;


•	business disruption following the Square 1 acquisition;


•	the reaction to the Square 1 acquisition of the companies’ customers, employees and counterparties;


•	changes in our stock price;


•	the need to retain capital for strategic or regulatory reasons;


•	the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on our business and business strategies;


•	compression of the net interest margin due to changes in our interest rate environment, loan products, spreads on newly originated loans and leases and/or asset mix;


•	credit quality deterioration or pronounced and sustained reduction in market values or other economic factors which adversely affect our borrowers’ ability to repay loans and leases and/or require an increased provision for loan and lease losses;


•	changes in economic or competitive market conditions could negatively impact investment or lending opportunities or product pricing and services;


•	reduced demand for our services due to strategic or regulatory reasons;


•	our inability to grow deposits and access wholesale funding sources;


•	legislative or regulatory requirements or changes could negatively impact our business, including an increase to capital requirements;


•	higher than expected loan repayments;


•	higher than anticipated delinquencies, charge-offs, and loan and lease losses;


•	the impact of asset/liability repricing risk and liquidity risk on net interest margin and the value of investments;


•	increased costs to manage and sell foreclosed assets;


•	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 noncash charge to net income;


•	the success and timing of other business strategies;


•	changes in the forward yield curve;


•	changes in 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


•	other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and documents filed by PacWest with the U.S. Securities and Exchange Commission (“SEC”).

All forward-looking statements included in this Form 10-Q are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.

Overview

PacWest Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our Los Angeles‑based wholly-owned banking subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to “we,” “us,” "our," 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 79 full-service branches located throughout the state of California, one branch located in Durham, North Carolina, and several loan production offices located in cities across the country. The Bank provides commercial banking services, including real estate, construction, and commercial loans and leases, and comprehensive deposit and treasury management services to small and middle-market businesses. Pacific Western offers additional products and services through its CapitalSource and Square 1 Bank divisions. CapitalSource provides cash flow, asset-based, equipment and real estate loans and treasury management services to established middle-market businesses on a national basis. Square 1 Bank offers a comprehensive suite of financial services focused on entrepreneurial businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Square 1 Asset Management, Inc., a wholly-owned subsidiary of the Bank and a SEC-registered investment adviser.

In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin. Net interest income, on a year-to-date basis in 2016, accounted for 89.5% of our net revenues (net interest income plus noninterest income).

At September 30, 2016, we had total assets of $21.3 billion, including $14.7 billion of loans and leases, net of deferred fees, compared to $21.3 billion of total assets, including $14.5 billion of loans and leases, net of deferred fees, at December 31, 2015. Total assets increased $26.8 million during the nine months ended September 30, 2016 due to a $264.6 million increase in loans and leases, net of deferred fees, driven by new production, and an increase of $143.9 million in cash and cash equivalents, offset partially by a $218.1 million decrease in securities available-for-sale due to sales from ongoing portfolio management activities and a $99.3 million decrease in deferred tax assets.

At September 30, 2016, we had total liabilities of $16.8 billion, including total deposits of $15.6 billion and borrowings of $541.0 million compared to $16.9 billion of total liabilities, including $15.7 billion of total deposits and $621.9 million of borrowings at December 31, 2015. The $118.1 million decrease in total liabilities since year-end is due to a $1.6 billion decrease in higher-cost time deposits and an $80.9 million decrease in borrowings, primarily overnight FHLB advances, offset by a $1.4 billion increase in lower-cost core deposits and a $139.9 million increase in brokered non-maturity deposits. At September 30, 2016, core deposits totaled $12.0 billion, or 77% of total deposits, and time deposits totaled $2.6 billion, or 16% of total deposits.

On March 31, 2016, we sold our Pacific Western Equipment Finance leasing unit in Midvale, Utah, including approximately $139 million of outstanding lease balances.

Recent Events

Stock Repurchase Program

The Stock Repurchase Program expires on December 31, 2017. 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.

Sale of Branches

On September 30, 2016 Pacific Western entered into a definitive agreement to sell two branches to First Foundation Bank (the “Transaction”). The branches are located in Laguna Hills and Seal Beach, California (the “Branches”). As of September 30, 2016, the deposits of the Branches totaled approximately $200 million, principally comprised of time deposits. No loans are being sold in connection with the Transaction. The Transaction is expected to be completed during the fourth quarter of 2016 subject to regulatory approval and customary closing conditions.

Square 1 Financial, Inc. Acquisition

PacWest acquired Square 1 Financial, Inc. (“Square 1”) on October 6, 2015. As part of the acquisition, Square 1 Bank, a wholly-owned subsidiary of Square 1, merged with and into Pacific Western. At closing, we formed the Square 1 Bank Division of the Pacific Western which focuses on providing a comprehensive suite of financial services to entrepreneurial businesses and their venture capital and private equity investors nationwide. We completed this acquisition to increase our core deposits, expand our lending products across the nation, and increase our presence in the technology and life-sciences credit markets. We recorded the assets and liabilities, both tangible and intangible, at their estimated fair values as of the acquisition date and increased total assets by approximately $4.6 billion. The application of the acquisition method of accounting resulted in goodwill of $446.1 million. For further information, see Note 2. Acquisitions, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in “Item 1. Condensed Consolidated Financial Statements (Unaudited).”

Key Performance Indicators

Among other factors, our operating results depend generally 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) 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 income on certain municipal securities based on a 35% federal statutory tax rate. Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets. A sustained low interest rate environment combined with low loan growth and high levels of marketplace liquidity may reduce both our net interest income and net interest margin going forward.

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. As a result of the CapitalSource Inc. merger, $5.3 billion of time deposits were assumed. Our goal is to continue replacing these higher-costing time deposits with core deposits. The acquisition of Square 1 accelerated this shift in deposit mix as nearly all of the $3.8 billion of acquired deposits were core deposits. The Square 1 acquisition increased our on-balance sheet liquidity and enables us to maintain adequate liquidity as we manage down the level of higher-cost time deposits.

Loan and Lease Growth

We actively seek new lending opportunities under an array of commercial real estate loans and commercial and industrial ("C&I") lending products. Our targeted collateral for our real estate loan offerings includes healthcare properties, office properties, industrial properties, multifamily properties, hospitality properties, and retail properties. Our C&I loan products include equipment-secured loans and leases, asset-secured loans, loans to finance companies, and cash flow loans (which are loans secured by borrower future cash flows and borrower enterprise value) and venture capital-backed loans to entrepreneurial companies to support early-stage operations. Our loan origination process emphasizes credit quality. We foster lender relationships with borrowers that have proven loan repayment performance. Our commitment sizes vary by loan product and can range up to $100 million for certain asset-based lending arrangements and multi-property 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 successful borrowers that opt to prepay loans.

The Magnitude of Credit Losses

We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified and nonperforming assets and net charge‑offs. We maintain an allowance for credit losses on loans and leases, which is the sum of our allowance for loan and lease losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off‑balance sheet credit exposure. Loans and leases which are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology which considers various credit performance measures such as historical and current net charge‑offs, the levels and trends of nonaccrual and 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 purchased credit impaired ("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 stemming 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 (such as crude oil), 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 of our concentration 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).

The following table presents the calculation of our efficiency ratio for the periods indicated:



		Three Months Ended									Nine Months Ended
		September 30,			June 30,			September 30,			September 30,
Efficiency Ratio:		2016			2016			2015			2016			2015
		(Dollars in thousands)
Noninterest expense		$	110,710		$	110,081		$	90,139		$	331,479		$	259,775
Less:	Intangible asset amortization	4,224			4,371			1,497			13,341			4,500
	Foreclosed assets (income) expense, net	(248		)	(3		)	4,521			(812		)	2,517
	Acquisition, integration, and reorganization costs	—			—			747			200			3,647
Noninterest expense used for efficiency ratio		$	106,734		$	105,713		$	83,374		$	318,750		$	249,111

Net interest income (tax equivalent)		$	239,473		$	238,667		$	195,274		$	727,680		$	600,855
Noninterest income		26,920			22,121			15,758			83,580			56,252
Net revenues		266,393			260,788			211,032			811,260			657,107
Less:	Gain on sale of securities	382			478			655			8,970			3,744
Net revenues used for efficiency ratio		$	266,011		$	260,310		$	210,377		$	802,290		$	653,363

Efficiency ratio		40.1		%	40.6		%	39.6		%	39.7		%	38.1		%

Critical Accounting Policies

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. The Company has 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, the fair value estimates of assets acquired and liabilities assumed in acquisitions, the carrying values of intangible assets, and the realization of deferred income tax assets. For further information, refer to our Annual Report on Form 10‑K for the year ended December 31, 2015.

Non-GAAP Measurements

The Company uses 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. The non-GAAP measures used in this Form 10-Q include the following:

•

Core net interest margin and core loan and lease yield: The tax equivalent net interest margin ("NIM") and loan and lease yield are impacted by volatility in accelerated accretion of acquisition discounts due to the prepayment of acquired loans and leases. We disclose the core NIM and core loan and lease yield to provide an indication of what these measures would be without the effects of accelerated accretion as this indicates a "normalized" measure and a more accurate indicator of future performance. See “-Results of Operations-Net Interest Income” for a reconciliation of these non-GAAP measurements to the GAAP measurements for the periods presented.

•

Adjusted allowance for credit losses to loans and leases: As the allowance for credit losses takes into consideration credit deterioration on acquired loans and leases only after the purchase date and an estimate of credit losses is included in their initial fair values, we disclose two adjusted allowance for credit losses to loans and leases ratios in addition to the allowance for credit losses to loans and leases. The first adjusted allowance for credit losses to loans and leases excludes the allowance related to acquired loans and leases from the numerator and the acquired loans and leases from the denominator. The second ratio excludes the remaining unamortized purchase discount from both the numerator and the denominator. We disclose these ratios to more clearly illustrate the amounts established on our balance sheet for credit losses related to acquired loans in addition to the allowance for credit losses. See "-Balance Sheet Analysis-Allowance for Credit Losses on Non-PCI Loans and Leases" for a reconciliation of these non-GAAP measurements to the GAAP measurement as of the dates presented.

•

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 reconciliation of these non-GAAP measurements to the GAAP measurements is presented in the following tables for and as of the periods presented:



		Three Months Ended									Nine Months Ended
		September 30,			June 30,			September 30,			September 30,
Return on Average Tangible Equity		2016			2016			2015			2016			2015
		(Dollars in thousands)
Net earnings		$	93,895		$	82,168		$	69,616		$	266,519		$	227,778

Average stockholders' equity		$	4,530,701		$	4,483,593		$	3,572,765		$	4,484,468		$	3,551,763
Less:	Average intangible assets	2,217,564			2,222,007			1,741,902			2,222,346			1,740,911
Average tangible common equity		$	2,313,137		$	2,261,586		$	1,830,863		$	2,262,122		$	1,810,852

Return on average equity ⁽¹⁾		8.24		%	7.37		%	7.73		%	7.94		%	8.57		%
Return on average tangible equity ⁽²⁾		16.15		%	14.61		%	15.09		%	15.74		%	16.82		%

_____________________________________


(1)	Annualized net earnings divided by average stockholders' equity.


