PACWEST BANCORP - Quarter Report: 2020 June (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


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

For the quarterly period ended June 30, 2020

Commission File No. 001-36408

PACWEST BANCORP

(Exact name of registrant as specified in its charter)


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

9701 Wilshire Blvd., Suite 700

Beverly Hills, CA 90212

(Address of Principal Executive Offices, Including Zip Code)

(310) 887-8500

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share

PACW

The Nasdaq Stock Market, LLC

(Title of Each Class)

(Trading Symbol)

(Name of Exchange on Which Registered)

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

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging 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 July 30, 2020, there were 116,749,981 shares of the registrant's common stock outstanding, excluding 1,623,568 shares of unvested restricted stock.

PACWEST BANCORP

JUNE 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

PART I

Glossary of Acronyms, Abbreviations, and Terms

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."

AFX

American Financial Exchange

IPO

Initial Public Offering

ALLL

Allowance for Loan and Lease Losses

IRR

Interest Rate Risk

ALM

Asset Liability Management

LIBOR

London Inter-bank Offered Rate

ASC

Accounting Standards Codification

LIHTC

Low Income Housing Tax Credit

ASU

Accounting Standards Update

MBS

Mortgage-Backed Securities

Basel III

A comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013

MVE

Market Value of Equity

BHCA

Bank Holding Company Act of 1956, as amended

NII

Net Interest Income

BOLI

Bank Owned Life Insurance

NIM

Net Interest Margin

CARES Act

Coronavirus Aid, Relief, and Economic Security Act

NSF

Non-Sufficient Funds

CDI

Core Deposit Intangible Assets

OREO

Other Real Estate Owned

CECL

Current Expected Credit Loss

PD/LGD

Probability of Default/Loss Given Default

CET1

Common Equity Tier 1

PPNR

Pre-Provision, Pre-Goodwill Impairment, Pre-Tax Net Revenue

CMBS

Commercial Mortgage-Backed Securities

PPP

Paycheck Protection Program

CMOs

Collateralized Mortgage Obligations

PRSUs

Performance-Based Restricted Stock Units

COVID-19

Coronavirus Disease

PWAM

Pacific Western Asset Management Inc.

CPI

Consumer Price Index

ROU

Right-of-use

CRA

Community Reinvestment Act

SBA

Small Business Administration

CRI

Customer Relationship Intangible Assets

SEC

Securities and Exchange Commission

DBO

California Department of Business Oversight

SOFR

Secured Overnight Financing Rate

DTAs

Deferred Tax Assets

Tax Equivalent Net Interest Income

Net interest income reflecting adjustments related to tax-exempt interest on certain loans and investment securities

Dodd-Frank Act

Dodd-Frank Wall Street Reform and Consumer Protection Act

Tax Equivalent NIM

NIM reflecting adjustments related to tax-exempt interest on certain loans and investment securities

Efficiency Ratio

Noninterest 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)

TCJA

Tax Cuts and Jobs Act

FASB

Financial Accounting Standards Board

TDRs

Troubled Debt Restructurings

FDIC

Federal Deposit Insurance Corporation

TRSAs

Time-Based Restricted Stock Awards

FHLB

Federal Home Loan Bank of San Francisco

U.S. GAAP

U.S. Generally Accepted Accounting Principles

FRB

Board of Governors of the Federal Reserve System

VIE

Variable Interest Entity

FRBSF

Federal Reserve Bank of San Francisco

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,		December 31,
	2020		2019
	(Unaudited)
	(Dollars in thousands, except par value amounts)
ASSETS:
Cash and due from banks	$	174,059	$	172,585
Interest-earning deposits in financial institutions	1,747,077		465,039
Total cash, cash equivalents, and restricted cash	1,921,136		637,624
Securities available-for-sale, at fair value	3,851,141		3,797,187
Federal Home Loan Bank stock, at cost	17,250		40,924
Total investment securities	3,868,391		3,838,111

Gross loans and leases held for investment	19,780,476		18,910,740
Deferred fees, net	(85,845)		(63,868)
Allowance for loan and lease losses	(301,050)		(138,785)
Total loans and leases held for investment, net	19,393,581		18,708,087
Equipment leased to others under operating leases	295,191		324,084
Premises and equipment, net	42,299		38,585
Foreclosed assets, net	1,449		440
Goodwill	1,078,670		2,548,670
Core deposit and customer relationship intangibles, net	30,564		38,394
Other assets	734,457		636,811
Total assets	$	27,365,738	$	26,770,806

LIABILITIES:
Noninterest-bearing deposits	$	8,629,543	$	7,243,298
Interest-bearing deposits	14,299,036		11,989,738
Total deposits	22,928,579		19,233,036
Borrowings	60,000		1,759,008
Subordinated debentures	460,772		458,209
Accrued interest payable and other liabilities	463,489		365,856
Total liabilities	23,912,840		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 June 30, 2020 and
December 31, 2019; 120,681,951 and 121,890,008 shares issued, respectively, includes
1,624,622 and 1,513,197 shares of unvested restricted stock, respectively)	1,207		1,219
Additional paid-in capital	3,148,090		3,306,006
Retained earnings	247,058		1,652,248
Treasury stock, at cost (2,307,348 and 2,108,403 shares at June 30, 2020 and
December 31, 2019)	(88,495)		(83,434)
Accumulated other comprehensive income, net	145,038		78,658
Total stockholders' equity	3,452,898		4,954,697
Total liabilities and stockholders' equity	$	27,365,738	$	26,770,806

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)


	Three Months Ended										Six Months Ended
	June 30,		March 31,		June 30,		June 30,
	2020		2020		2019		2020		2019
	(Unaudited)
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	247,851	$	262,278	$	284,236	$	510,129	$	558,465
Investment securities	26,038		27,446		28,948		53,484		58,628
Deposits in financial institutions	186		1,608		1,349		1,794		1,999
Total interest income	274,075		291,332		314,533		565,407		619,092
Interest expense:
Deposits	13,075		28,247		38,720		41,322		72,955
Borrowings	1,319		6,778		7,210		8,097		14,920
Subordinated debentures	5,402		6,560		7,705		11,962		15,443
Total interest expense	19,796		41,585		53,635		61,381		103,318
Net interest income	254,279		249,747		260,898		504,026		515,774
Provision for credit losses	120,000		112,000		8,000		232,000		12,000
Net interest income after provision for credit losses	134,279		137,747		252,898		272,026		503,774
Noninterest income:
Other commissions and fees	10,111		9,721		11,590		19,832		22,598
Leased equipment income	12,037		12,251		9,182		24,288		18,464
Service charges on deposit accounts	2,004		2,658		3,771		4,662		7,501
Gain on sale of loans and leases	346		87		326		433		326
Gain on sale of securities	7,715		182		22,192		7,897		24,353
Other income	6,645		4,201		3,832		10,846		8,715
Total noninterest income	38,858		29,100		50,893		67,958		81,957
Noninterest expense:
Compensation	61,910		61,282		68,956		123,192		139,801
Occupancy	14,494		14,207		14,457		28,701		28,777
Data processing	7,102		6,454		6,817		13,556		13,742
Leased equipment depreciation	7,102		7,205		5,558		14,307		11,209
Intangible asset amortization	3,882		3,948		4,870		7,830		9,740
Other professional services	4,146		4,258		4,629		8,404		9,142
Insurance and assessments	9,373		4,249		4,098		13,622		8,136
Customer related expense	4,408		3,932		3,405		8,340		6,348
Loan expense	3,379		2,650		3,451		6,029		6,336
Acquisition, integration and reorganization costs	—		—		—		—		618
Foreclosed assets (income) expense, net	(146)		66		(146)		(80)		(117)
Goodwill impairment	—		1,470,000		—		1,470,000		—
Other expense	11,315		9,719		9,332		21,034		17,982
Total noninterest expense	126,965		1,587,970		125,427		1,714,935		251,714
Earnings (loss) before income taxes	46,172		(1,421,123)		178,364		(1,374,951)		334,017
Income tax expense	12,968		11,988		50,239		24,956		93,288
Net earnings (loss)	$	33,204	$	(1,433,111)	$	128,125	$	(1,399,907)	$	240,729

Earnings (loss) per share:
Basic	$	0.28	$	(12.23)	$	1.07	$	(11.98)	$	1.99
Diluted	$	0.28	$	(12.23)	$	1.07	$	(11.98)	$	1.99

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three Months Ended										Six Months Ended
	June 30,		March 31,		June 30,		June 30,
	2020		2020		2019		2020		2019
	(Unaudited)
	(In thousands)
Net earnings (loss)	$	33,204	$	(1,433,111)	$	128,125	$	(1,399,907)	$	240,729
Other comprehensive income, net of tax:
Unrealized net holding gains on securities
available-for-sale arising during the period	82,780		17,183		72,168		99,963		134,807
Income tax expense related to net unrealized
holding gains arising during the period	(23,095)		(4,794)		(20,459)		(27,889)		(38,217)
Unrealized net holding gains on securities
available-for-sale, net of tax	59,685		12,389		51,709		72,074		96,590
Reclassification adjustment for net gains
included in net earnings ⁽¹⁾	(7,715)		(182)		(22,192)		(7,897)		(24,353)
Income tax expense related to reclassification
adjustment	2,152		51		6,291		2,203		6,904
Reclassification adjustment for net gains
included in net earnings, net of tax	(5,563)		(131)		(15,901)		(5,694)		(17,449)
Other comprehensive income, net of tax	54,122		12,258		35,808		66,380		79,141
Comprehensive income (loss)	$	87,326	$	(1,420,853)	$	163,933	$	(1,333,527)	$	319,870

^{___________________________________}

(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.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


	Six Months Ended June 30, 2020
	Common Stock													Accumulated
				Additional						Other
		Par		Paid-in		Retained		Treasury		Comprehensive
	Shares	Value		Capital		Earnings		Stock		Income		Total
	(Unaudited)
	(Dollars in thousands)
Balance, December 31, 2019	119,781,605	$	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 forfeited	194,916	2		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, 2020	117,916,789	$	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 forfeited	550,738	6		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, 2020	118,374,603	$	1,207	$	3,148,090	$	247,058	$	(88,495)	$	145,038	$	3,452,898

________________________

(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.


