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PACWEST BANCORP - Quarter Report: 2020 September (Form 10-Q)


 
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

or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware33-0885320
(State of Incorporation)(I.R.S. Employer Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of Principal Executive Offices, Including Zip Code)
(310) 887-8500
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per sharePACWThe Nasdaq Stock Market, LLC
(Title of Each Class)(Trading Symbol)(Name of Exchange on Which Registered)
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No   
    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes        No  
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filerNon-accelerated filer
Smaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes No 
As of October 29, 2020, there were 116,783,237 shares of the registrant's common stock outstanding, excluding 1,701,004 shares of unvested restricted stock.
1


PACWEST BANCORP
SEPTEMBER 30, 2020 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
Page
PART I. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Financial Statements (Unaudited) 
 Condensed Consolidated Balance Sheets (Unaudited)
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Condensed Consolidated Statements of Cash Flows (Unaudited)
 Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.Index to Exhibits
Signatures

2


PART I
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
AFXAmerican Financial ExchangeGDPGross Domestic Product
ALLLAllowance for Loan and Lease LossesIPOInitial Public Offering
ALMAsset Liability ManagementIRRInterest Rate Risk
ASCAccounting Standards CodificationLIBORLondon Inter-bank Offered Rate
ASUAccounting Standards UpdateLIHTCLow Income Housing Tax Credit
Basel IIIA comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013MBSMortgage-Backed Securities
BHCABank Holding Company Act of 1956, as amendedMVEMarket Value of Equity
BOLIBank Owned Life InsuranceNAVNet Asset Value
CARES ActCoronavirus Aid, Relief, and Economic Security ActNIINet Interest Income
CDICore Deposit Intangible AssetsNIMNet Interest Margin
CECLCurrent Expected Credit LossNSFNon-Sufficient Funds
CET1Common Equity Tier 1OREOOther Real Estate Owned
CMBS Commercial Mortgage-Backed SecuritiesPD/LGDProbability of Default/Loss Given Default
CMOsCollateralized Mortgage ObligationsPPNRPre-Provision, Pre-Goodwill Impairment, Pre-Tax Net Revenue
COVID-19Coronavirus DiseasePPPPaycheck Protection Program
CPIConsumer Price IndexPRSUsPerformance-Based Restricted Stock Units
CRACommunity Reinvestment ActPWAMPacific Western Asset Management Inc.
CRECommercial Real EstateROURight-of-use
CRICustomer Relationship Intangible AssetsSBASmall Business Administration
DFPICalifornia Department of Financial Protection and InnovationSBICSmall Business Investment Company
DTAsDeferred Tax AssetsSECSecurities and Exchange Commission
Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection ActSOFRSecured Overnight Financing Rate
EADExposure at DefaultTax Equivalent Net Interest IncomeNet interest income reflecting adjustments related to tax-exempt interest on certain loans and investment securities
Efficiency RatioNoninterest expense (less intangible asset amortization, net foreclosed assets expense (income), goodwill impairment, and acquisition, integration and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)Tax Equivalent NIMNIM reflecting adjustments related to tax-exempt interest on certain loans and investment securities
FASBFinancial Accounting Standards BoardTCJA Tax Cuts and Jobs Act
FDICFederal Deposit Insurance CorporationTDRsTroubled Debt Restructurings
FHLBFederal Home Loan Bank of San FranciscoTRSAsTime-Based Restricted Stock Awards
FRBBoard of Governors of the Federal Reserve SystemU.S. GAAPU.S. Generally Accepted Accounting Principles
FRBSFFederal Reserve Bank of San FranciscoVIE Variable Interest Entity

3


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,December 31,
 20202019
(Unaudited)
 (Dollars in thousands, except par value amounts)
ASSETS:
Cash and due from banks$187,176 $172,585 
Interest-earning deposits in financial institutions2,766,020 465,039 
Total cash, cash equivalents, and restricted cash2,953,196 637,624 
Securities available-for-sale, at fair value4,532,614 3,797,187 
Federal Home Loan Bank stock, at cost17,250 40,924 
Total investment securities4,549,864 3,838,111 
Gross loans and leases held for investment19,101,680 18,910,740 
Deferred fees, net(75,480)(63,868)
Allowance for loan and lease losses(345,966)(138,785)
Total loans and leases held for investment, net18,680,234 18,708,087 
Equipment leased to others under operating leases286,425 324,084 
Premises and equipment, net40,544 38,585 
Foreclosed assets, net13,747 440 
Goodwill1,078,670 2,548,670 
Core deposit and customer relationship intangibles, net26,813 38,394 
Other assets797,223 636,811 
Total assets$28,426,716 $26,770,806 
LIABILITIES:  
Noninterest-bearing deposits$9,346,744 $7,243,298 
Interest-bearing deposits14,618,951 11,989,738 
Total deposits23,965,695 19,233,036 
Borrowings60,000 1,759,008 
Subordinated debentures463,282 458,209 
Accrued interest payable and other liabilities451,508 365,856 
Total liabilities24,940,485 21,816,109 
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)
— — 
Common stock ($0.01 par value, 200,000,000 shares authorized at September 30, 2020 and
December 31, 2019; 120,801,109 and 121,890,008 shares issued, respectively, includes
1,706,690 and 1,513,197 shares of unvested restricted stock, respectively)
1,208 1,219 
Additional paid-in capital3,125,554 3,306,006 
Retained earnings292,561 1,652,248 
Treasury stock, at cost (2,311,182 and 2,108,403 shares at September 30, 2020 and
December 31, 2019)(88,566)(83,434)
Accumulated other comprehensive income, net155,474 78,658 
Total stockholders' equity3,486,231 4,954,697 
Total liabilities and stockholders' equity$28,426,716 $26,770,806 
See Notes to Condensed Consolidated Financial Statements.
4


PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
 20202020201920202019
(Unaudited)
 (Dollars in thousands, except per share amounts)
Interest income:
Loans and leases$240,811 $247,851 $275,978 $750,940 $834,443 
Investment securities24,443 26,038 28,806 77,927 87,434 
Deposits in financial institutions654 186 2,424 2,448 4,423 
Total interest income265,908 274,075 307,208 831,315 926,300 
Interest expense:
Deposits9,887 13,075 40,703 51,209 113,658 
Borrowings 27 1,319 6,852 8,124 21,772 
Subordinated debentures4,670 5,402 7,417 16,632 22,860 
Total interest expense14,584 19,796 54,972 75,965 158,290 
Net interest income251,324 254,279 252,236 755,350 768,010 
Provision for credit losses97,000 120,000 7,000 329,000 19,000 
Net interest income after provision for credit losses154,324 134,279 245,236 426,350 749,010 
Noninterest income:
Other commissions and fees10,541 10,111 10,855 30,373 33,453 
Leased equipment income9,900 12,037 9,615 34,188 28,079 
Service charges on deposit accounts2,570 2,004 3,525 7,232 11,026 
Gain on sale of loans and leases35 346 765 468 1,091 
Gain on sale of securities5,270 7,715 908 13,167 25,261 
Other income9,936 6,645 7,761 20,782 16,476 
Total noninterest income38,252 38,858 33,429 106,210 115,386 
Noninterest expense:
Compensation75,131 61,910 71,424 198,323 211,225 
Occupancy14,771 14,494 14,089 43,472 42,866 
Data processing6,505 7,102 7,044 20,061 20,786 
Leased equipment depreciation7,057 7,102 5,951 21,364 17,160 
Intangible asset amortization3,751 3,882 4,833 11,581 14,573 
Other professional services4,713 4,146 4,400 13,117 13,542 
Insurance and assessments3,939 9,373 4,100 17,561 12,236 
Customer related expense4,762 4,408 3,539 13,102 9,887 
Loan expense3,499 3,379 3,628 9,528 9,964 
Acquisition, integration and reorganization costs— — — — 618 
Foreclosed assets expense (income), net335 (146)255 (109)
Goodwill impairment— — — 1,470,000 — 
Other expense8,939 11,315 7,793 29,973 25,775 
Total noninterest expense133,402 126,965 126,809 1,848,337 378,523 
Earnings (loss) before income taxes59,174 46,172 151,856 (1,315,777)485,873 
Income tax expense13,671 12,968 41,830 38,627 135,118 
Net earnings (loss)$45,503 $33,204 $110,026 $(1,354,404)$350,755 
Earnings (loss) per share:
Basic$0.38 $0.28 $0.92 $(11.60)$2.91 
Diluted$0.38 $0.28 $0.92 $(11.60)$2.91 
See Notes to Condensed Consolidated Financial Statements.
5


PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
20202020201920202019
(Unaudited)
(In thousands)
Net earnings (loss)$45,503 $33,204 $110,026 $(1,354,404)$350,755 
Other comprehensive income, net of tax:
Unrealized net holding gains on securities
available-for-sale arising during the period19,745 82,780 32,759 119,708 167,566 
Income tax expense related to net unrealized
holding gains arising during the period(5,510)(23,095)(9,287)(33,399)(47,504)
Unrealized net holding gains on securities
available-for-sale, net of tax14,235 59,685 23,472 86,309 120,062 
Reclassification adjustment for net gains
included in net earnings (1)
(5,270)(7,715)(908)(13,167)(25,261)
Income tax expense related to reclassification
adjustment1,471 2,152 257 3,674 7,161 
Reclassification adjustment for net gains
included in net earnings, net of tax(3,799)(5,563)(651)(9,493)(18,100)
Other comprehensive income, net of tax10,436 54,122 22,821 76,816 101,962 
Comprehensive income (loss)$55,939 $87,326 $132,847 $(1,277,588)$452,717 
___________________________________
(1)    Entire amounts are recognized in "Gain on sale of securities" on the Condensed Consolidated Statements of Earnings (Loss).
See Notes to Condensed Consolidated Financial Statements.

6


PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2020
Common StockAccumulated
AdditionalOther
ParPaid-inRetainedTreasuryComprehensive
 SharesValueCapitalEarningsStockIncome Total
(Unaudited)
 (Dollars in thousands)
Balance, December 31, 2019119,781,605 $1,219 $3,306,006 $1,652,248 $(83,434)$78,658 $4,954,697 
Cumulative effect of change in
accounting principle (1)
— — — (5,283)— — (5,283)
Net loss— — — (1,433,111)— — (1,433,111)
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax— — — — — 12,258 12,258 
Restricted stock awarded and
earned stock compensation,
net of shares forfeited194,916 6,492 — — — 6,494 
Restricted stock surrendered(106,021)— — — (3,460)— (3,460)
Common stock repurchased under
Stock Repurchase Program(1,953,711)(20)(69,980)— — — (70,000)
Cash dividends paid:
Common stock, $0.60/share
— — (71,206)— — — (71,206)
Balance, March 31, 2020117,916,789 $1,201 $3,171,312 $213,854 $(86,894)$90,916 $3,390,389 
Net earnings— — — 33,204 — — 33,204 
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax— — — — — 54,122 54,122 
Restricted stock awarded and
earned stock compensation,
net of shares forfeited550,738 6,283 — — — 6,289 
Restricted stock surrendered(92,924)— — — (1,601)— (1,601)
Cash dividends paid:
Common stock, $0.25/share
— — (29,505)— — — (29,505)
Balance, June 30, 2020118,374,603 $1,207 $3,148,090 $247,058 $(88,495)$145,038 $3,452,898 
Net earnings— — — 45,503 — — 45,503 
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax— — — — — 10,436 10,436 
Restricted stock awarded and
earned stock compensation,
net of shares forfeited119,158 7,063 — — — 7,064 
Restricted stock surrendered(3,834)— — — (71)— (71)
Cash dividends paid:
Common stock, $0.25/share
— — (29,599)— — — (29,599)
Balance, September 30, 2020118,489,927 $1,208 $3,125,554 $292,561 $(88,566)$155,474 $3,486,231 
________________________
(1)    Impact due to adoption on January 1, 2020 of ASU 2016-13, "Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments," and the related amendments, commonly referred to as CECL.

7


Nine Months Ended September 30, 2019
Common StockAccumulated
AdditionalOther
ParPaid-inRetainedTreasuryComprehensive
 SharesValueCapitalEarningsStockIncome (Loss)Total
(Unaudited)
 (Dollars in thousands)
Balance, December 31, 2018123,189,833 $1,251 $3,722,723 $1,182,674 $(74,985)$(6,075)$4,825,588 
Cumulative effect of change in
accounting principle (2)
— — — 938 — — 938 
Net earnings— — — 112,604 — — 112,604 
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax— — — — — 43,333 43,333 
Restricted stock awarded and
earned stock compensation,
net of shares forfeited195,536 5,806 — — — 5,808 
Restricted stock surrendered(113,544)— — — (4,522)— (4,522)
Common stock repurchased under
Stock Repurchase Program(3,070,676)(31)(119,556)— — — (119,587)
Cash dividends paid:
Common stock, $0.60/share
— — (73,180)— — — (73,180)
Balance, March 31, 2019120,201,149 $1,222 $3,535,793 $1,296,216 $(79,507)$37,258 $4,790,982 
Net earnings— — — 128,125 — — 128,125 
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax— — — — — 35,808 35,808 
Restricted stock awarded and
earned stock compensation,
net of shares forfeited619,653 6,715 — — — 6,721 
Restricted stock surrendered(74,429)— — — (2,788)— (2,788)
Common stock repurchased under
Stock Repurchase Program(917,269)(9)(34,920)— — — (34,929)
Cash dividends paid:
Common stock, $0.60/share
— — (71,909)— — — (71,909)
Balance, June 30, 2019119,829,104 $1,219 $3,435,679 $1,424,341 $(82,295)$73,066 $4,852,010 
Net earnings— — — 110,026 — — 110,026 
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax— — — — — 22,821 22,821 
Restricted stock awarded and
earned stock compensation,
net of shares forfeited5,040 — 7,305 — — — 7,305 
Restricted stock surrendered(2,952)— — — (102)— (102)
Cash dividends paid:
Common stock, $0.60/share
— — (71,952)— — — (71,952)
Balance, September 30, 2019119,831,192 $1,219 $3,371,032 $1,534,367 $(82,397)$95,887 $4,920,108 
________________________
(2)    Impact due to adoption on January 1, 2019 of ASU 2016-02, "Leases (Topic 842)," and the related amendments.

See Notes to Condensed Consolidated Financial Statements.
8


PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
 September 30,
 20202019
(Unaudited)
 (In thousands)
Cash flows from operating activities:  
Net (loss) earnings $(1,354,404)$350,755 
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Goodwill impairment1,470,000 — 
Depreciation and amortization 33,303 28,266 
Amortization of net premiums on securities available-for-sale9,994 11,078 
Amortization of intangible assets11,581 14,573 
Amortization of operating lease ROU assets22,080 22,028 
Provision for credit losses 329,000 19,000 
Gain on sale of foreclosed assets(187)(406)
Provision for losses on foreclosed assets267 54 
Gain on sale of loans and leases(468)(1,091)
Loss (gain) on sale of premises and equipment 309 (34)
Gain on sale of securities(13,167)(25,261)
Unrealized loss (gain) on derivatives and foreign currencies, net494 (16)
Earned stock compensation 19,847 19,834 
(Increase) decrease in other assets(60,450)50,345 
Decrease in accrued interest payable and other liabilities(125,262)(41,530)
Net cash provided by operating activities342,937 447,595 
Cash flows from investing activities:
Net increase in loans and leases(269,253)(894,624)
Proceeds from sales of loans and leases 6,536 102,507 
Proceeds from maturities and paydowns of securities available-for-sale292,769 238,487 
Proceeds from sales of securities available-for-sale167,267 1,554,805 
Purchases of securities available-for-sale(1,085,749)(1,444,720)
Net redemptions of Federal Home Loan Bank stock23,674 5,238 
Proceeds from sales of foreclosed assets983 4,322 
Purchases of premises and equipment, net(11,013)(10,990)
Proceeds from sales of premises and equipment60 
Proceeds from BOLI death benefit761 555 
Net decrease (increase) in equipment leased to others under operating leases16,860 (19,981)
Net cash used in investing activities(857,161)(464,341)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits2,105,033 (446,400)
Net increase in interest-bearing deposits2,629,213 1,310,432 
Net decrease in borrowings(1,699,008)(118,083)
Common stock repurchased and restricted stock surrendered(75,132)(161,928)
Cash dividends paid(130,310)(217,041)
Net cash provided by financing activities2,829,796 366,980 
Net increase in cash, cash equivalents, and restricted cash2,315,572 350,234 
Cash, cash equivalents, and restricted cash, beginning of period637,624 385,767 
Cash, cash equivalents, and restricted cash, end of period$2,953,196 $736,001 
See Notes to Condensed Consolidated Financial Statements.
9


PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
 September 30,
 20202019
(Unaudited)
 (In thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest$86,060 $154,212 
Cash paid for income taxes92,953 89,505 
Loans transferred to foreclosed assets14,370 37 
Transfers from loans held for investment to loans held for sale— 25,124 
See Notes to Condensed Consolidated Financial Statements.

10



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

NOTE 1.  ORGANIZATION    
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 71 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are interest paid by the Bank on deposits and borrowings, compensation, occupancy, and general operating expenses.
Significant Accounting Policies
Our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission ("Form 10-K"). Updates to our significant accounting policies described below reflect the impact of the adoption of ASU 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments” and the related amendments, commonly referred to as CECL.
Investment Securities
Prior to January 1, 2020, debt securities available-for-sale were measured at fair value and declines in the fair value were reviewed to determine whether the impairment was other-than-temporary. If the decline in fair value was considered temporary, the decline in fair value below the amortized cost basis of a security was recognized in other comprehensive income (loss). If we did not expect to recover the entire amortized cost basis of the security, then an other-than-temporary impairment was considered to have occurred. The cost basis of the security was written down to its estimated fair value and the amount of the write-down was recognized through a charge to earnings. If the amount of the amortized cost basis expected to be recovered increased in a future period, the cost basis of the security was not increased but rather recognized prospectively through interest income.
Effective January 1, 2020, upon the adoption of ASU 2016-13, debt securities available-for-sale are measured at fair value and are subject to impairment testing. A security is impaired if the fair value of the security is less than its amortized cost basis. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value decline (if any). If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation allowance would be reduced, but not more than the amount of the current existing allowance for that security.
11



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

Purchased Loans with Credit Deterioration
Prior to January 1, 2020, purchased credit impaired loans were accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” At the time of acquisition, these loans were recorded at estimated fair value based upon estimated future cash flows with no related allowance for credit losses.
Effective January 1, 2020, upon the adoption of ASU 2016-13, an entity records purchased financial assets with credit deterioration ("PCD assets") at the purchase price plus the allowance for credit losses expected at the time of acquisition. This allowance is recognized through a gross-up that increases the amortized cost basis of the asset with no effect on net income. Subsequent changes (favorable and unfavorable) in expected cash flows are recognized immediately in net income by adjusting the related allowance.
Allowance for Credit Losses on Loans and Leases Held for Investment
Effective January 1, 2020, upon the adoption of ASU 2016-13, the Company replaced the incurred loss accounting approach with the current expected credit loss ("CECL") approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.
The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The amortized cost basis of loans and leases does not include accrued interest receivable, which is included in "Other assets" on the condensed consolidated balance sheets. The "Provision for credit losses" on the condensed consolidated statements of earnings (loss) is a combination of the provision for loan and lease losses and the provision for unfunded loan commitments.
Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. The resulting allowance for loan and lease losses is deducted from the associated amortized cost basis to reflect the net amount expected to be collected. Subsequent changes in this estimate are recorded through the provision for credit losses and the allowance. The CECL methodology could result in significant changes to both the timing and amounts of provision for credit losses and the allowance as compared to historical periods. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for credit losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses is comprised of an individually evaluated component for loans and leases that no longer share similar risk characteristics with other loans and leases and a pooled loans component for loans and leases that share similar risk characteristics.
A loan or lease with an outstanding balance greater than $250,000 is individually evaluated for expected credit loss when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. We select loans and leases for individual assessment on an ongoing basis using certain criteria such as payment performance, borrower reported and forecasted financial results, and other external factors when appropriate. We measure the current expected credit loss of an individually evaluated loan or lease based upon the fair value of the underlying collateral if the loan or lease is collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease is not collateral-dependent. To the extent a loan or lease balance exceeds the estimated collectable value, a reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan is collateral-dependent.
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PACWEST BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

Our CECL methodology for the pooled loans component includes both quantitative and qualitative loss factors which are applied to our population of loans and leases and assessed at a pool level. The quantitative CECL model estimates credit losses by applying pool-specific probability of default ("PD") and loss given default ("LGD") rates to the expected exposure at default ("EAD") over the contractual life of loans and leases. The qualitative component considers internal and external risk factors that may not be adequately assessed in the quantitative model.
The loan portfolio is segmented into four loan segments, eight loan classes, and 19 loan pools (excluding Paycheck Protection Program loans, which are fully government guaranteed) based upon loan type that share similar default risk characteristics to calculate quantitative loss factors for each pool. Three of these loan pools have insignificant current balances and/or insignificant historical losses, thus, estimated losses are calculated using historical loss rates from the first quarter of 2009 to the current period rather than econometric regression modeling. For the remaining 16 loan pools, we estimate the PD during the reasonable and supportable forecast period using seven econometric regression models developed to correlate macroeconomic variables to historical credit performance (based on quarterly transition matrices from 2009 to 2019, which include risk rating upgrades/downgrades and defaults). The loans and unfunded commitments are grouped into nine LGD pools based on portfolio classes that share similar collateral risk characteristics. LGD rates are computed based on the net charge-offs recognized divided by the EAD of defaulted loans starting with the first quarter of 2009 to the current period. The PD and LGD rates are applied to the EAD at the loan or lease level based on contractual scheduled payments and estimated prepayments. We use our actual historical loan prepayment experience from 2009 to 2019 to estimate future prepayments by loan pool.
For the reasonable and supportable forecast period, future macroeconomic events and circumstances are estimated over a 4-quarter time horizon using a single scenario baseline forecast that is consistent with management's current expectations for the 16 loan pools. We use economic forecasts from Moody's Analytics in this process. The economic forecast is updated monthly; therefore, the one used for each quarter-end calculation is generally based on a one-month lag based on the timing of when the forecast is released. If economic conditions as of the balance sheet date change materially, management would consider a qualitative adjustment. The key macroeconomic assumptions used in each of the seven PD regression models include two or three of the following economic indicators: Real GDP, unemployment rates, CRE Price Index, the BBB corporate spread, nominal disposable income, and CPI. The quantitative CECL model applies the projected rates based on the economic forecasts for the 4-quarter reasonable and supportable forecast horizon to EAD to estimate defaulted loans. During this forecast horizon, prepayment rates during a historical period that exhibits economic conditions most similar to the economic forecast are used to estimate EAD. If no historical period from 2009 to 2019 exhibits economic conditions that are similar to the economic forecast, management considers the average of all historical prepayment experience to be a reasonable and supportable estimation of expected prepayments. Historical LGD rates are applied to estimated defaulted loans to determine estimated credit losses. We then use a 2-quarter reversion period to revert on a straight-line basis from the PD, LGD, and prepayment rates used during the reasonable and supportable forecast period to the Company’s historical PD, LGD, and prepayment experience. Subsequent to the reversion period for the remaining contractual life of loans and leases, the PD, LGD, and prepayment rates are based on historical experience from 2009 to 2019. PD regression models and prepayment rates are updated on an annual basis. LGD rates are updated every quarter to reflect current charge-off activity.
The PDs calculated by the quantitative models are highly correlated to our internal risk ratings assigned to each loan and lease. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans and leases on a regular basis. The credit risk ratings assigned to every loan and lease are as follows:
High Pass: (Risk ratings 1-2) Loans and leases rated as "high pass" exhibit a favorable credit profile and have minimal risk characteristics. Repayment in full is expected, even in adverse economic conditions.
Pass: (Risk ratings 3-4) Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
Special Mention: (Risk rating 5) Loans and leases rated 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: (Risk rating 6) Loans and leases rated 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: (Risk rating 7) Loans and leases rated as "doubtful" have all the weaknesses of those rated as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
13