(2)	Annualized net earnings divided by average tangible common equity.



Tangible Common Equity Ratio/	September 30,			December 31,
Tangible Book Value Per Share	2016			2015
	(Dollars in thousands, except per share data)
PacWest Bancorp Consolidated:
Stockholders’ equity	$	4,542,595		$	4,397,691
Less: Intangible assets	2,213,491			2,229,511
Tangible common equity	$	2,329,104		$	2,168,180
Total assets	$	21,315,291		$	21,288,490
Less: Intangible assets	2,213,491			2,229,511
Tangible assets	$	19,101,800		$	19,058,979
Equity to assets ratio	21.31		%	20.66		%
Tangible common equity ratio⁽¹⁾	12.19		%	11.38		%
Book value per share	$	37.29		$	36.22
Tangible book value per share	$	19.12		$	17.86
Shares outstanding	121,817,524			121,413,727

Pacific Western Bank:
Stockholder's equity	$	4,416,623		$	4,276,279
Less: Intangible assets	2,213,491			2,229,511
Tangible common equity	$	2,203,132		$	2,046,768
Total assets	$	21,266,705		$	21,180,689
Less: Intangible assets	2,213,491			2,229,511
Tangible assets	$	19,053,214		$	18,951,178
Equity to assets ratio	20.77		%	20.19		%
Tangible common equity ratio⁽¹⁾	11.56		%	10.80		%

_______________________________________


(1)	Tangible common equity divided by tangible assets.

Results of Operations

Acquisitions Impact Earnings Performance

The comparability of financial information is affected by our acquisitions. We completed the Square 1 acquisition on October 6, 2015, adding assets of $4.6 billion. This transaction has been accounted for using the acquisition method of accounting and, accordingly, the related operating results have been included in the consolidated financial statements from the acquisition date.

Earnings Performance

The following table presents performance metrics for the periods indicated:



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
Performance Measures:
Diluted earnings per share	$	0.77		$	0.68		$	0.68		$	2.19		$	2.21
Annualized return on:
Average assets	1.77		%	1.57		%	1.65		%	1.69		%	1.85		%
Average tangible equity ⁽¹⁾⁽²⁾	16.15		%	14.61		%	15.09		%	15.74		%	16.82		%
Net interest margin (tax equivalent)	5.26		%	5.33		%	5.46		%	5.37		%	5.76		%
Core net interest margin (tax equivalent) ⁽²⁾⁽³⁾	5.08		%	5.11		%	5.19		%	5.09		%	5.31		%
Efficiency ratio	40.1		%	40.6		%	39.6		%	39.7		%	38.1		%

_____________________________


(1)	Calculation reduces average stockholder's equity by average intangible assets.


(2)	See "Non-GAAP Measurements."


(3)	Calculation excludes accelerated accretion of acquisition discounts from early payoffs of acquired loans.

Third Quarter of 2016 Compared to Second Quarter of 2016

Net earnings were $93.9 million, or $0.77 per diluted share, for the third quarter of 2016, compared to $82.2 million, or $0.68 per diluted share, for the second quarter of 2016. The quarter‑over‑quarter increase of $11.7 million in net earnings was due to a lower provision for credit losses of $5.4 million, higher noninterest income of $4.8 million, and a lower effective tax rate as compared to the second quarter of 2016. The decrease in the provision for credit losses was due in part to a $4.8 million increase in recoveries of previously charged off loans. The increase in noninterest income was due to the elimination of FDIC loss sharing expense. The second quarter expense of $6.5 million included a pre-tax charge attributable to the early termination of all FDIC loss sharing agreements. The effective tax rate for the third quarter was lower due to certain discrete items associated with completion of the 2015 tax returns.

Third Quarter of 2016 Compared to Third Quarter of 2015

Net earnings for the third quarter of 2016 were $93.9 million, or $0.77 per diluted share, compared to net earnings for the third quarter of 2015 of $69.6 million, or $0.68 per diluted share. The $24.3 million increase in net earnings was due to higher net interest income of $42.1 million and higher noninterest income of $11.2 million offset by higher noninterest expense of $20.6 million. These increases were due primarily to including the operations of Square 1 subsequent to the October 6, 2015 acquisition date. The increase in net interest income was attributable to higher average balances for loans and leases and investment securities 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, and lower FDIC loss sharing expense, offset by lower dividends and realized gains on equity investments.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Net earnings for the nine months ended September 30, 2016 were $266.5 million, or $2.19 per diluted share, compared to net earnings for the nine months ended September 30, 2015 of $227.8 million, or $2.21 per diluted share. The $38.7 million increase in net earnings was due to higher net interest income of $118.8 million and higher noninterest income of $27.3 million, offset by higher noninterest expense of $71.7 million and a higher provision for credit losses of $10.8 million. These increases were due primarily to including the operations of Square 1 subsequent to the October 6, 2015 acquisition date. 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 is affected by changes in both interest rates and the volume of average interest‑earning assets and interest‑bearing liabilities.

The following table presents, for the periods indicated, 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:



	Three Months Ended
	September 30, 2016						June 30, 2016						September 30, 2015
			Interest		Yields				Interest		Yields				Interest		Yields
	Average		Income/		and		Average		Income/		and		Average		Income/		and
	Balance		Expense		Rates		Balance		Expense		Rates		Balance		Expense		Rates
	(Dollars in thousands)
ASSETS:
PCI loans	$	117,781	$	5,868	19.82	%	$	147,270	$	8,484	23.17	%	$	193,094	$	7,505	15.42	%
Non-PCI loans and leases	14,417,170		219,502		6.06	%	14,321,320		215,842		6.06	%	11,919,787		186,034		6.19	%
Total loans and leases ⁽¹⁾	14,534,951		225,370		6.17	%	14,468,590		224,326		6.24	%	12,112,881		193,539		6.34	%
Investment securities ⁽²⁾	3,338,209		27,025		3.22	%	3,288,819		27,330		3.34	%	1,806,628		16,709		3.67	%
Deposits in financial institutions	238,425		298		0.50	%	245,666		308		0.50	%	278,973		178		0.25	%
Total interest‑earning assets ⁽²⁾	18,111,585		252,693		5.55	%	18,003,075		251,964		5.63	%	14,198,482		210,426		5.88	%
Other assets	2,960,468						2,996,867						2,491,695
Total assets	$	21,072,053					$	20,999,942					$	16,690,177

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest checking deposits	$	1,161,931	604		0.21	%	$	1,024,763	501		0.20	%	$	787,271	300		0.15	%
Money market deposits	4,514,525		3,303		0.29	%	4,321,533		2,886		0.27	%	2,417,280		1,218		0.20	%
Savings deposits	764,415		341		0.18	%	766,309		412		0.22	%	746,362		449		0.24	%
Time deposits	2,666,434		2,999		0.45	%	3,086,492		4,024		0.52	%	5,042,768		8,433		0.66	%
Total interest‑bearing deposits	9,107,305		7,247		0.32	%	9,199,097		7,823		0.34	%	8,993,681		10,400		0.46	%
Borrowings	583,982		695		0.47	%	300,428		352		0.47	%	70,171		72		0.41	%
Subordinated debentures	439,970		5,278		4.77	%	439,081		5,122		4.69	%	434,420		4,680		4.27	%
Total interest‑bearing liabilities	10,131,257		13,220		0.52	%	9,938,606		13,297		0.54	%	9,498,272		15,152		0.63	%
Noninterest‑bearing demand deposits	6,274,294						6,437,720						3,486,780
Other liabilities	135,801						140,023						132,360
Total liabilities	16,541,352						16,516,349						13,117,412
Stockholders’ equity	4,530,701						4,483,593						3,572,765
Total liabilities and stockholders’ equity	$	21,072,053					$	20,999,942					$	16,690,177
Net interest income (tax equivalent) ⁽²⁾			$	239,473					$	238,667					$	195,274
Net interest rate spread					5.03	%					5.09	%					5.25	%
Net interest margin					5.26	%					5.33	%					5.46	%

Total deposits ⁽³⁾	$	15,381,599	$	7,247	0.19	%	$	15,636,817	$	7,823	0.20	%	$	12,480,461	$	10,400	0.33	%
Funding sources ⁽⁴⁾	$	16,405,551	$	13,220	0.32	%	$	16,376,326	$	13,297	0.33	%	$	12,985,052	$	15,152	0.46	%

_____________________


(1)	Includes nonaccrual loans and leases and loan fees.


(2)	Includes tax-equivalent adjustments of $4.8 million, $4.9 million, and $2.8 million for the three months ended September 30, 2016, June 30, 2016, and September 30, 2015, respectively, related to tax-exempt income on municipal securities. The federal statutory tax rate utilized was 35% for the periods.


(3)	Total deposits is the sum of total interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.


(4)	Funding sources is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.



	Nine Months Ended September 30,
	2016						2015
			Interest		Yields				Interest		Yields
	Average		Income/		and		Average		Income/		and
	Balance		Expense		Rates		Balance		Expense		Rates
	(Dollars in thousands)
ASSETS:
PCI loans	$	144,129	$	34,425	31.90	%	$	227,072	$	25,563	15.05	%
Non-PCI loans and leases	14,347,598		651,646		6.07	%	11,865,330		573,854		6.47	%
Total loans and leases ⁽¹⁾	14,491,727		686,071		6.32	%	12,092,402		599,417		6.63	%
Investment securities ⁽²⁾	3,362,352		81,848		3.25	%	1,698,254		47,428		3.73	%
Deposits in financial institutions	238,129		914		0.51	%	158,708		304		0.26	%
Total interest‑earning assets ⁽²⁾	18,092,208		768,833		5.68	%	13,949,364		647,149		6.20	%
Other assets	2,997,922						2,535,453
Total assets	$	21,090,130					$	16,484,817

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest checking deposits	$	1,038,103	1,488		0.19	%	$	752,217	696		0.12	%
Money market deposits	4,229,315		8,604		0.27	%	2,108,317		3,251		0.21	%
Savings deposits	761,376		1,197		0.21	%	747,902		1,575		0.28	%
Time deposits	3,202,436		12,854		0.54	%	5,359,911		26,590		0.66	%
Total interest‑bearing deposits	9,231,230		24,143		0.35	%	8,968,347		32,112		0.48	%
Borrowings	460,165		1,628		0.47	%	190,502		395		0.28	%
Subordinated debentures	438,534		15,382		4.69	%	433,233		13,787		4.25	%
Total interest‑bearing liabilities	10,129,929		41,153		0.54	%	9,592,082		46,294		0.65	%
Noninterest‑bearing demand deposits	6,328,223						3,199,843
Other liabilities	147,510						141,129
Total liabilities	16,605,662						12,933,054
Stockholders’ equity	4,484,468						3,551,763
Total liabilities and stockholders’ equity	$	21,090,130					$	16,484,817
Net interest income (tax equivalent) ⁽²⁾			$	727,680					$	600,855
Net interest rate spread					5.14	%					5.55	%
Net interest margin					5.37	%					5.76	%

Total deposits ⁽³⁾	$	15,559,453	$	24,143	0.21	%	$	12,168,190	$	32,112	0.35	%
Funding sources ⁽⁴⁾	$	16,458,152	$	41,153	0.33	%	$	12,791,925	$	46,294	0.48	%

_____________________


(1)	Includes nonaccrual loans and leases and loan fees.