	Six Months Ended June 30, 2019
	Common Stock													Accumulated
				Additional						Other
		Par		Paid-in		Retained		Treasury		Comprehensive
	Shares	Value		Capital		Earnings		Stock		Income (Loss)		Total
	(Unaudited)
	(Dollars in thousands)
Balance, December 31, 2018	123,189,833	$	1,251	$	3,722,723	$	1,182,674	$	(74,985)	$	(6,075)	$	4,825,588
Cumulative effect of change in
accounting principle ⁽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 forfeited	195,536	2		5,806		—		—		—		5,808
Restricted stock surrendered	(113,544)	—		—		—		(4,522)		—		(4,522)
Common stock repurchased under
Stock Repurchase Program	(3,070,676)	(31)		(119,556)		—		—		—		(119,587)
Cash dividends paid:
Common stock, $0.60/share	—	—		(73,180)		—		—		—		(73,180)
Balance, March 31, 2019	120,201,149	$	1,222	$	3,535,793	$	1,296,216	$	(79,507)	$	37,258	$	4,790,982
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 forfeited	619,653	6		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, 2019	119,829,104	$	1,219	$	3,435,679	$	1,424,341	$	(82,295)	$	73,066	$	4,852,010

________________________

(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.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,
	2020		2019
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net (loss) earnings	$	(1,399,907)	$	240,729
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Goodwill impairment	1,470,000		—
Depreciation and amortization	22,124		18,607
Amortization of net premiums on securities available-for-sale	5,591		7,933
Amortization of intangible assets	7,830		9,740
Amortization of operating lease ROU assets	14,662		14,723
Provision for credit losses	232,000		12,000
Gain on sale of foreclosed assets	(112)		(320)
Provision for losses on foreclosed assets	110		—
Gain on sale of loans and leases	(433)		(326)
Loss (gain) on sale of premises and equipment	187		(37)
Gain on sale of securities	(7,897)		(24,353)

Unrealized loss (gain) on derivatives and foreign currencies, net	564		(40)
Earned stock compensation	12,783		12,529

Decrease in other assets	8,393		44,349
Decrease in accrued interest payable and other liabilities	(91,873)		(55,550)
Net cash provided by operating activities	274,022		279,984

Cash flows from investing activities:
Net increase in loans and leases	(887,247)		(605,228)
Proceeds from sales of loans and leases	3,522		80,440
Proceeds from maturities and paydowns of securities available-for-sale	170,245		150,766
Proceeds from sales of securities available-for-sale	144,997		1,410,510
Purchases of securities available-for-sale	(274,824)		(1,232,214)
Net redemptions (purchases) of Federal Home Loan Bank stock	23,674		(11,043)
Proceeds from sales of foreclosed assets	769		4,184
Purchases of premises and equipment, net	(9,772)		(8,621)
Proceeds from sales of premises and equipment	2		54
Proceeds from BOLI death benefit	761		555
Net decrease (increase) in equipment leased to others under operating leases	15,147		(18,986)
Net cash used in investing activities	(812,726)		(229,583)

Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits	1,387,698		(588,417)
Net increase in interest-bearing deposits	2,309,298		524,957
Net (decrease) increase in borrowings	(1,699,008)		541,945

Common stock repurchased and restricted stock surrendered	(75,061)		(161,826)
Cash dividends paid	(100,711)		(145,089)
Net cash provided by financing activities	1,822,216		171,570

Net increase in cash, cash equivalents, and restricted cash	1,283,512		221,971
Cash, cash equivalents, and restricted cash, beginning of period	637,624		385,767
Cash, cash equivalents, and restricted cash, end of period	$	1,921,136	$	607,738

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,
	2020		2019
	(Unaudited)
	(In thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest	$	68,390	$	97,238
Cash paid for income taxes	3,850		68,305

Loans transferred to foreclosed assets	1,776		37
Transfers from loans held for investment to loans held for sale	—		25,124

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION

PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.

We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located 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 innovative 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 reserve would be reduced, but not more than the amount of the current existing reserve for that security.

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 model 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 recent 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 a loan or lease based upon the fair value of the underlying collateral if the loan or lease is collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease is not collateral-dependent. To the extent a loan or lease balance exceeds the estimated collectable value, a 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.

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 loan portfolio is segmented into four loan segments, eight loan classes and 22 loan pools based upon loan type that share similar default risk characteristics to calculate quantitative loss factors for each pool. Six 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 probability of default (“PD”) during the reasonable and supportable period using seven econometric regression models developed to correlate macroeconomic variables to credit performance (including risk rating upgrades/downgrades and defaults). The loans and unfunded commitments are grouped into nine loss given default (“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 exposure at default (“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, estimated prepayments, and estimated usage of unfunded commitments to compute the current expected credit loss. We use our actual historical loan prepayment experience from 2009 - 2019 to estimate future prepayments by loan pool. Given that no historical period exhibits economic conditions similar to the single scenario baseline forecast discussed below, prepayment rates based on all historical prepayment experience from 2009 - 2019 are consistently applied during the reasonable and supportable, reversion, and post-reversion periods.

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 becomes available. The key macroeconomic assumptions used in the PD regression models include at least three of the following economic indicators; Real GDP, unemployment rates, CRE Price Index and the BBB spread. The quantitative CECL model, utilizing historical portfolio performance, current portfolio composition and performance, estimated prepayments, and the effects of the economic forecast, calculates the expected EAD which is multiplied by the PD and LGD rates to calculate expected losses through the end of the forecast period. 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 support 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, 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.

In addition, we may refer to the loans and leases with assigned credit risk ratings of "substandard" and "doubtful" together as "classified" loans and leases. For further information on classified loans and leases, see Note 4. Loans and Leases of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

PACWEST BANCORP AND SUBSIDIARIES

Notes to 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 our CECL quantitative methodology and component of the reserve. An incremental qualitative adjustment may be considered when economic forecasts exhibit higher levels of volatility or uncertainty.

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;

•Collateral Dependency - considers changes in collateral values;

•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 as used for the allowance for loan and lease losses. 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 of unfunded commitments for the various loan types from the first quarter of 2015 to the fourth quarter of 2019. The utilization rates are updated on an annual basis.

Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio 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. In addition, current credit risk ratings are subject to change as we continue to monitor our loans and leases. To the extent we experience increased levels of borrower loan defaults, borrowers’ noncompliance with loan agreements, adverse changes in collateral values, or changes in economic and business conditions that adversely affect our borrowers, classified loans and leases may increase. Higher levels of classified loans and leases generally result in increased provisions for credit losses and an increased allowance for credit losses. In addition, economic forecasts utilized in the estimation process will change in future periods, which will result in changes to the estimates made for current expected credit losses as of a point in time. However, economic forecasts are just one of many assumptions and components that go into estimating the allowance for credit losses.

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, selection of the most reliable econometric regression models, segmentation of the loan and lease portfolio, determining the amount of loss history to consider, determining the relevant macroeconomic inputs to the quantitative models, determining the methodology to forecast prepayments, selection of the most appropriate economic forecast scenario, determining the length of the reasonable and supportable forecast and reversion periods, determining expected utilization rates on unfunded loan commitments and determining 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 we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the allowance will be sufficient to absorb future losses.

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 model 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 guidance. 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. 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.

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 six months ended June 30, 2020 and the year ended December 31, 2019 were $83.1 million and $131.0 million. As of June 30, 2020 and December 31, 2019, we pledged cash collateral for our derivative contracts of $2.2 million and $3.2 million.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 3. INVESTMENT SECURITIES

Securities Available-for-Sale

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


	June 30, 2020														December 31, 2019
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
Security Type	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
	(In thousands)
Agency commercial MBS	$	1,060,551	$	72,587	$	(52)	$	1,133,086	$	1,083,182	$	25,579	$	(537)	$	1,108,224
Agency residential CMOs	993,696		56,055		(9)		1,049,742		1,112,573		24,403		(579)		1,136,397
Municipal securities	825,446		62,976		(84)		888,338		691,647		43,851		(339)		735,159
Agency residential MBS	236,134		12,847		(47)		248,934		294,606		10,593		(1)		305,198
Asset-backed securities	232,081		556		(5,431)		227,206		216,133		320		(1,670)		214,783
Collateralized loan obligations	142,080		—		(5,417)		136,663		124,134		25		(403)		123,756
Private label residential CMOs	95,629		2,245		(1,099)		96,775		96,066		3,430		(13)		99,483
SBA securities	42,375		2,236		(35)		44,576		47,765		506		(13)		48,258
Corporate debt securities	17,000		3,458		—		20,458		17,000		3,748		—		20,748
U.S. Treasury securities	4,987		376		—		5,363		4,985		196		—		5,181


Total	$	3,649,979	$	213,336	$	(12,174)	$	3,851,141	$	3,688,091	$	112,651	$	(3,555)	$	3,797,187

As of June 30, 2020, securities available-for-sale with a fair value of $642.0 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 Ended						Six Months Ended
	June 30,						June 30,
Sales of Securities Available-for-Sale	2020		2019		2020		2019
	(In thousands)
Amortized cost of securities sold	$	122,334	$	980,395	$	137,100	$	1,386,157

Gross realized gains	$	7,747	$	24,154	$	7,929	$	28,213
Gross realized losses	(32)		(1,962)		(32)		(3,860)
Net realized gains	$	7,715	$	22,192	$	7,897	$	24,353

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:


	June 30, 2020
	Less Than 12 Months						12 Months or More						Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Security Type	Value		Losses		Value		Losses		Value		Losses
	(In thousands)
Agency commercial MBS	$	9,281	$	(52)	$	—	$	—	$	9,281	$	(52)
Agency residential CMOs	—		—		1,308		(9)		1,308		(9)
Municipal securities	20,448		(84)		—		—		20,448		(84)
Agency residential MBS	2,403		(47)		—		—		2,403		(47)
Asset-backed securities	116,863		(3,400)		36,800		(2,031)		153,663		(5,431)
Collateralized loan obligations	104,062		(3,352)		32,601		(2,065)		136,663		(5,417)
Private label residential CMOs	52,839		(1,096)		78		(3)		52,917		(1,099)
SBA securities	1,971		(35)		—		—		1,971		(35)