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

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 4. Loans and Leases of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s loan and lease risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in increases in the provisions for credit losses and the allowance for credit losses.
The qualitative portion of the reserve on pooled loans and leases represents management’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative reserve. The qualitative loss factors consider idiosyncratic risk factors, conditions that may not be reflected in quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects our best estimate of current expected credit losses. Current and forecasted economic trends and underlying market values for collateral dependent loans are generally considered to be encompassed within the CECL quantitative reserve. An incremental qualitative adjustment may be considered when economic forecasts exhibit higher levels of volatility or uncertainty.
In addition to economic conditions and collateral dependency, the other qualitative criteria we consider when establishing the loss factors include the following:
Legal and Regulatory - matters that could impact our borrowers’ ability to repay our loans and leases;
Concentrations - loan and lease portfolio composition and any loan concentrations;
Lending Policy - current lending policies and the effects of any new policies or policy amendments;
Nature and Volume - loan and lease production volume and mix;
Problem Loan Trends - loan and lease portfolio credit performance trends, including a borrower's financial condition, credit rating, and ability to meet loan payment requirements;
Loan Review - results of independent credit review; and
Management - changes in management related to credit administration functions.
We estimate the reserve for unfunded loan commitments using the same PD, LGD, and prepayment rates for the quantitative credit losses and qualitative loss factors as used for the allowance for loan and lease losses. The EAD for the reserve for unfunded loan commitments is computed using expected future utilization rates of the unfunded commitments during the contractual life of the commitments based on historical usage by loan pool from 2015 to 2019. The utilization rates are updated on an annual basis.
The CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Most of the steps in the methodology involve judgment and are subjective in nature including, among other things: segmenting the loan and lease portfolio; determining the amount of loss history to consider; selecting predictive econometric regression models that use appropriate macroeconomic variables; determining the methodology to forecast prepayments; selecting the most appropriate economic forecast scenario; determining the length of the reasonable and supportable forecast and reversion periods; estimating expected utilization rates on unfunded loan commitments; and assessing relevant and appropriate qualitative factors. In addition, the CECL methodology is dependent on economic forecasts which are inherently imprecise and will change from period to period. Although the allowance for credit losses is considered appropriate, there can be no assurance that it will be sufficient to absorb future losses.
Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. 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.
14



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

Accounting Standards Adopted in 2020
Effective January 1, 2020, the Company adopted ASU 2016-13 and the related amendments to ASC Topic 326, “Financial Instruments - Credit Losses,” to replace the incurred loss accounting approach with a current expected credit loss approach for financial instruments measured at amortized cost and other commitments to extend credit. The new standard is generally intended to require earlier recognition of credit losses. While the standard changes the measurement of the allowance for credit losses, it does not change the credit risk of our lending portfolios or the ultimate losses in those portfolios.
Under the CECL approach, the standard requires immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts. The standard modifies the other-than-temporary impairment model for available-for-sale debt securities to require entities to record an allowance when recognizing credit losses for available-for-sale securities, rather than reducing the amortized cost of the securities by direct write-offs.
The Company adopted the new standard using the modified retrospective approach and recognized a cumulative effect adjustment to decrease retained earnings by $5.3 million, net of taxes, and increase the allowance for credit losses by $7.3 million without restating prior periods and applied the requirements of the new standard prospectively. There was no cumulative effect adjustment related to available-for-sale securities at adoption. The Company elected to account for interest receivable separately from the amortized cost of loans and leases and investment securities. Interest receivable is included in "Other assets" on the condensed consolidated balance sheets. The Company elected the practical expedient to use the fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity’s assessment as of the reporting date (collateral dependent financial asset). Additionally, the Company implemented new business processes, new internal controls, and modified existing and/or implemented new internal models and tools to facilitate the ongoing application of the new standard. See Note 4. Loans and Leases for further details.
Effective January 1, 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" which simplifies goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit.
The Company used this approach to evaluate its goodwill during the first quarter of 2020, as an unprecedented decline in economic conditions triggered by the Coronavirus Disease ("COVID-19") pandemic caused a significant decline in stock market valuations in March 2020, including our stock price. These events indicated that goodwill may be impaired and resulted in us performing a goodwill impairment assessment. We applied the market approach using an average share price of the Company's stock and a control premium to determine the fair value of the reporting unit. As a result, a goodwill impairment charge of $1.47 billion was recorded in the first quarter of 2020 as the Company's estimated fair value was less than its book value.
Effective January 1, 2020, the Company adopted the provisions of ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurements" which add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty. Although the guidance modifies our disclosures in 2020, there was no impact to our condensed consolidated financial statements from the adoption of this new standard.
ASU 2020-03, "Codification Improvements to Financial Instruments" ("ASU 2020-03"), revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release in March 2020 and did not have a material impact to our condensed consolidated financial statements.
15



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

Basis of Presentation    
Our interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, the carrying value of goodwill and other intangible assets, and the realization of deferred tax assets. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
Reclassifications
None.
NOTE 2. RESTRICTED CASH BALANCES
The FRBSF establishes cash reserve requirements that its member banks must maintain based on a percentage of deposit liabilities. On March 26, 2020, the FRBSF reduced the reserve requirement ratios to zero percent. The average reserves required to be held at the FRBSF for the nine months ended September 30, 2020 and the year ended December 31, 2019 were $55.2 million and $131.0 million. As of September 30, 2020 and December 31, 2019, we pledged cash collateral for our derivative contracts of $2.5 million and $3.2 million.
16



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

NOTE 3. INVESTMENT SECURITIES     
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and fair values of securities available-for-sale as of the dates indicated:
 September 30, 2020December 31, 2019
GrossGrossGrossGross
AmortizedUnrealizedUnrealizedFairAmortizedUnrealizedUnrealizedFair
Security TypeCostGainsLossesValueCostGainsLossesValue
 (In thousands)
Agency commercial MBS$1,129,060 $75,309 $(54)$1,204,315 $1,083,182 $25,579 $(537)$1,108,224 
Municipal securities 1,133,811 70,758 (1,539)1,203,030 691,647 43,851 (339)735,159 
Agency residential CMOs1,111,235 54,900 (263)1,165,872 1,112,573 24,403 (579)1,136,397 
Agency residential MBS233,513 13,018 (33)246,498 294,606 10,593 (1)305,198 
Asset-backed securities236,081 554 (2,532)234,103 216,133 320 (1,670)214,783 
Corporate debt securities173,707 726 (151)174,282 17,000 3,748 — 20,748 
Collateralized loan obligations138,966 — (3,633)135,333 124,134 25 (403)123,756 
Private label residential CMOs115,101 6,089 (28)121,162 96,066 3,430 (13)99,483 
SBA securities40,515 2,194 (25)42,684 47,765 506 (13)48,258 
U.S. Treasury securities4,988 347 — 5,335 4,985 196 — 5,181 
Total$4,316,977 $223,895 $(8,258)$4,532,614 $3,688,091 $112,651 $(3,555)$3,797,187 
As of September 30, 2020, securities available-for-sale with a fair value of $605.3 million were pledged as collateral for public deposits and other purposes as required by various statutes and agreements.
Realized Gains and Losses on Securities Available-for-Sale
The following table presents the amortized cost of securities sold with related gross realized gains, gross realized losses, and net realized gains for the years indicated:
Three Months EndedNine Months Ended
September 30,September 30,
Sales of Securities Available-for-Sale2020201920202019
(In thousands)
Amortized cost of securities sold $17,000 $143,388 $154,100 $1,529,544 
Gross realized gains$5,270 $1,187 $13,199 $29,400 
Gross realized losses— (279)(32)(4,139)
Net realized gains $5,270 $908 $13,167 $25,261 


17



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 as of the dates indicated:
September 30, 2020
 Less Than 12 Months12 Months or MoreTotal
GrossGrossGross
FairUnrealizedFairUnrealizedFairUnrealized
Security TypeValueLossesValueLossesValueLosses
 (In thousands)
Agency commercial MBS$3,066 $(4)$9,241 $(50)$12,307 $(54)
Municipal securities 189,163 (1,539)— — 189,163 (1,539)
Agency residential CMOs77,168 (263)— — 77,168 (263)
Agency residential MBS1,753 (33)— — 1,753 (33)
Asset-backed securities44,658 (339)122,729 (2,193)167,387 (2,532)
Corporate debt securities60,056 (151)— — 60,056 (151)
Collateralized loan obligations102,396 (1,938)32,937 (1,695)135,333 (3,633)
Private label residential CMOs8,510 (26)76 (2)8,586 (28)
SBA securities1,964 (25)— — 1,964 (25)
Total$488,734 $(4,318)$164,983 $(3,940)$653,717 $(8,258)
December 31, 2019
 Less Than 12 Months12 Months or MoreTotal
GrossGrossGross
FairUnrealizedFairUnrealizedFairUnrealized
Security TypeValueLossesValueLossesValueLosses
 (In thousands)
Agency commercial MBS$214,862 $(537)$— $— $214,862 $(537)
Municipal securities 38,667 (339)— — 38,667 (339)
Agency residential CMOs180,071 (572)1,456 (7)181,527 (579)
Agency residential MBS— — 186 (1)186 (1)
Asset-backed securities165,575 (1,670)— — 165,575 (1,670)
Collateralized loan obligations102,469 (403)— — 102,469 (403)
Private label residential CMOs9,872 (11)114 (2)9,986 (13)
SBA securities4,565 (13)— — 4,565 (13)
Total$716,081 $(3,545)$1,756 $(10)$717,837 $(3,555)
The securities that were in an unrealized loss position at September 30, 2020, were considered impaired and required further review to determine if the unrealized losses were credit-related. We concluded their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. We also considered the seniority of the tranches and U.S. government agency guarantees, if any, to assess whether an unrealized loss was credit-related. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "other comprehensive income" in stockholders' equity. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.
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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, 2020
AmortizedFair
MaturitiesCostValue
 (In thousands)
Due in one year or less$8,226 $8,310 
Due after one year through five years508,645 532,309 
Due after five years through ten years1,067,818 1,135,249 
Due after ten years2,732,288 2,856,746 
Total securities available-for-sale$4,316,977 $4,532,614 
CMBS, CMOs, and MBS have contractual maturity dates, but require periodic payments based upon scheduled amortization terms. Actual principal collections on these securities usually occur more rapidly than the scheduled amortization terms because of prepayments made by obligors of the underlying loan collateral.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(In thousands)
Taxable interest$17,835 $22,829 $59,457 $63,515 
Non-taxable interest6,272 5,565 17,113 22,705 
Dividend income336 412 1,357 1,214 
Total interest income on investment securities$24,443 $28,806 $77,927 $87,434 
19



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

NOTE 4.  LOANS AND LEASES
Our loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired and purchased loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are sold.
Loans and Leases Held for Investment
The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:
September 30,December 31,
20202019
(In thousands)
Real estate mortgage$7,883,473 $7,982,383 
Real estate construction and land3,453,155 2,773,209 
Commercial7,402,854 7,714,358 
Consumer362,198 440,790 
Total gross loans and leases held for investment19,101,680 18,910,740 
Deferred fees, net(75,480)(63,868)
Total loans and leases held for investment, net of deferred fees19,026,200 18,846,872 
Allowance for loan and lease losses(345,966)(138,785)
Total loans and leases held for investment, net (1)
$18,680,234 $18,708,087 
____________________
(1)    Excludes accrued interest receivable of $71.5 million and $67.5 million at September 30, 2020 and December 31, 2019, respectively, which is recorded in "Other assets" on the condensed consolidated balance sheets.
The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:
September 30, 2020
30 - 8990 or More
DaysDaysTotal
Past DuePast DuePast DueCurrentTotal
 (In thousands)
Real estate mortgage:
Commercial$412 $32,662 $33,074 $4,159,392 $4,192,466 
Income producing and other residential1,761 537 2,298 3,682,281 3,684,579 
Total real estate mortgage2,173 33,199 35,372 7,841,673 7,877,045 
Real estate construction and land:
Commercial— — — 1,241,647 1,241,647 
Residential3,108 — 3,108 2,178,992 2,182,100 
Total real estate construction and land3,108 — 3,108 3,420,639 3,423,747 
Commercial:
Asset-based— 2,248 2,248 3,150,800 3,153,048 
Venture capital2,319 — 2,319 1,634,813 1,637,132 
Other commercial185 10,751 10,936 2,562,058 2,572,994 
Total commercial2,504 12,999 15,503 7,347,671 7,363,174 
Consumer791 116 907 361,327 362,234 
Total$8,576 $46,314 $54,890 $18,971,310 $19,026,200 
20



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

December 31, 2019
30 - 8990 or More
DaysDaysTotal
Past DuePast DuePast DueCurrentTotal
 (In thousands)
Real estate mortgage:
Commercial$2,448 $5,919 $8,367 $4,194,320 $4,202,687 
Income producing and other residential2,105 802 2,907 3,767,153 3,770,060 
Total real estate mortgage4,553 6,721 11,274 7,961,473 7,972,747 
Real estate construction and land:
Commercial— — — 1,082,368 1,082,368 
Residential1,429 — 1,429 1,654,005 1,655,434 
Total real estate construction and land1,429 — 1,429 2,736,373 2,737,802 
Commercial:
Asset-based19 — 19 3,748,388 3,748,407 
Venture capital— — — 2,179,422 2,179,422 
Other commercial2,781 4,164 6,945 1,760,722 1,767,667 
Total commercial2,800 4,164 6,964 7,688,532 7,695,496 
Consumer1,006 200 1,206 439,621 440,827 
Total$9,788 $11,085 $20,873 $18,825,999 $18,846,872 
It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more (unless the loan is both well secured and in the process of collection) or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:  
 September 30, 2020December 31, 2019
NonaccrualPerformingTotalNonaccrualPerformingTotal
 (In thousands)
Real estate mortgage:
Commercial$45,120 $4,147,346 $4,192,466 $18,346 $4,184,341 $4,202,687 
Income producing and other residential2,008 3,682,571 3,684,579 2,478 3,767,582 3,770,060 
Total real estate mortgage47,128 7,829,917 7,877,045 20,824 7,951,923 7,972,747 
Real estate construction and land:
Commercial324 1,241,323 1,241,647 364 1,082,004 1,082,368 
Residential— 2,182,100 2,182,100 — 1,655,434 1,655,434 
Total real estate construction and land324 3,423,423 3,423,747 364 2,737,438 2,737,802 
Commercial:
Asset-based2,817 3,150,231 3,153,048 30,162 3,718,245 3,748,407 
Venture capital2,001 1,635,131 1,637,132 12,916 2,166,506 2,179,422 
Other commercial32,941 2,540,053 2,572,994 27,594 1,740,073 1,767,667 
Total commercial37,759 7,325,415 7,363,174 70,672 7,624,824 7,695,496 
Consumer404 361,830 362,234 493 440,334 440,827 
Total$85,615 $18,940,585 $19,026,200 $92,353 $18,754,519 $18,846,872 
21



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

At September 30, 2020, nonaccrual loans and leases included $46.3 million of loans and leases 90 or more days past due, $0.4 million of loans and leases 30 to 89 days past due, and $38.9 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. At December 31, 2019, nonaccrual loans and leases included $11.1 million of loans and leases 90 or more days past due, $1.2 million of loans and leases 30 to 89 days past due, and $80.0 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of September 30, 2020, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $49.3 million and represented 58% of total nonaccrual loans and leases.
The following tables present the credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated. Classified loans and leases are those with a credit risk rating of either substandard or doubtful.
September 30, 2020
ClassifiedSpecial MentionPassTotal
(In thousands)
Real estate mortgage:
Commercial$109,651 $330,367 $3,752,448 $4,192,466 
Income producing and other residential9,558 63,378 3,611,643 3,684,579 
Total real estate mortgage119,209 393,745 7,364,091 7,877,045 
Real estate construction and land:
Commercial324 13,838 1,227,485 1,241,647 
Residential— — 2,182,100 2,182,100 
Total real estate construction and land324 13,838 3,409,585 3,423,747 
Commercial:
Asset-based27,900 190,193 2,934,955 3,153,048 
Venture capital15,078 123,675 1,498,379 1,637,132 
Other commercial111,553 57,787 2,403,654 2,572,994 
Total commercial154,531 371,655 6,836,988 7,363,174 
Consumer 508 4,518 357,208 362,234 
Total$274,572 $783,756 $17,967,872 $19,026,200 

December 31, 2019
ClassifiedSpecial MentionPassTotal
(In thousands)
Real estate mortgage:
Commercial$33,535 $30,070 $4,139,082 $4,202,687 
Income producing and other residential8,600 1,711 3,759,749 3,770,060 
Total real estate mortgage42,135 31,781 7,898,831 7,972,747 
Real estate construction and land:
Commercial364 — 1,082,004 1,082,368 
Residential— 1,429 1,654,005 1,655,434 
Total real estate construction and land364 1,429 2,736,009 2,737,802 
Commercial:
Asset-based32,223 38,936 3,677,248 3,748,407 
Venture capital35,316 74,813 2,069,293 2,179,422 
Other commercial65,261 174,785 1,527,621 1,767,667 
Total commercial132,800 288,534 7,274,162 7,695,496 
Consumer 613 1,212 439,002 440,827 
Total$175,912 $322,956 $18,348,004 $18,846,872 
22



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

The following table presents our nonaccrual loans and leases by loan portfolio segment and class and by with and without an allowance recorded as of the date indicated and interest income recognized on nonaccrual loans and leases for the period indicated:
At and For the Three Months EndedAt and For the Nine Months Ended
 September 30, 2020September 30, 2020
NonaccrualInterestNonaccrualInterest
Recorded Income RecordedIncome
InvestmentRecognizedInvestmentRecognized
 (In thousands)(In thousands)
With An Allowance Recorded:  
Real estate mortgage:
Commercial$736 $— $736 $— 
Income producing and other residential1,163 — 1,163 — 
Commercial:
Asset based2,248 — 2,248 — 
Venture capital2,001 — 2,001 — 
Other commercial1,235 — 1,235 — 
Consumer404 — 404 — 
With No Related Allowance Recorded:
Real estate mortgage:
Commercial$44,384 $155 $44,384 $285 
Income producing and other residential845 — 845 — 
Real estate construction and land:
Commercial324 — 324 — 
Commercial:
Asset based569 — 569 — 
Other commercial31,706 517 31,706 1,628 
Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage$47,128 $155 $47,128 $285 
Real estate construction and land324 — 324 — 
Commercial37,759 517 37,759 1,628 
Consumer404 — 404 — 
Total$85,615 $672 $85,615 $1,913 














23



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

The following tables present our loans held for investment by loan portfolio segment and class, by credit quality indicator (internal risk ratings), and by year of origination (vintage year) as of the date indicated:
Revolving
Converted
Amortized Cost BasisTerm Loans by Origination YearRevolvingto Term
September 30, 202020202019201820172016PriorLoansLoansTotal
(In thousands)
Real Estate Mortgage:
Commercial
Internal risk rating:
1-2 High pass$— $28,297 $15,106 $13,295 $7,746 $47,517 $— $— $111,961 
3-4 Pass459,907 453,362 646,326 804,351 362,735 846,325 63,689 3,792 3,640,487 
5 Special mention— 70,371 79,083 3,034 75,221 102,658 — — 330,367 
6-8 Classified— 1,301 55,863 5,187 3,444 43,856 — — 109,651 
Total$459,907 $553,331 $796,378 $825,867 $449,146 $1,040,356 $63,689 $3,792 $4,192,466 
Current YTD period:
Gross charge-offs$— $— $— $3,330 $— $2,677 $— $— $6,007 
Gross recoveries— — — (9)— (262)— — (271)
Net $— $— $— $3,321 $— $2,415 $— $— $5,736 
Real Estate Mortgage:
Income Producing and
Other Residential
Internal risk rating:
1-2 High pass$27,760 $25,590 $36,440 $35,858 $46,419 $12,260 $— $— $184,327 
3-4 Pass256,056 844,049 1,179,643 587,821 247,643 199,144 112,390 570 3,427,316 
5 Special mention12,308 4,207 42,660 1,863 — — 2,340 — 63,378 
6-8 Classified— — 2,874 — — 5,608 83 993 9,558 
Total$296,124 $873,846 $1,261,617 $625,542 $294,062 $217,012 $114,813 $1,563 $3,684,579 
Current YTD period:
Gross charge-offs$— $— $— $— $— $51 $— $175 $226 
Gross recoveries— — — — — (88)(1)— (89)
Net $— $— $— $— $— $(37)$(1)$175 $137 
Real Estate Construction
and Land: Commercial
Internal risk rating:
1-2 High pass$— $— $— $— $— $— $— $— $— 
3-4 Pass38,945 335,115 385,317 209,380 106,937 139,453 6,630 5,708 1,227,485 
5 Special mention— — 13,838 — — — — — 13,838 
6-8 Classified— — — — — 324 — — 324 
Total$38,945 $335,115 $399,155 $209,380 $106,937 $139,777 $6,630 $5,708 $1,241,647 
Current YTD period:
Gross charge-offs$— $— $— $— $— $— $— $— $— 
Gross recoveries— — — — — — — — — 
Net $— $— $— $— $— $— $— $— $— 


24



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

Revolving
Converted
Amortized Cost BasisTerm Loans by Origination YearRevolvingto Term
September 30, 202020202019201820172016PriorLoansLoansTotal
(In thousands)
Real Estate Construction
and Land: Residential
Internal risk rating:
1-2 High pass$— $— $— $— $— $— $— $— $— 
3-4 Pass236,355 501,855 835,914 512,565 35,286 315 9,034 50,776 2,182,100 
5 Special mention— — — — — — — — — 
6-8 Classified— — — — — — — — — 
Total$236,355 $501,855 $835,914 $512,565 $35,286 $315 $9,034 $50,776 $2,182,100 
Current YTD period:
Gross charge-offs$— $— $— $— $— $— $— $— $— 
Gross recoveries— — — — — (21)— — (21)
Net $— $— $— $— $— $(21)$— $— $(21)
Commercial: Asset-Based
Internal risk rating:
1-2 High pass$33,273 $167,859 $116,944 $65,740 $120,644 $87,642 $231,234 $73,549 $896,885 
3-4 Pass61,548 123,290 81,362 36,075 13,181 48,991 1,653,848 19,775 2,038,070 
5 Special mention— 64,586 61,726 21,043 14,913 958 22,150 4,817 190,193 
6-8 Classified— — — — 19,398 569 8,791 (858)27,900 
Total$94,821 $355,735 $260,032 $122,858 $168,136 $138,160 $1,916,023 $97,283 $3,153,048 
Current YTD period:
Gross charge-offs$— $— $— $— $— $11,817 $— $— $11,817 
Gross recoveries(39)— — — — (323)(231)— (593)
Net $(39)$— $— $— $— $11,494 $(231)$— $11,224 
Commercial: Venture
Capital
Internal risk rating:
1-2 High pass (1)
$2,003 $5,644 $— $(4)$(6)$(4)$234,321 $— $241,954 
3-4 Pass59,229 133,479 44,599 9,733 32,079 6,550 965,206 5,550 1,256,425 
5 Special mention5,958 38,163 1,586 4,000 526 — 68,331 5,111 123,675 
6-8 Classified— (1,663)11,750 — — 3,663 1,328 — 15,078 
Total$67,190 $175,623 $57,935 $13,729 $32,599 $10,209 $1,269,186 $10,661 $1,637,132 
Current YTD period:
Gross charge-offs$— $— $6,534 $— $(8)$150 $142 $— $6,818 
Gross recoveries— — (177)(128)(145)(3)(450)— (903)
Net $— $— $6,357 $(128)$(153)$147 $(308)$— $5,915 
____________________
(1)    Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.