(2)	Includes tax-equivalent adjustments of $14.7 million and $6.7 million for the nine months ended September 30, 2016, and September 30, 2015 related to tax-exempt income on municipal securities. The federal statutory tax rate utilized was 35% for the periods.


(3)	Total deposits is the sum of total interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on deposits divided by average total deposits.


(4)	Funding sources is the sum of total interest-bearing liabilities and noninterest-bearing demand deposits. The cost of funding sources is calculated as annualized total interest expense divided by average funding sources.

The tax equivalent NIM and loan and lease yields are impacted by accelerated accretion of acquisition discounts resulting from early payoffs of acquired loans, which causes volatility from period to period. The effects of this item on the NIM and loan and lease yield are shown in the following table for the periods indicated:



	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
	2016		2016		2015		2016		2015
NIM:
Reported	5.26	%	5.33	%	5.46	%	5.37	%	5.76	%
Less: Accelerated accretion of acquisition discounts
from early payoffs of acquired loans	(0.18	)%	(0.22	)%	(0.27	)%	(0.28	)%	(0.45	)%
Core	5.08	%	5.11	%	5.19	%	5.09	%	5.31	%
Loan and Lease Yield:
Reported	6.17	%	6.24	%	6.34	%	6.32	%	6.63	%
Less: Accelerated accretion of acquisition discounts
from early payoffs of acquired loans	(0.23	)%	(0.27	)%	(0.32	)%	(0.35	)%	(0.51	)%
Core	5.94	%	5.97	%	6.02	%	5.97	%	6.12	%

The following table presents the impact on tax equivalent net interest income and NIM from all purchase accounting items as indicated in the table below for the periods indicated:



	Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
	2016			2016			2016			2015			2015
	(Dollars in thousands)
Impact on Net Interest Income:
Net interest income (tax equivalent)	$	239,473		$	238,667		$	249,540		$	233,959		$	195,274
Less:
Accelerated accretion of acquisition discounts
from early payoffs of acquired loans	(8,226		)	(9,780		)	(19,465		)	(5,511		)	(9,659		)
Remaining accretion of Non-PCI loan acquisition
discounts	(5,997		)	(6,407		)	(8,403		)	(10,553		)	(7,485		)
Total accretion of loan acquisition discounts	(14,223		)	(16,187		)	(27,868		)	(16,064		)	(17,144		)
Amortization of TruPS discount	1,391			1,393			1,395			1,397			1,399
Accretion of time deposits premium	(121		)	(172		)	(270		)	(384		)	(576		)
Total purchase accounting adjustments	(12,953		)	(14,966		)	(26,743		)	(15,051		)	(16,321		)
Net interest income - excluding purchase accounting	$	226,520		$	223,701		$	222,797		$	218,908		$	178,953

Impact on Net Interest Margin:
Net interest margin (tax equivalent)	5.26		%	5.33		%	5.53		%	5.22		%	5.46		%
Less:
Accelerated accretion of acquisition discounts
from early payoffs of acquired loans	(0.18		)%	(0.22		)%	(0.43		)%	(0.12		)%	(0.27		)%
Remaining accretion of Non-PCI loan acquisition
discounts	(0.13		)%	(0.14		)%	(0.19		)%	(0.24		)%	(0.21		)%
Total accretion of loan acquisition discounts	(0.31		)%	(0.36		)%	(0.62		)%	(0.36		)%	(0.48		)%
Amortization of TruPS discount	0.03		%	0.03		%	0.03		%	0.03		%	0.04		%
Accretion of time deposits premium	—		%	—		%	(0.01		)%	(0.01		)%	(0.02		)%
Total purchase accounting adjustments	(0.28		)%	(0.33		)%	(0.60		)%	(0.34		)%	(0.46		)%
Net interest margin - excluding purchase accounting	4.98		%	5.00		%	4.93		%	4.88		%	5.00		%

Third Quarter of 2016 Compared to Second Quarter of 2016

Net interest income increased by $0.9 million to $234.6 million for the third quarter of 2016 compared to $233.8 million for the second quarter of 2016 due to a higher average loan and lease balance, higher nonaccrual interest recoveries, and one additional day in the period, offset by a lower loan and lease yield. The loan and lease yield for the third quarter of 2016 was 6.17% compared to 6.24% for the second quarter of 2016. The decrease in the loan and lease yield was due to the lower discount accretion on acquired loans and the lower yield on new production compared to the current portfolio yield. Total discount accretion on acquired loans was $14.2 million in the third quarter of 2016 (39 basis points on the loan and lease yield) compared to $16.2 million in the second quarter of 2016 (45 basis points on the loan and lease yield). Excluding accelerated accretion, the core loan and lease yield was 5.94% in the third quarter compared to 5.97% in the second quarter.

The tax equivalent NIM for the third quarter of 2016 was 5.26% compared to 5.33% for the second quarter of 2016. The decrease in the tax equivalent NIM was due to lower discount accretion on acquired loans. Total discount accretion on acquired loans contributed 31 basis points to the NIM in the third quarter of 2016 and 36 basis points in the second quarter of 2016. Excluding accelerated accretion, the core NIM was 5.08% for the third quarter and 5.11% for the second quarter. Tax-exempt interest income contributed 11 points to the tax equivalent NIM for the third and second quarters of 2016.

Included in net interest income for the third quarter of 2016 was $3.0 million of interest resulting from the payoff in full of a nonperforming loan. This recovery contributed seven basis points to the third quarter 2016 NIM and eight basis points of loan and lease yield for the third quarter of 2016.

The cost of total deposits decreased to 0.19% in the third quarter of 2016 from 0.20% in the second quarter of 2016 due to a lower average cost and balance of time deposits.

Third Quarter of 2016 Compared to Third Quarter of 2015

Net interest income increased by $42.1 million to $234.6 million for the third quarter of 2016 compared to $192.5 million for the third quarter of 2015 due mainly to higher average balances for loans and leases and investment securities attributable to the Square 1 acquisition, offset partially by a lower loan and lease yield. The loan and lease yield for the third quarter of 2016 was 6.17% compared to 6.34% for the same quarter of 2015. The decrease in the loan and lease yield was due mainly to the lower discount accretion on acquired loans and yields on newly originated loans being lower than the average portfolio yield. Total discount accretion on acquired loans was $14.2 million in the third quarter of 2016 (39 basis points on the loan and lease yield) compared to $17.1 million in the third quarter of 2015 (57 basis points on the loan and lease yield).

The tax equivalent NIM for the third quarter of 2016 was 5.26% compared to 5.46% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the loan and lease yield as described above, the lower yield on average investment securities and loans and leases comprising a lower percentage of average interest-earning assets. Total discount accretion on acquired loans contributed 31 basis points to the NIM for the third quarter of 2016 compared to 48 basis points for the third quarter of 2015. Tax-exempt interest income contributed 11 basis points to the tax equivalent NIM for the third quarter of 2016 and eight basis points for the third quarter of 2015.

The cost of total deposits decreased to 0.19% for the third quarter of 2016 from 0.33% for the third quarter of 2015 due mainly to the $3.8 billion of lower-cost core deposits added in the Square 1 acquisition, a lower level of higher-cost time deposits, and a lower average cost of interest-bearing deposits.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Net interest income increased by $118.8 million to $713.0 million for the nine months ended September 30, 2016 compared to $594.1 million for the nine months ended September 30, 2015 due mainly to higher average interest-earning asset balances attributable to the Square 1 acquisition, offset partially by lower discount accretion on acquired loans and lower yields on average loans and leases and investment securities. The loan and lease yield for the first nine months of 2016 was 6.32% compared to 6.63% for the same period in 2015. The decrease in the loan and lease yield was due mainly to the lower discount accretion on acquired loans and yields on new production being lower than the average portfolio yield. Total discount accretion on acquired loans was $58.3 million during the nine months ended September 30, 2016 (54 basis points on the loan and lease yield) compared to $73.6 million during the nine months ended September 30, 2015 (81 basis points on the loan and lease yield). Discount accretion for the 2016 period includes $12.1 million of accelerated accretion from the payoff of a nonaccrual PCI loan, resulting in the higher PCI loan yield.

The tax equivalent NIM for the first nine months of 2016 was 5.37% compared to 5.76% for the same period last year. The decrease in the tax equivalent NIM was due mostly to the decrease in loan and lease yield as described above and loans and leases comprising a lower percentage of average interest-earning assets. Total discount accretion on acquired loans contributed 43 basis points to the NIM for the nine months ended September 30, 2016 compared to 71 basis points for the nine months ended September 30, 2015. Tax-exempt interest income contributed 11 basis points to the tax equivalent NIM for the first six months of 2016 and six basis points for the same period last year.

The cost of total deposits decreased to 0.21% for the nine months ended September 30, 2016 from 0.35% for the nine months ended September 30, 2015 due mainly to the $3.8 billion of lower-cost core deposits added in the Square 1 acquisition, a lower level of higher-cost time deposits, and a lower average cost of interest-bearing deposits.

Provision for Credit Losses

The following table sets forth the details of the provision for credit losses and allowance for credit losses data for the periods indicated:



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
	(Dollars in thousands)
Provision For Credit Losses:
Addition to allowance for Non‑PCI loans and leases	$	8,621		$	11,625		$	10,500		$	39,411		$	31,104
Addition to reserve for unfunded loan commitments	(621		)	375			500			589			2,063
Total provision for Non‑PCI loans and leases	8,000			12,000			11,000			40,000			33,167
Provision for PCI Loans	471			1,903			(2,254		)	2,514			(1,458		)
Total provision for credit losses	$	8,471		$	13,903		$	8,746		$	42,514		$	31,709

Non‑PCI Credit Quality Metrics:
Net charge‑offs on Non-PCI
loans and leases	$	3,874		$	432		$	3,231		$	8,198		$	9,244
Annualized net charge‑offs to
average Non-PCI loans and leases	0.11		%	0.01		%	0.11		%	0.08		%	0.10		%
At period end:
Allowance for credit losses	154,070			149,944			100,690
Non‑PCI nonaccrual loans and leases	171,085			127,655			107,190
Non‑PCI classified loans and leases	417,541			441,035			328,038
Allowance for credit losses to Non‑PCI
loans and leases	1.05		%	1.03		%	0.82		%
Allowance for credit losses to Non‑PCI
nonaccrual loans and leases	90.1		%	117.5		%	93.9		%

Provisions for credit losses are charged to earnings for both on and off‑balance sheet credit exposures. We have a provision for credit losses on our Non‑PCI loans and leases and a provision for credit losses on our PCI loans. The provision for credit losses on our Non‑PCI loans and leases is based on our allowance methodology and is an expense, or contra‑expense, that, in our judgment, is required to maintain an adequate allowance for credit losses. Our allowance methodology uses our actual historical loan and lease charge-off experience on pools of similar loans and leases, considers the current credit risk ratings, giving greater weight to loans with more adverse credit risk ratings, and considers subjective criteria such as current economic trends and forecasts, current commercial real estate values and performance trends, and the loan portfolio credit performance trends. The provision for credit losses on our PCI loans results from decreases or increases in expected cash flows on such loans compared to those previously estimated.