Total	$	307,867	$	(8,066)	$	70,787	$	(4,108)	$	378,654	$	(12,174)


	December 31, 2019
	Less Than 12 Months						12 Months or More						Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Security Type	Value		Losses		Value		Losses		Value		Losses
	(In thousands)
Agency commercial MBS	$	214,862	$	(537)	$	—	$	—	$	214,862	$	(537)
Agency residential CMOs	180,071		(572)		1,456		(7)		181,527		(579)
Municipal securities	38,667		(339)		—		—		38,667		(339)
Agency residential MBS	—		—		186		(1)		186		(1)
Asset-backed securities	165,575		(1,670)		—		—		165,575		(1,670)
Collateralized loan obligations	102,469		(403)		—		—		102,469		(403)
Private label residential CMOs	9,872		(11)		114		(2)		9,986		(13)
SBA securities	4,565		(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 June 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 such impairment 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.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Contractual Maturities of Securities Available-for-Sale

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


	June 30, 2020
	Amortized		Fair
Maturities	Cost		Value
	(In thousands)
Due in one year or less	$	8,979	$	9,110
Due after one year through five years	328,227		344,634
Due after five years through ten years	967,544		1,032,710
Due after ten years	2,345,229		2,464,687
Total securities available-for-sale	$	3,649,979	$	3,851,141

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 Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
	(In thousands)
Taxable interest	$	19,836	$	20,944	$	41,622	$	40,686
Non-taxable interest	5,612		7,547		10,841		17,140
Dividend income	590		457		1,021		802
Total interest income on investment securities	$	26,038	$	28,948	$	53,484	$	58,628

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:


	June 30,		December 31,
	2020		2019
	(In thousands)
Real estate mortgage	$	7,963,898	$	7,982,383
Real estate construction and land	3,371,672		2,773,209
Commercial	8,033,592		7,714,358
Consumer	411,314		440,790
Total gross loans and leases held for investment	19,780,476		18,910,740
Deferred fees, net	(85,845)		(63,868)
Total loans and leases held for investment, net of deferred fees	19,694,631		18,846,872
Allowance for loan and lease losses	(301,050)		(138,785)
Total loans and leases held for investment, net ⁽¹⁾	$	19,393,581	$	18,708,087

____________________

(1) Excludes accrued interest receivable of $63.0 million and $67.5 million at June 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:


	June 30, 2020
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	42,784	$	6,985	$	49,769	$	4,172,306	$	4,222,075
Income producing and other residential	50		654		704		3,732,955		3,733,659
Total real estate mortgage	42,834		7,639		50,473		7,905,261		7,955,734
Real estate construction and land:
Commercial	—		—		—		1,167,609		1,167,609
Residential	1,022		—		1,022		2,171,897		2,172,919
Total real estate construction and land	1,022		—		1,022		3,339,506		3,340,528
Commercial:
Asset-based	3,697		17,725		21,422		3,391,009		3,412,431
Venture capital	3,939		—		3,939		1,810,402		1,814,341
Other commercial	7,991		1,877		9,868		2,750,410		2,760,278
Total commercial	15,627		19,602		35,229		7,951,821		7,987,050
Consumer	1,067		215		1,282		410,037		411,319
Total	$	60,550	$	27,456	$	88,006	$	19,606,625	$	19,694,631

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	December 31, 2019
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	2,448	$	5,919	$	8,367	$	4,194,320	$	4,202,687
Income producing and other residential	2,105		802		2,907		3,767,153		3,770,060
Total real estate mortgage	4,553		6,721		11,274		7,961,473		7,972,747
Real estate construction and land:
Commercial	—		—		—		1,082,368		1,082,368
Residential	1,429		—		1,429		1,654,005		1,655,434
Total real estate construction and land	1,429		—		1,429		2,736,373		2,737,802
Commercial:
Asset-based	19		—		19		3,748,388		3,748,407
Venture capital	—		—		—		2,179,422		2,179,422
Other commercial	2,781		4,164		6,945		1,760,722		1,767,667
Total commercial	2,800		4,164		6,964		7,688,532		7,695,496
Consumer	1,006		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:


	June 30, 2020										December 31, 2019
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
	(In thousands)
Real estate mortgage:
Commercial	$	61,771	$	4,160,304	$	4,222,075	$	18,346	$	4,184,341	$	4,202,687
Income producing and other residential	2,207		3,731,452		3,733,659		2,478		3,767,582		3,770,060
Total real estate mortgage	63,978		7,891,756		7,955,734		20,824		7,951,923		7,972,747
Real estate construction and land:
Commercial	337		1,167,272		1,167,609		364		1,082,004		1,082,368
Residential	—		2,172,919		2,172,919		—		1,655,434		1,655,434
Total real estate construction and land	337		3,340,191		3,340,528		364		2,737,438		2,737,802
Commercial:
Asset-based	19,013		3,393,418		3,412,431		30,162		3,718,245		3,748,407
Venture capital	8,270		1,806,071		1,814,341		12,916		2,166,506		2,179,422
Other commercial	73,995		2,686,283		2,760,278		27,594		1,740,073		1,767,667
Total commercial	101,278		7,885,772		7,987,050		70,672		7,624,824		7,695,496
Consumer	520		410,799		411,319		493		440,334		440,827
Total	$	166,113	$	19,528,518	$	19,694,631	$	92,353	$	18,754,519	$	18,846,872

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

At June 30, 2020, nonaccrual loans and leases included $27.5 million of loans and leases 90 or more days past due, $52.6 million of loans and leases 30 to 89 days past due, and $86.0 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. 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 June 30, 2020, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $86.5 million and represented 52% 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.


	June 30, 2020
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	71,446	$	322,312	$	3,828,317	$	4,222,075
Income producing and other residential	6,941		6,150		3,720,568		3,733,659
Total real estate mortgage	78,387		328,462		7,548,885		7,955,734
Real estate construction and land:
Commercial	337		12,354		1,154,918		1,167,609
Residential	—		—		2,172,919		2,172,919
Total real estate construction and land	337		12,354		3,327,837		3,340,528
Commercial:
Asset-based	25,008		186,813		3,200,610		3,412,431
Venture capital	29,054		138,403		1,646,884		1,814,341
Other commercial	159,814		82,313		2,518,151		2,760,278
Total commercial	213,876		407,529		7,365,645		7,987,050
Consumer	630		18,052		392,637		411,319
Total	$	293,230	$	766,397	$	18,635,004	$	19,694,631


	December 31, 2019
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	33,535	$	30,070	$	4,139,082	$	4,202,687
Income producing and other residential	8,600		1,711		3,759,749		3,770,060
Total real estate mortgage	42,135		31,781		7,898,831		7,972,747
Real estate construction and land:
Commercial	364		—		1,082,004		1,082,368
Residential	—		1,429		1,654,005		1,655,434
Total real estate construction and land	364		1,429		2,736,009		2,737,802
Commercial:
Asset-based	32,223		38,936		3,677,248		3,748,407
Venture capital	35,316		74,813		2,069,293		2,179,422
Other commercial	65,261		174,785		1,527,621		1,767,667
Total commercial	132,800		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

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 Ended						At and For the Six Months Ended
	June 30, 2020						June 30, 2020
	Nonaccrual		Interest		Nonaccrual		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
	(In thousands)						(In thousands)
With An Allowance Recorded:
Real estate mortgage:
Commercial	$	304	$	—	$	304	$	—
Income producing and other residential	1,445		—		1,445		—



Commercial:
Asset based	2,458		—		2,458		—
Venture capital	8,270		—		8,270		—
Other commercial	45,569		—		45,569		—
Consumer	520		—		520		—
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	61,467	$	62	$	61,467	$	130
Income producing and other residential	762		—		762		—
Real estate construction and land:
Commercial	337		—		337		—

Commercial:
Asset based	16,555		—		16,555		—

Other commercial	28,426		1,196		28,426		1,220

Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage	$	63,978	$	62	$	63,978	$	130
Real estate construction and land	337		—		337		—
Commercial	101,278		1,196		101,278		1,220
Consumer	520		—		520		—
Total	$	166,113	$	1,258	$	166,113	$	1,350

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 Basis	Term Loans by Origination Year																		Revolving	to Term
June 30, 2020	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Mortgage:
Commercial
Internal risk rating:
1-2 High pass	$	—	$	—	$	15,131	$	15,672	$	10,233	$	62,921	$	—	$	—	$	103,957
3-4 Pass	338,636		538,666		720,870		805,795		358,812		890,775		66,993		3,813		3,724,360
5 Special mention	—		55,250		92,175		2,558		77,811		94,518		—		—		322,312
6-8 Classified	—		1,367		183		21,747		2,909		45,240		—		—		71,446
Total	$	338,636	$	595,283	$	828,359	$	845,772	$	449,765	$	1,093,454	$	66,993	$	3,813	$	4,222,075
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	1,831	$	—	$	2,676	$	—	$	—	$	4,507
Gross recoveries	—		—		—		—		—		(237)		—		—		(237)
Net	$	—	$	—	$	—	$	1,831	$	—	$	2,439	$	—	$	—	$	4,270

Real Estate Mortgage:
Income Producing and
Other Residential
Internal risk rating:
1-2 High pass	$	—	$	34,966	$	76,744	$	46,031	$	54,261	$	28,639	$	—	$	—	$	240,641
3-4 Pass	148,116		843,413		1,243,035		653,956		260,740		220,111		109,783		773		3,479,927
5 Special mention	—		—		2,888		962		—		—		2,300		—		6,150
6-8 Classified	—		—		—		—		—		5,452		106		1,383		6,941
Total	$	148,116	$	878,379	$	1,322,667	$	700,949	$	315,001	$	254,202	$	112,189	$	2,156	$	3,733,659
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	175	$	175
Gross recoveries	—		—		—		—		—		(13)		(1)		—		(14)
Net	$	—	$	—	$	—	$	—	$	—	$	(13)	$	(1)	$	175	$	161