25



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

Revolving
Converted
Amortized Cost BasisTerm Loans by Origination YearRevolvingto Term
September 30, 202020202019201820172016PriorLoansLoansTotal
(In thousands)
Commercial: Other
Commercial
Internal risk rating:
1-2 High pass$1,212,466 $409 $$390 $73 $1,592 $77,891 $94 $1,292,922 
3-4 Pass57,738 98,217 105,234 83,456 32,063 108,219 619,093 6,712 1,110,732 
5 Special mention— 1,011 — 316 1,735 5,398 48,252 1,075 57,787 
6-8 Classified— 84 48 2,969 7,723 97,357 3,370 111,553 
Total$1,270,204 $99,639 $105,325 $84,210 $36,840 $122,932 $842,593 $11,251 $2,572,994 
Current YTD period:
Gross charge-offs$— $— $— $506 $214 $33,492 $11,662 $1,828 $47,702 
Gross recoveries— (9)(8)(26)(84)(2,683)(100)(4)(2,914)
Net $— $(9)$(8)$480 $130 $30,809 $11,562 $1,824 $44,788 
Consumer
Internal risk rating:
1-2 High pass$22 $— $$16 $— $101 $453 $— $601 
3-4 Pass45,224 126,060 69,895 44,717 48,158 14,164 8,383 356,607 
5 Special mention— — 2,332 534 1,172 480 — — 4,518 
6-8 Classified— 74 — — 57 342 33 508 
Total$45,246 $126,134 $72,236 $45,267 $49,387 $15,087 $8,838 $39 $362,234 
Current YTD period:
Gross charge-offs$— $97 $86 $152 $295 $44 $22 $$705 
Gross recoveries— — (1)(8)(15)(24)— — (48)
Net $— $97 $85 $144 $280 $20 $22 $$657 
Total Loans and Leases
Internal risk rating:
1-2 High pass$1,275,524 $227,799 $168,506 $115,295 $174,876 $149,108 $543,899 $73,643 $2,728,650 
3-4 Pass1,215,002 2,615,427 3,348,290 2,288,098 878,082 1,363,161 3,438,273 92,889 15,239,222 
5 Special mention18,266 178,338 201,225 30,790 93,567 109,494 141,073 11,003 783,756 
6-8 Classified— (286)70,571 5,235 25,868 62,085 107,561 3,538 274,572 
Total$2,508,792 $3,021,278 $3,788,592 $2,439,418 $1,172,393 $1,683,848 $4,230,806 $181,073 $19,026,200 
Current YTD period:
Gross charge-offs$— $97 $6,620 $3,988 $501 $48,231 $11,826 $2,012 $73,275 
Gross recoveries(39)(9)(186)(171)(244)(3,404)(782)(4)(4,839)
Net $(39)$88 $6,434 $3,817 $257 $44,827 $11,044 $2,008 $68,436 


26



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

TDRs are a result of rate reductions, term extensions, fee concessions, transfers to foreclosed assets, discounted loan payoffs, and debt forgiveness, or a combination thereof. The Company has granted various commercial and consumer loan modifications to provide borrowers relief from the economic impacts of COVID-19. In accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, the Company has elected to not apply TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act. The following table presents our troubled debt restructurings of loans held for investment by loan portfolio segment and class for the periods indicated:
Three Months Ended September 30,
 20202019
Pre-Post-Pre-Post-
ModificationModificationModificationModification
NumberOutstandingOutstandingNumberOutstandingOutstanding
of RecordedRecordedof RecordedRecorded
Troubled Debt RestructuringsLoansInvestmentInvestmentLoansInvestmentInvestment
 (Dollars in thousands)
Real estate mortgage:
Commercial$12,594 $— — $— $— 
Income producing and other residential157 157 495 495 
Commercial:
Asset-based 15,267 — — — — 
Venture capital2,015 2,015 — — 
Other commercial7,105 100 99 99 
Total 10 $37,138 $2,272 $594 $594 

Nine Months Ended September 30,
 20202019
Pre-Post-Pre-Post-
ModificationModificationModificationModification
NumberOutstandingOutstandingNumberOutstandingOutstanding
of RecordedRecordedof RecordedRecorded
Troubled Debt RestructuringsLoansInvestmentInvestmentLoansInvestmentInvestment
 (Dollars in thousands)
Real estate mortgage:
Commercial$16,339 $3,745 $37 $— 
Income producing and other residential911 911 1,280 1,280 
Commercial:
Asset-based 17,008 1,741 620 620 
Venture capital2,047 2,047 11 16,076 16,214 
Other commercial33 30,324 21,544 14 792 792 
Consumer212 212 — — — 
Total 61 $66,841 $30,200 34 $18,805 $18,906 
During the three months ended September 30, 2020, there was one $412,000 real estate mortgage commercial loan restructured in the preceding 12-month period that subsequently defaulted. During the nine months ended September 30, 2020, there was one $412,000 real estate mortgage commercial loan and one $5,000 other commercial loan restructured in the preceding 12-month period that subsequently defaulted.
During the three months ended September 30, 2019, there were three other commercial loan of $133,000 and one income producing and other residential loan for $254,000 restructured in the preceding 12-month period that subsequently defaulted. During the nine months ended September 30, 2019, there were two venture capital loans totaling $441,000, three other commercial loans totaling $133,000, and one income producing and other residential loan for $254,000 restructured in the preceding 12-month period that subsequently defaulted.
27



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

Leases Receivable
We provide equipment financing to our customers primarily with operating and direct financing leases. For direct financing leases, lease receivables are recorded on the balance sheet but the leased equipment is not, although we generally retain legal title to the leased equipment until the end of each lease. Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value, less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized using the effective interest method over the life of the leases. Direct financing leases are subject to our accounting for allowance for loan and lease losses. See Note 8. Leases for information regarding operating leases where we are the lessor.
The following table provides the components of leases receivable income for the periods indicated:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(In thousands)
Component of leases receivable income:
Interest income on net investments in leases$1,869 $2,648 $6,224 $8,674 

The following table presents the components of leases receivable as of the dates indicated:
September 30, 2020December 31, 2019
(In thousands)
Net investment in direct financing leases:
Lease payments receivable$124,550 $147,729 
Unguaranteed residual assets18,404 20,806 
Deferred costs and other550 655 
Aggregate net investment in leases$143,504 $169,190 
The following table presents maturities of leases receivable as of the date indicated:
September 30, 2020
(In thousands)
Period ending December 31,
2020$16,794 
202161,600 
202225,977 
202315,329 
202411,416 
2025 and thereafter3,160 
Total undiscounted cash flows134,276 
Less: Unearned income(9,726)
Present value of lease payments$124,550 





28



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 loans and leases held for investment by loan portfolio segment for the periods indicated:
Three Months Ended September 30, 2020
Real Estate
Real EstateConstruction
Mortgageand LandCommercialConsumerTotal
(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period$130,724 $70,113 $97,947 $2,266 $301,050 
Charge-offs(1,551)— (35,666)(67)(37,284)
Recoveries109 21 1,063 1,200 
Net charge-offs(1,442)21 (34,603)(60)(36,084)
Provision (negative provision)(7,588)20,039 64,921 3,628 81,000 
Balance, end of period$121,694 $90,173 $128,265 $5,834 $345,966 

Nine Months Ended September 30, 2020
Real Estate
Real EstateConstruction
Mortgageand LandCommercialConsumerTotal
(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period$44,575 $30,544 $61,528 $2,138 $138,785 
Cumulative effect of change in accounting
principle - CECL5,308 (8,592)6,860 41 3,617 
Balance, January 1, 202049,883 21,952 68,388 2,179 142,402 
Charge-offs(6,233)— (66,337)(705)(73,275)
Recoveries360 21 4,410 48 4,839 
Net charge-offs(5,873)21 (61,927)(657)(68,436)
Provision77,684 68,200 121,804 4,312 272,000 
Balance, end of period$121,694 $90,173 $128,265 $5,834 $345,966 
Ending Allowance by
Evaluation Methodology:
Individually evaluated $340 $— $2,584 $— $2,924 
Collectively evaluated $121,354 $90,173 $125,681 $5,834 $343,042 
Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated $51,852 $1,782 $41,501 $— $95,135 
Collectively evaluated 7,825,193 3,421,965 7,321,673 362,234 18,931,065 
Ending balance$7,877,045 $3,423,747 $7,363,174 $362,234 $19,026,200 

29



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

Three Months Ended September 30, 2019
Real Estate
Real EstateConstruction
Mortgageand LandCommercialConsumerTotal
(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period$46,826 $26,378 $59,401 $2,432 $135,037 
Charge-offs(120)— (6,021)(360)(6,501)
Recoveries95 — 1,898 23 2,016 
Net charge-offs(25)— (4,123)(337)(4,485)
Provision (negative provision)(1,655)683 8,907 65 8,000 
Balance, end of period$45,146 $27,061 $64,185 $2,160 $138,552 

Nine Months Ended September 30, 2019
Real Estate
Real EstateConstruction
Mortgageand LandCommercialConsumerTotal
(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period $46,021 $28,209 $56,360 $1,882 $132,472 
Charge-offs(850)— (25,951)(802)(27,603)
Recoveries478 — 11,084 121 11,683 
Net charge-offs(372)— (14,867)(681)(15,920)
Provision (negative provision)(503)(1,148)22,692 959 22,000 
Balance, end of period$45,146 $27,061 $64,185 $2,160 $138,552 
Ending Allowance by
Evaluation Methodology:
Individually evaluated $248 $— $9,082 $— $9,330 
Collectively evaluated $44,898 $27,061 $55,103 $2,160 $129,222 
Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated $29,808 $5,357 $75,455 $— $110,620 
Collectively evaluated 7,867,116 2,546,117 7,803,102 408,588 18,624,923 
Ending balance$7,896,924 $2,551,474 $7,878,557 $408,588 $18,735,543 
The allowance for loan and lease losses increased by $44.9 million in the third quarter of 2020 to $346.0 million due primarily to a provision for loan and lease losses of $81.0 million driven by changes in the economic forecast, changes in modeling assumptions, and increased provisions for individually evaluated loans and leases.
We actively participated in the Paycheck Protection Program ("PPP"), under the provisions of the CARES Act during the second quarter of 2020. As of September 30, 2020, PPP loans had an outstanding balance of approximately $1.2 billion. The loans have two-year terms, are fully guaranteed by the SBA, and do not carry an allowance. As of September 30, 2020, none of the PPP loans have been forgiven.
30



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

A loan is considered collateral-dependent, and is individually evaluated for reserve purposes, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent loans held for investment by collateral type as of the following date:
September 30, 2020
RealBusiness
PropertyAssetsTotal
(In thousands)
Real estate mortgage$45,504 $— $45,504 
Real estate construction and land1,782 — 1,782 
Commercial— 28,136 28,136 
     Total$47,286 $28,136 $75,422 
Allowance for Credit Losses
The allowance for credit losses is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets.
The following tables present a summary of the activity in the allowance for loan and lease losses and reserve for unfunded loan commitments for the periods indicated:
Three Months Ended
September 30, 2020
Allowance for Reserve forTotal
Loan and Unfunded LoanAllowance for
Lease LossesCommitmentsCredit Losses
(In thousands)
Balance, beginning of period$301,050 $80,571 $381,621 
Charge-offs(37,284)— (37,284)
Recoveries1,200 — 1,200 
Net charge-offs(36,084)— (36,084)
Provision 81,000 16,000 97,000 
Balance, end of period$345,966 $96,571 $442,537 

Nine Months Ended
September 30, 2020
Allowance for Reserve forTotal
Loan and Unfunded LoanAllowance for
Lease LossesCommitmentsCredit Losses
(In thousands)
Balance, beginning of period $138,785 $35,861 $174,646 
Cumulative effect of change in accounting
principle - CECL3,617 3,710 7,327 
Balance, January 1, 2020142,402 39,571 181,973 
Charge-offs(73,275)— (73,275)
Recoveries4,839 — 4,839 
Net charge-offs(68,436)— (68,436)
Provision272,000 57,000 329,000 
Balance, end of period$345,966 $96,571 $442,537 
31



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

Three Months Ended
September 30, 2019
Allowance for Reserve forTotal
Loan and Unfunded LoanAllowance for
Lease LossesCommitmentsCredit Losses
(In thousands)
Balance, beginning of period$135,037 $34,861 $169,898 
Charge-offs(6,501)— (6,501)
Recoveries2,016 — 2,016 
Net charge-offs(4,485)— (4,485)
Provision (negative provision)8,000 (1,000)7,000 
Balance, end of period$138,552 $33,861 $172,413 

Nine Months Ended
September 30, 2019
Allowance for Reserve forTotal
Loan and Unfunded LoanAllowance for
Lease LossesCommitmentsCredit Losses
(In thousands)
Balance, beginning of period$132,472 $36,861 $169,333 
Charge-offs(27,603)— (27,603)
Recoveries11,683 — 11,683 
Net charge-offs(15,920)— (15,920)
Provision (negative provision)22,000 (3,000)19,000 
Balance, end of period$138,552 $33,861 $172,413 
32



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

NOTE 5.  FORECLOSED ASSETS
The following table summarizes foreclosed assets, net of the valuation allowance, as of the dates indicated:
September 30,
December 31,
Property Type20202019
(In thousands)
Commercial real estate$12,594 $221 
Construction and land development219 219 
Total other real estate owned, net12,813 440 
Other foreclosed assets934 — 
Total foreclosed assets, net$13,747 $440 
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, 2019$440 
Transfers to foreclosed assets from loans14,370 
Provision for losses(267)
Reductions related to sales(796)
Balance, September 30, 2020$13,747 
NOTE 6.  GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment annually unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings (loss).
The unprecedented decline in economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations in March 2020, including our stock price. These events indicated that goodwill may be impaired and resulted in us performing a goodwill impairment assessment. We applied the market approach using an average share price of the Company's stock and a control premium to determine the fair value of the reporting unit. As a result, we recorded a goodwill impairment charge of $1.47 billion in the first quarter of 2020 as the estimated fair value of equity was less than book value. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, or liquidity position.
The following table presents the changes in the carrying amount of goodwill for the period indicated:
 Goodwill
 (In thousands)
Balance, December 31, 2019$2,548,670 
Impairment - March 2020(1,470,000)
Balance, September 30, 2020$1,078,670 
33



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

Our other intangible assets with definite lives include CDI and CRI. CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or customer relationships acquired. The aggregate amortization expense is expected to be $14.8 million for 2020. The estimated aggregate amortization expense related to our current intangible assets for each of the next four years is $10.8 million for 2021, $7.4 million for 2022, $3.8 million for 2023, and $1.7 million for 2024. Our current intangible assets are estimated to be fully amortized by the end of 2024.
The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 Three Months EndedNine Months Ended
September 30,September 30,
 2020201920202019
 (In thousands)
Gross Amount of CDI and CRI:    
Balance, beginning of period$109,646 $119,497 $117,573 $119,497 
Fully amortized portion— (1,924)(7,927)(1,924)
Balance, end of period109,646 117,573 109,646 117,573 
Accumulated Amortization:
Balance, beginning of period(79,082)(72,117)(79,179)(62,377)
Amortization(3,751)(4,833)(11,581)(14,573)
Fully amortized portion— 1,924 7,927 1,924 
Balance, end of period(82,833)(75,026)(82,833)(75,026)
Net CDI and CRI, end of period$26,813 $42,547 $26,813 $42,547 
NOTE 7.  OTHER ASSETS
The following table presents the detail of our other assets as of the dates indicated:
September 30,
December 31,
Other Assets20202019
(In thousands)
Cash surrender value of BOLI$201,884 $199,029 
LIHTC investments (1)
200,352 75,149 
Operating lease ROU assets, net (2)
121,887 129,301 
Interest receivable86,540 81,479 
Taxes receivable42,243 31,591 
Equity investments without readily determinable fair values33,783 27,738 
SBIC investments (3)
27,357 16,505 
Prepaid expenses23,972 17,099 
Equity warrants (4)
4,742 3,434 
Equity investments with readily determinable fair values 1,135 2,998 
Deferred tax assets, net1,080 — 
Other receivables/assets52,248 52,488 
Total other assets$797,223 $636,811 
____________________
(1)    During the first quarter of 2020, the Company increased the amount of its investment in low income housing project partnerships by $101 million representing the amount of related unfunded commitments, with an offset to a liability included in "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets.
(2)    See Note 8. Leases for further details regarding the operating lease ROU assets.
(3)    During the third quarter of 2020, the Company prospectively changed the accounting method for its SBIC investments from modified cost to NAV fair value.
(4)    For information regarding equity warrants, see Note 10. Derivatives.
.
34



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

NOTE 8. LEASES
Operating Leases as a Lessee
Our lease expense is a component of "Occupancy expense" on our condensed consolidated statements of earnings (loss). The following table presents the components of lease expense for the periods indicated:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(In thousands)
Operating lease expense:
Fixed costs$8,950 $8,347 $26,027 $25,183 
Variable costs15 40 77 
Short-term lease costs117 126 312 849 
Sublease income(1,081)(1,010)(3,100)(3,190)
Net lease expense$8,001 $7,470 $23,279 $22,919 
The following table presents supplemental cash flow information related to leases for the periods indicated:
Nine Months Ended
September 30,
20202019
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$25,198 $24,674 
ROU assets obtained in exchange for lease obligations:
Operating leases$19,027 $172,189 
The following table presents supplemental balance sheet and other information related to operating leases as of the dates indicated:
September 30,December 31,
20202019
(Dollars in thousands)
Operating leases:
Operating lease right-of-use assets, net$121,887 $129,301 
Operating lease liabilities$142,016 $145,354 
Weighted average remaining lease term (in years)5.96.1
Weighted average discount rate2.61 %2.82 %
35



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

The following table presents the maturities of operating lease liabilities as of the date indicated:
September 30, 2020
(In thousands)
Period ending December 31,
2020$8,729 
202133,834 
202228,190 
202325,194 
202417,989 
2025 and thereafter39,926 
Total operating lease liabilities153,862 
Less: Imputed interest(11,846)
Present value of operating lease liabilities$142,016 
Operating Leases as a Lessor
We provide equipment financing to our customers through operating leases where we facilitate the purchase of equipment leased to our customers. The equipment is shown on the condensed consolidated balance sheets as "Equipment leased to others under operating leases" and is depreciated to its estimated residual value at the end of the lease term, shown as "Leased equipment depreciation" in the condensed consolidated statements of earnings (loss), according to our fixed asset accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Noninterest Income" in the condensed consolidated statements of earnings (loss). The equipment is tested periodically for impairment. No impairment was recorded on "Equipment leased to others under operating leases" in the three or nine months ended September 30, 2020 and 2019.
The following table presents the rental payments to be received on operating leases as of the date indicated:
September 30, 2020
(In thousands)
Period ending December 31,
2020$8,573 
202133,629 
202231,080 
202323,931 
202419,486 
2025 and thereafter34,284 
Total undiscounted cash flows$150,983 
36



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

NOTE 9.  BORROWINGS AND SUBORDINATED DEBENTURES
Borrowings
The following table summarizes our borrowings as of the dates indicated:
September 30, 2020December 31, 2019
WeightedWeighted
AverageAverage
BalanceRateBalanceRate
(Dollars in thousands)
FHLB secured advances$10,000 — %$1,318,000 1.66 %
FHLB unsecured overnight advance— — %141,000 1.56 %
AFX short-term borrowings50,000 0.06 %300,000 1.61 %
Non-recourse debt— — %7.50 %
Total borrowings$60,000 0.05 %$1,759,008 1.64 %
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 FRBSF, and other financial institutions.
FHLB Secured Line of Credit. The Bank had secured financing capacity with the FHLB as of September 30, 2020 of $3.6 billion, collateralized by a blanket lien on $5.6 billion of qualifying loans. During the second quarter of 2020, the Company prepaid $750.0 million of FHLB term advances and incurred $6.6 million of prepayment penalties, which is included in "Other expense" on the condensed consolidated statements of earnings (loss). The FHLB term advances had a weighted average interest rate of 0.96% and the prepayment decision was made after the significant drop in market interest rates in March 2020 and the expectation of continued low interest rates for an extended time.
The following table presents the interest rates and maturity dates of FHLB secured advances as of the dates indicated:
September 30, 2020December 31, 2019
MaturityMaturity
BalanceRateDateBalanceRateDate
(Dollars in thousands)
Overnight advance$— — %$1,318,000 1.66 %1/2/2020
Term advance5,000 — %11/6/2020— — %
Term advance5,000 — %5/6/2021— — %
Total FHLB secured advances$10,000 — %$1,318,000 1.66 %
FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of September 30, 2020, the Bank had secured borrowing capacity of $1.6 billion collateralized by liens covering $2.1 billion of qualifying loans. As of September 30, 2020 and December 31, 2019, there were no balances outstanding.
FHLB Unsecured Line of Credit. The Bank has a $112.0 million unsecured line of credit with the FHLB for the purchase of overnight funds, of which there were no balances outstanding at September 30, 2020. At December 31, 2019, the balance outstanding was $141.0 million.
Federal Funds Arrangements with Commercial Banks. As of September 30, 2020, the Bank had unsecured lines of credit of $180.0 million in the aggregate with several 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, 2020 and December 31, 2019, there were no balances outstanding. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2020, there was a $50.0 million balance outstanding. As of December 31, 2019, there were $300.0 million in overnight borrowings outstanding.
37