We recorded a total provision for credit losses of $8.5 million in the third quarter of 2016, $13.9 million in the second quarter of 2016 and $8.7 million in the third quarter of 2015 in accordance with our allowance methodology. The provision for the nine months ended September 30, 2016 was $42.5 million compared to $31.7 million in the same period last year and increased due to net portfolio growth, portfolio mix and asset quality, including the level of net charge-offs and specific reserves.

Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances are net loan and lease and unfunded commitment growth, an increased amount of loan and lease charge-offs, 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 and adverse conditions in borrowers’ businesses. See further discussion in “-Balance Sheet Analysis-Allowance for Credit Losses on Non‑PCI Loans” and “-Balance Sheet Analysis-Allowance for Credit Losses on PCI Loans” contained herein.

Noninterest Income

The following table summarizes noninterest income by category for the periods indicated:



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
	(In thousands)
Noninterest Income:
Service charges on deposit accounts	$	3,488		$	3,633		$	2,601		$	10,977		$	7,787
Other commissions and fees	12,528			11,073			6,376			35,090			18,895
Leased equipment income	8,538			8,523			5,475			25,305			16,232
Gain on sale of loans and leases	157			388			27			790			190
Gain on sale of securities	382			478			655			8,970			3,744
FDIC loss sharing expense, net	—			(6,502		)	(4,449		)	(8,917		)	(13,955		)
Other income:
Dividends and realized gains on equity investments	377			2,185			4,357			2,808			16,003
Foreign currency translation net (losses) gains	(224		)	324			(373		)	706			847
Other	1,674			2,019			1,089			7,851			6,509
Total noninterest income	$	26,920		$	22,121		$	15,758		$	83,580		$	56,252

Third Quarter of 2016 Compared to Second Quarter of 2016

Noninterest income increased by $4.8 million to $26.9 million for the third quarter of 2016 compared to $22.1 million for the second quarter of 2016 due mostly to a $6.5 million decrease in FDIC loss sharing expense and a $1.5 million increase in other commissions and fees, offset by a $1.8 million decrease in dividends and realized gains on equity investments and a $0.5 million decrease in foreign currency translation net gains. The elimination of FDIC loss sharing expense was due to the early termination of all FDIC loss sharing agreements for which a $6.0 million pre-tax charge was recognized in the second quarter. Other commissions and fees increased due to higher prepayment and other loan-related fees.

Third Quarter of 2016 Compared to Third Quarter of 2015

Noninterest income increased by $11.2 million to $26.9 million for the third quarter of 2016 compared to $15.8 million for the third quarter of 2015. The increase was due mostly to higher other commissions and fees of $6.2 million, higher leased equipment income of $3.1 million, and lower FDIC loss sharing expense of $4.4 million, offset by lower dividends and realized gains on equity investments of $4.0 million. The increase in other commissions and fees included $3.1 million from loan prepayment penalty fees, $1.7 million from foreign exchange fees, $0.8 million from credit card fees, and $0.5 million from letter of credit fees. The revenue streams from foreign exchange fees and credit card fees were gained in the Square 1 acquisition. The elimination of FDIC loss sharing expense was due to the early termination of our loss sharing agreements with the FDIC in the second quarter of 2016.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Noninterest income increased by $27.3 million to $83.6 million for the nine months ended September 30, 2016 compared to $56.3 million for the nine months ended September 30, 2015. The increase was due mostly to higher other commissions and fees of $16.2 million, higher leased equipment income of $9.1 million, higher gain on sales of securities of $5.2 million, lower FDIC loss sharing expense of $5.0 million, and higher service charges on deposit accounts of $3.2 million, offset by lower dividends and realized gains on equity investments of $13.2 million. The increase in other commissions and fees was comprised mostly of $6.2 million from loan prepayment penalty fees, $5.5 million from foreign exchange fees, $2.3 million from credit card fees, and $1.4 million from letter of credit fees. The increases in foreign exchange fees and credit card fees were due to the Square 1 acquisition. The decrease in FDIC loss sharing expense was due mainly to lower amortization of the FDIC loss sharing asset, offset partially by the $6.0 million pre-tax charge recognized in the second quarter of 2016 to terminate all FDIC loss sharing agreements. The increase in service charges on deposits was due primarily to increased deposits as a result of the Square 1 acquisition.

Noninterest Expense

The following table summarizes noninterest expense by category for the periods indicated:



	Three Months Ended								Nine Months Ended
	September 30,			June 30,			September 30,		September 30,
	2016			2016			2015		2016			2015
	(In thousands)
Noninterest Expense:
Compensation	$	62,661		$	62,174		$	48,152	$	185,900		$	144,922
Occupancy	12,010			12,193			10,762		36,835			31,950
Data processing	6,234			5,644			4,322		17,782			13,032
Other professional services	4,625			3,401			3,396		11,598			9,949
Insurance and assessments	4,324			4,951			3,805		14,240			11,546
Intangible asset amortization	4,224			4,371			1,497		13,341			4,500
Leased equipment depreciation	5,298			5,286			3,162		15,608			9,368
Foreclosed assets (income) expense, net	(248		)	(3		)	4,521		(812		)	2,517
Acquisition, integration and reorganization costs	—			—			747		200			3,647
Other expense:
Loan expense	1,931			2,145			1,494		6,231			3,319
Other	9,651			9,919			8,281		30,556			25,025
Total noninterest expense	$	110,710		$	110,081		$	90,139	$	331,479		$	259,775

The following table presents the components of foreclosed assets (income) expense, net for the periods indicated:



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2016			2016			2015			2016			2015
	(In thousands)
Foreclosed Assets (Income) Expense:
Provision for losses	$	—		$	—		$	4,757		$	—		$	5,163
Operating (income) expense	55			27			(152		)	25			(2,688		)
(Gain) loss on sale	(303		)	(30		)	(84		)	(837		)	42
Total foreclosed assets (income) expense, net	$	(248	)	$	(3	)	$	4,521		$	(812	)	$	2,517

Third Quarter of 2016 Compared to Second Quarter of 2016

Noninterest expense increased by $0.6 million to $110.7 million for the third quarter of 2016 compared to $110.1 million for the second quarter of 2016. The expense category with the highest increase was other professional services, which increased $1.2 million primarily due to higher litigation expense.

Third Quarter of 2016 Compared to Third Quarter of 2015

Noninterest expense increased by $20.6 million to $110.7 million for the third quarter of 2016 compared to $90.1 million for the third quarter of 2015. The increase was due primarily to including the operations of Square 1 subsequent to its October 6, 2015 acquisition date, offset by lower foreclosed assets expense of $4.8 million. Foreclosed assets expense decreased due mainly to lower write-downs on existing properties.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Noninterest expense increased by $71.7 million to $331.5 million for the nine months ended September 30, 2016 compared to $259.8 million for the nine months ended September 30, 2015. The increase was due primarily to including the operations of Square 1 subsequent to its October 6, 2015 acquisition date, offset by lower acquisition, integration and reorganization costs of $3.4 million and lower foreclosed assets expense of $3.3 million. Foreclosed assets expense decreased due mainly to lower write-downs on existing properties, offset partially by lower operating income.

Income Taxes

The effective tax rate for the third quarter of 2016 was 34.1% compared to 37.7% for the second quarter of 2016 and 36.4% for the third quarter of 2015. The effective tax rate for the third quarter of 2016 was lower due to the net favorable treatment of certain items associated with completion of the 2015 tax returns. The expected effective tax rate for the calendar year 2016 is approximately 37.5%. The Company's blended statutory tax rate for federal and state is 41%.

Balance Sheet Analysis

Investment Portfolio

The following table presents the components, yields, and durations of our securities available-for-sale as of the date indicated:



	September 30, 2016
	Amortized		Fair			Duration
Security Type:	Cost		Value		Yield⁽¹⁾⁽²⁾	(in years)
	(Dollars in thousands)
Residential mortgage-backed securities ("MBS")
and collateralized mortgage obligations ("CMOs"):
Agency MBS	$	518,996	$	528,941	2.08%	2.8
Agency CMOs	154,216		157,231		2.04%	2.2
Private label CMOs	133,917		138,625		5.00%	2.7
Municipal securities	1,437,952		1,522,494		4.13%	6.4
Agency commercial MBS	517,163		531,273		2.84%	5.4
Corporate debt securities	47,155		49,011		7.33%	5.1
Collateralized loan obligations	155,373		156,647		3.05%	0.1
SBA securities	185,639		187,300		0.30%	1.9
Asset-backed and other securities	69,189		69,813		2.71%	3.1
Total securities available-for-sale	$	3,219,600	$	3,341,335	3.29%	4.7

______________________________________


(1)	Represents the yield for the month of September 30, 2016.


(2)	Tax-equivalent basis.

The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:



	September 30, 2016
	Carrying		% of
Municipal Securities by State:	Value		Total
	(Dollars in thousands)
California	$	217,170	14	%
New York	187,238		12	%
Washington	171,032		11	%
Texas	117,842		8	%
Ohio	97,965		6	%
District of Columbia	68,227		4	%
Massachusetts	67,631		4	%
Florida	53,652		4	%
Oregon	45,133		3	%
Illinois	40,559		3	%
Total of 10 largest states	1,066,449		69	%
All other states	456,045		31	%
Total municipal securities	$	1,522,494	100	%

Loans and Leases

The following table presents the composition of our total loans and leases as of the dates indicated:



	September 30, 2016				June 30, 2016				December 31, 2015
			% of				% of				% of
	Amount		Total		Amount		Total		Amount		Total
	(Dollars in thousands)
Real estate mortgage:
Healthcare real estate	$	959,993	7	%	$	1,152,433	8	%	$	1,230,787	9	%
Hospitality	666,523		5	%	712,900		5	%	656,750		5	%
SBA program	468,138		3	%	473,465		3	%	473,960		3	%
Other commercial real estate	2,232,911		15	%	2,180,411		15	%	2,284,036		16	%
Total commercial real estate	4,327,565		30	%	4,519,209		31	%	4,645,533		33	%
Income producing residential	1,070,842		7	%	1,011,651		7	%	1,035,164		7	%
Owner-occupied residential	171,412		1	%	153,133		1	%	176,045		1	%
Total residential real estate	1,242,254		8	%	1,164,784		8	%	1,211,209		8	%
Total real estate mortgage	5,569,819		38	%	5,683,993		39	%	5,856,742		41	%
Real estate construction and land:
Commercial	510,831		3	%	417,144		3	%	345,991		2	%
Residential	323,104		2	%	281,788		2	%	184,382		1	%
Total real estate construction and land	833,935		5	%	698,932		5	%	530,373		3	%
Total real estate loans	6,403,754		43	%	6,382,925		44	%	6,387,115		44	%
Commercial:
Technology cash flow	1,097,041		7	%	1,002,709		7	%	978,283		7	%
Security cash flow	416,648		3	%	430,591		3	%	450,544		3	%
Healthcare cash flow	751,580		5	%	821,698		6	%	865,355		6	%
Other cash flow	806,337		5	%	793,441		5	%	779,783		5	%
Total cash flow	3,071,606		20	%	3,048,439		21	%	3,073,965		21	%
Lender finance & timeshare	1,654,585		11	%	1,730,870		12	%	1,587,577		11	%
Healthcare asset-based	174,362		1	%	214,242		1	%	228,445		2	%
Other asset-based	744,490		5	%	738,801		5	%	731,643		5	%
Total asset-based	2,573,437		17	%	2,683,913		18	%	2,547,665		18	%
Equity funds group	282,874		2	%	270,722		2	%	228,863		2	%
Early stage	412,537		3	%	369,803		3	%	347,298		2	%
Expansion stage	790,117		5	%	725,482		5	%	600,541		4	%
Later stage	280,981		2	%	300,345		2	%	281,311		2	%
Venture capital	1,766,509		12	%	1,666,352		12	%	1,458,013		10	%
Equipment finance	670,783		5	%	646,940		4	%	890,349		6	%
Total commercial	8,082,335		54	%	8,045,644		55	%	7,969,992		55	%
Consumer	256,757		3	%	212,891		1	%	121,147		1	%
Total loans and leases, net of deferred fees	$	14,742,846	100	%	$	14,641,460	100	%	$	14,478,254	100	%

Our real estate loan portfolio exposes us to risks associated with mortgage loans on commercial property. Commercial real estate mortgage loan repayments typically do not rely on the sale of the underlying collateral, but instead rely on the income producing potential of the collateral as the source of repayment. However, due to the loan amortization period generally being greater than the contractual loan term, the borrower may be required to refinance the loan, either with us or another lender, or pay off the loan, by selling the underlying collateral.