Real Estate Construction
and Land: Commercial
Internal risk rating:
1-2 High pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
3-4 Pass	22,576		285,286		362,367		216,294		119,503		137,008		7,112		4,772		1,154,918
5 Special mention	—		—		12,354		—		—		—		—		—		12,354
6-8 Classified	—		—		—		—		—		337		—		—		337
Total	$	22,576	$	285,286	$	374,721	$	216,294	$	119,503	$	137,345	$	7,112	$	4,772	$	1,167,609
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Gross recoveries	—		—		—		—		—		—		—		—		—
Net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


															Revolving
															Converted
Amortized Cost Basis	Term Loans by Origination Year																		Revolving	to Term
June 30, 2020	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Construction
and Land: Residential
Internal risk rating:
1-2 High pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
3-4 Pass	177,247		366,209		783,534		671,665		110,532		2,051		18,714		42,967		2,172,919
5 Special mention	—		—		—		—		—		—		—		—		—
6-8 Classified	—		—		—		—		—		—		—		—		—
Total	$	177,247	$	366,209	$	783,534	$	671,665	$	110,532	$	2,051	$	18,714	$	42,967	$	2,172,919
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Gross recoveries	—		—		—		—		—		—		—		—		—
Net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial: Asset-Based
Internal risk rating:
1-2 High pass	$	22,993	$	178,052	$	116,797	$	65,756	$	130,266	$	95,166	$	288,230	$	98,416	$	995,676
3-4 Pass	45,866		141,935		111,495		40,166		58,534		60,573		1,722,555		23,810		2,204,934
5 Special mention	—		66,446		52,740		22,597		18,793		1,429		19,720		5,088		186,813
6-8 Classified	—		—		—		—		—		15,854		8,836		318		25,008
Total	$	68,859	$	386,433	$	281,032	$	128,519	$	207,593	$	173,022	$	2,039,341	$	127,632	$	3,412,431
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	11,550	$	—	$	—	$	11,550
Gross recoveries	(8)		—		—		—		—		(323)		(56)		—		(387)
Net	$	(8)	$	—	$	—	$	—	$	—	$	11,227	$	(56)	$	—	$	11,163

Commercial: Venture
Capital
Internal risk rating:
1-2 High pass⁽¹⁾	$	—	$	5,649	$	—	$	(6)	$	(6)	$	(2)	$	237,484	$	—	$	243,119
3-4 Pass	50,908		172,879		82,954		11,696		34,275		9,055		1,036,748		5,250		1,403,765
5 Special mention	9,499		28,162		27,430		4,000		610		—		66,685		2,017		138,403
6-8 Classified	—		(866)		10,871		—		—		3,632		12,574		2,843		29,054
Total	$	60,407	$	205,824	$	121,255	$	15,690	$	34,879	$	12,685	$	1,353,491	$	10,110	$	1,814,341
Current YTD period:
Gross charge-offs	$	—	$	—	$	6,532	$	—	$	(8)	$	149	$	140	$	—	$	6,813
Gross recoveries	—		—		(41)		(104)		(136)		(3)		(15)		—		(299)
Net	$	—	$	—	$	6,491	$	(104)	$	(144)	$	146	$	125	$	—	$	6,514

____________________

(1) Amounts with negative balances are loans with zero principal balances but have deferred loan origination fees.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


															Revolving
															Converted
Amortized Cost Basis	Term Loans by Origination Year																		Revolving	to Term
June 30, 2020	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
	(In thousands)
Commercial: Other
Commercial
Internal risk rating:
1-2 High pass	$	1,209,264	$	432	$	8	$	16,894	$	1	$	3,076	$	97,116	$	136	$	1,326,927
3-4 Pass	19,833		102,743		112,650		97,807		33,596		108,841		698,428		17,326		1,191,224
5 Special mention	—		109		—		818		1,995		4,892		73,339		1,160		82,313
6-8 Classified	1		3		35		70		4,126		46,522		105,085		3,972		159,814
Total	$	1,229,098	$	103,287	$	112,693	$	115,589	$	39,718	$	163,331	$	973,968	$	22,594	$	2,760,278
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	52	$	—	$	996	$	10,031	$	1,229	$	12,308
Gross recoveries	—		—		(8)		(19)		(73)		(2,459)		(100)		(2)		(2,661)
Net	$	—	$	—	$	(8)	$	33	$	(73)	$	(1,463)	$	9,931	$	1,227	$	9,647

Consumer
Internal risk rating:
1-2 High pass	$	23	$	—	$	10	$	18	$	—	$	—	$	752	$	—	$	803
3-4 Pass	51,068		138,584		71,591		50,523		53,886		15,445		10,735		2		391,834
5 Special mention	—		637		9,971		2,097		3,592		1,755		—		—		18,052
6-8 Classified	—		57		116		—		62		355		1		39		630
Total	$	51,091	$	139,278	$	81,688	$	52,638	$	57,540	$	17,555	$	11,488	$	41	$	411,319
Current YTD period:
Gross charge-offs	$	—	$	97	$	86	$	135	$	295	$	—	$	21	$	4	$	638
Gross recoveries	—		—		(1)		(5)		(14)		(21)		—		—		(41)
Net	$	—	$	97	$	85	$	130	$	281	$	(21)	$	21	$	4	$	597

Total Loans and Leases
Internal risk rating:
1-2 High pass	$	1,232,280	$	219,099	$	208,690	$	144,365	$	194,755	$	189,800	$	623,582	$	98,552	$	2,911,123
3-4 Pass	854,250		2,589,715		3,488,496		2,547,902		1,029,878		1,443,859		3,671,068		98,713		15,723,881
5 Special mention	9,499		150,604		197,558		33,032		102,801		102,594		162,044		8,265		766,397
6-8 Classified	1		561		11,205		21,817		7,097		117,392		126,602		8,555		293,230
Total	$	2,096,030	$	2,959,979	$	3,905,949	$	2,747,116	$	1,334,531	$	1,853,645	$	4,583,296	$	214,085	$	19,694,631
Current YTD period:
Gross charge-offs	$	—	$	97	$	6,618	$	2,018	$	287	$	15,371	$	10,192	$	1,408	$	35,991
Gross recoveries	(8)		—		(50)		(128)		(223)		(3,056)		(172)		(2)		(3,639)
Net	$	(8)	$	97	$	6,568	$	1,890	$	64	$	12,315	$	10,020	$	1,406	$	32,352

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

TDRs are a result of rate reductions, term extensions, fee concessions, and debt forgiveness, or a combination thereof. The Company has granted various consumer and commercial loan modifications to provide borrowers relief from the economic impacts of COVID-19. In accordance with the 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 June 30,
	2020								2019
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
	Number	Outstanding		Outstanding		Number	Outstanding		Outstanding
	of	Recorded		Recorded		of	Recorded		Recorded
Troubled Debt Restructurings	Loans	Investment		Investment		Loans	Investment		Investment
	(Dollars in thousands)
Real estate mortgage:
Commercial	7	$	3,745	$	3,745	—	$	—	$	—
Income producing and other residential	5	787		787		3	456		456



Commercial:
Asset-based	6	1,234		1,234		1	620		620
Venture capital	—	—		—		4	13,971		14,972
Other commercial	19	18,840		15,726		3	107		107
Consumer	3	212		212		—	—		—
Total	40	$	24,818	$	21,704	11	$	15,154	$	16,155


	Six Months Ended June 30,
	2020								2019
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
	Number	Outstanding		Outstanding		Number	Outstanding		Outstanding
	of	Recorded		Recorded		of	Recorded		Recorded
Troubled Debt Restructurings	Loans	Investment		Investment		Loans	Investment		Investment
	(Dollars in thousands)
Real estate mortgage:
Commercial	8	$	3,745	$	3,745	1	$	37	$	—
Income producing and other residential	5	787		787		6	1,245		1,245



Commercial:
Asset-based	7	1,741		1,741		1	620		620
Venture capital	2	2,047		2,047		10	16,076		16,214
Other commercial	30	23,219		21,444		11	692		692
Consumer	3	212		212		—	—		—
Total	55	$	31,751	$	29,976	29	$	18,670	$	18,771

During the three and six months ended June 30, 2020, there was one $2.0 million venture capital loan restructured in the preceding 12-month period that subsequently defaulted.

During the three months ended June 30, 2019, there were two venture capital loans totaling $447,000 and one other commercial loan of $81,000, restructured in the preceding 12-month period that subsequently defaulted. During the six months ended June 30, 2019, there were two venture capital loans totaling $447,000 and three other commercial loans totaling $140,000, restructured in the preceding 12-month period that subsequently defaulted.