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

Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
September 30, 2020December 31, 2019DateMaturityRate Index
SeriesBalance
Rate
Balance
Rate
IssuedDate(Quarterly Reset)
(Dollars in thousands)
Trust V$10,310 3.35 %$10,310 5.00 %8/15/20039/17/2033
3-month LIBOR + 3.10
Trust VI10,310 3.30 %10,310 4.94 %9/3/20039/15/2033
3-month LIBOR + 3.05
Trust CII5,155 3.20 %5,155 4.85 %9/17/20039/17/2033
3-month LIBOR + 2.95
Trust VII61,856 3.02 %61,856 4.69 %2/5/20044/23/2034
3-month LIBOR + 2.75
Trust CIII20,619 1.94 %20,619 3.58 %8/15/20059/15/2035
3-month LIBOR + 1.69
Trust FCCI16,495 1.85 %16,495 3.49 %1/25/20073/15/2037
3-month LIBOR + 1.60
Trust FCBI10,310 1.80 %10,310 3.44 %9/30/200512/15/2035
3-month LIBOR + 1.55
Trust CS 2005-182,475 2.20 %82,475 3.85 %11/21/200512/15/2035
3-month LIBOR + 1.95
Trust CS 2005-2128,866 2.22 %128,866 3.89 %12/14/20051/30/2036
3-month LIBOR + 1.95
Trust CS 2006-151,545 2.22 %51,545 3.89 %2/22/20064/30/2036
3-month LIBOR + 1.95
Trust CS 2006-251,550 2.22 %51,550 3.89 %9/27/200610/30/2036
3-month LIBOR + 1.95
Trust CS 2006-3 (1)
30,211 1.60 %28,902 1.64 %9/29/200610/30/2036
3-month EURIBOR + 2.05
Trust CS 2006-4 16,470 2.22 %16,470 3.89 %12/5/20061/30/2037
3-month LIBOR + 1.95
Trust CS 2006-5 6,650 2.22 %6,650 3.89 %12/19/20061/30/2037
3-month LIBOR + 1.95
Trust CS 2007-239,177 2.22 %39,177 3.89 %6/13/20077/30/2037
3-month LIBOR + 1.95
Gross subordinated debentures541,999 2.30 %540,690 3.87 %
Unamortized discount (2)
(78,717)(82,481)
Net subordinated debentures$463,282 $458,209 
___________________
(1)    Denomination is in Euros with a value of €25.8 million.
(2)    Amount represents the fair value adjustment on trust preferred securities assumed in acquisitions.
NOTE 10.  DERIVATIVES
The Company uses derivatives to manage exposure to market risk, primarily foreign currency risk and interest rate risk, and to assist customers with their risk management objectives. The Company uses foreign exchange contracts to manage the foreign exchange rate risk associated with certain foreign currency-denominated assets and liabilities. As of September 30, 2020, all of our derivatives were held for risk management purposes and none were designated as accounting hedges. The objective is to manage the uncertainty of future foreign exchange rate fluctuations. These derivatives provide for a fixed exchange rate which has the effect of reducing or eliminating changes to anticipated cash flows to be received on assets and liabilities denominated in foreign currencies as the result of changes to exchange rates. Our derivatives are carried at fair value and recorded in other assets or other liabilities, as appropriate. The changes in fair value of our derivatives and the related interest are recognized in "Noninterest income - other" in the condensed consolidated statements of earnings (loss). For the nine months ended September 30, 2020, changes in fair value recorded through noninterest income in the condensed consolidated statements of earnings (loss) were immaterial.
In connection with negotiated credit facilities and certain other services, we may obtain equity warrant assets giving us the right to acquire stock in primarily private, venture-backed companies. We hold these assets for prospective investment gains. We do not use them to hedge any economic risks nor do we use other derivative instruments to hedge economic risks stemming from equity warrant assets. We account for equity warrant assets as derivatives when they contain net settlement terms and other qualifying criteria under ASC 815. These equity warrant assets are recorded at estimated fair value and are classified as "Other assets" on our condensed consolidated balance sheets at the time they are obtained. See Note 7. Other Assets.
38



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

Derivative instruments expose us to credit risk in the event of nonperformance by counterparties. This risk exposure consists primarily of the termination value of agreements where we are in a favorable position. We manage the credit risk associated with various derivative agreements through bilateral collateral posting requirements, counterparty credit review, and monitoring procedures.
The following table presents the U.S. dollar notional amounts and fair values of our derivative instruments included in the condensed consolidated balance sheets as of the dates indicated:
September 30, 2020December 31, 2019
NotionalFairNotionalFair
Derivatives Not Designated As Hedging InstrumentsAmountValueAmountValue
(In thousands)
Derivative Assets:
Interest rate contracts$10,364 $81 $15,159 $71 
Foreign exchange contracts72,284 3,533 91,144 1,163 
Interest rate and economic contracts82,648 3,614 106,303 1,234 
Equity warrant assets25,729 4,742 26,079 3,434 
Total$108,377 $8,356 $132,382 $4,668 
Derivative Liabilities:
Interest rate contracts$10,364 $81 $15,159 $71 
Foreign exchange contracts72,284 — 91,144 684 
Total$82,648 $81 $106,303 $755 
NOTE 11.  COMMITMENTS AND CONTINGENCIES
The following table presents a summary of commitments described below as of the dates indicated:
September 30,
December 31,
20202019
(In thousands)
Loan commitments to extend credit$7,178,506 $8,183,158 
Standby letters of credit353,820 355,503 
Commitments to contribute capital to small business
investment companies and CRA-related loan pools52,941 40,698 
Commitments to contribute capital to low income housing
project partnerships (1)
— 88,515 
Commitments to contribute capital to private equity funds50 50 
Total$7,585,317 $8,667,924 
____________________
(1)    During the first quarter of 2020, the Company increased the amount of its investment in low income housing project partnerships by $101 million representing the amount of related unfunded commitments, with an offset to a liability included in "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets.
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 and standby letters of credit. 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 that the Company has in particular classes of financial instruments.
39



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

Commitments to extend credit are contractual agreements to lend to our customers when customers are in compliance with their contractual credit agreements and when customers have contractual availability to borrow under such agreements. 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 under these arrangements.
In addition, we invest in small business investment companies that call for capital contributions up to an amount specified in the partnership agreements, and in CRA-related loan pools. As of September 30, 2020 and December 31, 2019, we had commitments to contribute capital to these entities totaling $52.9 million and $40.7 million. We also had commitments to contribute up to an additional $50,000 to private equity funds at September 30, 2020 and December 31, 2019.
The following table presents the years in which commitments are expected to be paid for our commitments to contribute capital to small business investment companies and CRA-related loan pools as of the date indicated:
September 30, 2020
(In thousands)
Period ending December 31,
2020$26,824 
202126,117 
Total $52,941 
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. The range of any reasonably possible liabilities is also not significant.
40



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

NOTE 12.  FAIR VALUE MEASUREMENTS
The Company uses 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 individually evaluated loans and leases and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long-lived assets.
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, as amended by ASU 2016-01 and ASU 2018-03), see Note 1. Nature of Operations and Summary of Significant Accounting Policies, and Note 14. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2019 Annual Report on Form 10-K.
The Company also holds SBIC investments measured at fair value using the NAV per share practical expedient that are not required to be classified in the fair value hierarchy. At September 30, 2020, the fair value of these investments was $27.4 million.
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, 2020
Measured on a Recurring BasisTotalLevel 1Level 2Level 3
(In thousands)
Securities available-for-sale:
Agency commercial MBS$1,204,315 $— $1,204,315 $— 
Municipal securities1,203,030 — 1,203,030 — 
Agency residential CMOs1,165,872 — 1,165,872 — 
Agency residential MBS246,498 — 246,498 — 
Asset-backed securities234,103 — 203,881 30,222 
Corporate debt securities174,282 — 174,282 — 
Collateralized loan obligations135,333 — 135,333 — 
Private label residential CMOs121,162 — 116,111 5,051 
SBA securities42,684 — 42,684 — 
U.S. Treasury securities5,335 5,335 — — 
Total securities available-for-sale$4,532,614 $5,335 $4,492,006 $35,273 
Equity investments with readily determinable fair values$1,135 $1,135 $— $— 
Derivatives (1):
Equity warrants 4,742 — — 4,742 
Interest rate and economic contracts3,614 — 3,614 — 
Derivative liabilities 81 — 81 — 
41



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

Fair Value Measurements as of
December 31, 2019
Measured on a Recurring BasisTotalLevel 1Level 2Level 3
(In thousands)
Securities available-for-sale:
Agency commercial MBS$1,108,224 $— $1,108,224 $— 
Agency residential CMOs1,136,397 — 1,136,397 — 
Municipal securities735,159 — 735,159 — 
Agency residential MBS305,198 — 305,198 — 
Asset-backed securities214,783 — 198,348 16,435 
Collateralized loan obligations123,756 — 123,756 — 
Private label residential CMOs99,483 — 93,219 6,264 
SBA securities48,258 — 48,258 — 
Corporate debt securities20,748 — 20,748 — 
U.S. Treasury securities5,181 5,181 — — 
Total securities available-for-sale$3,797,187 $5,181 $3,769,307 $22,699 
Equity investments with readily determinable fair values$2,998 $2,998 $— $— 
Derivatives (1):
Equity warrants 3,434 — — 3,434 
Interest rate and economic contracts1,234 — 1,234 — 
Derivative liabilities 755 — 755 — 
____________________
(1)    For information regarding derivative instruments, see Note 10. Derivatives.
During the nine months ended September 30, 2020, there was an $8,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily determinable fair values measured on a recurring basis.
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 residential CMOs and asset-backed securities available-for-sale measured at fair value on a recurring basis as of the date indicated:
September 30, 2020
Private Label Residential CMOsAsset-Backed Securities
Weighted
Input or
Weighted
Range
Average
Range
Average
Unobservable Inputsof Inputs
Input (1)
of Inputs
Input (2)
Voluntary annual prepayment speeds
5.3% - 16.1%
10.7%
10.0% - 15.0%
12.1%
Annual default rates (3)
0.7% - 29.8%
3.1%2.0%2.0%
Loss severity rates (3)
1.9% - 165.2%
53.0%60.0%60.0%
Discount rates
2.1% - 7.9%
6.0%
3.0% - 5.2%
3.8%
____________________
(1)    Unobservable inputs for private label residential CMOs were weighted by the relative fair values of the instruments.
(2)    Voluntary annual prepayment speeds and discount rates for asset-backed securities were weighted by the relative fair values of the instruments.
(3)    Annual default rates and loss severity rates were the same for all of the asset-backed securities.
42



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 the date indicated:
September 30, 2020
Equity Warrants
Weighted
RangeAverage
Unobservable Inputsof Inputs
Input (1)
Volatility
23.7% - 224.4%
31.8%
Risk-free interest rate
0.1% - 0.3%
0.2%
Remaining life assumption (in years)
0.20 - 4.95
2.85
____________________
(1)    Unobservable inputs for equity warrants were weighted by the relative fair values of the instruments.
The following table summarizes activity for our Level 3 private label residential 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 LabelAsset-BackedEquity
Residential CMOsSecuritiesWarrants
(In thousands)
Balance, December 31, 2019$6,264 $16,435 $3,434 
Total included in earnings326 42 3,310 
Total included in other comprehensive income(447)(389)— 
Purchases— 20,100 — 
Issuances— — 240 
Sales
— — (2,234)
Net settlements(1,092)(5,966)— 
Transfers to Level 1 (equity investments with readily
determinable fair values)— — (8)
Balance, September 30, 2020$5,051 $30,222 $4,742 
Unrealized net gains (losses) for the period included in other
comprehensive income for securities held at quarter-end$1,239 $(192)
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, 2020
Measured on a Non-Recurring BasisTotalLevel 1Level 2Level 3
(In thousands)
Individually evaluated loans and leases (1)
$63,865 $— $3,031 $60,834 
Total non-recurring$63,865 $— $3,031 $60,834 
______________________
(1)    Includes nonaccrual loans and leases and performing TDRs with balances greater than $250,000.

43



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

Fair Value Measurement as of
December 31, 2019
Measured on a Non-Recurring BasisTotalLevel 1Level 2Level 3
(In thousands)
Impaired loans and leases (1)
$28,706 $— $1,083 $27,623 
OREO105 — — 105 
Total non-recurring$28,811 $— $1,083 $27,728 
_____________________
(1)    Includes all nonaccrual loans and leases and performing TDRs.
The following table presents losses recognized on assets measured on a nonrecurring basis for the periods indicated:
Three Months EndedNine Months Ended
Losses on Assets September 30,September 30,
Measured on a Non-Recurring Basis2020201920202019
(In thousands)
Individually evaluated loans and leases (1)
$29,047 $8,339 $40,920 $10,091 
OREO157 54 267 54 
Total losses$29,204 $8,393 $41,187 $10,145 
_____________________
(1)    For 2019, losses are based on impaired loans and leases.
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of the date indicated:
September 30, 2020
ValuationUnobservableInput or
Weighted
Asset
Fair Value
TechniqueInputsRange
Average
(In thousands)
Individually evaluated
loans and leases$26,357Discounted cash flowsDiscount rates
3.75% - 10.46%
8.19%
Individually evaluated Discount from
loans and leases (1)
26,889Third party appraisalappraisal 23.00%23.00%
Individually evaluated
loans and leases7,588Third party appraisalsNo discounts
Total non-recurring Level 3$60,834
_____________________
(1)    Relates to one loan at September 30, 2020.





44



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

The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
September 30, 2020
Carrying
Estimated Fair Value
AmountTotalLevel 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and due from banks$187,176 $187,176 $187,176 $— $— 
Interest-earning deposits in financial institutions2,766,020 2,766,020 2,766,020 — — 
Securities available-for-sale4,532,614 4,532,614 5,335 4,492,006 35,273 
Investment in FHLB stock17,250 17,250 — 17,250 — 
Loans and leases held for investment, net18,680,234 19,040,922 — 3,031 19,037,891 
Equity warrants4,742 4,742 — — 4,742 
Interest rate and economic contracts3,614 3,614 — 3,614 — 
Equity investments with readily determinable fair values1,135 1,135 1,135 — — 
Financial Liabilities:
Core deposits21,117,629 21,117,629 — 21,117,629 — 
Non-core non-maturity deposits1,123,909 1,123,909 — 1,123,909 — 
Time deposits1,724,157 1,731,333 — 1,731,333 — 
Borrowings60,000 59,988 50,000 9,988 — 
Subordinated debentures463,282 445,978 — 445,978 — 
Derivative liabilities81 81 — 81 — 

December 31, 2019
Carrying
Estimated Fair Value
AmountTotalLevel 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and due from banks$172,585 $172,585 $172,585 $— $— 
Interest-earning deposits in financial institutions465,039 465,039 465,039 — — 
Securities available-for-sale3,797,187 3,797,187 5,181 3,769,307 22,699 
Investment in FHLB stock40,924 40,924 — 40,924 — 
Loans and leases held for investment, net18,708,087 19,055,004 — 1,083 19,053,921 
Equity warrants3,434 3,434 — — 3,434 
Interest rate and economic contracts1,234 1,234 — 1,234 — 
Equity investments with readily determinable fair values2,998 2,998 2,998 — — 
Financial Liabilities:
Core deposits16,187,287 16,187,287 — 16,187,287 — 
Non-core non-maturity deposits496,407 496,407 — 496,407 — 
Time deposits2,549,342 2,549,260 — 2,549,260 — 
Borrowings1,759,008 1,759,008 1,759,000 — 
Subordinated debentures458,209 441,617 — 441,617 — 
Derivative liabilities755 755 — 755 — 
45



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

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, 2020, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
NOTE 13.  EARNINGS (LOSS) PER SHARE
The following table presents the computations of basic and diluted net earnings (loss) per share for the periods indicated:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(Dollars in thousands, except per share data)
Basic Earnings (Loss) Per Share:
Net earnings (loss) $45,503 $110,026 $(1,354,404)$350,755 
Less: Earnings allocated to unvested restricted stock(1)
(578)(1,369)(1,603)(3,725)
Net earnings (loss) allocated to common shares$44,925 $108,657 $(1,356,007)$347,030 
Weighted-average basic shares and unvested restricted
stock outstanding118,438 119,831 118,469 120,691 
Less: Weighted-average unvested restricted stock
outstanding(1,684)(1,622)(1,596)(1,480)
Weighted-average basic shares outstanding116,754 118,209 116,873 119,211 
Basic earnings (loss) per share$0.38 $0.92 $(11.60)$2.91 
Diluted Earnings (Loss) Per Share:
Net earnings (loss) allocated to common shares$44,925 $108,657 $(1,356,007)$347,030 
Weighted-average diluted shares outstanding116,754 118,209 116,873 119,211 
Diluted earnings (loss) per share$0.38 $0.92 $(11.60)$2.91 
________________________
(1)    Represents cash dividends paid to holders of unvested restricted stock, net of forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.
46



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

NOTE 14. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table presents interest income and noninterest income, the components of total revenue, as disclosed in the condensed consolidated statements of earnings (loss) and the related amounts which are from contracts with customers within the scope of ASC Topic 606, "Revenue from Contracts with Customers," for the periods indicated. As illustrated here, substantially all of our revenue is specifically excluded from the scope of ASC Topic 606.
Three Months Ended September 30,
20202019
TotalRevenue fromTotalRevenue from
RecordedContracts withRecordedContracts with
RevenueCustomersRevenueCustomers
(In thousands)
Total interest income$265,908 $— $307,208 $— 
Noninterest income:
   Service charges on deposit accounts2,570 2,570 3,525 3,525 
   Other commissions and fees10,541 3,228 10,855 4,965 
   Leased equipment income9,900 — 9,615 — 
   Gain on sale of loans35 — 765 — 
   Gain on sale of securities5,270 — 908 — 
   Other income9,936 289 7,761 428 
      Total noninterest income38,252 6,087 33,429 8,918 
Total revenue$304,160 $6,087 $340,637 $8,918 
The following table presents revenue from contracts with customers based on the timing of revenue recognition for the periods indicated:
Three Months Ended
September 30,
20202019
(In thousands)
Products and services transferred at a point in time$3,189 $5,046 
Products and services transferred over time2,898 3,872 
Total revenue from contracts with customers$6,087 $8,918 

47



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

Nine Months Ended September 30,
20202019
TotalRevenue fromTotalRevenue from
RecordedContracts withRecordedContracts with
RevenueCustomersRevenueCustomers
(In thousands)
Total interest income$831,315 $— $926,300 $— 
Noninterest income:
   Service charges on deposit accounts7,232 7,232 11,026 11,026 
   Other commissions and fees30,373 10,388 33,453 14,661 
   Leased equipment income34,188 — 28,079 — 
   Gain on sale of loans468 — 1,091 — 
   Gain on sale of securities13,167 — 25,261 — 
   Other income20,782 961 16,476 1,253 
      Total noninterest income106,210 18,581 115,386 26,940 
Total revenue$937,525 $18,581 $1,041,686 $26,940 
The following table presents revenue from contracts with customers based on the timing of revenue recognition for the periods indicated:
Nine Months Ended
September 30,
20202019
(In thousands)
Products and services transferred at a point in time$10,152 $14,579 
Products and services transferred over time8,429 12,361 
Total revenue from contracts with customers$18,581 $26,940 
Contract Balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of the dates indicated:
September 30, 2020December 31, 2019
(In thousands)
Receivables, which are included in "Other assets"$1,207 $1,094 
Contract assets, which are included in "Other assets"$— $— 
Contract liabilities, which are included in "Accrued interest payable and other liabilities"$392 $490 
Contract liabilities relate to advance consideration received from customers for which revenue is recognized over the life of the contract. The change in contract liabilities for the nine months ended September 30, 2020 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $98,000.
48



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

NOTE 15.  STOCK-BASED COMPENSATION
The Company’s 2017 Stock Incentive Plan, or the 2017 Plan, permits stock-based compensation awards to officers, directors, employees, and consultants. The 2017 Plan authorized grants of stock-based compensation instruments to purchase or issue up to 4,000,000 shares of Company common stock. As of September 30, 2020, there were 1,670,705 shares available for grant under the 2017 Plan. Though frozen for new issuances, certain awards issued under the 2003 Stock Incentive Plan remain outstanding, but are due to vest no later than February 2021.
Restricted Stock
Restricted stock amortization totaled $7.1 million and $7.3 million for the three months ended September 30, 2020 and 2019, and $19.2 million and $19.3 million for the nine months ended September 30, 2020 and 2019. Such amounts are included in "Compensation expense" on the condensed consolidated statements of earnings (loss). The amount of unrecognized compensation expense related to unvested TRSAs and PRSUs as of September 30, 2020 totaled $50.6 million.
Time-Based Restricted Stock Awards
At September 30, 2020, there were 1,706,690 shares of unvested TRSAs outstanding pursuant to the Company's 2003 and 2017 Stock Incentive Plans. The TRSAs generally vest ratably over a service period of three to four years from the date of the grant or immediately upon death of an employee. Compensation expense related to TRSAs is based on the fair value of the underlying award on the grant date and is recognized over the vesting period using the straight-line method.
Performance-Based Restricted Stock Units
At September 30, 2020, there were 315,008 units of unvested PRSUs that have been granted. The PRSUs will vest only if performance goals with respect to certain financial metrics are met over a three-year performance period. The shares underlying the PRSUs are not considered issued and outstanding until they vest. PRSUs are granted and initially expensed based on a target number. The number of shares that will ultimately vest based on actual performance will range from zero to a maximum of either 150% or 200% of target.
Compensation expense related to PRSUs is based on the fair value of the underlying award on the grant 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 or all of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion or all of the previously recognized amortization is reversed and also suspended. If it is determined that attainment of a financial measure higher than target is probable, the amortization will increase to up to 150% or 200% of the target amortization amount. Annual PRSU expense may vary during the three-year performance period based upon changes in management's estimate of the number of shares that may ultimately vest. In the case where the performance target for the PRSU 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 and the employee continues to meet the service requirement of the award.
49



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

NOTE 16.  RECENTLY ISSUED ACCOUNTING STANDARDS
EffectiveEffect on the Financial Statements
StandardDescriptionDateor Other Significant Matters
ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes"

This Update simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates an clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.
January 1, 2021The adoption of this guidance is not expected to have a material impact on the Company's condensed consolidated financial statements.

EffectiveEffect on the Financial Statements
StandardDescriptionDateor Other Significant Matters
ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)"

This Update clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.
January 1, 2021The adoption of this guidance is not expected to have a material impact on the Company's condensed consolidated financial statements.