The following table presents the geographic composition of our real estate loans by the top 10 states and all other states combined (in the order presented for the current quarter-end) as of the dates indicated:



	September 30, 2016				December 31, 2015
			% of				% of
Real Estate Loans by State:	Amount		Total		Amount		Total
	(Dollars in thousands)
California	$	3,199,545	50	%	$	3,121,801	49	%
Florida	464,758		7	%	488,793		8	%
New York	448,448		7	%	315,433		5	%
Texas	301,872		5	%	342,815		5	%
Virginia	188,766		3	%	182,040		3	%
Illinois	179,118		3	%	157,431		2	%
Pennsylvania	149,345		2	%	215,945		4	%
Arizona	148,267		2	%	144,177		2	%
Georgia	124,487		2	%	71,992		1	%
Maryland	93,545		2	%	71,747		1	%
Total of 10 largest states	5,298,151		83	%	5,112,174		80	%
All other states	1,105,603		17	%	1,274,941		20	%
Total real estate loans	$	6,403,754	100	%	$	6,387,115	100	%

The following table presents a roll forward of the loan and lease portfolio for the periods indicated:



	Three Months Ended			Nine Months Ended
Loan and Lease Roll Forward: ⁽¹⁾	September 30, 2016			September 30, 2016
	(Dollars in thousands)
Beginning balance	$	14,641,460		$	14,478,254
New production	1,071,943			2,845,430
Existing loans and leases:
Principal repayments, net⁽²⁾	(933,037		)	(2,318,321		)
Loan and lease sales	(27,065		)	(105,319		)
Transfers to foreclosed assets	—			(129		)
Charge-offs	(10,455		)	(17,871		)
Sale of Pacific Western Equipment Finance ("PWEF")	—			(139,198		)
Ending balance	$	14,742,846		$	14,742,846

Weighted average rate on new production	5.11		%	4.95		%

_______________________________________


(1)	Includes direct financing leases but excludes equipment leased to others under operating leases.


(2)	Includes principal repayments on existing loans, changes in revolving lines of credit (repayments and draws), loan participation sales and other changes within the loan portfolio.

Credit Exposure Affected by Low Oil Prices

At September 30, 2016, we had 14 outstanding loan and lease relationships totaling $101.7 million to borrowers and lessees primarily involved in the oil and gas industry down from $137.3 million at December 31, 2015. The obligors under these loans and leases either conduct oil and gas extraction or provide industrial support services to such types of businesses. The collateral for these loans and leases includes primarily equipment, such as drilling and mining equipment and transportation vehicles, used directly and indirectly in these activities. At September 30, 2016, two relationships totaling $40.3 million were on nonaccrual status and were classified, down from three relationships totaling $47.1 million at December 31, 2015. The largest of these relationships had an aggregate outstanding balance of $39.9 million at September 30, 2016. Reserves related to our total oil and gas services industry exposure were approximately 14% at September 30, 2016, which included reserves of approximately 24% related to our impaired oil and gas services industry exposure. Unfunded commitments related to the oil and gas portfolio totaled $21.6 million at September 30, 2016 and relate to three relationships governed with a borrowing base for accounts receivable and inventory.

The following table presents loan and lease relationships with exposure to the oil and gas industry as of the date indicated:



	September 30, 2016
	Obligors	Amount		% of Total
	(Dollars in thousands)
Nonaccrual	2	$	40,262	39	%
Large, rated companies⁽¹⁾	2	41,410		41	%
All others	10	20,058		20	%
Total oil & gas support services	14	$	101,730	100	%

_______________________________________


(1)	Borrowing entity or obligor contractual counterpart rated BB- or higher.

Allowance for Credit Losses on Non-PCI Loans and Leases

The allowance for credit losses on non-purchased credit impaired ("Non-PCI") loans and leases is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of outstanding loan and lease balances and the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The following discussion is for Non-PCI loans and leases and the allowance for credit losses thereon. Refer to "-Balance Sheet Analysis-Allowance for Credit Losses on PCI Loans" 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 loan and lease 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 continual 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 pay. 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 contains 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 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 based upon the fair value of the loan’s collateral if the loan is collateral-dependent or the present value of cash flows, discounted at the loan’s effective interest rate, if the loan is not collateral-dependent. We measure impairment of a lease based upon the present value of the scheduled lease and residual cash flows, discounted at the lease's effective interest rate. To the extent a loan or lease balance exceeds the estimated collectable value, a specific reserve or charge-off is recorded depending upon the certainty of the estimate of loss. 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.

The methodology we use to estimate the general reserve component of our allowance for credit losses considers both quantitative and qualitative criteria. The quantitative criteria uses our actual historical loan and lease charge-off experience on pools of similar loans and leases to establish loss factors that are applied to our current loan and lease balances to estimate inherent credit losses. When estimating the general reserve component for the various pools of similar loan types, the loss factors applied to the loan pools consider the current credit risk ratings, giving greater weight to loans with more adverse credit risk ratings. We recognize that the determination of the allowance for loan and lease losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the ratings assigned to loans on an ongoing basis.

The qualitative criteria considered when establishing the loss factors include the following:


•	current economic trends and forecasts;


•	current commercial real estate 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;


•	our loan and lease portfolio composition and any loan concentrations;


•	our current lending policies and the effects of any new policies or policy amendments;


•	our new loan and lease origination volume and the nature of it;


•	our loan and lease portfolio credit performance trends; and


•	the results of our ongoing independent credit review.

The reserve for unfunded commitments is estimated using the same loss factors as used for the allowance for loan and lease losses and is computed based only on the expected usage of the unfunded commitments.

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 5. Loans and Leases, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

Management believes the allowance for credit losses is appropriate for the known and inherent risks in our 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 documentation deficiencies, adverse changes in collateral values, or negative 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 related losses in the future.

The following table presents information regarding the allowance for credit losses on Non-PCI loans and leases as of the dates indicated:



	September 30,			June 30,			December 31,			September 30,
Non-PCI Allowance for Credit Losses Data:	2016			2016			2015			2015
	(Dollars in thousands)
Allowance for loan and lease losses	$	136,747		$	132,000		$	105,534		$	92,316
Reserve for unfunded loan commitments	17,323			17,944			16,734			8,374
Total allowance for credit losses	$	154,070		$	149,944		$	122,268		$	100,690

Allowance for credit losses to loans and leases	1.05		%	1.03		%	0.85		%	0.82		%
Allowance for credit losses to nonaccrual loans and leases	90.1		%	117.5		%	94.8		%	93.9		%

All acquired loans are recorded initially at their estimated fair value with such initial fair value including an estimate of credit losses. Two additional credit coverage ratios shown in the table below are presented to give an indication of overall credit risk coverage:



	September 30, 2016								June 30, 2016
	Non-PCI								Non-PCI
Non-PCI Adjusted Allowance for	Loans and			Allowance/			Coverage		Loans and			Allowance/			Coverage
Credit Losses to Loans and Leases:	Leases			Discount			Ratio		Leases			Discount			Ratio
	(Dollars in thousands)
Adjustment for acquired loans and leases
and related allowance:
Ending balance	$	14,686,206		$	154,070		1.05	%	$	14,566,425		$	149,944		1.03	%
Acquired loans and leases	(4,612,787		)	(46,039		)			(5,131,674		)	(37,440		)
Adjusted balance	$	10,073,419		$	108,031		1.07	%	$	9,434,751		$	112,504		1.19	%

Adjustment for unamortized purchase
discount on acquired loans and leases:
Ending balance	$	14,686,206		$	154,070		1.05	%	$	14,566,425		$	149,944		1.03	%
Unamortized purchase discount	53,041			53,041					65,391			65,391
Adjusted balance	$	14,739,247		$	207,111		1.41	%	$	14,631,816		$	215,335		1.47	%

The first additional credit coverage ratio calculation makes adjustments for acquired loans and leases and the related allowance. Our Non‑PCI loans and leases at September 30, 2016, included $4.6 billion in loans and leases acquired in acquisitions. These acquired loans and leases were initially recorded at their estimated fair values and such initial fair values included an estimate of credit losses. The allowance calculation for Non‑PCI loans and leases takes into consideration those acquired loans and leases whose credit quality has deteriorated since their acquisition dates. At September 30, 2016, our allowance for credit losses included $46.0 million related to these acquired loans and leases. When these acquired loans and leases are excluded from the total of Non‑PCI loans and leases and the related allowance is excluded from the allowance for credit losses, the result is an adjusted coverage ratio of our allowance for credit losses to Non‑PCI loans and leases of 1.07% at September 30, 2016; at June 30, 2016, this ratio was 1.19%.

The second additional credit coverage ratio calculation makes an adjustment for the unamortized purchase discount on acquired loans and leases. Our acquired Non-PCI loans and leases included an unamortized purchase discount of $53.0 million at September 30, 2016, which is assigned specifically to those loans and leases only. Such discount represents the acquisition date fair value adjustment based on market, liquidity, interest rate and credit risk. When the unamortized purchase discount is added back separately to both our Non-PCI loans and leases and allowance for credit losses, the result is an adjusted coverage ratio of our allowance for credit losses to Non-PCI loans and leases of 1.41% at September 30, 2016; at June 30, 2016, this ratio was 1.47%.

The unamortized purchase discount is being accreted to interest income over the remaining life of the respective loans and leases primarily using the interest method. Use of the interest method results in steadily declining amounts being taken into income in each reporting period. The remaining discount of $53.0 million at September 30, 2016 is expected to be substantially accreted to income by the end of 2018.