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 Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
	(In thousands)
Component of leases receivable income:
Interest income on net investments in leases	$	2,103	$	2,886	$	4,355	$	6,026

The following table presents the components of leases receivable as of the dates indicated:


	June 30, 2020		December 31, 2019
	(In thousands)
Net investment in direct financing leases:
Lease payments receivable	$	137,984	$	147,729
Unguaranteed residual assets	18,653		20,806
Deferred costs and other	577		655
Aggregate net investment in leases	$	157,214	$	169,190

The following table presents maturities of leases receivable as of the date indicated:


	June 30, 2020
	(In thousands)
Period ending December 31,
2020	$	35,218
2021	61,182
2022	24,981
2023	14,366
2024	10,469
2025 and thereafter	2,766
Total undiscounted cash flows	148,982
Less: Unearned income	(10,998)
Present value of lease payments	$	137,984

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 June 30, 2020
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	91,372	$	40,173	$	87,570	$	2,177	$	221,292
Charge-offs	(4,182)		—		(11,439)		(165)		(15,786)
Recoveries	127		—		2,392		25		2,544
Net charge-offs	(4,055)		—		(9,047)		(140)		(13,242)
Provision	43,407		29,940		19,424		229		93,000
Balance, end of period	$	130,724	$	70,113	$	97,947	$	2,266	$	301,050















	Six Months Ended June 30, 2020
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	44,575	$	30,544	$	61,528	$	2,138	$	138,785
Charge-offs	(4,682)		—		(30,671)		(638)		(35,991)
Recoveries	251		—		3,347		41		3,639
Net charge-offs	(4,431)		—		(27,324)		(597)		(32,352)
Provision	85,272		48,161		56,883		684		191,000
Cumulative effect of change in accounting
principle - CECL	5,308		(8,592)		6,860		41		3,617
Balance, end of period	$	130,724	$	70,113	$	97,947	$	2,266	$	301,050

Ending Allowance by
Evaluation Methodology:
Individually evaluated	$	211	$	—	$	8,282	$	—	$	8,493
Collectively evaluated	$	130,513	$	70,113	$	89,665	$	2,266	$	292,557

Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated	$	68,240	$	1,799	$	105,661	$	—	$	175,700
Collectively evaluated	7,887,494		3,338,729		7,881,389		411,319		19,518,931
Ending balance	$	7,955,734	$	3,340,528	$	7,987,050	$	411,319	$	19,694,631

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)















	Three Months Ended June 30, 2019
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	45,754	$	27,208	$	61,496	$	1,823	$	136,281
Charge-offs	(534)		—		(16,927)		(176)		(17,637)
Recoveries	240		—		6,080		73		6,393
Net charge-offs	(294)		—		(10,847)		(103)		(11,244)
Provision (negative provision)	1,366		(830)		8,752		712		10,000
Balance, end of period	$	46,826	$	26,378	$	59,401	$	2,432	$	135,037















	Six Months Ended June 30, 2019
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	46,021	$	28,209	$	56,360	$	1,882	$	132,472
Charge-offs	(730)		—		(19,930)		(442)		(21,102)
Recoveries	383		—		9,186		98		9,667
Net charge-offs	(347)		—		(10,744)		(344)		(11,435)
Provision (negative provision)	1,152		(1,831)		13,785		894		14,000
Balance, end of period	$	46,826	$	26,378	$	59,401	$	2,432	$	135,037

Ending Allowance by
Evaluation Methodology:
Individually evaluated	$	260	$	—	$	4,482	$	—	$	4,742
Collectively evaluated	$	46,566	$	26,378	$	54,919	$	2,432	$	130,295

Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated	$	27,594	$	5,376	$	60,380	$	—	$	93,350
Collectively evaluated	8,048,432		2,370,754		7,513,934		446,382		18,379,502
Ending balance	$	8,076,026	$	2,376,130	$	7,574,314	$	446,382	$	18,472,852

The allowance for loan and lease losses increased by $79.8 million in the second quarter of 2020 to $301.1 million due primarily to a provision for loan and lease losses of $93.0 million driven by the impact from the significant deterioration and continued uncertainty in the key macro-economic forecast variables such as unemployment and GDP as a result of COVID-19.

We actively participated in the Paycheck Protection Program ("PPP"), under the provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act during the second quarter of 2020. As of June 30, 2020, we processed approximately $1.2 billion in loans through the PPP. The loans have two-year terms, are fully guaranteed by the SBA, and do not carry an allowance.

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:


	June 30, 2020
	Real		Business
	Property		Assets		Total
	(In thousands)
Real estate mortgage	$	62,021	$	—	$	62,021
Real estate construction and land	1,799		—		1,799
Commercial	—		32,135		32,135
Total	$	63,820	$	32,135	$	95,955

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
	June 30, 2020
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	221,292	$	53,571	$	274,863
Charge-offs	(15,786)		—		(15,786)
Recoveries	2,544		—		2,544
Net charge-offs	(13,242)		—		(13,242)
Provision	93,000		27,000		120,000
Balance, end of period	$	301,050	$	80,571	$	381,621


	Six Months Ended
	June 30, 2020
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	138,785	$	35,861	$	174,646
Charge-offs	(35,991)		—		(35,991)
Recoveries	3,639		—		3,639
Net charge-offs	(32,352)		—		(32,352)
Provision	191,000		41,000		232,000
Cumulative effect of change in accounting
principle - CECL	3,617		3,710		7,327
Balance, end of period	$	301,050	$	80,571	$	381,621

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Three Months Ended
	June 30, 2019
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	136,281	$	36,861	$	173,142
Charge-offs	(17,637)		—		(17,637)
Recoveries	6,393		—		6,393
Net charge-offs	(11,244)		—		(11,244)
Provision (negative provision)	10,000		(2,000)		8,000
Balance, end of period	$	135,037	$	34,861	$	169,898


	Six Months Ended
	June 30, 2019
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	132,472	$	36,861	$	169,333
Charge-offs	(21,102)		—		(21,102)
Recoveries	9,667		—		9,667
Net charge-offs	(11,435)		—		(11,435)
Provision (negative provision)	14,000		(2,000)		12,000
Balance, end of period	$	135,037	$	34,861	$	169,898

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 5. FORECLOSED ASSETS

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


	June 30,		December 31,
Property Type	2020		2019
	(In thousands)
Commercial real estate	$	28	$	221
Construction and land development	219		219


Total other real estate owned, net	247		440
Other foreclosed assets	1,202		—
Total foreclosed assets, net	$	1,449	$	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 loans	1,776

Provision for losses	(110)
Reductions related to sales	(657)
Balance, June 30, 2020	$	1,449

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 implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings (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. 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, June 30, 2020	$	1,078,670

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 Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
	(In thousands)
Gross Amount of CDI and CRI:
Balance, beginning of period	$	117,573	$	119,497	$	117,573	$	119,497

Fully amortized portion	(7,927)		—		(7,927)		—

Balance, end of period	109,646		119,497		109,646		119,497
Accumulated Amortization:
Balance, beginning of period	(83,127)		(67,247)		(79,179)		(62,377)
Amortization	(3,882)		(4,870)		(7,830)		(9,740)
Fully amortized portion	7,927		—		7,927		—

Balance, end of period	(79,082)		(72,117)		(79,082)		(72,117)
Net CDI and CRI, end of period	$	30,564	$	47,380	$	30,564	$	47,380

NOTE 7. OTHER ASSETS

The following table presents the detail of our other assets as of the dates indicated:


	June 30,		December 31,
Other Assets	2020		2019
	(In thousands)
Cash surrender value of BOLI	$	200,733	$	199,029
LIHTC investments ⁽¹⁾	192,963		75,149
Operating lease ROU assets, net ⁽²⁾	125,325		129,301
Interest receivable	76,150		81,479
CRA investments ⁽³⁾	74,644		65,152
Prepaid expenses	24,971		17,099
Equity investments without readily determinable fair values	14,967		14,890
Equity warrants ⁽⁴⁾	4,781		3,434
Equity investments with readily determinable fair values	2,688		2,998
Taxes receivable	—		31,591
Other receivables/assets	17,235		16,689
Total other assets	$	734,457	$	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) Includes equity investments without readily determinable fair values of $21.0 million and $17.8 million at June 30, 2020 and December 31, 2019.

(4) For information regarding equity warrants, see Note 10. Derivatives.

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 Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
	(In thousands)
Operating lease expense:
Fixed costs	$	8,832	$	8,534	$	17,077	$	16,836
Variable costs	12		46		25		70
Short-term lease costs	102		203		194		723
Sublease income	(1,003)		(1,054)		(2,019)		(2,180)
Net lease expense	$	7,943	$	7,729	$	15,277	$	15,449

The following table presents supplemental cash flow information related to leases for the periods indicated:


	Six Months Ended
	June 30,
	2020		2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	16,519	$	16,408
ROU assets obtained in exchange for lease obligations:
Operating leases	$	14,542	$	149,621

The following table presents supplemental balance sheet and other information related to operating leases as of the dates indicated:


	June 30,			December 31,
	2020			2019
	(Dollars in thousands)
Operating leases:
Operating lease right-of-use assets, net	$	125,325		$	129,301
Operating lease liabilities	$	145,261		$	145,354

Weighted average remaining lease term (in years)	6.0			6.1
Weighted average discount rate	2.67		%	2.82		%

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:


	June 30, 2020
	(In thousands)
Period ending December 31,
2020	$	17,487
2021	33,171
2022	27,289
2023	24,265
2024	17,032
2025 and thereafter	38,940
Total operating lease liabilities	158,184
Less: Imputed interest	(12,923)
Present value of operating lease liabilities	$	145,261

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 following table presents the rental payments to be received on operating leases as of the date indicated:


	June 30, 2020
	(In thousands)
Period ending December 31,
2020	$	20,056
2021	37,745
2022	31,705
2023	24,213
2024	19,562
2025 and thereafter	34,266
Total undiscounted cash flows	$	167,547

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:


	June 30, 2020						December 31, 2019
			Weighted				Weighted
			Average				Average
	Balance		Rate		Balance		Rate
	(Dollars in thousands)
FHLB secured advances	$	10,000	—	%	$	1,318,000	1.66	%
FHLB unsecured overnight advance	—		—	%	141,000		1.56	%
AFX short-term borrowings	50,000		0.05	%	300,000		1.61	%
Non-recourse debt	—		—	%	8		7.50	%
Total borrowings	$	60,000	0.04	%	$	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 June 30, 2020 of $4.2 billion, collateralized by a blanket lien on $6.4 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:


	June 30, 2020									December 31, 2019
					Maturity					Maturity
	Balance		Rate		Date	Balance		Rate		Date
	(Dollars in thousands)
Overnight advance	$	—	—	%	—	$	1,318,000	1.66	%	1/2/2020
Term advance	5,000		—	%	11/6/2020	—		—	%	—
Term advance	5,000		—	%	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 June 30, 2020, the Bank had secured borrowing capacity of $1.6 billion collateralized by liens covering $2.2 billion of qualifying loans. As of June 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 June 30, 2020. At December 31, 2019, the balance outstanding was $141.0 million.

Federal Funds Arrangements with Commercial Banks. As of June 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 June 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 June 30, 2020, there was a $50.0 million balance outstanding. As of December 31, 2019, there were $300.0 million in overnight borrowings outstanding.