50



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

EffectiveEffect on the Financial Statements
StandardDescriptionDateor Other Significant Matters
ASU 2020-04, "Reference Rate Reform (Topic 848)"
This Update provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other agreements affected by the anticipated transition away from LIBOR toward new interest reference rates. For agreements that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. This Update also provides numerous optional expedients for derivative accounting. An entity may elect to apply this Update for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. We anticipate that ASU 2020-04 will simplify any modifications we execute between the selected start date (not yet determined) and December 31, 2022 that are directly related to LIBOR transition.
March 12, 2020 through December 31, 2022The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.
EffectiveEffect on the Financial Statements
StandardDescriptionDateor Other Significant Matters
ASU 2020-08, "Codification Improvements to Subtopic 31-20, Receivables - Nonrefundable Fees and Other Costs"

This Update clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period, which impacts the amortization period for nonrefundable fees and other costs.
January 1, 2021The adoption of this guidance is not expected to have a material impact on the Company's condensed consolidated financial statements.

NOTE 17.  SUBSEQUENT EVENTS
The Company has evaluated events that have occurred subsequent to September 30, 2020 and have concluded there are no other subsequent events that would require recognition in the accompanying condensed consolidated financial statements.

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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 operating expenses, profitability, allowance for loan and lease losses, net interest margin, net interest income, deposit growth, loan and lease portfolio growth and production, acquisitions, maintaining capital adequacy, liquidity, goodwill, and interest rate risk management. 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:
the COVID-19 pandemic is adversely affecting the Company, its employees, customers and third-party service providers, and the ultimate extent of the impacts of the pandemic and related government stimulus programs on its business, financial position, results of operations, liquidity and prospects is uncertain. Continued deterioration in general business and economic conditions could adversely affect the Company’s revenues and the values of its assets and liabilities, lead to a tightening of credit and increase stock price volatility;
our ability to complete future acquisitions, and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
our ability to compete effectively against other financial service providers in our markets;
the impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolios;
deterioration, weaker than expected improvement, or other changes in the state of the economy or the markets in which we conduct business (including the levels of IPOs and mergers and acquisitions), which may affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans;
changes in credit quality and the effect of credit quality and the CECL accounting standard on our provision for credit losses and allowance for loan and lease losses;
our ability to attract deposits and other sources of funding or liquidity;
the need to retain capital for strategic or regulatory reasons;
compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases, changes in our asset or liability mix, and/or changes to the cost of deposits and borrowings;
uncertainty regarding the future of LIBOR and the transition away from LIBOR toward new reference rates by the end of 2021;
reduced demand for our services due to strategic or regulatory reasons or reduced demand for our products due to legislative changes such as new rent control laws;
our ability to successfully execute on initiatives relating to enhancements of our technology infrastructure, including client-facing systems and applications;
legislative or regulatory requirements or changes, including an increase of capital requirements, and increased political and regulatory uncertainty;
the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
higher than anticipated increases in operating expenses;
lower than expected dividends paid from the Bank to the holding company;
the amount and exact timing of any common stock repurchases will depend upon market conditions and other factors;
52


a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge;
the effectiveness of our risk management framework and quantitative models;
the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
the impact of changes made to tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and
our success at managing risks involved in the foregoing items and all other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and other documents filed or furnished by PacWest with the 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, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
The Bank is 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 71 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an 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 2020, accounted for 87.7% of net revenue (net interest income plus noninterest income).
At September 30, 2020, the Company had total assets of $28.4 billion, including $19.0 billion of total loans and leases, net of deferred fees, and $4.5 billion of securities available-for-sale, compared to $26.8 billion of total assets, including $18.8 billion of total loans and leases, net of deferred fees, and $3.8 billion of securities available-for-sale at December 31, 2019. The $1.7 billion increase in total assets since year-end was due primarily to a $2.3 billion increase in interest-earning deposits in financial institutions and a $735.4 million increase in securities available-for-sale, offset partially by a $1.47 billion write-down of goodwill.
53


At September 30, 2020, the Company had total liabilities of $24.9 billion, including total deposits of $24.0 billion and borrowings of $60.0 million, compared to $21.8 billion of total liabilities, including $19.2 billion of total deposits and $1.8 billion of borrowings at December 31, 2019. The $3.1 billion increase in total liabilities since year-end was due mainly to increases of $4.9 billion in core deposits and $627.5 million in non-core non-maturity deposits, offset partially by decreases of $1.7 billion in borrowings, primarily FHLB advances, and $825.2 million in time deposits. The increase in core deposits was due primarily to PPP loan proceeds being deposited into customers' accounts and capital market activities by our venture banking clients, which saw deposits increase by $3.0 billion to $10.1 billion at September 30, 2020. At September 30, 2020, core deposits totaled $21.1 billion, or 88% of total deposits, including $9.3 billion of noninterest-bearing demand deposits, or 39% of total deposits.
At September 30, 2020, the Company had total stockholders' equity of $3.5 billion compared to $5.0 billion at December 31, 2019. The $1.5 billion decrease in stockholders' equity since year-end was due mainly to a $1.35 billion net loss, attributable primarily to a $1.47 billion goodwill impairment charge, $130.3 million of cash dividends paid, and $70.0 million of common stock repurchased under the Stock Repurchase Program, offset partially by a $76.8 million increase in accumulated other comprehensive income. Consolidated capital ratios remained strong and continued to increase with Tier 1 capital and total capital ratios of 10.45% and 13.74% at September 30, 2020.
Recent Events
COVID-19 Pandemic
The outbreak of the Coronavirus Disease ("COVID-19") pandemic has impacted our business and operations in several ways as outlined below. Our first and continuing priority remains the safety and health of our employees and customers as we navigate our way through the pandemic. In the first quarter, we activated our Business Continuity Team and Pandemic Plan under the direction of a special task force comprised of executive level management from various departments to work closely with the Business Continuity Team to help lead our people and our business through this period of uncertainty. The special task force has continued to meet multiple times per week since the onset of the pandemic.
Our Employees
We took several actions in March to move everyone possible to a remote working environment, which has continued to this day; however, as an essential business service, some of our employees are required to work at one of our critical offices or at one of our branch locations where we are practicing social distancing and other safety measures to the best of our ability. We have applied social distancing, wearing of face masks, remote working, additional cleaning, reminders of frequent handwashing, installation of plexi-glass barriers among other steps to ensure the health and safety of employees and customers. We suspended all employee business travel and canceled all hosted client events. We require anyone who has traveled personally to a foreign country or on a cruise, to self-quarantine for 14 days. Despite these restrictions, we have remained fully operational and able to meet the needs of our clients and the communities we serve. To recognize our employees who must work in our branches or critical locations, we paid a special bonus of up to $1,000 in the second quarter of 2020. We have begun to re-open some office locations if permitted under local government guidance, but any such re-openings generally remain limited to no more than a 50% capacity. Despite some re-openings, the vast majority of our non-branch employees continue to work remotely.
Our Clients and Branch Operations
Our primary branch operations are within California, which continues to work its way through the State's Resilience Roadmap from the initial "Stay-at-home" order issued on March 13, 2020 to the subsequent executive orders and phased-in guidance issued for re-openings. As a large state, the stages of re-opening vary by county and thus the impact to our operations varies by county. At the outset of the pandemic, we closed 19 branches along with the lobbies of 27 additional branches where drive-up tellers are available. On June 1st, we re-opened 17 of the 19 branches and decided to permanently close two branches in the third quarter. We continue to monitor the pandemic's impact on our branch operations and have alternative plans in place in the event we need to reduce branch hours, temporarily close branches in close proximity to each other, or stagger the hours of our employees, all in an effort to keep our employees and customers safe while meeting the needs of our customers.


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Impact to Our Business
To date, from a business perspective, the impacts from the COVID-19 pandemic have been primarily related to our loan portfolio. We have experienced an increase in customers seeking loan modifications through payment deferrals and extension of terms. As of September 30, 2020, active loan payment deferral modifications represented approximately 3.3% of the loan portfolio, down from approximately 6.6% of the loan portfolio at June 30, 2020. Most of the modifications were for payment deferrals for three months, while some deferrals were up to six months. As of September 30, 2020, approximately 13% of the loans that were granted a payment deferral received a second modification. Of the remaining $625 million of loans on deferral as of September 30, 2020, 95% expire by December 31, 2020.We also granted maturity extensions totaling approximately $315 million primarily for three months, while some extensions were for one year. The table below presents the amount of active loan payment or deferral modifications by loan segment for the periods indicated:
Deferrals as % of
Total Loans Total Loans
Loan and Lease PortfolioLoan Deferrals Outstandingand Leasesand Leases
Segment and ClassJune 30, 2020September 30, 2020September 30, 2020September 30, 2020
(Dollars in thousands)
Real estate mortgage:
Commercial $810,689 $430,682 $4,192,466 10.3 %
Income producing and other residential187,641 42,448 3,684,579 1.2 %
Real estate construction and land:
Commercial 208,866 86,963 1,241,647 7.0 %
Residential 329 — 2,182,100 — %
Commercial:
Asset-based30,572 30,507 3,153,048 1.0 %
Venture capital12,497 2,849 1,637,132 0.2 %
Other commercial42,687 30,556 2,572,994 1.2 %
Consumer4,230 632 362,234 0.2 %
Total$1,297,511 $624,637 $19,026,200 3.3 %
As % of total loans and leases6.6 %3.3 %
We actively participated in the Paycheck Protection Program ("PPP"), under the provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. As of September 30, 2020, PPP loans had an outstanding balance of approximately $1.2 billion. The loans have two-year terms with a 1% loan coupon rate and origination fees that varied from 1% to 5% depending on the size of the loan. These fees, which totaled approximately $36.4 million, are recognized over the two-year life of the loan with the fee recognition accelerated upon forgiveness or repayment of the loan. The PPP loans are fully guaranteed by the SBA and do not carry an allowance. Our participation in the PPP resulted in a corresponding increase in core deposits in the second quarter of 2020 due to PPP loan proceeds being deposited into customers' accounts.
As events unfolded in March, we immediately increased the enhanced monitoring of our loan and lease portfolio with particular emphasis on certain loan and lease portfolios that we expected to be most impacted by the COVID-19 pandemic, such as hotel, retail, commercial aviation, restaurant, and oil services loan and lease portfolios. The economic impacts caused by the COVID-19 pandemic precipitated loan and lease risk rating downgrades across these loan and lease portfolios, resulting in increases of $460.8 million in special mention loans and $98.7 million in classified loans during the nine months ended September 30, 2020.









55


Our exposure to these loan and lease portfolios, which includes equipment leased to others under operating leases, is as follows:
September 30, 2020
% of
SpecialTotal Loans
Loan and Lease PortfolioClassifiedMentionPassTotaland Leases
(Dollars in thousands)
Hotel$57,635 $281,044 $847,960 $1,186,639 6.2 %
Retail CRE27,678 497 417,311 445,486 2.3 %
Commercial aviation19,397 140,246 96,335 255,978 1.3 %
Restaurant8,379 8,920 131,497 148,796 0.8 %
Oil services12,883 5,438 74,305 92,626 0.5 %
Total$125,972 $436,145 $1,567,408 $2,129,525 11.2 %
The deterioration in economic conditions caused by the COVID-19 pandemic has significantly impacted the economic forecasts and assumptions used in our estimation process for the allowance for credit losses under CECL. Although our provision for credit losses for the third quarter of 2020 decreased by $23.0 million from the second quarter of 2020 to $97.0 million, the provision for credit losses increased by $310.0 million to $329.0 million during the nine months ended September 30, 2020 when compared to the same period in 2019. Deterioration in the macro-economic variables used in economic forecasts used in the allowance for credit losses process has contributed to a higher provision for credit losses for the first nine months of the year. For further details on CECL and the impacts to our process in the third quarter, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein. .
During the first quarter of 2020, the economic impact of the COVID-19 pandemic also resulted in market volatility and a significant decline in stock market valuations, including our stock price. As a result, we performed an updated goodwill impairment assessment and recorded goodwill impairment of $1.47 billion in the first quarter, as the estimated fair value of equity was less than book value as of March 31, 2020. This is a non-cash charge and had no impact on our regulatory capital ratios, cash flows, or liquidity position. The goodwill impairment charge resulted in a net loss of $1.43 billion in the first quarter and although our net earnings excluding the goodwill impairment charge were $36.9 million, or $0.31 per diluted share, the results contributed to our decision to reduce our quarterly dividend from $0.60 per share to $0.25 per share beginning in the second quarter.
On March 23, 2020, we announced the temporary suspension of share repurchases under our stock repurchase program until June 30, 2020 and, subsequently announced on April 21, 2020, the indefinite suspension of any repurchases in light of the COVID-19 pandemic. We have not repurchased any shares since February 28, 2020.
Looking ahead, we expect the operating environment to remain challenging as the severity and duration of the pandemic remains uncertain. We expect to see some requests for further loan modifications as the initial modifications expire in the next few months, while the level of provisions for credit losses will continue to be impacted by the economic forecasts and overall credit performance of the loan portfolio.
Key Performance Indicators
Among other factors, our operating results generally depend on the following key performance indicators:
The Level of Net Interest Income
Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. Net interest margin is net interest income (annualized if related to a quarterly period) expressed as a percentage of average interest-earning assets. Tax equivalent net interest income is net interest income increased by an adjustment for tax-exempt interest on certain loans and investment securities based on a 21% federal statutory tax rate. Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets.
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Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities. Our primary interest-earning assets are loans and investment securities, and our primary interest-bearing liabilities are deposits and borrowings. Contributing to our high net interest margin is our high yield on loans and leases and competitive cost of deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we seek to minimize the impact of these variances by attracting a high percentage of noninterest-bearing deposits.
Loan and Lease Growth
We actively seek new lending opportunities under an array of lending products. Our lending activities include real estate mortgage loans, real estate construction and land loans, commercial loans and leases, and a small amount of consumer lending. Our commercial real estate loans and real estate construction loans are secured by a range of property types. Our commercial loans and leases portfolio is diverse and generally includes various asset-secured loans, equipment-secured loans and leases, venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial and venture-backed companies during the various phases of their early life cycles, and secured business loans.
Our loan origination process emphasizes credit quality. To augment our internal loan production, we have historically purchased multi-family loans from other banks and private student loans from third-party lenders. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic, interest-rate risk, credit risk, and product composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.
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 loans and leases, nonaccrual loans and leases, and net charge-offs. We maintain an allowance for credit losses on loans and leases, which is the sum of the allowance for loan and lease losses and the 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 exposures. Loans and leases that 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 the impact of assumptions and is reflective of historical experience, economic forecasts viewed to be reasonable and supportable by management, the current loan and lease composition, and relative credit risks known as of the balance sheet date. For originated and acquired credit-deteriorated loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively.
We regularly review loans and leases to determine whether there has been any deterioration in credit quality resulting from borrower operations or changes in collateral value or other factors which may affect collectability of our loans and leases. Changes in economic conditions, such as the rate of economic growth, the unemployment rate, rate of inflation, increases in the general level of interest rates, declines in real estate values, changes in commodity prices, and adverse conditions in borrowers’ businesses, could negatively impact our borrowers and cause us to adversely classify loans and leases. An increase in classified loans and leases generally results in increased provisions for credit losses and an increased allowance for credit losses. Any deterioration in the commercial real estate market may lead to increased provisions for credit losses because our loans are concentrated in commercial real estate loans.
The Level of Noninterest Expense
Our noninterest expense includes fixed and controllable overhead, the largest components of which are compensation and occupancy expense. 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, which is calculated by dividing noninterest expense (less intangible asset amortization, net foreclosed assets expense (income), goodwill impairment, and acquisition, integration and reorganization costs) by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain (loss) on sale of securities and gain (loss) on sales of assets other than loans and leases).
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The following table presents the calculation of our efficiency ratio for the periods indicated:
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
Efficiency Ratio20202020201920202019
(Dollars in thousands)
Noninterest expense$133,402 $126,965 $126,809 $1,848,337 $378,523 
Less:Intangible asset amortization3,751 3,882 4,833 11,581 14,573 
Foreclosed assets expense (income), net335 (146)255 (109)
Goodwill impairment— — — 1,470,000 — 
Acquisition, integration and reorganization costs— — — — 618 
      Noninterest expense used for efficiency ratio$129,316 $123,229 $121,968 $366,501 $363,441 
Net interest income (tax equivalent)$253,632 $256,294 $255,974 $761,354 $773,716 
Noninterest income 38,252 38,858 33,429 106,210 115,386 
Net revenues291,884 295,152 289,403 867,564 889,102 
Less:Gain on sale of securities5,270 7,715 908 13,167 25,261 
Net revenues used for efficiency ratio$286,614 $287,437 $288,495 $854,397 $863,841 
Efficiency ratio45.1 %42.9 %42.3 %42.9 %42.1 %
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that 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 and estimates relate to the allowance for credit losses on loans and leases held for investment, the carrying value of goodwill and other intangible assets, and the realization of deferred income tax assets and liabilities.
Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC. Updates to our critical accounting policies and estimates are described below.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment annually unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings (loss).
Allowance for Credit Losses on Loans and Leases Held for Investment
For information regarding the calculation of the allowance for credit losses on loans and leases held for investment using the CECL methodology effective January 1, 2020, see " - Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" and "Note 1. Organization - Significant Accounting Policies and Accounting Standards Adopted in 2020," of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)." For further information regarding our critical accounting policies and estimates, refer to our Annual Report on Form 10-K for the year ended December 31, 2019.
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Non-GAAP Measurements
We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-Q:
Return on average tangible equity, tangible common equity ratio, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP measures of return on average equity, equity to assets ratio, and book value per share, respectively. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
Return on Average Tangible Equity
20202020201920202019
(Dollars in thousands)
Net earnings (loss)$45,503 $33,204 $110,026 $(1,354,404)$350,755 
Add:Intangible asset amortization3,751 3,882 4,833 11,581 14,573 
Goodwill impairment— — — 1,470,000 — 
Adjusted net earnings used for return
   on average tangible equity$49,254 $37,086 $114,859 $127,177 $365,328 
Average stockholders' equity$3,497,869 $3,446,850 $4,890,746 $3,965,453 $4,842,140 
Less:Average intangible assets1,107,548 1,111,302 2,593,925 1,594,231 2,598,806 
Average tangible common equity$2,390,321 $2,335,548 $2,296,821 $2,371,222 $2,243,334 
Return on average equity (1)
5.18 %3.87 %8.93 %(45.62)%9.68 %
Return on average tangible equity (2)
8.20 %6.39 %19.84 %7.16 %21.77 %
___________________________________
(1)     Annualized net earnings (loss) divided by average stockholders' equity.
(2)     Annualized adjusted net earnings divided by average tangible common equity.

Tangible Common Equity Ratio/September 30,December 31,
Tangible Book Value Per Share20202019
(Dollars in thousands, except per share data)
Stockholders’ equity$3,486,231 $4,954,697 
Less: Intangible assets1,105,483 2,587,064 
Tangible common equity$2,380,748 $2,367,633 
Total assets$28,426,716 $26,770,806 
Less: Intangible assets1,105,483 2,587,064 
Tangible assets$27,321,233 $24,183,742 
Equity to assets ratio12.26 %18.51 %
Tangible common equity ratio (1)
8.71 %9.79 %
Book value per share$29.42 $41.36 
Tangible book value per share (2)
$20.09 $19.77 
Shares outstanding118,489,927 119,781,605 
_______________________________________ 
(1)    Tangible common equity divided by tangible assets.
(2)    Tangible common equity divided by shares outstanding.

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PPNR and PPNR return on average assets: Given that the use of PPNR is prevalent among bank investors and analysts during periods of economic stress and elevated loan provisioning, we disclose it and the PPNR return on average assets, in addition to the related GAAP measures of net earnings and return on average assets. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for the periods presented.