The following table presents the changes in our allowance for credit losses on Non-PCI loans and leases for the periods indicated:



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
Non-PCI Allowance for Credit Losses:	2016			2016			2015			2016			2015
	(Dollars in thousands)
Allowance for credit losses, beginning of period	$	149,944		$	138,376		$	92,921		$	122,268		$	76,767
Provision for credit losses:
Addition to allowance for loan and lease losses	8,621			11,625			10,500			39,411			31,104
Addition to reserve for unfunded loan commitments	(621		)	375			500			589			2,063
Provision for credit losses	8,000			12,000			11,000			40,000			33,167
Loans and leases charged off:
Real estate mortgage	(302		)	(866		)	(252		)	(1,905		)	(1,767		)
Commercial	(9,606		)	(655		)	(4,035		)	(14,306		)	(12,964		)
Consumer	(16		)	(191		)	(25		)	(798		)	(115		)
Total loans and leases charged off ⁽¹⁾	(9,924		)	(1,712		)	(4,312		)	(17,009		)	(14,846		)
Recoveries on loans charged off:
Real estate mortgage	2,414			939			288			4,352			1,783
Real estate construction and land	27			6			390			185			1,034
Commercial	3,553			312			239			4,179			2,393
Consumer	56			23			164			95			392
Total recoveries on loans charged off	6,050			1,280			1,081			8,811			5,602
Net (charge-offs) recoveries	(3,874		)	(432		)	(3,231		)	(8,198		)	(9,244		)
Allowance for credit losses, end of period	$	154,070		$	149,944		$	100,690		$	154,070		$	100,690

Annualized net charge-offs (recoveries) to
average loans and leases	0.11		%	0.01		%	0.11		%	0.08		%	0.10		%

_______________________________________


(1)	The third quarter 2016 Non-PCI charge-offs included $9.7 million of loans and leases that were fully reserved at June 30, 2016.

Allowance for Credit Losses on PCI Loans

The PCI loans are subject to our internal and external credit review. For PCI loans, the allowance for loan losses is measured at the end of each financial reporting period based on expected cash flows. Decreases or (increases) in the amount and changes in the timing of expected cash flows on the PCI loans as of the financial reporting date compared to those previously estimated are usually recognized by recording a provision or a (negative provision) for credit losses on such loans. If deterioration in the expected cash flows results in a reserve requirement, a provision for credit losses is charged to earnings.

The following table presents the changes in our allowance for credit losses on PCI loans for the periods indicated:



	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
PCI Allowance for Credit Losses:	2016			2016			2015			2016			2015
	(In thousands)
Allowance for credit losses, beginning of period	$	11,289		$	9,554		$	14,328		$	9,577		$	13,999
Provision (negative provision)	471			1,903			(2,254		)	2,514			(1,458		)
Net charge-offs	(531		)	(168		)	(1,119		)	(862		)	(1,586		)
Allowance for credit losses, end of period	$	11,229		$	11,289		$	10,955		$	11,229		$	10,955

Nonperforming Assets, Performing Troubled Debt Restructured Loans, and Classified Loans and Leases

The following table presents nonperforming assets, performing troubled debt restructured loans, and classified loans and leases information as of the dates indicated:



	September 30,			June 30,			December 31,			September 30,
	2016			2016			2015			2015
	(Dollars in thousands)
Nonaccrual Non-PCI loans and leases	$	171,085		$	127,655		$	129,019		$	107,190
Nonaccrual PCI loans	3,478			2,025			4,596			4,823
Total nonaccrual loans and leases	174,563			129,680			133,615			112,013
Accruing Non-PCI loans contractually past due 90 days or more	—			—			700			—
Foreclosed assets, net	15,113			16,181			22,120			33,216
Total nonperforming assets	$	189,676		$	145,861		$	156,435		$	145,229

Performing troubled debt restructured loans⁽¹⁾	$	70,348		$	71,709		$	40,182		$	39,956
Classified Non-PCI loans and leases	$	417,541		$	441,035		$	391,754		$	323,038
Nonaccrual loans and leases to loans and leases	1.18		%	0.88		%	0.92		%	0.90		%
Nonperforming assets to loans and leases and foreclosed assets, net	1.28		%	0.99		%	1.08		%	1.16		%
Classified Non-PCI loans and leases to Non-PCI loans and leases	2.84		%	3.03		%	2.73		%	2.67		%

_______________________________________


(1)	Excludes PCI loans.

Nonperforming assets include Non-PCI and PCI nonaccrual loans and leases and foreclosed assets and totaled $189.7 million at September 30, 2016 compared to $145.9 million at June 30, 2016. The $43.8 million increase in nonperforming assets during the third quarter of 2016 was due to a $44.9 million increase in nonaccrual loans and leases and a $1.1 million decrease in foreclosed assets. The ratio of nonperforming assets to loans and leases and foreclosed assets increased to 1.28% at September 30, 2016 from 0.99% at June 30, 2016. During the third quarter of 2016, Non-PCI classified loans and leases decreased by $23.5 million to $417.5 million as resolutions, including repayment in full of four loans totaling $49.9 million, exceeded new downgrades.

Nonaccrual Loans and Leases

During the third quarter of 2016, nonaccrual loan and leases increased by $44.9 million to $174.6 million at September 30, 2016 due mainly to new nonaccrual additions of $72.0 million, offset by $27.1 million in principal payments and other reductions. Additions included a $49.8 million healthcare real estate loan secured by a continuing care retirement facility which migrated to nonaccrual status due to continued weak operating performance and cash flow difficulties.

The following table presents our Non-PCI nonaccrual loans and leases and accruing loans and leases past due between 30 and 89 days by portfolio segment and class as of the dates indicated:



	Nonaccrual Loans and Leases								Accruing and
	September 30, 2016				June 30, 2016				30 - 89 Days Past Due
			% of				% of		September 30,		June 30,
			Loan				Loan		2016		2015
	Amount		Category		Amount		Category		Amount		Amount
	(Dollars in thousands)
Real estate mortgage:
Commercial	$	74,606	1.7	%	$	29,183	0.7	%	$	2,146	$	2,126
Residential	5,089		0.4	%	4,238		0.4	%	—		171
Total real estate mortgage	79,695		1.5	%	33,421		0.6	%	2,146		2,297
Real estate construction and land:
Commercial	1,245		0.2	%	—		—	%	—		—
Residential	366		0.1	%	368		0.1	%	—		—
Total real estate construction and land	1,611		0.2	%	368		0.1	%	—		—
Commercial:
Cash flow	27,831		0.9	%	38,146		1.3	%	21		389
Asset-based	4,044		0.2	%	1,986		0.1	%	6,644		—
Venture capital	10,782		0.6	%	1,088		0.1	%	—		3,548
Equipment finance ⁽¹⁾	46,916		7.0	%	52,432		8.1	%	—		—
Total commercial	89,573		1.1	%	93,652		1.2	%	6,665		3,937
Consumer	206		0.1	%	214		0.1	%	—		—
Total Non-PCI loans and leases	$	171,085	1.2	%	$	127,655	0.9	%	$	8,811	$	6,234

_______________________________________


(1)	Includes nonaccrual loans and leases to companies involved in the oil and gas industries of $40.3 million and $48.5 million at September 30, 2016 and June 30, 2016.

As of September 30, 2016, the Company's ten largest Non-PCI loan relationships on nonaccrual status had an aggregate carrying value of $145 million and represented 84.5% of total Non-PCI nonaccrual loans and leases. The largest of these relationships had an aggregate carrying value of $49.8 million and is described earlier in this "-Nonaccrual Loans and Leases" section.

Foreclosed Assets

The following table presents the components of foreclosed assets (primarily other real estate owned, or OREO) as of the dates indicated:



	September 30,		June 30,		December 31,		September 30,
Property Type:	2016		2016		2015		2015
	(In thousands)
Commercial real estate	$	—	$	—	$	487	$	3,558
Construction and land development	13,800		13,800		13,801		14,343
Multi-family	—		—		—		3,481
Single family residence	—		852		952		1,663
Total OREO, net	13,800		14,652		15,240		23,045
Other foreclosed assets	1,313		1,529		6,880		10,171
Total foreclosed assets	$	15,113	$	16,181	$	22,120	$	33,216

During the third quarter of 2016, foreclosed assets decreased by $1.1 million to $15.1 million at September 30, 2016 due to sales of $1.1 million.

Performing Troubled Debt Restructured Loans

During the third quarter of 2016, Non-PCI performing troubled debt restructured loans decreased by $1.4 million to $70.3 million as the result of $1.4 million in payoffs and other reductions. At September 30, 2016, we had $59.8 million in real estate mortgage loans, $7.1 million in real estate construction and land loans, $3.3 million in commercial loans, and $0.2 million in consumer loans that were accruing interest under the terms of troubled debt restructurings.

The majority of the number of performing troubled debt restructured loans were on accrual status prior to the loan restructurings and have remained on accrual status after the loan restructurings due to the borrowers making payments before and after the restructurings.

Deposits

The following table presents the balance of each major category of deposits at the dates indicated:



	September 30, 2016				June 30, 2016				December 31, 2015
			% of				% of				% of
Deposit Category:	Amount		Total		Amount		Total		Amount		Total
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	6,521,946	42	%	$	6,222,696	41	%	$	6,171,455	39	%
Interest checking deposits	1,184,350		8		1,035,395		7		874,349		5
Money market deposits	3,532,050		22		3,392,811		22		2,782,974		18
Savings deposits	772,293		5		761,090		5		742,795		5
Total core deposits	12,010,639		77		11,411,992		75		10,571,573		67
Brokered non-maturity deposits	1,082,114		7		972,820		7		942,253		6
Total non-maturity deposits	13,092,753		84		12,384,812		82		11,513,826		73
Time deposits under $100,000	1,180,428		7		1,114,074		7		1,656,227		11
Time deposits $100,000 and over	1,372,487		9		1,649,123		11		2,496,129		16
Total time deposits	2,552,915		16		2,763,197		18		4,152,356		27
Total deposits	$	15,645,668	100	%	$	15,148,009	100	%	$	15,666,182	100	%

Total deposits increased by $497.7 million during the third quarter to $15.6 billion, due mainly to an increase in core deposits of $598.6 million offset partially by a decrease in time deposits of $210.3 million. At September 30, 2016, core deposits totaled $12.0 billion, or 77% of total deposits, including $6.5 billion of noninterest-bearing demand deposits, or 42% of total deposits.

The following table summarizes the maturities of time deposits, together with their weighted average contractual rate, as of the date indicated:



	September 30, 2016
	Time		Time
	Deposits		Deposits		Total
	Under		$100,000		Time		Contractual
Maturity:	$100,000		or More		Deposits		Rate
	(Dollars in thousands)
Due in three months or less	$	402,305	$	473,136	$	875,441	0.43%
Due in over three months through six months	277,632		361,539		639,171		0.35%
Due in over six months through twelve months	388,867		411,147		800,014		0.36%
Due in over 12 months through 24 months	86,228		89,603		175,831		0.66%
Due in over 24 months	25,396		37,062		62,458		0.77%
Total	$	1,180,428	$	1,372,487	$	2,552,915	0.41%

At June 30, 2016	$	1,114,074	$	1,649,123	$	2,763,197	0.49%

Brokered time deposits totaled $404.5 million and $151.7 million at September 30, 2016 and June 30, 2016.