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:


	June 30, 2020						December 31, 2019				Date	Maturity	Rate Index
Series	Balance		Rate		Balance		Rate		Issued	Date	(Quarterly Reset)
	(Dollars in thousands)
Trust V	$	10,310	3.40	%	$	10,310	5.00	%	8/15/2003	9/17/2033	3-month LIBOR + 3.10
Trust VI	10,310		3.36	%	10,310		4.94	%	9/3/2003	9/15/2033	3-month LIBOR + 3.05
Trust CII	5,155		3.25	%	5,155		4.85	%	9/17/2003	9/17/2033	3-month LIBOR + 2.95
Trust VII	61,856		3.51	%	61,856		4.69	%	2/5/2004	4/23/2034	3-month LIBOR + 2.75
Trust CIII	20,619		2.00	%	20,619		3.58	%	8/15/2005	9/15/2035	3-month LIBOR + 1.69
Trust FCCI	16,495		1.91	%	16,495		3.49	%	1/25/2007	3/15/2037	3-month LIBOR + 1.60
Trust FCBI	10,310		1.86	%	10,310		3.44	%	9/30/2005	12/15/2035	3-month LIBOR + 1.55
Trust CS 2005-1	82,475		2.26	%	82,475		3.85	%	11/21/2005	12/15/2035	3-month LIBOR + 1.95
Trust CS 2005-2	128,866		2.71	%	128,866		3.89	%	12/14/2005	1/30/2036	3-month LIBOR + 1.95
Trust CS 2006-1	51,545		2.71	%	51,545		3.89	%	2/22/2006	4/30/2036	3-month LIBOR + 1.95
Trust CS 2006-2	51,550		2.71	%	51,550		3.89	%	9/27/2006	10/30/2036	3-month LIBOR + 1.95
Trust CS 2006-3 ⁽¹⁾	28,956		1.82	%	28,902		1.64	%	9/29/2006	10/30/2036	3-month EURIBOR + 2.05
Trust CS 2006-4	16,470		2.71	%	16,470		3.89	%	12/5/2006	1/30/2037	3-month LIBOR + 1.95
Trust CS 2006-5	6,650		2.71	%	6,650		3.89	%	12/19/2006	1/30/2037	3-month LIBOR + 1.95
Trust CS 2007-2	39,177		2.71	%	39,177		3.89	%	6/13/2007	7/30/2037	3-month LIBOR + 1.95
Gross subordinated debentures	540,744		2.65	%	540,690		3.87	%
Unamortized discount ⁽²⁾	(79,972)				(82,481)
Net subordinated debentures	$	460,772			$	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 June 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 six months ended June 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.

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:


	June 30, 2020						December 31, 2019
	Notional		Fair		Notional		Fair
Derivatives Not Designated As Hedging Instruments	Amount		Value		Amount		Value
	(In thousands)
Derivative Assets:
Interest rate contracts	$	10,649	$	107	$	15,159	$	71
Foreign exchange contracts	80,240		3,078		91,144		1,163
Other derivative assets	90,889		3,185		106,303		1,234
Equity warrant assets	26,391		4,781		26,079		3,434
Total	$	117,280	$	7,966	$	132,382	$	4,668

Derivative Liabilities:
Interest rate contracts	$	10,649	$	107	$	15,159	$	71
Foreign exchange contracts	80,240		22		91,144		684
Total	$	90,889	$	129	$	106,303	$	755

NOTE 11. COMMITMENTS AND CONTINGENCIES

The following table presents a summary of commitments described below as of the dates indicated:


	June 30,		December 31,
	2020		2019
	(In thousands)
Loan commitments to extend credit	$	7,745,921	$	8,183,158
Standby letters of credit	365,792		355,503
Commitments to contribute capital to small business
investment companies and CRA-related loan pools	49,993		40,698
Commitments to contribute capital to low income housing
project partnerships ⁽¹⁾	—		88,515
Commitments to contribute capital to private equity funds	50		50
Total	$	8,161,756	$	8,667,924

____________________

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.

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 June 30, 2020 and December 31, 2019, we had commitments to contribute capital to these entities totaling $50.0 million and $40.7 million. We also had commitments to contribute up to an additional $50,000 to private equity funds at June 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:


	June 30, 2020
	(In thousands)
Period ending December 31,
2020	$	25,876
2021	24,117




Total	$	49,993

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.

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 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
	June 30, 2020
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency commercial MBS	$	1,133,086	$	—	$	1,133,086	$	—
Agency residential CMOs	1,049,742		—		1,049,742		—
Municipal securities	888,338		—		888,338		—
Agency residential MBS	248,934		—		248,934		—
Asset-backed securities	227,206		—		193,513		33,693
Collateralized loan obligations	136,663		—		136,663		—
Private label residential CMOs	96,775		—		91,639		5,136
SBA securities	44,576		—		44,576		—
Corporate debt securities	20,458		—		20,458		—
U.S. Treasury securities	5,363		5,363		—		—
Total securities available-for-sale	$	3,851,141	$	5,363	$	3,806,949	$	38,829
Equity investments with readily determinable fair values	$	2,688	$	2,688	$	—	$	—
Derivatives ⁽¹⁾:
Equity warrants	4,781		—		—		4,781
Other derivative assets	3,185		—		3,185		—
Derivative liabilities	129		—		129		—

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Fair Value Measurements as of
	December 31, 2019
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency commercial MBS	$	1,108,224	$	—	$	1,108,224	$	—
Agency residential CMOs	1,136,397		—		1,136,397		—
Municipal securities	735,159		—		735,159		—
Agency residential MBS	305,198		—		305,198		—
Asset-backed securities	214,783		—		198,348		16,435
Collateralized loan obligations	123,756		—		123,756		—
Private label residential CMOs	99,483		—		93,219		6,264
SBA securities	48,258		—		48,258		—
Corporate debt securities	20,748		—		20,748		—
U.S. Treasury securities	5,181		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
Other derivative assets	1,234		—		1,234		—
Derivative liabilities	755		—		755		—

____________________

(1) For information regarding derivative instruments, see Note 10. Derivatives.

During the six months ended June 30, 2020, there was a $5,000 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:


	June 30, 2020
	Private Label Residential CMOs			Asset-Backed Securities
		Weighted	Input or	Weighted
	Range	Average	Range	Average
Unobservable Inputs	of Inputs	Input ⁽¹⁾	of Inputs	Input ⁽²⁾
Voluntary annual prepayment speeds	6.1% - 17.7%	11.7%	10.0% - 15.0%	12.0%
Annual default rates ⁽³⁾	0.3% - 35.5%	2.2%	2.0%	2.0%
Loss severity rates ⁽³⁾	2.3% - 242.7%	53.8%	60.0%	60.0%
Discount rates	2.1% - 9.9%	6.8%	3.0% - 5.1%	3.7%

____________________

(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.

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:

June 30, 2020

Equity Warrants

Weighted

Range

Average

Unobservable Inputs

of Inputs

Input ⁽¹⁾

Volatility

23.4% - 147.4%

28.4%

Risk-free interest rate

0.1% - 0.3%

0.2%

Remaining life assumption (in years)

0.10 - 4.97

2.98

____________________

(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 Label		Asset-Backed		Equity
	Residential CMOs		Securities		Warrants
	(In thousands)
Balance, December 31, 2019	$	6,264	$	16,435	$	3,434
Total included in earnings	244		78		2,810
Total included in other comprehensive income	(574)		(473)		—
Purchases	—		20,100		—
Issuances	—		—		201
Sales	—		—		(1,659)


Net settlements	(798)		(2,447)		—

Transfers to Level 1 (equity investments with readily
determinable fair values)	—		—		(5)
Balance, June 30, 2020	$	5,136	$	33,693	$	4,781

Unrealized net gains (losses) for the period included in other
comprehensive income for securities held at quarter-end	$	1,112	$	(276)

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


	Fair Value Measurement as of
	June 30, 2020
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases ⁽¹⁾	$	134,012	$	—	$	3,346	$	130,666

OREO	28		—		—		28
Total non-recurring	$	134,040	$	—	$	3,346	$	130,694

______________________

(1) Includes nonaccrual loans and leases and performing TDRs with balances greater than $250,000.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Fair Value Measurement as of
	December 31, 2019
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans and leases ⁽¹⁾	$	28,706	$	—	$	1,083	$	27,623
OREO	105		—		—		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 Ended						Six Months Ended
Losses on Assets	June 30,						June 30,
Measured on a Non-Recurring Basis	2020		2019		2020		2019
	(In thousands)
Individually evaluated loans and leases ⁽¹⁾	$	9,483	$	1,842	$	29,317	$	3,038

OREO	5		—		110		—
Total losses	$	9,488	$	1,842	$	29,427	$	3,038

_____________________

(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:

June 30, 2020

Valuation

Unobservable

Input or

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(In thousands)

Individually evaluated

loans and leases

72,972

Discounted cash flows

Discount rates

2.25% - 10.46%

7.57%

Individually evaluated

Discount from

loans and leases

57,252

Third party appraisal

appraisal

23.00% - 54.06%

36.07%

Individually evaluated

loans and leases

442

Third party appraisals

No discounts

Discount from

OREO ⁽¹⁾

Third party appraisal

appraisal

20.00%

Total non-recurring Level 3

130,694

____________________

(1) Relates to one OREO at June 30, 2020.