Three Months EndedNine Months Ended
PPNR and PPNR Return
September 30,June 30,September 30,September 30,
on Average Assets
20202020201920202019
(Dollars in thousands)
Net earnings (loss)$45,503 $33,204 $110,026 $(1,354,404)$350,755 
Add:Provision for credit losses97,000 120,000 7,000 329,000 19,000 
Goodwill impairment— — — 1,470,000 — 
Income tax expense13,671 12,968 41,830 38,627 135,118 
Pre-provision, pre-goodwill impairment
pre-tax net revenue ("PPNR")$156,174 $166,172 $158,856 $483,223 $504,873 
Average assets$27,935,193 $26,621,227 $26,406,603 $27,221,102 $26,012,890 
Return on average assets (1)
0.65 %0.50 %1.65 %(6.65)%1.80 %
PPNR return on average assets (2)
2.22 %2.51 %2.39 %2.37 %2.59 %
___________________________________
(1)     Annualized net earnings (loss) divided by average assets.
(2)     Annualized PPNR divided by average assets.
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Results of Operations
Earnings Performance
The following table presents performance metrics for the periods indicated:
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
20202020201920202019
(Dollars in thousands, except per share data)
Earnings Summary:
Interest income$265,908 $274,075 $307,208 $831,315 $926,300 
Interest expense(14,584)(19,796)(54,972)(75,965)(158,290)
Net interest income251,324 254,279 252,236 755,350 768,010 
Provision for credit losses(97,000)(120,000)(7,000)(329,000)(19,000)
Noninterest income38,252 38,858 33,429 106,210 115,386 
Operating expense(133,402)(126,965)(126,809)(378,337)(378,523)
Goodwill impairment— — — (1,470,000)— 
Earnings (loss) before income taxes59,174 46,172 151,856 (1,315,777)485,873 
Income tax expense(13,671)(12,968)(41,830)(38,627)(135,118)
Net earnings (loss) $45,503 $33,204 $110,026 $(1,354,404)$350,755 
Pre-provision, pre-goodwill impairment,
pre-tax net revenue ("PPNR") (2)
$156,174 $166,172 $158,856 $483,223 $504,873 
Performance Measures:
Diluted earnings (loss) per share$0.38 $0.28 $0.92 $(11.60)$2.91 
Return on average assets 0.65 %0.50 %1.65 %(6.65)%1.80 %
PPNR return on average assets (2)
2.22 %2.51 %2.39 %2.37 %2.59 %
Return on average tangible equity (1)(2)
8.20 %6.39 %19.84 %7.16 %21.77 %
Net interest margin (tax equivalent)3.90 %4.20 %4.46 %4.13 %4.62 %
Yield on average loans and leases (tax equivalent)5.01 %5.01 %5.91 %5.18 %6.11 %
Cost of average total deposits0.17 %0.25 %0.83 %0.32 %0.79 %
Efficiency ratio45.1 %42.9 %42.3 %42.9 %42.1 %
_____________________________
(1)    Calculation reduces average stockholder's equity by average intangible assets.
(2)    See "- Non-GAAP Measurements."
Third Quarter of 2020 Compared to Second Quarter of 2020
Net earnings for the third quarter of 2020 were $45.5 million, or $0.38 per diluted share, compared to net earnings for the second quarter of 2020 of $33.2 million, or $0.28 per diluted share. The $12.3 million increase in net earnings from the prior quarter was due primarily to a lower provision for credit losses of $23.0 million, offset partially by lower net interest income of $3.0 million and higher noninterest expense of $6.4 million. The decrease in the provision for credit losses reflected improvement in certain key macro-economic forecast variables (unemployment and real GDP growth), offset partially by deterioration in other key macro-economic variables, including CRE price index and BBB spreads, and increased provisions for individually evaluated loans and leases. Net interest income decreased due mainly to a lower balance of average loans and leases, offset partially by a lower cost of average interest-bearing liabilities. Noninterest expense increased due mainly to an increase of $13.2 million in compensation expense, offset partially by decreases of $5.4 million in insurance and assessments expense and $2.4 million in other expense.
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Third Quarter of 2020 Compared to Third Quarter of 2019
Net earnings for the third quarter of 2020 were $45.5 million, or $0.38 per diluted share, compared to net earnings for the third quarter of 2019 of $110.0 million, or $0.92 per diluted share. The $64.5 million decrease in net earnings from the year-ago quarter was due primarily to a higher provision for credit losses of $90.0 million and higher noninterest expense of $6.6 million, offset partially by higher noninterest income of $4.8 million and lower income tax expense of $28.2 million. The increase in the provision for credit losses for the third quarter of 2020 from the year-ago quarter was the result of the impact of the current economic forecast used in our CECL process, which reflected a significant deterioration in key macro-economic forecast variables such as unemployment and GDP growth as a result of COVID-19. Noninterest expense increased due mostly to increases of $3.7 million in compensation expense, $1.2 million in customer related expense, and $1.1 million in other expense. Noninterest income increased due principally to increases of $6.9 million in dividends and gains on equity investments and $4.4 million in gain on sale of securities, offset partially by a $3.4 million decrease in warrant income. The decrease in income tax expense is mostly due to lower pre-tax earnings in the third quarter of 2020 compared to the year-ago quarter.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Net loss for the nine months ended September 30, 2020 was $1.35 billion, or a loss of $11.60 per diluted share, compared to net earnings for the nine months ended September 30, 2019 of $350.8 million, or $2.91 per diluted share. The $1.71 billion decrease in net earnings from the year-ago period was due primarily to a $1.47 billion goodwill impairment charge in the first quarter of 2020, a higher provision for credit losses of $310.0 million, lower noninterest income of $9.2 million, and lower net interest income of $12.7 million, offset partially by lower income tax expense of $96.5 million. The increase in the provision for credit losses for the nine months ended September 30, 2020 was the result of the impact of the current economic forecast used in our CECL process, which reflected a significant deterioration in key macro-economic forecast variables such as unemployment and GDP growth as a result of COVID-19. The decrease in noninterest income for the first nine months of 2020 compared to the same period a year ago was due primarily to a $12.1 million decrease in the gain on sale of securities. Net interest income decreased due mainly to lower yields on average loans and leases and securities as a result of lower market rates, offset partially by a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases.
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Net Interest Income
The following tables summarize the distribution of average assets, liabilities, and stockholders’ equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, presented on a tax equivalent basis, for the periods indicated:
Three Months Ended
September 30, 2020June 30, 2020September 30, 2019
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:
Loans and leases (1)(2)(3)
$19,195,737 $241,547 5.01 %$19,951,603 $248,474 5.01 %$18,539,281 $276,309 5.91 %
Investment securities (2)(4)
4,107,915 26,015 2.52 %3,846,459 27,430 2.87 %3,809,243 32,213 3.36 %
Deposits in financial institutions2,554,349 654 0.10 %733,142 186 0.10 %445,152 2,424 2.16 %
Total interest‑earning assets (2)
25,858,001 268,216 4.13 %24,531,204 276,090 4.53 %22,793,676 310,946 5.41 %
Other assets2,077,192 2,090,023 3,612,927 
Total assets$27,935,193 $26,621,227 $26,406,603 
LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking $4,904,614 2,019 0.16 %$4,001,750 1,573 0.16 %$3,598,698 11,942 1.32 %
Money market 7,170,842 3,081 0.17 %6,114,354 2,856 0.19 %5,121,856 14,807 1.15 %
Savings 565,395 35 0.02 %524,335 33 0.03 %515,649 218 0.17 %
Time 1,876,072 4,752 1.01 %2,475,858 8,613 1.40 %2,795,573 13,736 1.95 %
Total interest‑bearing deposits14,516,923 9,887 0.27 %13,116,297 13,075 0.40 %12,031,776 40,703 1.34 %
Borrowings181,315 27 0.06 %871,110 1,319 0.61 %1,181,313 6,852 2.30 %
Subordinated debentures462,375 4,670 4.02 %459,466 5,402 4.73 %456,011 7,417 6.45 %
Total interest‑bearing liabilities15,160,613 14,584 0.38 %14,446,873 19,796 0.55 %13,669,100 54,972 1.60 %
Noninterest‑bearing demand deposits
8,812,391 8,292,151 7,487,555 
Other liabilities464,320 435,353 359,202 
Total liabilities24,437,324 23,174,377 21,515,857 
Stockholders’ equity3,497,869 3,446,850 4,890,746 
Total liabilities and
stockholders' equity$27,935,193 $26,621,227 $26,406,603 
Net interest income (2)
$253,632 $256,294 $255,974 
Net interest rate spread (2)
3.75 %3.98 %3.81 %
Net interest margin (2)
3.90 %4.20 %4.46 %
Total deposits (5)
$23,329,314 $9,887 0.17 %$21,408,448 $13,075 0.25 %$19,519,331 $40,703 0.83 %
_____________________
(1)    Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2)    Tax equivalent.
(3)    Includes discount accretion on acquired loans of $2.0 million, $2.5 million, and $2.6 million for the three months ended September 30, 2020, June 30, 2020, and September 30, 2019, respectively.
(4)    Includes tax-equivalent adjustments of $1.6 million, $1.4 million, and $3.4 million for the three months ended September 30, 2020, June 30, 2020, and September 30, 2019, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.
(5)    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 total deposits divided by average total deposits.

63


Nine Months Ended
September 30, 2020September 30, 2019
Interest
Yields
Interest
Yields
Average
Income/
and
Average
Income/
and
Balance
Expense
Rates
Balance
Expense
Rates
(Dollars in thousands)
ASSETS:
Loans and leases (1)(2)(3)
$19,403,365 $752,785 5.18 %$18,282,807 $835,335 6.11 %
Investment securities (2)(4)
3,936,492 82,086 2.79 %3,855,486 92,248 3.20 %
Deposits in financial institutions1,279,628 2,448 0.26 %263,155 4,423 2.25 %
Total interest-earning assets (2)
24,619,485 837,319 4.54 %22,401,448 932,006 5.56 %
Other assets2,601,617 3,611,442 
Total assets$27,221,102 $26,012,890 
LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking $4,127,239 10,727 0.35 %$3,296,533 31,907 1.29 %
Money market 6,181,312 15,953 0.34 %5,147,060 44,319 1.15 %
Savings 529,362 228 0.06 %531,306 687 0.17 %
Time 2,343,645 24,301 1.39 %2,606,417 36,745 1.88 %
Total interest-bearing deposits13,181,558 51,209 0.52 %11,581,316 113,658 1.31 %
Borrowings1,023,307 8,124 1.06 %1,180,482 21,772 2.47 %
Subordinated debentures460,088 16,632 4.83 %455,045 22,860 6.72 %
Total interest-bearing liabilities14,664,953 75,965 0.69 %13,216,843 158,290 1.60 %
Noninterest-bearing demand deposits
8,157,169 7,603,993 
Other liabilities433,527 349,914 
Total liabilities23,255,649 21,170,750 
Stockholders’ equity3,965,453 4,842,140 
Total liabilities and
stockholders' equity$27,221,102 $26,012,890 
Net interest income (2)
$761,354 $773,716 
Net interest rate spread (2)
3.85 %3.96 %
Net interest margin (2)
4.13 %4.62 %
Total deposits (5)
$21,338,727 $51,209 0.32 %$19,185,309 $113,658 0.79 %
_____________________
(1)    Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2)    Tax equivalent.
(3)    Includes discount accretion on acquired loans of $9.3 million and $9.1 million for the nine months ended September 30, 2020 and 2019, respectively.
(4)    Includes tax-equivalent adjustments of $4.2 million and $4.8 million for the nine months ended September 30, 2020 and 2019, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.
(5)    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 total deposits divided by average total deposits.












64


Third Quarter of 2020 Compared to Second Quarter of 2020
Net interest income decreased by $3.0 million to $251.3 million for the third quarter of 2020 compared to $254.3 million for the second quarter of 2020 due mainly to a lower balance of average loans and leases, offset partially by a lower cost of average interest-bearing liabilities. The tax-equivalent yield on average loans and leases was 5.01% for both the third quarter and second quarter of 2020.
The tax equivalent NIM was 3.90% for the third quarter of 2020 compared to 4.20% for the second quarter of 2020. The decrease in the tax equivalent NIM was due mostly to the change in the earning asset mix. Average loans and leases decreased by $756 million, while the average balance of deposits in financial institutions increased by $1.8 billion in the third quarter of 2020. This excess liquidity had a negative impact on the third quarter tax equivalent NIM of 32 basis points, while the PPP loans, which have a coupon rate of 1%, had a negative impact of seven basis points.
The cost of average total deposits decreased to 0.17% for the third quarter of 2020 from 0.25% for the second quarter of 2020. The lower cost of average total deposits was due primarily to the repricing of maturing time deposits. The cost of deposits was 0.13% at September 30, 2020.
Third Quarter of 2020 Compared to Third Quarter of 2019
Net interest income decreased by $0.9 million to $251.3 million for the third quarter of 2020 compared to $252.2 million for the third quarter of 2019 due mainly to a lower yield on average loans and leases, offset partially by a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases. The tax equivalent yield on average loans and leases was 5.01% for the third quarter of 2020 compared to 5.91% for the same quarter of 2019. The decrease in the yield on average loans and leases was due mainly to lower loan coupon interest from the repricing of variable-rate loans in conjunction with decreased market rates and a lower rate on loan production from the impact of the PPP loans.
The tax equivalent NIM was 3.90% for the third quarter of 2020 compared to 4.46% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the yield on average loans and leases as described above, offset partially by lower deposit and borrowing costs. Total discount accretion on acquired loans contributed three basis points to the NIM for the third quarter of 2020 compared to four basis points for the third quarter of 2019.
The cost of average total deposits decreased to 0.17% for the third quarter of 2020 from 0.83% for the third quarter of 2019 due mainly to lower rates paid on deposits in conjunction with decreased market rates.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Net interest income decreased by $12.7 million to $755.4 million for the nine months ended September 30, 2020 compared to $768.0 million for the nine months ended September 30, 2019 due mainly to a lower yield on average loans and leases and higher balances of average interest-bearing deposits and borrowings, offset partially by a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases. The tax equivalent yield on average loans and leases was 5.18% for the nine months ended September 30, 2020 compared to 6.11% for the same period in 2019. The decrease in the yield on average loans and leases was due mainly to lower loan coupon interest from the repricing of variable-rate loans in conjunction with decreased market rates and a lower rate on loan production from the impact of the PPP loans. Excluding the PPP loans, which have a coupon rate of 1%, the tax equivalent yield on average loans and leases was 5.28% in the 2020 period.
The tax equivalent NIM was 4.13% for the nine months ended September 30, 2020 compared to 4.62% for the same period last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the yield on average loans and leases as described above, offset partially by lower deposit and borrowing costs. Excluding the PPP loans, the tax equivalent NIM was 4.17% for the nine months ended September 30, 2020.
The cost of average total deposits decreased to 0.32% for the nine months ended September 30, 2020 from 0.79% for the nine months ended September 30, 2019 due mainly to lower rates paid on deposits resulting from decreased market rates.
65


Provision for Credit Losses
The following table sets forth the details of the provision for credit losses on loans and leases held for investment and information regarding credit quality metrics for the periods indicated:
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
20202020201920202019
(Dollars in thousands)
Provision For Credit Losses:
Addition to allowance for loan and lease losses$81,000 $93,000 $8,000 $272,000 $22,000 
Addition to (reduction in) reserve for unfunded
loan commitments16,000 27,000 (1,000)57,000 (3,000)
Total provision for credit losses$97,000 $120,000 $7,000 $329,000 $19,000 
Credit Quality Metrics:
Net charge-offs on loans and leases held for
investment (1)
$36,084 $13,242 $4,485 $68,436 $15,920 
Annualized net charge-offs to average loans and leases0.75 %0.27 %0.10 %0.47 %0.12 %
At quarter-end:
Allowance for credit losses$442,537 $381,621 $172,413 
Allowance for credit losses to loans and leases
held for investment2.33 %1.94 %0.92 %
Allowance for credit losses to nonaccrual
loans and leases held for investment516.9 %229.7 %174.0 %
Nonaccrual loans and leases held for investment $85,615 $166,113 $99,113 
Performing TDRs held for investment $13,679 $15,037 $16,329 
Classified loans and leases held for investment
$274,572 $293,230 $188,607 
______________________
(1)    See "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" for detail of charge-offs and recoveries by loan portfolio segment, class, and subclass for the periods presented.
Provisions for credit losses are charged to earnings for both the allowance for loan and lease losses and the reserve for unfunded loan commitments (collectively, the allowance for credit losses). The provision for credit losses on our loans and leases held for investment is based on our allowance methodology and is an expense that, in our judgment, is required to maintain an adequate allowance for credit losses. For further details on our allowance for credit losses methodology, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.
The provision for credit losses decreased by $23.0 million to $97.0 million for the third quarter of 2020 compared to $120.0 million for the second quarter of 2020 as a result of improvement in certain key macro-economic forecast variables (unemployment and real GDP growth), offset partially by deterioration in other key macro-economic variables, including CRE price index and BBB spreads, and increased provisions for individually evaluated loans and leases.
The provision for credit losses increased by $90.0 million to $97.0 million for the third quarter of 2020 compared to $7.0 million for the third quarter of 2019 as a result of the impact of the current economic forecast used in our CECL process, which reflected a significant deterioration in key macro-economic forecast variables such as unemployment and GDP growth as a result of COVID-19.
The provision for credit losses increased by $310.0 million to $329.0 million for the nine months ended September 30, 2020 compared to $19.0 million for the nine months ended September 30, 2019 as a result of the impact of the current economic forecast used in our CECL process, which reflected a significant deterioration in key macro-economic forecast variables such as unemployment and GDP growth as a result of COVID-19.
66


Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances include deterioration in economic conditions and forecasts, an increased amount of classified and/or criticized loans and leases, and net loan and lease and unfunded commitment growth. Deterioration in economic conditions and forecasts include the rate of economic growth, the unemployment rate, the rate of inflation, changes in the general level of interest rates, changes in real estate values, and adverse conditions in borrowers’ businesses. See further discussion in “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.
Noninterest Income
The following table summarizes noninterest income by category for the periods indicated:
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
Noninterest Income20202020201920202019
(In thousands)
Leased equipment income$9,900 $12,037 $9,615 $34,188 $28,079 
Other commissions and fees10,541 10,111 10,855 30,373 33,453 
Service charges on deposit accounts2,570 2,004 3,525 7,232 11,026 
Gain on sale of loans and leases35 346 765 468 1,091 
Gain on sale of securities5,270 7,715 908 13,167 25,261 
Other income:
Dividends and gains (losses) on equity investments6,945 2,947 14 9,920 227 
Warrant income 500 1,973 3,936 3,310 7,429 
Other 2,491 1,725 3,811 7,552 8,820 
Total noninterest income$38,252 $38,858 $33,429 $106,210 $115,386 
Third Quarter of 2020 Compared to Second Quarter of 2020
Noninterest income decreased by $0.6 million to $38.3 million for the third quarter of 2020 compared to $38.9 million for the second quarter of 2020 due mainly to decreases of $2.4 million in gain on sale of securities, $2.1 million in leased equipment income, and $1.5 million in warrant income, offset partially by a $4.0 million increase in dividends and gains on equity investments. The decrease in gain on sale of securities resulted from the sale of $17.0 million of securities for a gain of $5.3 million in the third quarter compared to sales of $122.3 million of securities for a gain of $7.7 million in the second quarter. Leased equipment income decreased due mainly to lower gains from early lease terminations and lower rental income attributable to operating leases placed on nonaccrual status in the third quarter. Warrant income decreased due principally to lower gains from exercised warrants. The increase in dividends and gains on equity investments resulted primarily from net fair value gains of $5.9 million recorded in the third quarter of 2020 on equity investments still held.
Third Quarter of 2020 Compared to Third Quarter of 2019
Noninterest income increased by $4.8 million to $38.3 million for the third quarter of 2020 compared to $33.4 million for the third quarter of 2019 due mainly to increases of $6.9 million in dividends and gains on equity investments and $4.4 million in gain on sale of securities, offset partially by a decrease of $3.4 million in warrant income. The increase in dividends and gains on equity investments resulted primarily from net fair value gains of $5.9 million on equity investments still held recorded in the third quarter of 2020. The increase in gain on sale of securities resulted from the sale of $17.0 million of securities for a gain of $5.3 million in the third quarter of 2020 compared to sales of $143.4 million of securities for a gain of $0.9 million in the third quarter of 2019. Warrant income decreased due principally to lower gains from exercised warrants.
67


Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Noninterest income decreased by $9.2 million to $106.2 million for the nine months ended September 30, 2020 compared to $115.4 million for the nine months ended September 30, 2019 due mainly to decreases of $12.1 million in gain on sale of securities, $4.1 million in warrant income, $3.8 million in service charges on deposit accounts, and $3.1 million in other commissions and fees, offset partially by increases of $9.7 million in dividends and gains on equity investments and $6.1 million in leased equipment income. The decrease in gain on sale of securities resulted from the sale of $154.1 million of securities for a gain of $13.2 million for the nine months ended September 30, 2020 compared to sales of $1.5 billion of securities for a gain of $25.3 million for the nine months ended September 30, 2019. Warrant income decreased due principally to lower gains from exercised warrants. Service charges on deposit accounts decreased due primarily to lower analysis fees and NSF fees for the nine months ended September 30, 2020 as compared to the same period last year as we waived certain fees for a period of time as part of our response to the COVID-19 pandemic. Other commissions and fees decreased primarily due to lower foreign exchange fees and lower credit card fee income, offset partially by higher customer success fees. Dividends and gains on equity investments increased due primarily to increases in the fair value of equity investments still held and higher gains on sale of equity investments sold. Leased equipment income increased due to early lease terminations resulting in higher termination gains in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 and a higher average balance of leases in 2020 resulting in higher lease income as compared to the 2019 period, offset partially by lower rental income attributable to operating leases placed on nonaccrual status in 2020.
Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
Noninterest Expense20202020201920202019
(In thousands)
Compensation$75,131 $61,910 $71,424 $198,323 $211,225 
Occupancy14,771 14,494 14,089 43,472 42,866 
Leased equipment depreciation7,057 7,102 5,951 21,364 17,160 
Data processing6,505 7,102 7,044 20,061 20,786 
Other professional services4,713 4,146 4,400 13,117 13,542 
Insurance and assessments3,939 9,373 4,100 17,561 12,236 
Intangible asset amortization3,751 3,882 4,833 11,581 14,573 
Customer related expense4,762 4,408 3,539 13,102 9,887 
Loan expense3,499 3,379 3,628 9,528 9,964 
Foreclosed assets expense (income), net335 (146)255 (109)
Acquisition, integration and reorganization costs— — — — 618 
Other8,939 11,315 7,793 29,973 25,775 
Total operating expense133,402 126,965 126,809 378,337 378,523 
Goodwill impairment— — — 1,470,000 — 
Total noninterest expense$133,402 $126,965 $126,809 $1,848,337 $378,523 
68


Third Quarter of 2020 Compared to Second Quarter of 2020
Noninterest expense increased by $6.4 million to $133.4 million for the third quarter of 2020 compared to $127.0 million for the second quarter of 2020 attributable primarily to a $13.2 million increase in compensation expense, offset partially by decreases of $5.4 million in insurance and assessments expense and $2.4 million in other expense. Compensation expense increased due mainly to higher bonus accruals of $12.4 million and stock compensation expense of $1.4 million. Projections for accruals for discretionary bonuses were reduced in the first quarter with the onset of the pandemic and continued at the lower accrual rate in the second quarter, before being increased in the third quarter causing an incremental increase in the third quarter based on the updated bonus projections. The updated annual bonus projections remain below normal historical levels and are subject to change. Insurance and assessments expense decreased due mostly to a decline in FDIC assessment expense, which was attributable primarily to increases in liquidity and uninsured deposits during the last two quarters. The decrease in other expense was due primarily to $6.6 million in prepayment penalties incurred in the second quarter from the early payoff of $750 million of FHLB term advances, offset partially by higher legal accruals in the third quarter.
Third Quarter of 2020 Compared to Third Quarter of 2019
Noninterest expense increased by $6.6 million to $133.4 million for the third quarter of 2020 compared to $126.8 million for the third quarter of 2019 due mainly to increases of $3.7 million in compensation expense, $1.2 million in customer related expense, and $1.1 million in other expense. Compensation expense increased due mostly to higher bonus expense reflecting the incremental increase to the annual bonus projection discussed above and higher vacation accrual expense. Customer related expense increased due primarily to higher customer analysis expenses. Other expense increased due mainly to higher legal accruals, offset partially by lower business development expenses as a result of COVID-19.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Noninterest expense increased by $1.47 billion to $1.85 billion for the nine months ended September 30, 2020 compared to $378.5 million for the nine months ended September 30, 2019 due mainly to a $1.47 billion goodwill impairment charge. Excluding the goodwill impairment charge, noninterest expense decreased by $0.2 million to $378.3 million. This decrease was due mainly to decreases of $12.9 million in compensation expense and $3.0 million in intangible asset amortization, offset partially by increases of $5.3 million in insurance and assessments, $4.2 million in leased equipment depreciation, and $4.2 million in other expense. Compensation expense decreased due mainly to lower bonus expense in the 2020 period compared to the prior year. Intangible asset amortization decreased due mostly to lower CDI amortization related to a financial institution acquired in 2017. Insurance and assessments expense increased due primarily to an increase in our FDIC assessment rate as a result of the first quarter 2020 loss from the goodwill impairment charge. Leased equipment depreciation increased due principally to a higher average balance of leased equipment. Other expense increased due mainly to $6.6 million in prepayment penalties incurred in the second quarter from the early payoff of $750 million of FHLB term advances and higher legal accruals, offset partially by lower business development expenses and employee related expenses as a result of COVID-19.
Income Taxes
The effective tax rate for the third quarter of 2020 was 23.1% compared to 28.1% for the second quarter of 2020 and 27.5% for the third quarter of 2019. The lower effective tax rate in the third quarter of 2020 was due mainly to the tax effects of restricted stock vestings in the second quarter that elevated the second quarter effective tax rate. The effective tax rate for the nine months ended September 30, 2020 was (2.9)% compared to 27.8% for the nine months ended September 30, 2019. Excluding non-deductible goodwill impairment, the effective income tax rate was 25.0% for the nine months ended September 30, 2020. The Company’s blended statutory tax rate for federal and state is 27.9% and the effective tax rate for the full year 2020, excluding non-deductible goodwill impairment, is estimated to be in the range of 25-27%.
69