At September 30, 2016 and June 30, 2016, we had $461 million and $537 million, respectively, of time deposits that exceeded the FDIC insurance limit of $250,000, while the remaining $2.1 billion and $2.2 billion of time deposits met or fell below the FDIC insurance limit.

Regulatory Matters

Capital

Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines that compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. At September 30, 2016, banks considered to be “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5.00%, a minimum common equity Tier 1 risk-based capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, and a minimum total risk-based capital ratio of 10.00%. Regulatory capital requirements limit the amount of deferred tax assets that may be included when determining the amount of regulatory capital. Deferred tax asset amounts in excess of the calculated limit are disallowed from regulatory capital. At September 30, 2016, such disallowed amounts were $11.3 million for the Company and $0.1 million for the Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future or that the Company or Bank will not have increased deferred tax assets that are disallowed.

Basel III, the comprehensive regulatory capital rules for U.S. banking organizations became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain components and other provisions. The most significant provisions of Basel III which applied to the Company and the Bank were as follows: the phase-out of trust preferred securities from Tier 1 capital, the higher risk-weighting of high volatility and past due real estate loans, and the capital treatment of deferred tax assets and liabilities above certain thresholds.

The following table presents a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:



			Minimum
			Required
		Minimum	Plus Capital	Minimum
		Required	Conservation	Required
		For Capital	Buffer	For Well
		Adequacy	Phase-In	Capitalized
	Actual	Purposes	for 2016	Requirement
September 30, 2016
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)	12.13%	4.00%	4.000%	N/A
CET1 capital (to risk weighted assets)	12.83%	4.50%	5.125%	N/A
Tier 1 capital (to risk weighted assets)	12.83%	6.00%	6.625%	N/A
Total capital (to risk weighted assets)	16.18%	8.00%	8.625%	N/A

Pacific Western Bank
Tier 1 capital (to average assets)	11.54%	4.00%	4.000%	5.00%
CET1 capital (to risk weighted assets)	12.21%	4.50%	5.125%	6.50%
Tier 1 capital (to risk weighted assets)	12.21%	6.00%	6.625%	8.00%
Total capital (to risk weighted assets)	13.15%	8.00%	8.625%	10.00%



December 31, 2015
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)	11.67%	4.00%	N/A	N/A
CET1 capital (to risk weighted assets)	12.58%	4.50%	N/A	N/A
Tier 1 capital (to risk weighted assets)	12.60%	6.00%	N/A	N/A
Total capital (to risk weighted assets)	15.65%	8.00%	N/A	N/A

Pacific Western Bank
Tier 1 capital (to average assets)	11.40%	4.00%	N/A	5.00%
CET1 capital (to risk weighted assets)	12.03%	4.50%	N/A	6.50%
Tier 1 capital (to risk weighted assets)	12.03%	6.00%	N/A	8.00%
Total capital (to risk weighted assets)	12.80%	8.00%	N/A	10.00%

Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At September 30, 2016, the Company and Bank are in compliance with the capital conservation buffer requirement. The capital conservation buffer will increase by 0.625% each year through 2019, at which point, the common equity tier 1, tier 1 and total capital ratio minimums inclusive of the capital conservation buffer will be 7.0%, 8.5% and 10.5%, respectively.

Subordinated Debentures

We issued subordinated debentures to trusts that were established by us or entities we previously acquired, which, in turn, issued trust preferred securities. The carrying value of subordinated debentures totaled $441.1 million at September 30, 2016. At September 30, 2016, none of the trust preferred securities was included in the Company's Tier I capital under the phase-out limitations of Basel III, and $428.7 million was included in Tier II capital.

Dividends on Common Stock and Interest on Subordinated Debentures

As a bank holding company, we are required to notify the Board of Governors of the Federal Reserve System (“FRB”) prior to declaring and paying a dividend to stockholders during any period in which quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. Interest payments made by us on subordinated debentures are considered dividend payments under FRB regulations.

Liquidity

Liquidity Management

The goals of our liquidity management are to ensure the ability of the Company to meet its financial commitments when contractually due and to respond to other demands for funds such as the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers who have unfunded commitments. We have an Executive Management Asset Liability Management Committee ("Executive ALM Committee"), which is comprised of members of senior management and is responsible for managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving our financial objectives. Our Executive ALM Committee meets regularly to review funding capacities, current and forecasted loan demand, and investment opportunities.

We manage our liquidity by maintaining pools of liquid assets on-balance sheet, consisting of cash and due from banks, interest-earning deposits in other financial institutions and unpledged investment securities available-for-sale, which we refer to as our primary liquidity. In addition, we also maintain available borrowing capacity under secured borrowing lines with the FHLB and the Federal Reserve Bank of San Francisco (“FRBSF”), which we refer to as our secondary liquidity. In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit, subject to availability, of $80.0 million with correspondent banks and $99.0 million with the FHLB, both for the purchase of overnight funds. As of September 30, 2016, there was a $90.0 million balance outstanding related to the FHLB unsecured line of credit. In March 2016, the Bank became a member of the American Financial Exchange, through which it may either borrow or lend funds on an overnight basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2016, there was a $40.0 million balance outstanding.

The following tables provide a summary of the Bank’s primary and secondary liquidity levels at the dates indicated:



	September 30,			June 30,			December
	2016			2016			2015
	(Dollars in thousands)
Primary Liquidity - On-Balance Sheet:
Cash and due from banks	$	286,371		$	226,471		$	161,020
Interest-earning deposits in financial institutions	253,994			218,882			235,466
Securities available-for-sale	3,341,335			3,347,546			3,559,437
Less: pledged securities	(342,232		)	(442,884		)	(421,574		)
Total primary liquidity	$	3,539,468		$	3,350,015		$	3,534,349

Ratio of primary liquidity to total deposits	22.6		%	22.1		%	22.6		%



	September 30,			June 30,			December
	2016			2016			2015
	(In thousands)
Secondary Liquidity - Off-Balance Sheet
Available Secured Borrowing Capacity:
Total secured borrowing capacity with the FHLB	$	2,044,799		$	2,043,979		$	2,500,000
Less: secured advances outstanding	(410,000		)	(787,000		)	(618,000		)
Net secured borrowing capacity with the FHLB	1,634,799			1,256,979			1,882,000
Secured borrowing capacity with the FRBSF	2,429,729			1,829,572			2,078,292
Total secondary liquidity	$	4,064,528		$	3,086,551		$	3,960,292

During the three months ended September 30, 2016, the Bank’s primary liquidity increased by $189.5 million due to a $100.7 million decrease in pledged securities available-for-sale, a $59.9 million increase in cash and due from banks, and a $35.1 million increase in interest-earning deposits in financial institutions. The Bank’s secondary liquidity increased by $978.0 million during the third quarter due to a $600.2 million increase in the borrowing capacity on the secured credit line with the FRBSF and a $377.8 million increase in the borrowing capacity on the secured credit line with the FHLB.

At September 30, 2016, certain qualifying loans totaling $3.3 billion were specifically pledged as collateral for the secured borrowing line maintained with the FRBSF. The FHLB borrowing lines are secured by a blanket lien on certain qualifying loans that are not pledged to the FRBSF.

In addition to our primary liquidity, the Bank generates liquidity from cash flows from our loan and securities portfolios and from our large base of core customer deposits, defined as noninterest-bearing demand, interest checking, money market, and savings accounts. At September 30, 2016, such core deposits totaled $12.0 billion and represented 77% of the Bank's total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company promoting long-standing relationships and stable funding sources. See "-Balance Sheet Analysis-Deposits" for additional information and detail of our core deposits.

Customer deposit balances may decrease if interest rates increase significantly or if corporate customers move funds from the Bank. In order to address the Bank’s liquidity risk as deposit balances may fluctuate, the Bank maintains adequate levels of available liquidity.

Our liquidity policy establishes various liquidity guidelines for the Bank. The policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Coverage and Crisis Coverage Ratios (measurements of liquid assets to expected short-term liquidity required for the loan and deposit portfolios under normal and stressed conditions), Loan to Funding Ratio (measurement of gross loans net of fees divided by deposits plus FHLB borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. As of September 30, 2016, all liquidity guidelines established in the liquidity policy were in compliance.

We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulatory limits, for liquidity management purposes. At September 30, 2016, brokered deposits totaled $1.5 billion, consisting of $404.5 million of brokered time deposits, $1.1 billion of non-maturity brokered sweep accounts, and $13.3 million of other brokered deposits. At December 31, 2015, brokered deposits totaled $1.2 billion, consisting of $272.5 million of brokered time deposits, $942.3 million of non-maturity brokered sweep accounts, and $15.3 million of other brokered deposits. The amount of our brokered deposits fluctuates based on market conditions and liquidity and funding needs. Brokered deposits are an effective source of funding due to the large amount of deposits that can be obtained in a short period of time.

Holding Company Liquidity

The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and our ability to raise capital, issue subordinated debt and secure outside borrowings. Our ability to obtain funds for the payment of dividends to our stockholders and for other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company through intercompany loans, advances or cash dividends.

Dividends paid by California state-chartered banks are regulated by the California Department of Business Oversight (“DBO”) under its general supervisory authority as it relates to a bank’s capital requirements and the FDIC. A state bank may declare a dividend without the approval of the DBO and the FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net profits for three previous fiscal years less any dividends paid during such period. During the three and nine months ended September 30, 2016, PacWest received $65.0 million and $194.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $536.0 million at September 30, 2016, for the foreseeable future, any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.

At September 30, 2016, PacWest had $483.3 million in cash, of which substantially all is on deposit at the Bank. We believe this amount of cash, along with anticipated dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months, including any stock repurchases pursuant to the Company's recently announced stock repurchase program. See "-Recent Events-Stock Repurchase Program" for additional information. PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity.

Contractual Obligations

The following table summarizes the known contractual obligations of the Company as of the date indicated:



	September 30, 2016
	Due		Due in		Due in		Due
	Within		One to		Three to		After
	One Year		Three Years		Five Years		Five Years		Total
	(In thousands)
Time deposits⁽¹⁾	$	2,314,213	$	213,328	$	24,032	$	929	$	2,552,502
Short-term FHLB and American Financial
Exchange borrowings	540,000		—		—		—		540,000
Long-term debt obligations⁽¹⁾	613		368		30		540,329		541,340
Contractual interest⁽²⁾	3,394		2,324		793		46		6,557
Operating lease obligations	29,136		52,179		39,915		41,074		162,304
Other contractual obligations	120,495		27,048		12,622		21,139		181,304
Total	$	3,007,851	$	295,247	$	77,392	$	603,517	$	3,984,007

_______________________________________


(1)	Excludes purchase accounting fair value adjustments.


(2)	Excludes interest on subordinated debentures as these instruments are variable rate.

Long-term debt obligations include subordinated debentures. Debt obligations are also discussed in Note 7. Borrowings and Subordinated Debentures, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in “Item 1. Condensed Consolidated Financial Statements (Unaudited).” Operating lease obligations are discussed in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. The other contractual obligations relate to our minimum liability associated with our data and item processing contract with a third-party provider, commitments to contribute capital to investments in low income housing project partnerships and private equity funds, commitments to purchase loans, and commitments under deferred compensation arrangements.