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:


	June 30, 2020
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	174,059	$	174,059	$	174,059	$	—	$	—
Interest-earning deposits in financial institutions	1,747,077		1,747,077		1,747,077		—		—
Securities available-for-sale	3,851,141		3,851,141		5,363		3,806,949		38,829
Investment in FHLB stock	17,250		17,250		—		17,250		—

Loans and leases held for investment, net	19,393,581		19,603,897		—		3,346		19,600,551
Equity warrants	4,781		4,781		—		—		4,781
Other derivative assets	3,185		3,185		—		3,185		—
Equity investments with readily determinable fair values	2,688		2,688		2,688		—		—

Financial Liabilities:
Core deposits	19,535,814		19,535,814		—		19,535,814		—
Non-core non-maturity deposits	1,217,266		1,217,266		—		1,217,266		—
Time deposits	2,175,499		2,184,874		—		2,184,874		—
Borrowings	60,000		59,976		50,000		9,976		—
Subordinated debentures	460,772		443,945		—		443,945		—
Derivative liabilities	129		129		—		129		—


	December 31, 2019
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	172,585	$	172,585	$	172,585	$	—	$	—
Interest-earning deposits in financial institutions	465,039		465,039		465,039		—		—
Securities available-for-sale	3,797,187		3,797,187		5,181		3,769,307		22,699
Investment in FHLB stock	40,924		40,924		—		40,924		—
Loans and leases held for investment, net	18,708,087		19,055,004		—		1,083		19,053,921
Equity warrants	3,434		3,434		—		—		3,434
Other derivative assets	1,234		1,234		—		1,234		—
Equity investments with readily determinable fair values	2,998		2,998		2,998		—		—

Financial Liabilities:
Core deposits	16,187,287		16,187,287		—		16,187,287		—
Non-core non-maturity deposits	496,407		496,407		—		496,407		—
Time deposits	2,549,342		2,549,260		—		2,549,260		—
Borrowings	1,759,008		1,759,008		1,759,000		8		—
Subordinated debentures	458,209		441,617		—		441,617		—
Derivative liabilities	755		755		—		755		—

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 June 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 Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
	(Dollars in thousands, except per share data)
Basic Earnings (Loss) Per Share:
Net earnings (loss)	$	33,204	$	128,125	$	(1,399,907)	$	240,729
Less: Earnings allocated to unvested restricted stock⁽¹⁾	(362)		(1,190)		(1,251)		(2,343)
Net earnings (loss) allocated to common shares	$	32,842	$	126,935	$	(1,401,158)	$	238,386

Weighted-average basic shares and unvested restricted
stock outstanding	118,192		120,042		118,484		121,128
Less: Weighted-average unvested restricted stock
outstanding	(1,606)		(1,462)		(1,551)		(1,407)
Weighted-average basic shares outstanding	116,586		118,580		116,933		119,721

Basic earnings (loss) per share	$	0.28	$	1.07	$	(11.98)	$	1.99

Diluted Earnings (Loss) Per Share:
Net earnings (loss) allocated to common shares	$	32,842	$	126,935	$	(1,401,158)	$	238,386

Weighted-average diluted shares outstanding	116,586		118,580		116,933		119,721

Diluted earnings (loss) per share	$	0.28	$	1.07	$	(11.98)	$	1.99

________________________

(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.

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 June 30,
	2020						2019
	Total		Revenue from		Total		Revenue from
	Recorded		Contracts with		Recorded		Contracts with
	Revenue		Customers		Revenue		Customers
	(In thousands)
Total interest income	$	274,075	$	—	$	314,533	$	—
Noninterest income:
Service charges on deposit accounts	2,004		2,004		3,771		3,771
Other commissions and fees	10,111		3,006		11,590		5,158
Leased equipment income	12,037		—		9,182		—
Gain on sale of loans	346		—		326		—
Gain on sale of securities	7,715		—		22,192		—
Other income	6,645		336		3,832		454
Total noninterest income	38,858		5,346		50,893		9,383
Total revenue	$	312,933	$	5,346	$	365,426	$	9,383

The following table presents revenue from contracts with customers based on the timing of revenue recognition for the periods indicated:


	Three Months Ended
	June 30,
	2020		2019
	(In thousands)
Products and services transferred at a point in time	$	2,727	$	4,987
Products and services transferred over time	2,619		4,396
Total revenue from contracts with customers	$	5,346	$	9,383

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Six Months Ended June 30,
	2020						2019
	Total		Revenue from		Total		Revenue from
	Recorded		Contracts with		Recorded		Contracts with
	Revenue		Customers		Revenue		Customers
	(In thousands)
Total interest income	$	565,407	$	—	$	619,092	$	—
Noninterest income:
Service charges on deposit accounts	4,662		4,662		7,501		7,501
Other commissions and fees	19,832		7,160		22,598		9,696
Leased equipment income	24,288		—		18,464		—
Gain on sale of loans	433		—		326		—
Gain on sale of securities	7,897		—		24,353		—
Other income	10,846		672		8,715		825
Total noninterest income	67,958		12,494		81,957		18,022
Total revenue	$	633,365	$	12,494	$	701,049	$	18,022

The following table presents revenue from contracts with customers based on the timing of revenue recognition for the periods indicated:


	Six Months Ended
	June 30,
	2020		2019
	(In thousands)
Products and services transferred at a point in time	$	6,963	$	9,533
Products and services transferred over time	5,531		8,489
Total revenue from contracts with customers	$	12,494	$	18,022

Contract Balances

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of the dates indicated:


	June 30, 2020		December 31, 2019
	(In thousands)
Receivables, which are included in "Other assets"	$	936	$	1,094
Contract assets, which are included in "Other assets"	$	—	$	—
Contract liabilities, which are included in "Accrued interest payable and other liabilities"	$	425	$	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 six months ended June 30, 2020 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $65,000.

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 June 30, 2020, there were 1,790,129 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 $5.7 million and $6.2 million for the three months ended June 30, 2020 and 2019, and $12.2 million and $12.0 million for the six months ended June 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 June 30, 2020 totaled $55.3 million.

Time-Based Restricted Stock Awards

At June 30, 2020, there were 1,624,622 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 June 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.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 16. RECENTLY ISSUED ACCOUNTING STANDARDS

Effective

Effect on the Financial Statements

Standard

Description

Date

or 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, 2021

The adoption of this guidance is not expected to have a material impact on the Company's condensed consolidated financial statements.

Effective

Effect on the Financial Statements

Standard

Description

Date

or 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, 2022

The 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 June 30, 2020 and have concluded there are no other subsequent events that would require recognition in the accompanying condensed consolidated financial statements.

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

Forward-Looking Information

This Form 10-Q contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our 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;

•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

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 74 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 innovative 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 88.1% of net revenue (net interest income plus noninterest income).

At June 30, 2020, the Company had total assets of $27.4 billion, including $19.7 billion of total loans and leases, net of deferred fees, and $3.9 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 $594.9 million increase in total assets since year-end was due primarily to a $1.3 billion increase in interest-earning deposits in financial institutions and an $847.8 million increase in loans and leases, net of deferred fees, offset partially by a $1.5 billion write-down of goodwill. The increase in loans and leases was driven mostly by $1.2 billion of loans funded under the Paycheck Protection Program and increased balances on existing loans resulting primarily from disbursements on construction loans.

At June 30, 2020, the Company had total liabilities of $23.9 billion, including total deposits of $22.9 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 $2.1 billion increase in total liabilities since year-end was due mainly to increases of $3.3 billion in core deposits and $720.9 million in non-core non-maturity deposits, offset partially by decreases of $1.7 billion in borrowings, primarily FHLB advances, and $373.8 million in time deposits. The increase in core deposits was due primarily to PPP loan proceeds being deposited into customers' accounts and venture banking, which saw deposits increase by $1.6 billion to a record $8.7 billion at June 30, 2020. At June 30, 2020, core deposits totaled $19.5 billion, or 85% of total deposits, including $8.6 billion of noninterest-bearing demand deposits, or 38% of total deposits.

At June 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 $1.4 billion net loss, attributable primarily to a $1.47 billion goodwill impairment charge, $100.7 million of cash dividends paid, and $70.0 million of common stock repurchased under the Stock Repurchase Program, offset partially by a $66.4 million increase in accumulated other comprehensive income. Consolidated capital ratios remained strong with Tier 1 capital and total capital ratios of 9.97% and 13.18% at June 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.

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.

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 1^st, we re-opened 17 of the 19 branches and decided to permanently close two branches. 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.

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 June 30, 2020, loan payment or deferral modifications were made on approximately 9% of the loan portfolio, most of which occurred in May and June. Most of the modifications were either for payment deferrals for three months or maturity extensions up to three months, while some deferrals were up to six months and some extensions were up to one year. As of July 30, 2020, loan modifications were 9% of the June 30, 2020 loan and lease portfolio as shown in the table below:


		July 30, 2020		June 30, 2020		% of
		Total Deferral		Loan and Lease		June 30, 2020
Loan and Lease Portfolio		and Extensions		Portfolio		Loan and Lease
Segment and Class	Count	Balance		Balance		Portfolio
	(Dollars in millions)
Real estate mortgage:
Commercial	123	$	932	$	4,222	22	%
Income producing and other residential	49	225		3,734		6	%
Real estate construction and land:
Commercial	13	284		1,168		24	%
Residential	9	192		2,173		9	%
Commercial:
Asset-based	43	115		3,413		3	%
Venture capital	19	18		1,814		1	%
Other commercial	151	46		2,760		2	%
Consumer	499	34		411		8	%
Total	906	$	1,846	$	19,695	9	%

We actively participated in the Paycheck Protection Program ("PPP"), under the provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. As of June 30, 2020, we processed over 4,100 loans for approximately $1.2 billion in loans through the PPP. The loans had 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 amounted to 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 $443.4 million in special mention loans and $117.3 million in classified loans during the six months ended June 30, 2020. Our exposure to these loan and lease portfolios, which includes equipment leased to others under operating leases, is as follows:


	June 30, 2020
									% of
			Special						Total Loans
Loan and Lease Portfolio	Classified		Mention		Pass		Total		and Leases
	(Dollars in millions)
Hotel	$	2	$	305	$	836	$	1,143	6	%
Retail	43		2		580		625		3	%
Commercial aviation	—		150		147		297		2	%
Restaurant	12		4		145		161		1	%
Oil services	28		4		93		125		1	%
Total	$	85	$	465	$	1,801	$	2,351	12	%

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. Our provision for credit losses for the second quarter of 2020 increased by $8.0 million from the first quarter of 2020 to $120.0 million, while during the first quarter of 2020, the provision for credit losses increased by $109.0 million to $112.0 million when compared to the fourth quarter of 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 half of the year. For further details on CECL and the impacts to our process in the second 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 $1.4 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 during 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 recent COVID-19 pandemic-related developments. 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 continue to unfold. We expect to see some requests for further loan modifications as the initial modifications expire during the second half of the year 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.

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).