Balance Sheet Analysis
Securities Available-for-Sale
The following table presents the composition and durations of our securities available-for-sale as of the dates indicated:
 September 30, 2020June 30, 2020December 31, 2019
Fair
% of
DurationFair
% of
DurationFair
% of
Duration
Security TypeValue
Total
(in years)Value
Total
(in years)Value
Total
(in years)
 (Dollars in thousands)
Agency commercial MBS$1,204,315 27 %2.6 $1,133,086 29 %2.8 $1,108,224 29 %4.4 
Municipal securities 1,203,030 27 %7.7 888,338 23 %7.2 735,159 19 %7.6 
Agency residential CMOs1,165,872 26 %2.8 1,049,742 27 %2.9 1,136,397 30 %3.7 
Agency residential MBS246,498 %1.8 248,934 %2.5 305,198 %3.3 
Asset-backed securities234,103 %0.7 227,206 %0.6 214,783 %1.1 
Corporate debt securities174,282 %3.7 20,458 %9.9 20,748 %11.3 
Collateralized loan obligations135,333 %— 136,663 %(0.1)123,756 %0.2 
Private label residential CMOs121,162 %2.5 96,775 %2.3 99,483 %3.2 
SBA securities42,684 %3.0 44,576 %3.0 48,258 %4.0 
U.S. Treasury securities5,335 — %1.4 5,363 — %1.6 5,181 — %3.2 
Total securities available-
   for-sale$4,532,614 100 %3.8 $3,851,141 100 %3.6 $3,797,187 100 %4.4 
The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
September 30, 2020
Fair
% of
Municipal Securities by State
Value
Total
(Dollars in thousands)
 California$376,174 31 %
 Texas176,618 15 %
 Washington168,705 14 %
 Georgia67,524 %
 Oregon52,616 %
 New York52,325 %
 Utah41,282 %
 Maryland29,052 %
 Florida24,468 %
 Illinois23,469 %
Total of ten largest states1,012,233 84 %
 All other states190,797 16 %
Total municipal securities$1,203,030 100 %
70


Loans and Leases Held for Investment
The following table presents the composition of our loans and leases held for investment, net of deferred fees, by loan portfolio segment, class, and subclass as of the dates indicated:
September 30, 2020June 30, 2020December 31, 2019
% of
% of
% of
Loan and Lease Portfolio
Balance
Total
Balance
Total
Balance
Total
(Dollars in thousands)
Real estate mortgage:
Healthcare real estate$202,570 %$237,287 %$334,070 %
Hotel648,523 %648,081 %625,798 %
SBA program600,668 %573,149 %556,889 %
Other commercial real estate2,740,705 14 %2,763,558 14 %2,685,930 14 %
Total commercial real estate mortgage4,192,466 22 %4,222,075 22 %4,202,687 22 %
Income producing and other residential3,592,905 19 %3,638,835 19 %3,665,790 19 %
Other residential real estate91,674 — %94,824 — %104,270 %
Total income producing and other
residential real estate mortgage3,684,579 19 %3,733,659 19 %3,770,060 20 %
Total real estate mortgage7,877,045 41 %7,955,734 41 %7,972,747 42 %
Real estate construction and land:
Commercial1,241,647 %1,167,609 %1,082,368 %
Residential2,182,100 11 %2,172,919 11 %1,655,434 %
Total real estate construction and land (1)
3,423,747 18 %3,340,528 17 %2,737,802 15 %
Total real estate 11,300,792 59 %11,296,262 58 %10,710,549 57 %
Commercial:
Lender finance 1,819,169 10 %1,979,392 10 %2,118,767 11 %
Equipment finance692,089 %786,388 %852,278 %
Premium financek#VALUE!420,479 %467,469 %
Other asset-based219,804 #VALUE!226,172 %309,893 %
Total asset-based3,153,048 17 %3,412,431 17 %3,748,407 20 %
Equity fund loans745,596 %739,761 %1,199,268 %
Venture lending891,536 %1,074,580 %980,154 %
Total venture capital1,637,132 %1,814,341 %2,179,422 12 %
Paycheck Protection Program1,212,477 %1,211,163 %— — %
Secured business loans411,559 %501,680 %583,300 %
Security monitoring411,271 %498,895 %619,260 %
Other lending507,105 %511,655 %527,049 %
Cash flow30,582 — %36,885 — %38,058 — %
Total other commercial2,572,994 13 %2,760,278 14 %1,767,667 %
Total commercial7,363,174 39 %7,987,050 40 %7,695,496 41 %
Consumer362,234 %411,319 %440,827 %
Total loans and leases held for investment,
net of deferred fees$19,026,200 100 %$19,694,631 100 %$18,846,872 100 %
 
________________________________
(1)    Includes land and acquisition and development loans of $154.1 million at September 30, 2020, $145.5 million at June 30, 2020, and $173.4 million at December 31, 2019.
71


The following table presents the geographic composition of our real estate loans held for investment, net of deferred fees, 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, 2020December 31, 2019
% of
% of
Real Estate Loans by StateBalance
Total
Balance
Total
(Dollars in thousands)
California$6,783,946 60 %$6,510,094 61 %
New York719,294 %711,301 %
Florida679,130 %598,561 %
Washington386,659 %324,588 %
Colorado354,968 %126,370 %
Texas282,806 %260,513 %
Oregon270,765 %288,764 %
Arizona193,400 %162,317 %
Nevada167,943 %88,650 %
District of Columbia154,242 %166,641 %
Total of 10 largest states9,993,153 88 %9,237,799 86 %
All other states1,307,639 12 %1,472,750 14 %
Total real estate loans held for investment, net of deferred fees$11,300,792 100 %$10,710,549 100 %
The following table presents a roll forward of loans and leases held for investment, net of deferred fees, for the periods indicated:
Three Months EndedNine Months Ended
Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees (1)
September 30, 2020September 30, 2020
(Dollars in thousands)
Balance, beginning of period$19,694,631 $18,846,872 
Additions:
Production (2)
519,671 3,112,373 
Disbursements1,008,336 3,805,874 
Total production and disbursements1,528,007 6,918,247 
Reductions:
Payoffs (982,889)(2,408,433)
Paydowns(1,160,692)(4,236,773)
Total payoffs and paydowns(2,143,581)(6,645,206)
Sales(2,979)(6,068)
Transfers to foreclosed assets(12,594)(14,370)
Charge-offs(37,284)(73,275)
Total reductions(2,196,438)(6,738,919)
Net (decrease) increase(668,431)179,328 
Balance, end of period$19,026,200 $19,026,200 
Weighted average rate on production (3)
4.95 %3.27 %
_______________________________________ 
(1)    Includes direct financing leases but excludes equipment leased to others under operating leases.
(2)    Production for the nine months ended September 30, 2020 includes $1.2 billion of PPP loans originated in the second quarter.
(3)    The weighted average rate on production presents contractual rates on a tax equivalent basis and does not include amortized fees. Amortized fees added approximately 26 and 23 basis points to loan yields for the three and nine months ended September 30, 2020. Excluding PPP loans, which were at a 1% rate, the weighted average rate on production for the nine months ended September 30, 2020 was 4.81%.


72


Allowance for Credit Losses on Loans and Leases Held for Investment
The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The amortized cost basis of loans and leases does not include interest receivable, which is included in "Other assets" on the condensed consolidated balance sheets. The "Provision for credit losses" on the condensed consolidated statement of earnings (loss) is a combination of the provision for loan and lease losses and the provision for unfunded loan commitments.
Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. For further information regarding the calculation of the allowance for credit losses on loans and leases held for investment using the CECL methodology effective January 1, 2020, see Note 1. Organization - Significant Accounting Policies and Accounting Standards Adopted in 2020 of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
In calculating our allowance for credit losses in the third quarter of 2020, we continued to consider the impacts of the COVID-19 pandemic on our estimation of expected credit losses given the changes in economic forecasts and assumptions along with the uncertainty related to the severity and duration of the economic consequences of the COVID-19 pandemic. Our methodology and framework along with the 4-quarter reasonable and supportable forecast period and 2-quarter reversion period have remained consistent since the implementation of CECL on January 1, 2020. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis. In the second quarter of 2020, we updated our estimated prepayment rates and expected future utilization rates for the reserve for unfunded commitments, while during the third quarter of 2020, we updated our PD econometric regression models.
In the second and third quarters of 2020, we used the Moody’s Consensus Scenario Forecast dated June 11, 2020 and September 11, 2020, respectively, for our quantitative component, unlike the first quarter when we used the Moody’s Baseline Forecast dated March 27, 2020, as the Consensus Scenario Forecast at that time was considered stale due to the fact it was dated March 12, 2020 and did not reflect the pandemic and rapidly changing environment. For the first and second quarters of 2020, we made additional adjustments to the quantitative calculation due to regression model limitations caused by the sudden and unprecedented changes in macroeconomic variables and for imprecision inherent in the economic forecasts. In the third quarter of 2020, as part of the planned annual update of the PD regression models, we recalibrated the models in consideration of known model limitations to improve performance when applying highly volatile economic forecasts. The recalibration of models included expanding the number of macroeconomic variables and the variable transformations used to correlate to historical credit performance. As a result of the updated PD regression models, adjustments that were made to the quantitative calculation in the first and second quarters were not necessary in the third quarter.
The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of allowance for credit losses. As part of our allowance for credit losses process, sensitivity analyses are performed to assess the impact of how changing certain assumptions could impact the estimated allowance for credit losses. At times, these analyses can provide information to further assist management in making decisions on certain assumptions. However, changing one assumption and not reassessing other assumptions used in the quantitative or qualitative process could yield results that are not reasonable or appropriate, hence all assumptions and information must be considered. From a sensitivity analysis perspective, changing key assumptions such as the macro-economic variable inputs from the economic forecasts, the reasonable and supportable forecast period, prepayment rates, loan segmentation, historical loss factors and/or periods, among others, would all change the outcome of the quantitative components of the allowance for credit losses. Those results would then need to be assessed from a qualitative perspective potentially requiring further adjustments to the qualitative component to arrive at a reasonable and appropriate allowance for credit losses.
73


The determination of the allowance for credit losses is complex and highly dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses as quantified in the allowance for credit losses considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan and lease composition, and relative credit risks known as of the balance sheet date.
Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. 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.
The following table presents information regarding the allowance for credit losses on loans and leases held for investment as of the dates indicated:
September 30,June 30,
December 31,
September 30,
Allowance for Credit Losses Data
2020202020192019
(Dollars in thousands)
Allowance for loan and lease losses$345,966 $301,050 $138,785 $138,552 
Reserve for unfunded loan commitments96,571 80,571 35,861 33,861 
Total allowance for credit losses$442,537 $381,621 $174,646 $172,413 
Allowance for loan and lease losses to loans and leases held for investment1.82 %1.53 %0.74 %0.74 %
Allowance for credit losses to loans and leases held for investment2.33 %1.94 %0.93 %0.92 %
Allowance for credit losses to nonaccrual loans and leases held for investment516.9 %229.7 %189.1 %174.0 %





74


The following table presents the changes in our allowance for credit losses on loans and leases held for investment for the periods indicated:
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
Allowance for Credit Losses Roll Forward
20202020201920202019
(Dollars in thousands)
Balance, beginning of period $381,621 $274,863 $169,898 $174,646 $169,333 
Cumulative effect of change in accounting
principle - CECL, as of January 1, 2020:
Allowance for loan and lease losses— — — 3,617 — 
Reserve for unfunded loan commitments— — — 3,710 — 
Total cumulative effect— — — 7,327 — 
Provision for credit losses:
Addition to allowance for loan and lease losses81,000 93,000 8,000 272,000 22,000 
Addition to (reduction in) reserve for unfunded
loan commitments16,000 27,000 (1,000)57,000 (3,000)
Total provision for credit losses97,000 120,000 7,000 329,000 19,000 
Loans and leases charged off:
Real estate mortgage(1,551)(4,182)(120)(6,233)(850)
Real estate construction and land— — — — — 
Commercial(35,666)(11,439)(6,021)(66,337)(25,951)
Consumer(67)(165)(360)(705)(802)
Total loans and leases charged off(37,284)(15,786)(6,501)(73,275)(27,603)
Recoveries on loans charged off:
Real estate mortgage109 127 95 360 478 
Real estate construction and land21 — — 21 — 
Commercial1,063 2,392 1,898 4,410 11,084 
Consumer25 23 48 121 
Total recoveries on loans charged off 1,200 2,544 2,016 4,839 11,683 
Net charge-offs(36,084)(13,242)(4,485)(68,436)(15,920)
Balance, end of period$442,537 $381,621 $172,413 $442,537 $172,413 
Annualized net charge-offs to average loans and leases0.75 %0.27 %0.10 %0.47 %0.12 %



75


The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
Allowance for Credit Losses Charge-offs
20202020201920202019
(In thousands)
Real estate mortgage:
Healthcare real estate$— $— $— $— $— 
Hotel— — — — — 
SBA program76 120 280 750 
Other commercial real estate1,494 4,106 — 5,727 
Total commercial real estate mortgage1,500 4,182 120 6,007 759 
Income producing and other residential— — — — — 
Other residential real estate51 — — 226 91 
Total income producing and other residential
real estate mortgage 51 — — 226 91 
Total real estate mortgage1,551 4,182 120 6,233 850 
Real estate construction and land:
Commercial— — — — — 
Residential— — — — — 
Total real estate construction and land— — — — — 
Commercial:
Lender finance — — — — — 
Equipment finance267 — — 11,817 — 
Premium finance— — — — — 
Other asset-based— — — — 11,800 
Total asset-based267 — — 11,817 11,800 
Equity fund loans— — — — — 
Venture lending6,470 4,367 6,818 6,130 
Total venture capital6,470 4,367 6,818 6,130 
Paycheck Protection Program — — — — 
Security monitoring33,796 4,180 — 44,032 1,707 
Secured business loans— — 1,111 — 1,220 
Other lending1,353 789 437 3,425 2,133 
Cash flow245 — 106 245 2,961 
Total other commercial35,394 4,969 1,654 47,702 8,021 
Total commercial35,666 11,439 6,021 66,337 25,951 
Consumer67 165 360 705 802 
Total charge-offs$37,284 $15,786 $6,501 $73,275 $27,603 


76


The following table presents recoveries by portfolio segment, class, and subclass for the periods indicated:
Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,
Allowance for Credit Losses Recoveries 20202020201920202019
(In thousands)
Real estate mortgage:
Healthcare real estate$— $— $— $— $— 
Hotel— — — — — 
SBA program31 15 77 153 198 
Other commercial real estate103 12 118 143 
Total commercial real estate mortgage34 118 89 271 341 
Income producing and other residential— — — — — 
Other residential real estate75 89 137 
Total income producing and other
residential real estate mortgage75 89 137 
Total real estate mortgage109 127 95 360 478 
Real estate construction and land:
Commercial— — — — — 
Residential21 — — 21 — 
Total real estate construction and land21 — — 21 — 
Commercial:
Lender finance — — — 
Equipment finance31 — 269 11 
Premium finance— — — — — 
Other asset-based175 14 227 324 545 
Total asset-based206 22 230 593 561 
Equity fund loans— — — — — 
Venture lending604 114 428 903 7,503 
Total venture capital604 114 428 903 7,503 
Paycheck Protection Program— — — — — 
Security monitoring— — 181 — 181 
Secured business loans56 139 731 273 2,176 
Other lending115 117 297 497 612 
Cash flow82 2,000 31 2,144 51 
Total other commercial253 2,256 1,240 2,914 3,020 
Total commercial1,063 2,392 1,898 4,410 11,084 
Consumer25 23 48 121 
Total recoveries$1,200 $2,544 $2,016 $4,839 $11,683 
77


Deposits
The following table presents the balance of each major category of deposits as of the dates indicated:
September 30, 2020June 30, 2020December 31, 2019
% of
% of
% of
Deposit CompositionBalance
Total
Balance
Total
Balance
Total
(Dollars in thousands)
Noninterest-bearing demand $9,346,744 39 %$8,629,543 38 %$7,243,298 38 %
Interest checking4,657,511 20 %4,858,168 21 %3,753,978 19 %
Money market6,539,313 27 %5,498,150 24 %4,690,420 24 %
Savings574,061 %549,953 %499,591 %
Total core deposits21,117,629 88 %19,535,814 85 %16,187,287 84 %
Non-core non-maturity deposits1,123,909 %1,217,266 %496,407 %
Total non-maturity deposits22,241,538 93 %20,753,080 90 %16,683,694 87 %
Time deposits $250,000 and under1,047,621 %1,522,928 %2,065,733 11 %
Time deposits over $250,000676,536 %652,571 %483,609 %
Total time deposits1,724,157 %2,175,499 10 %2,549,342 13 %
Total deposits$23,965,695 100 %$22,928,579 100 %$19,233,036 100 %
During the third quarter of 2020, total deposits increased by $1.0 billion to $24.0 billion, due mainly to increases of $1.6 billion in core deposits, offset partially by a decrease of $451.3 million in time deposits and a decrease of $93.4 million in non-core non-maturity deposits. The increase in core deposits in the third quarter was driven by continued strong deposit growth from our venture banking clients. At September 30, 2020, core deposits totaled $21.1 billion, or 88% of total deposits, including $9.3 billion of noninterest-bearing demand deposits, or 39% of total deposits.
The following table summarizes the maturities of time deposits as of the date indicated:
Time Deposits
$250,000
Over
September 30, 2020
and Under
$250,000
Total
(In thousands)
Maturities:
Due in three months or less$303,866 $261,245 $565,111 
Due in over three months through six months203,783 187,586 391,369 
Due in over six months through twelve months276,297 174,570 450,867 
Total due within twelve months783,946 623,401 1,407,347 
Due in over 12 months through 24 months90,807 51,311 142,118 
Due in over 24 months172,868 1,824 174,692 
Total $1,047,621 $676,536 $1,724,157 
Client Investment Funds
In addition to deposit products, we also offer select clients non-depository cash investment options through PWAM, our registered investment adviser subsidiary, and third-party money market sweep products. PWAM provides customized investment advisory and asset management solutions. At September 30, 2020, total off-balance sheet client investment funds were $1.2 billion, of which $1.0 billion was managed by PWAM. At December 31, 2019, total off-balance sheet client investment funds were $1.5 billion, of which $1.2 billion was managed by PWAM.
78


Credit Quality
Nonperforming Assets, Performing TDRs, and Classified Loans and Leases
The following table presents information on our nonperforming assets, performing TDRs, and classified loans and leases as of the dates indicated:
September 30,June 30,
December 31,
September 30,
2020202020192019
(Dollars in thousands)
Nonaccrual loans and leases held for investment $85,615 $166,113 $92,353 $99,113 
Foreclosed assets, net13,747 1,449 440 1,366 
Total nonperforming assets$99,362 $167,562 $92,793 $100,479 
Performing TDRs held for investment $13,679 $15,037 $12,257 $16,329 
Classified loans and leases held for investment $274,572 $293,230 $175,912 $188,607 
Nonaccrual loans and leases held for investment to
loans and leases held for investment 0.45 %0.84 %0.49 %0.53 %
Nonperforming assets to loans and leases held for investment
and foreclosed assets, net 0.52 %0.85 %0.49 %0.54 %
Classified loans and leases held for investment
to loans and leases held for investment 1.44 %1.49 %0.93 %1.01 %
Nonaccrual Loans and Leases Held for Investment
The following table presents our nonaccrual loans and leases held for investment and accruing loans and leases past due between 30 and 89 days by loan portfolio segment and class as of the dates indicated:
September 30, 2020June 30, 2020Increase (Decrease)
Accruing AccruingAccruing
and 30-89and 30-89and 30-89
Days PastDays Past Days Past
NonaccrualDueNonaccrualDueNonaccrualDue
(Dollars in thousands)
Real estate mortgage:
Commercial$45,120 $— $61,771 $— $(16,651)$— 
Income producing and other residential2,008 1,761 2,207 — (199)1,761 
Total real estate mortgage47,128 1,761 63,978 — (16,850)1,761 
Real estate construction and land:
Commercial324 — 337 — (13)— 
Residential— 3,108 — 1,021 — 2,087 
Total real estate construction and land324 3,108 337 1,021 (13)2,087 
Commercial:
Asset-based2,817 — 19,013 3,697 (16,196)(3,697)
Venture capital2,001 2,319 8,270 1,924 (6,269)395 
Other commercial32,941 185 73,995 191 (41,054)(6)
Total commercial37,759 2,504 101,278 5,812 (63,519)(3,308)
Consumer404 791 520 1,067 (116)(276)
Total held for investment$85,615 $8,164 $166,113 $7,900 $(80,498)$264 
79


During the third quarter of 2020, nonaccrual loan and leases held for investment decreased by $80.5 million to $85.6 million at September 30, 2020 due mainly to charge-offs of $36.3 million, transfers to foreclosed assets of $12.6 million, and principal payments and other reductions of $37.0 million, offset partially by additions of $5.4 million. As of September 30, 2020, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $49.3 million and represented 58% of total nonaccrual loans and leases.
Foreclosed Assets
The following table presents foreclosed assets (primarily OREO), net of the valuation allowance, by property type as of the dates indicated:
September 30,June 30,
December 31,
September 30,
Property Type2020201920192019
(In thousands)
Commercial real estate$12,594 $28 $221 $199 
Single-family residence— — — 948 
Construction and land development219 219 219 219 
Total OREO, net12,813 247 440 1,366 
Other foreclosed assets934 1,202 — — 
Total foreclosed assets, net$13,747 $1,449 $440 $1,366 
During the third quarter of 2020, foreclosed assets increased by $12.3 million to $13.7 million at September 30, 2020, due mainly to additions of $12.6 million related to a retail lifestyle center, offset partially by impairment losses of $0.2 million and sales of $0.1 million.
Performing TDRs Held for Investment
The following table presents our performing TDRs held for investment by loan portfolio segment as of the dates indicated:
September 30, 2020June 30, 2020December 31, 2019
NumberNumberNumber
ofofof
Performing TDRs
BalanceLoansBalanceLoansBalanceLoans
(Dollars in thousands)
Real estate mortgage$6,678 20 $6,900 21 $10,165 22 
Real estate construction and land1,458 1,462 1,470 
Commercial5,487 16 6,612 12 550 12 
Consumer56 63 72 
Total performing TDRs held for investment $13,679 39 $15,037 36 $12,257 37 
During the third quarter of 2020, performing TDRs held for investment decreased by $1.4 million to $13.7 million at September 30, 2020 attributable primarily to principal payments and other reductions of $1.6 million.
80