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity, and continued deposit gathering activities. We believe we have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Off-Balance Sheet Arrangements

Our obligations also include off-balance sheet arrangements consisting of loan and lease-related commitments, of which only a portion is expected to be funded. At September 30, 2016, our loan and lease-related commitments, including standby letters of credit, totaled $4.4 billion. The commitments, which may result in funded loans and leases, increase our profitability through net interest income when drawn. We manage our overall liquidity taking into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources have been and are expected to be sufficient to meet the cash requirements of our lending activities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This analysis should be read in conjunction with text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2015, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.

Market Risk - Foreign Currency Exchange

We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' transaction and economic exposures arising out of commercial transactions. We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar. We recognized foreign currency translation net gains of $0.7 million and $0.8 million for the nine months ended September 30, 2016 and 2015. In June 2015, we hedged our Euro-denominated subordinated debentures with a cross currency swap to reduce the related foreign currency translation volatility.

Asset/Liability Management and Interest Rate Sensitivity

Interest Rate Risk

We measure our interest rate risk position, or "IRR," on at least a quarterly basis using two methods: (i) net interest income simulation analysis; and (ii) market value of equity modeling. The Executive ALM Committee and the Board Asset Liability Management Committee review the results of these analyses quarterly. If hypothetical changes to interest rates cause changes to our simulated net present value of equity and/or net interest income outside our pre‑established limits, we may adjust our asset and liability mix in an effort to bring our interest rate risk exposure within our established limits.

We evaluated the results of our net interest income simulation ("NII simulation model") and market value of equity models ("MVE model") prepared as of September 30, 2016, the results of which are presented below. Our NII simulation and MVE models indicate that our balance sheet is asset sensitive. An asset sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated net interest income and market value of equity, while a liability sensitive profile would suggest that these amounts would decrease.

Net Interest Income Simulation

We used a NII simulation model to measure the estimated changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of September 30, 2016. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. We have assumed no growth in either our total interest‑sensitive assets or liabilities over the next 12 months, therefore the results reflect an interest rate shock to a static balance sheet.

This analysis calculates the difference between net interest income forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at September 30, 2016. In order to arrive at the base case, we extend our balance sheet at September 30, 2016 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products’ pricing as of September 30, 2016. Based on such repricing, we calculate an estimated net interest income and net interest margin.

The NII simulation model is dependent upon numerous assumptions. For example, the substantial majority of our loans are variable‑rate, which are assumed to reprice in accordance with their contractual terms. Some loans and investment securities include the opportunity of prepayment (embedded options) and the simulation model uses prepayment assumptions to estimate these prepayments and reinvest these proceeds at current simulated yields. Our deposit products reprice at our discretion and are assumed to reprice more slowly in a rising or declining interest rate environment and usually reprice at a rate less than the change in market rates. The effects of certain balance sheet attributes, such as fixed‑rate loans, variable‑rate loans that have reached their floors, and the volume of noninterest‑bearing deposits as a percentage of earning assets, impact our assumptions and consequently the results of our NII simulation model. Changes that could vary significantly from our assumptions include loan and deposit growth or contraction, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, all of which may have significant effects on our net interest income.

The following table presents as of September 30, 2016, forecasted net interest income and net interest margin for the next 12 months using the forward yield curve as the base scenario and shocking the base scenario given immediate and sustained parallel upward and downward movements in interest rates of 100, 200 and 300 basis points:




	Forecasted				Forecasted
September 30, 2016	Net Interest		Percentage	Forecasted	Net Interest
Interest Rate Scenario:	Income		Change	Net Interest	Margin Change
	(Tax Equivalent)		From Base	Margin	From Base
	(Dollars in millions)
Up 300 basis points	$	1,061.8	16.3%	5.75%	0.80%
Up 200 basis points	$	1,013.7	11.0%	5.49%	0.54%
Up 100 basis points	$	963.5	5.6%	5.22%	0.27%
BASE CASE	$	912.8	—	4.95%	—
Down 100 basis points	$	887.3	(2.8)%	4.82%	(0.13)%
Down 200 basis points	$	879.1	(3.7)%	4.77%	(0.18)%
Down 300 basis points	$	873.0	(4.4)%	4.74%	(0.21)%

Total base case year 1 tax equivalent NII was $912.8 million at September 30, 2016 compared to $932.2 million at June 30, 2016. The decrease in year 1 NII was due to a decrease in the yield on loans due to the payoff of higher coupon legacy loans that were replaced by new loan originations at lower coupons and an increase in the cost of deposits due to the higher forward yield curve, partially offset by higher loan income on floating rate loans due to the higher forward yield curve.

In addition to parallel interest rate shock scenarios, we also model various alternative rate vectors that are viewed as more likely to occur in a typical monetary policy tightening cycle. One such scenario provides for market rates to increase during the next six months in accordance with the forward yield curve and thereafter to increase by 25 basis points every six months. The expected first year NII under this alternative rising rate scenario would be approximately 0.5% higher than the base case.

Of the $14.8 billion of total loans in the portfolio, $10.8 billion have variable interest rate terms (excluding hybrid loans discussed below) of which $6.7 billion would immediately reprice at September 30, 2016.

The following table presents variable-rate loans at their floors and the amounts for which the fully-indexed rates would rise off of the floors and reprice as a result of the rate increases shown:



September 30, 2016
Cumulative		Rate
Amount of		Increase
Variable-Rate		Needed to
Loans		Reprice
(Dollars in millions)
$	3,648	0 - 100 bps
$	3,841	101 - 200 bps
$	3,950	201 - 300 bps
$	4,061	> 300 bps

Additionally, certain variable-rate hybrid loans do not immediately reprice because the loans contain an initial fixed-rate period before they become variable. The cumulative amounts of hybrid loans that would switch from being fixed-rate to variable-rate because the initial fixed-rate term would expire were approximately $82 million, $273 million, and $405 million in the next one, two, and three years. Approximately 66% of the total variable-rate loans have a LIBOR index rate.

Market Value of Equity

We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities and off‑balance sheet items, defined as the market value of equity, using our MVE model. This simulation model assesses the changes in the market value of our interest‑sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest rates of 100, 200, and 300 basis points. This analysis assigns significant value to our noninterest-bearing deposit balances. The projections include various assumptions regarding cash flows and interest rates and are by their nature forward‑looking and inherently uncertain.

The MVE model is an interest rate risk management tool and the results are not necessarily an indication of our actual future results. Actual results may vary significantly from the results suggested by the market value of equity table. Loan prepayments and deposit attrition, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions. The base case is determined by applying various current market discount rates to the estimated cash flows from the different types of assets, liabilities and off‑balance sheet items existing at September 30, 2016.

The following table shows the projected change in the market value of equity for the set of rate scenarios presented as of September 30, 2016:



										Ratio of
	Projected		Dollar			Percentage		Percentage		Projected
September 30, 2016	Market Value		Change			Change		of Total		Market Value
Interest Rate Scenario:	of Equity		From Base			From Base		Assets		to Book Value
	(Dollars in millions)
Up 300 basis points	$	5,622	$	127		2.3	%	26.4	%	123.8	%
Up 200 basis points	$	5,590	$	95		1.7	%	26.2	%	123.1	%
Up 100 basis points	$	5,550	$	55		1.0	%	26.0	%	122.2	%
BASE CASE	$	5,495	$	—		—	%	25.8	%	121.0	%
Down 100 basis points	$	5,462	$	(33	)	(0.6	)%	25.6	%	120.2	%
Down 200 basis points	$	5,289	$	(207	)	(3.8	)%	24.8	%	116.4	%
Down 300 basis points	$	5,181	$	(314	)	(5.7	)%	24.3	%	114.1	%

In comparing the September 30, 2016 simulation results to June 30, 2016, our base case market value of equity has increased $225 million while our overall profile has remained relatively unchanged. The increase in base case market value of equity was due primarily to a $144 million increase in the fair value of loans and leases due to lower discount rates used for the valuation, a $50 million increase in the fair value of non-maturity deposits due to increased volume and higher market discount rates, and the $31 million net increase in stockholders' equity during the quarter.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.

There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 8. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements (Unaudited) is incorporated herein by reference.

In addition, in the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon information currently available to us, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.

ITEM 1A. RISK FACTORS

For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2015. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this quarterly report on Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents stock purchases made during the third quarter of 2016:



	Total
	Number of	Average
	Shares	Price Paid
Purchase Dates	Purchased⁽¹⁾	Per Share
July 1, 2016 - July 31, 2016	—	$	—
August 1, 2016 - August 31, 2016	4,704	41.50
September 1, 2016 - September 30, 2016	—	—
Total	4,704	$	41.50

__________________________


(1)	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.

ITEM 6. INDEX TO EXHIBITS



Exhibit Number	Description
2.3	Agreement and Plan of Merger dated March 1, 2015 between PacWest Bancorp and Square 1 Financial, Inc. (Exhibit 2.1 to Form 8-K filed on March 5, 2015 and incorporated herein by this reference).
3.1	Certificate of Incorporation, as amended, of PacWest Bancorp, a Delaware corporation, dated April 22, 2008 (Exhibit 3.1 to Form 8-K filed on May 14, 2008 and incorporated herein by this reference).
3.2	Certificate of Amendment of Certificate of Incorporation of PacWest Bancorp, a Delaware Corporation, dated May 14, 2010 (Exhibit 3.1 to Form 8-K filed on May 14, 2010 and incorporated herein by this reference).
3.5	Amended and Restated Bylaws of PacWest Bancorp, a Delaware corporation, dated November 5, 2014 (Exhibit 3.5 to Form 10-Q filed on November 7, 2014 and incorporated herein by this reference).
10.1	PacWest Bancorp 2003 Stock Incentive Plan, as amended and restated, dated May 16, 2016 (Exhibit 10.1 to Form 8-K filed on May 18, 2016 and incorporated herein by this reference).
10.2	Form of Stock Award Agreement pursuant to the Company's 2003 Stock Incentive Plan, as amended. *
10.3	Form of Stock Unit Award Agreement pursuant to the Company's 2003 Stock Incentive Plan, as amended. *
31.1	Section 302 Certification of Chief Executive Officer. *
31.2	Section 302 Certification of Chief Financial Officer. *
32.1	Section 906 Certification of Chief Executive Officer. *
32.2	Section 906 Certification of Chief Financial Officer. *
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, (ii) the Condensed Consolidated Statements of Earnings for the three months ended September 30, 2016, June 30, 2016, and September 30, 2015 and nine months ended September 30, 2016 and 2015, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2016, June 30, 2016, and September 30, 2015 and nine months ended September 30, 2016 and 2015, (iv) the Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2016, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015, and (vi) the Notes to Condensed Consolidated Financial Statements. *

_____________________

* Filed herewith.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	PACWEST BANCORP

November 4, 2016	/s/ Patrick J. Rusnak
	Patrick J. Rusnak
	Executive Vice President and Chief Financial Officer

Attached files

Stock widget

Investing forum

PACWEST BANCORP Reports