Classified and Special Mention Loans and Leases Held for Investment
The following table presents the credit risk ratings of our loans and leases held for investment, net of deferred fees, as of the dates indicated:
September 30,June 30,December 31,September 30,
Loan and Lease Credit Risk Ratings
2020202020192019
(Dollars in thousands)
Pass$17,967,872 $18,635,004 $18,348,004 $18,279,011 
Special mention783,756 766,397 322,956 267,925 
Classified274,572 293,230 175,912 188,607 
Total loans and leases held for investment, net of deferred fees$19,026,200 $19,694,631 $18,846,872 $18,735,543 
Classified and special mention loans and leases fluctuate from period to period as a result of loan repayments and downgrades or upgrades from our ongoing active portfolio management.
During the third quarter of 2020, classified loans and leases decreased by $18.7 million to $274.6 million at September 30, 2020 due mostly to charge-offs of $35.7 million, transfers to foreclosed assets of $12.6 million, and principal payments and other reductions of $55.0 million, offset partially by the migration of $66.0 million in loans and leases from special mention and downgrades from pass of $19.4 million.
During the third quarter of 2020, special mention loans and leases increased by $17.4 million to $783.8 million at September 30, 2020 due mainly to downgrades from pass of $167.3 million, offset partially by the migration of $66.0 million in loans and leases to classified, upgrades to pass of $39.4 million, and principal payments and other reductions of $44.5 million.
The following table presents the classified and special mention credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class and the related net changes as of the dates indicated:
September 30, 2020June 30, 2020Increase (Decrease)
Special Special Special
ClassifiedMentionClassifiedMentionClassifiedMention
(In thousands)
Real estate mortgage:
Commercial$109,651 $330,367 $71,446 $322,312 $38,205 $8,055 
Income producing and other residential9,558 63,378 6,941 6,150 2,617 57,228 
Total real estate mortgage119,209 393,745 78,387 328,462 40,822 65,283 
Real estate construction and land:
Commercial324 13,838 337 12,354 (13)1,484 
Residential— — — — — — 
Total real estate construction and land324 13,838 337 12,354 (13)1,484 
Commercial:
Asset-based27,900 190,193 25,008 186,813 2,892 3,380 
Venture capital15,078 123,675 29,054 138,403 (13,976)(14,728)
Other commercial111,553 57,787 159,814 82,313 (48,261)(24,526)
Total commercial154,531 371,655 213,876 407,529 (59,345)(35,874)
Consumer508 4,518 630 18,052 (122)(13,534)
Total$274,572 $783,756 $293,230 $766,397 $(18,658)$17,359 
81


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, 2020, 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%.
Basel III currently requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements 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. Effective January 1, 2019, the common equity tier 1, tier 1, and total capital ratio minimums inclusive of the capital conservation buffer were 7.00%, 8.50%, and 10.50%. At September 30, 2020, the Company and Bank were in compliance with the capital conservation buffer requirement. The Company and Bank elected the CECL 5-year regulatory transition guidance for calculating regulatory capital ratios and the September 30, 2020 ratios include this election. This regulatory guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through December 31, 2022. This cumulative amount will then be phased out of regulatory capital over the next three years from 2023 to 2025. The add-back as of September 30, 2020 added approximately 24 basis points to the capital ratios below.
The following tables present a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:
Minimum Required
For CapitalFor CapitalFor Well
AdequacyConservationCapitalized
ActualPurposesBufferClassification
September 30, 2020
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)8.66%4.00%4.00%N/A
CET1 capital (to risk weighted assets)10.45%4.50%7.00%N/A
Tier 1 capital (to risk weighted assets)10.45%6.00%8.50%N/A
Total capital (to risk weighted assets)13.74%8.00%10.50%N/A
Pacific Western Bank
Tier 1 capital (to average assets)9.70%4.00%4.00%5.00%
CET1 capital (to risk weighted assets)11.70%4.50%7.00%6.50%
Tier 1 capital (to risk weighted assets)11.70%6.00%8.50%8.00%
Total capital (to risk weighted assets)12.95%8.00%10.50%10.00%
82


Minimum Required
For CapitalFor CapitalFor Well
AdequacyConservationCapitalized
ActualPurposesBufferClassification
December 31, 2019
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)9.74%4.00%4.00%N/A
CET1 capital (to risk weighted assets)9.78%4.50%7.00%N/A
Tier 1 capital (to risk weighted assets)9.78%6.00%8.50%N/A
Total capital (to risk weighted assets)12.41%8.00%10.50%N/A
Pacific Western Bank
Tier 1 capital (to average assets)10.95%4.00%4.00%5.00%
CET1 capital (to risk weighted assets)11.00%4.50%7.00%6.50%
Tier 1 capital (to risk weighted assets)11.00%6.00%8.50%8.00%
Total capital (to risk weighted assets)11.74%8.00%10.50%10.00%
Subordinated Debentures
We issued or assumed through mergers subordinated debentures to trusts that were established by us or entities we acquired, which, in turn, issued trust preferred securities. The carrying value of subordinated debentures totaled $463.3 million at September 30, 2020. At September 30, 2020, none of the trust preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $449.4 million were included in Tier II capital.
Dividends on Common Stock and Interest on Subordinated Debentures
As a bank holding company, PacWest is required to notify and receive approval from the 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 on subordinated debentures are considered dividend payments under FRB regulations. We may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. Due to the impact of the goodwill impairment charge on net earnings in the first quarter of 2020, we are required to receive such approval from the FRB prior to declaring a dividend. The FRB approved our third quarter dividend, which was paid on September 10, 2020, and we are currently awaiting their approval for our fourth quarter dividend.
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") that is comprised of members of senior management and is responsible for managing 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 securities available-for-sale, which we refer to as our primary liquidity. We also maintain available borrowing capacity under secured borrowing lines with the FHLB and the FRBSF, which we refer to as our secondary liquidity.
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As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB of $3.62 billion at September 30, 2020, of which $3.61 billion was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $5.6 billion of certain qualifying loans. The Bank also had secured borrowing capacity with the FRBSF of $1.6 billion at September 30, 2020, all of which was available on that date. The FRBSF secured credit line was collateralized by liens on $2.1 billion of qualifying loans.
In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit for the purpose of borrowing overnight funds, subject to availability, of $112.0 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of September 30, 2020, there was no balance outstanding related to the FHLB unsecured line of credit. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2020, the Bank had $50.0 million of borrowings outstanding through the AFX.
    The following tables provide a summary of the Bank’s primary and secondary liquidity levels at the dates indicated:
September 30,June 30,
December 31,
Primary Liquidity - On-Balance Sheet202020202019
(Dollars in thousands)
Cash and due from banks$187,176 $174,059 $172,585 
Interest-earning deposits in financial institutions2,766,020 1,747,077 465,039 
Securities available-for-sale4,532,614 3,851,141 3,797,187 
Less: pledged securities(605,258)(642,029)(486,200)
Total primary liquidity$6,880,552 $5,130,248 $3,948,611 
Ratio of primary liquidity to total deposits28.7 %22.4 %20.5 %

Secondary Liquidity - Off-Balance Sheet September 30,June 30,
December 31,
Available Secured Borrowing Capacity202020202019
(In thousands)
Secured borrowing capacity with the FHLB$3,623,177 $4,201,095 $4,229,788 
Less: secured advances outstanding(10,000)(10,000)(1,318,000)
Available secured borrowing capacity with the FHLB3,613,177 4,191,095 2,911,788 
Available secured borrowing capacity with the FRBSF1,560,042 1,552,204 1,988,028 
Total secondary liquidity$5,173,219 $5,743,299 $4,899,816 
During the three months ended September 30, 2020, the Company's primary liquidity increased by $1.8 billion to $6.9 billion at September 30, 2020 due mainly to a $1.0 billion increase in interest-earning deposits in financial institutions, a $681.5 million increase in securities available-for-sale, and a $36.8 million decrease in pledged securities. During the third quarter of 2020, the Company's secondary liquidity decreased by $570.1 million to $5.2 billion at September 30, 2020 due mostly to a $577.9 million decrease in secured borrowing capacity with the FHLB attributable to a decrease in pledged loans.
In addition to our primary liquidity, we generate liquidity from cash flows from our loan and securities portfolios and from our large base of core deposits, defined as noninterest-bearing demand, interest checking, savings, and non-brokered money market accounts. At September 30, 2020, core deposits totaled $21.1 billion and represented 88% of the Company's total deposits. Core deposits are normally less volatile, often with customer relationships tied to other products offered by the Bank promoting long-standing relationships and stable funding sources. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our core deposits.
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Our deposit balances may decrease if customers withdraw funds from the Bank. In order to address the Bank’s liquidity risk from fluctuating deposit balances, the Bank maintains adequate levels of available liquidity on and off the balance sheet.
We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At September 30, 2020, brokered deposits totaled $1.4 billion, consisting primarily of $1.1 billion of non-maturity brokered accounts and $240.8 million of brokered time deposits. At December 31, 2019, brokered deposits totaled $1.7 billion, consisting mainly of $1.2 billion of brokered time deposits and $496.4 million of non-maturity brokered accounts.
Our liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Liquidity Buffer Coverage Ratio (the ratio of cash and unpledged securities to the estimated 30 day cash outflow in a defined stress scenario), Liquidity Stress Test Survival Horizon (the number of days that the Bank’s liquidity buffer plus available secured borrowing capacity is sufficient to offset cumulative cash outflow in a defined stress scenario), Loan to Funding Ratio (measurement of gross loans net of fees divided by deposits plus borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. At September 30, 2020, the Bank was in compliance with all established liquidity guidelines.
Holding Company Liquidity
PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and PacWest's ability to raise capital, issue subordinated debt, and secure outside borrowings. PacWest's ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common stock, and 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. Our ability to pay dividends is also subject to the restrictions set forth in Delaware law, by the FRB, and by certain covenants contained in our subordinated debentures. Approval by the FRB is also required prior to our declaring and paying a cash dividend during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. PacWest may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, now or in the future, from paying dividends. Due to the impact of the goodwill impairment charge on net earnings in the first quarter of 2020, we are now required to receive approval from the FRB, as described above, prior to declaring a dividend.
Dividends paid by California state-chartered banks are regulated by the FDIC for non-member banks and the DFPI under their general supervisory authority. The Bank may declare a dividend without the approval of the DFPI and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for the three previous fiscal years less any dividends paid during such period. The Bank's net earnings during the three fiscal years of 2019, 2018, and 2017 exceeded dividends paid during that same period by $34.8 million. During the three and nine months ended September 30, 2020, PacWest received $33.0 million and $225.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $2.1 billion at September 30, 2020, for the foreseeable future any dividends from the Bank to PacWest will continue to require DFPI and FDIC approval consistent with what has been required since 2008 when Bank first had an accumulated deficit triggered by goodwill impairment write-downs during the Financial Crisis.
At September 30, 2020, PacWest had $123.3 million in cash and cash equivalents, of which substantially all is on deposit at the Bank. We believe this amount of cash, along with anticipated future dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months.
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Stock Repurchase Programs
In February 2020, we repurchased 1,953,711 shares of common stock for a total amount of $70.0 million at an average price of $35.83 under the former Stock Repurchase Program. All shares repurchased under the former Stock Repurchase Program were retired upon settlement.
On February 12, 2020, PacWest's Board of Directors authorized a new Stock Repurchase Program to purchase shares of its common stock for an aggregate purchase price not to exceed $200 million until February 28, 2021, effective upon the maturity of the former Stock Repurchase Program on February 29, 2020. No shares have been repurchased under the new Stock Repurchase Program and the entire $200 million is remaining at September 30, 2020. On April 21, 2020, stock repurchases under the new Stock Repurchase Program were suspended indefinitely.
Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
Due AfterDue After
DueOne YearThree YearsDue
WithinThroughThroughAfter
September 30, 2020One YearThree YearsFive YearsFive YearsTotal
(In thousands)
Time deposits$1,407,347 $197,366 $119,444 $— $1,724,157 
Short-term borrowings60,000 — — — 60,000 
Long-term debt obligations (1)
— — — 541,999 541,999 
Contractual interest (2)
4,279 2,232 2,286 — 8,797 
Operating lease obligations34,675 55,113 33,168 30,091 153,047 
Other contractual obligations68,945 88,668 14,644 24,868 197,125 
Total$1,575,246 $343,379 $169,542 $596,958 $2,685,125 
_______________________________________ 
(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 9. 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, 2019. 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, 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 liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan and lease payoffs, securities repayments and maturities, and continued deposit gathering activities. We also 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 commitments, of which only a portion is expected to be funded, and standby letters of credit. At September 30, 2020, our loan commitments and standby letters of credit were $7.2 billion and $353.8 million. The loan commitments, a portion of which will eventually result in funded loans, increase our profitability through net interest income when drawn and unused commitment fees prior to being drawn. We manage our overall liquidity taking into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources, as described in "- Liquidity - Liquidity Management," have been and are expected to be sufficient to meet the cash requirements of our lending activities. For further information on loan commitments, see Note 11. Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
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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, 2019, 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' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps and foreign exchange forward contracts to hedge exposures to loans and debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings 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, and the derivatives that hedge those exposures. As of September 30, 2020, the U.S. Dollar notional amounts of loans receivable and subordinated debentures payable denominated in foreign currencies were $41.7 million and $30.2 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures were $43.8 million and $28.5 million. We recognized a foreign currency translation net loss of $368,000 for the nine months ended September 30, 2020 and a foreign currency translation net gain of $8,000 for the nine months ended September 30, 2019.
Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk
We measure our IRR position on a monthly basis using two methods: (i) NII simulation analysis; and (ii) MVE 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 NII simulation model and MVE model prepared as of September 30, 2020, the results of which are presented below. Our NII simulation and MVE model 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 NII and MVE, 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 NII that would result over the next 12 months from immediate and sustained changes in interest rates as of September 30, 2020. 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 or changes in the product mix of 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 NII forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at September 30, 2020. In order to arrive at the base case, we extend our balance sheet at September 30, 2020 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, 2020. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.
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The NII simulation model is dependent upon numerous assumptions. For example, the majority of our loans are variable rate that 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 accelerated cash flows and reinvest these proceeds at current simulated yields. Our interest-bearing deposits reprice at our discretion and are assumed to reprice at a rate less than the change in market rates. The 12-month NII simulation model as of September 30, 2020 assumes interest-bearing deposits reprice at 31% of the change in market rates in a rising interest rate scenario, depending on the amount of the rate change (this is commonly referred to as the "deposit beta"). 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. Additionally, we assume that all market interest rates have an interest rate floor of 0%. Changes that could vary significantly from our assumptions include loan and deposit growth or contraction, loan and deposit pricing, changes in the mix of 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 forecasted net interest income and net interest margin for the next 12 months using the static balance sheet and forward yield curve as the base scenario, with immediate and sustained parallel upward movements in interest rates of 100, 200, and 300 basis points and sustained parallel downward movements in interest rates of 25, 50, and 100 basis points as of the date indicated:
ForecastedForecastedForecasted
Net InterestPercentageNet InterestNet Interest
IncomeChange MarginMargin Change
September 30, 2020(Tax Equivalent)From Base(Tax Equivalent)From Base
(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points$1,163.3 20.2%4.54%0.76%
Up 200 basis points$1,078.0 11.4%4.21%0.43%
Up 100 basis points$1,008.7 4.2%3.94%0.16%
BASE CASE$967.8 3.78%
Down 25 basis points$962.9 (0.5)%3.76%(0.02)%
Down 50 basis points$959.1 (0.9)%3.74%(0.04)%
Down 100 basis points$958.8 (0.9)%3.74%(0.04)%

During the third quarter of 2020, total base case year 1 tax equivalent NII decreased by $37.3 million to $967.8 million at September 30, 2020, and the base case tax equivalent NIM decreased to 3.78% from 4.08%. The decrease in NII was attributable primarily to lower loan income due to unfavorable rate and volume changes, offset partially by lower cost of funds due to the shift in the funding mix from borrowings to core deposits. The decrease in NIM was due almost entirely to the quarter-over-quarter shift in the earning assets mix in the static balance sheet, as the balance of low yielding interest-earning deposits in financial institutions increased by $1.0 billion from the large increase in core deposits during the third quarter. The core deposits increase related primarily to the strong deposit growth from our venture banking clients.
In addition to parallel interest rate shock scenarios, we also model various alternative rate vectors. The most favorable alternate rate vector that we model is the “Bear Flattener” scenario, when short-term rates increase faster than long-term rates. In the “Bear Flattener” scenario, Year 1 tax equivalent NII increases by 1.9%. Because of the low level of market interest rates and the assumption that market rates contain a 0% floor, the ad hoc scenarios that assume decreasing interest rates do not differ materially from the base case scenario.
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At September 30, 2020, we had $19.1 billion of total loans that included $10.6 billion with variable interest rate terms (excluding hybrid loans discussed below). Of the variable interest rate loans, $8.7 billion, or 83%, contained interest rate floor provisions, which included $8.6 billion of loans with "in-the-money" floors, meaning the loan coupon will not adjust down if there are future decreases to the index interest rate. The following table summarizes the estimated balance of loans with "in-the-money" floors for the indicated increases in interest rates:
September 30, 2020
Total Amount of
Loans With
Basis Points of "In-the-Money"
Rate IncreasesLoan Floors
(Dollars in millions)
50 bps$6,674
100 bps$4,823
150 bps$2,944
200 bps$1,108
250 bps$167
At September 30, 2020, we also had $3.8 billion of variable-rate hybrid loans that 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 $441 million, $2.1 billion, and $2.8 billion in the next one, two, and three years.
LIBOR is expected to be phased out after 2021, as such the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR.  The business processes impacted relate primarily to our variable-rate loans and our subordinated debentures, both of which are indexed to LIBOR. For further information, see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2019.
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 in market interest rates of 100, 200, and 300 basis points and sustained decrease in market interest rates of 50 and 100 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, 2020.








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The following table shows the projected change in the market value of equity for the rate scenarios presented as of the date indicated:
Ratio of
Projected
Dollar
Percentage
Percentage
Projected
Market Value
Change
Change
of Total
Market Value
September 30, 2020
of Equity
From Base
From Base
Assets
to Book Value
(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points$5,692.9 $889.7 18.5 %20.0 %163.3 %
Up 200 basis points$5,384.2 $581.0 12.1 %18.9 %154.4 %
Up 100 basis points$5,066.7 $263.5 5.5 %17.8 %145.3 %
BASE CASE$4,803.3 $— — %16.9 %137.8 %
Down 50 basis points$4,642.8 $(160.4)(3.3)%16.3 %133.2 %
Down 100 basis points$4,512.7 $(290.5)(6.0)%15.9 %129.4 %
During the third quarter of 2020, total base case projected market value of equity decreased by $347 million to $4.8 billion. This decrease in base case projected MVE was due primarily to: (1) a $532 million increase in the mark-to-market adjustment for total deposits from the lower market interest rates used for the deposit valuation, offset partially by (2) a $150 million increase in the mark-to-market adjustment for loans and leases due to the impact of lower credit spreads used for calculating the valuation; and (3) a $33 million increase in the book value of stockholders' equity due mainly to $46 million of net earnings and a $10 million increase in accumulated other comprehensive income, offset partially by $30 million of cash dividends paid.
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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 11. 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, 2019. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this quarterly report on Form 10-Q and the updated Risk Factors below.

Since March 13, 2020, the United States has been operating under a state of emergency declared by President Trump in response to the spread of COVID-19. COVID-19 and related governmental responses have affected economic and financial market conditions as well as the operations, results, and prospects of companies across many industries. In connection with the impact of COVID-19 on the economy and the Company, the Company has supplemented the risk factors previously disclosed in the Company's most recent Annual Report on Form 10-K as follows:
General Economic and Market Conditions Risk
The recent outbreak of the novel coronavirus (COVID-19) pandemic and resulting economic conditions have adversely impacted our business operations, asset valuations and financial results, and the ultimate impact on our business and financial results is uncertain.
The novel coronavirus (COVID-19) pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business operations, asset valuations and financial results. The pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels at an unprecedented pace. In addition, the pandemic has resulted in temporary closures of many businesses and the practice of social distancing and stay-at-home requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans. The escalation of the pandemic may also negatively impact economic conditions for a period of time, resulting in declines in loan demand, liquidity of loan guarantors, loan collateral values (particularly in real estate), and deposit outflows.
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Furthermore, the pandemic has influenced and could further influence the recognition of credit losses in our loan portfolios and has increased and could further increase our allowance for credit losses, particularly as businesses remain closed and as more customers may draw on their lines of credit or seek additional loans to help finance their businesses.
Similarly, because of changing economic and market conditions affecting issuers, the securities we hold may lose value. The volatility in the equity markets has already impacted our asset valuations, as evidenced by our goodwill impairment charge in the first quarter, and asset valuations of goodwill or other assets could be further impacted depending on future developments caused by COVID-19.
Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. To protect the health and safety of our employees and communities, we have temporarily closed certain of our branches and offices and many of our employees are working remotely. We may experience operational difficulties, including increased cybersecurity risk, due to the remote working environments of our employees. We may also experience additional operational risk due to difficulties experienced by our third-party service providers.
Because there have been no comparable recent global pandemics that resulted in a similar impact on the U.S. economy, the full extent to which the COVID-19 pandemic will impact our business operations, asset valuations and financial results will depend on future developments which are highly uncertain and cannot be predicted. These include the scope and duration of the pandemic, the continued effectiveness of our business continuity plan, the direct and indirect impact of the pandemic on our employees, customers and third-party service providers, as well as other market participants, and the effectiveness of actions taken by governmental authorities and other third parties in response to the pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the pandemic continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations, cash flows, and ability to pay dividends, as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in our 2019 Form 10-K will be heightened.
Regulatory, Compliance and Legal Risk
Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.
The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents stock purchases made during the third quarter of 2020:
Total Number of Maximum Dollar
Shares PurchasedValue of Shares
Total as Part of That May Yet
Number of AveragePublicly Be Purchased
Shares Price PaidAnnouncedUnder the
Purchase Dates
Purchased (1)
Per Share
Program (2)
Program (2)
(In thousands)
July 1 – July 31, 2020— $— — $200,000 
August 1 – August 31, 20203,220 $19.15 — $200,000 
September 1 – September 30, 2020614 $16.19 — $200,000 
Total3,834 $18.67 — 
__________________________
(1)    Includes shares repurchased pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of Company stock awards, and shares repurchased pursuant to the Company's publicly announced Stock Repurchase Program, described in (2) below.
(2)    On February 12, 2020, PacWest's Board of Directors authorized a new Stock Repurchase Program to purchase shares of its common stock for an aggregate purchase price not to exceed $200 million until February 28, 2021. On April 21, 2020, stock repurchases under the current Stock Repurchase Program were suspended indefinitely. All shares repurchased under the various Stock Repurchase Programs were retired upon settlement.
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ITEM 6. INDEX TO EXHIBITS
Exhibit NumberDescription
3.1
3.2
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
31.1
31.2
32.1
32.2
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Exhibit NumberDescription
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i)  the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii)  the Condensed Consolidated Statements of Earnings (Loss) for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019 and nine months ended September 30, 2020 and 2019, (iii)    the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019 and nine months ended September 30, 2020 and 2019, (iv)    the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2020 and 2019, (v)   the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, and (vi)  the Notes to Condensed Consolidated Financial Statements. (Pursuant to Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.) (Filed herewith).
104Cover page of PacWest Bancorp’s Quarterly Report on Form 10-Q formatted as Inline XBRL and contained in Exhibit 101.

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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
Date:November 6, 2020
/s/ Bart R. Olson
 
Bart R. Olson
 Deputy Chief Financial Officer and Principal Accounting Officer
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