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


		Three Months Ended																				Six Months Ended
		June 30,				March 31,				June 30,				June 30,
Efficiency Ratio			2020				2020				2019				2020				2019
		(Dollars in thousands)
Noninterest expense			$	126,965			$	1,587,970			$	125,427			$	1,714,935			$	251,714
Less:	Intangible asset amortization	3,882				3,948				4,870				7,830				9,740
	Foreclosed assets (income) expense, net	(146)				66				(146)				(80)				(117)
	Goodwill impairment	—				1,470,000				—				1,470,000				—
	Acquisition, integration and reorganization costs	—				—				—				—				618
Noninterest expense used for efficiency ratio			$	123,229			$	113,956			$	120,703			$	237,185			$	241,473

Net interest income (tax equivalent)			$	256,294			$	251,428			$	261,689			$	507,722			$	517,742
Noninterest income			38,858				29,100				50,893				67,958				81,957
Net revenues			295,152				280,528				312,582				575,680				599,699
Less:	Gain on sale of securities	7,715				182				22,192				7,897				24,353
Net revenues used for efficiency ratio			$	287,437			$	280,346			$	290,390			$	567,783			$	575,346

Efficiency ratio			42.9		%		40.6		%		41.6		%		41.8		%		42.0		%

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

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.

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 Ended																				Six Months Ended
		June 30,				March 31,				June 30,				June 30,
Return on Average Tangible Equity						2020				2020				2019				2020				2019
		(Dollars in thousands)
Net earnings (loss)			$	33,204			$	(1,433,111)			$	128,125			$	(1,399,907)			$	240,729
Add:	Intangible asset amortization	3,882				3,948				4,870				7,830				9,740
	Goodwill impairment	—				1,470,000				—				1,470,000				—
	Adjusted net earnings used for return
	on average tangible equity		$	37,086			$	40,837			$	132,995			$	77,923			$	250,469

Average stockholders' equity			$	3,446,850			$	4,956,778			$	4,818,889			$	4,201,814			$	4,817,435
Less:	Average intangible assets	1,111,302				2,569,189				2,598,762				1,840,246				2,601,288
Average tangible common equity			$	2,335,548			$	2,387,589			$	2,220,127			$	2,361,568			$	2,216,147

Return on average equity ⁽¹⁾			3.87		%		(116.28)		%		10.66		%		(67.00)		%		10.08		%
Return on average tangible equity ⁽²⁾			6.39		%		6.88		%		24.03		%		6.64		%		22.79		%

___________________________________

(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/	June 30,			December 31,
Tangible Book Value Per Share	2020			2019
	(Dollars in thousands, except per share data)
Stockholders’ equity	$	3,452,898		$	4,954,697
Less: Intangible assets	1,109,234			2,587,064
Tangible common equity	$	2,343,664		$	2,367,633

Total assets	$	27,365,738		$	26,770,806
Less: Intangible assets	1,109,234			2,587,064
Tangible assets	$	26,256,504		$	24,183,742

Equity to assets ratio	12.62		%	18.51		%
Tangible common equity ratio ⁽¹⁾	8.93		%	9.79		%
Book value per share	$	29.17		$	41.36
Tangible book value per share⁽²⁾	$	19.80		$	19.77
Shares outstanding	118,374,603			119,781,605

_______________________________________

(1) Tangible common equity divided by tangible assets.

(2) Tangible common equity divided by shares outstanding.

•Adjusted net earnings and adjusted earnings per share: These non-GAAP measurements are presented in the following tables for the periods presented. See Note 13. Earnings (Loss) Per Share for the GAAP calculation of earnings per share.


		Three Months Ended																				Six Months Ended
Adjusted Net Earnings and				June 30,				March 31,				June 30,				June 30,
Adjusted Earnings Per Share				2020				2020				2019				2020				2019
		(Dollars in thousands)
Adjusted Net Earnings:
Net earnings (loss)				$	33,204			$	(1,433,111)			$	128,125			$	(1,399,907)			$	240,729
Add:	Goodwill impairment	—				1,470,000				—				1,470,000				—
	Adjusted net earnings	$	33,204			$	36,889			$	128,125			$	70,093			$	240,729

Adjusted Basic Earnings Per Share:
Adjusted net earnings						$	33,204			$	36,889			$	128,125			$	70,093			$	240,729
Less:	Earnings allocated to unvested restricted
	stock	(362)				(939)				(1,190)				(1,251)				(2,343)
Adjusted net earnings allocated to common shares						$	32,842			$	35,950			$	126,935			$	68,842			$	238,386

Weighted-average basic shares and unvested restricted
	stock outstanding	118,192				118,775				120,042				118,484				121,128
Less:	Weighted-average unvested restricted
	stock outstanding	(1,606)				(1,495)				(1,462)				(1,551)				(1,407)
Weighted-average basic shares outstanding						116,586				117,280				118,580				116,933				119,721

Adjusted basic earnings per share						$	0.28			$	0.31			$	1.07			$	0.59			$	1.99

Adjusted Diluted Earnings Per Share:
Adjusted net earnings allocated to common shares						$	32,842			$	35,950			$	126,935			$	68,842			$	238,386

Weighted-average diluted shares outstanding						116,586				117,280				118,580				116,933				119,721

Adjusted diluted earnings per share						$	0.28			$	0.31			$	1.07			$	0.59			$	1.99

•PPNR and PPNR return on average assets: Given that the use of PPNR is prevalent among bank investors and analysts, we disclose it, as well as 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 Ended																				Six Months Ended
PPNR and PPNR Return						June 30,				March 31,				June 30,				June 30,
on Average Assets						2020				2020				2019				2020				2019
		(Dollars in thousands)
Net earnings (loss)			$	33,204			$	(1,433,111)			$	128,125			$	(1,399,907)			$	240,729
Add:	Provision for credit losses	120,000				112,000				8,000				232,000				12,000
	Goodwill impairment	—				1,470,000				—				1,470,000				—
	Income tax expense	12,968				11,988				50,239				24,956				93,288
	Pre-provision, pre-goodwill impairment
	pre-tax net revenue ("PPNR")		$	166,172			$	160,877			$	186,364			$	327,049			$	346,017

Average assets			$	26,621,227			$	27,099,040			$	25,849,189			$	26,860,133			$	25,812,771

Return on average assets ⁽¹⁾			0.50		%		(21.27)		%		1.99		%		(10.48)		%		1.88		%
PPNR return on average assets ⁽²⁾			2.51		%		2.39		%		2.89		%		2.45		%		2.70		%

___________________________________

(1) Annualized net earnings (loss) divided by average assets.

(2) Annualized PPNR divided by average assets.

Results of Operations

Earnings Performance

The following table presents performance metrics for the periods indicated:


	Three Months Ended															Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2020			2020			2019			2020			2019
	(Dollars in thousands, except per share data)
Earnings Summary:
Net interest income	$	254,279		$	249,747		$	260,898		$	504,026		$	515,774
Provision for credit losses	(120,000)			(112,000)			(8,000)			(232,000)			(12,000)
Noninterest income	38,858			29,100			50,893			67,958			81,957
Operating expense	(126,965)			(117,970)			(125,427)			(244,935)			(251,714)
Goodwill impairment	—			(1,470,000)			—			(1,470,000)			—

Earnings (loss) before income taxes	46,172			(1,421,123)			178,364			(1,374,951)			334,017
Income tax expense	(12,968)			(11,988)			(50,239)			(24,956)			(93,288)
Net earnings (loss)	$	33,204		$	(1,433,111)		$	128,125		$	(1,399,907)		$	240,729

Pre-provision, pre-goodwill impairment,
pre-tax net revenue ("PPNR")⁽²⁾	$	166,172		$	160,877		$	186,364		$	327,049		$	346,017

Performance Measures:
Diluted earnings (loss) per share	$	0.28		$	(12.23)		$	1.07		$	(11.98)		$	1.99
Return on average assets	0.50		%	(21.27)		%	1.99		%	(10.48)		%	1.88		%
PPNR return on average assets ⁽²⁾	2.51		%	2.39		%	2.89		%	2.45		%	2.70		%
Return on average tangible equity ⁽¹⁾⁽²⁾	6.39		%	6.88		%	24.03		%	6.64		%	22.79		%
Net interest margin (tax equivalent)	4.20		%	4.31		%	4.72		%	4.26		%	4.70		%
Yield on average loans and leases (tax equivalent)	5.01		%	5.54		%	6.26		%	5.27		%	6.21		%
Cost of average total deposits	0.25		%	0.59		%	0.81		%	0.41		%	0.77		%
Efficiency ratio	42.9		%	40.6		%	41.6		%	41.8		%	42.0		%

_____________________________

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

(2) See "- Non-GAAP Measurements."

Second Quarter of 2020 Compared to First Quarter of 2020

Net earnings for the second quarter of 2020 was $33.2 million, or $0.28 per diluted share, compared to a net loss for the first quarter of 2020 of $1.43 billion, or a loss of $12.23 per diluted share. The $1.47 billion increase in net earnings from the prior quarter was due primarily to a $1.47 billion goodwill impairment charge in the first quarter, higher noninterest income of $9.8 million, and higher net interest income of $4.5 million, offset partially by higher noninterest expense (excluding the goodwill impairment charge) of $9.0 million, and a higher provision for credit losses of $8.0 million. Noninterest income increased due primarily to a $7.5 million increase in gain on sale of securities and a $2.9 million increase in dividends and gains on equity investments, offset partially by a $1.6 million decrease in other income. Net interest income increased due mainly to a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases, offset partially by a lower yield on average loans and leases and securities. The increase in noninterest expense (excluding the goodwill impairment charge) was due mainly to increases of $5.1 million in insurance and assessments expense and $6.6 million in prepayment penalties incurred from the early payoff of $750 million of FHLB term advances, offset partially by the reversal of a $1.5 million accrual for operational loss contingencies. The increase in the provision for credit losses in the second quarter of 2020 was driven by the impact from the significant deterioration and continued uncertainty in the key macro-economic forecast variables such as unemployment and GDP as a result of the impact of COVID-19. Excluding the goodwill impairment charge, adjusted net earnings for the first quarter of 2020 were $36.9 million, or $0.31 per diluted share. See "Non-GAAP Measurements" for the calculations of these amounts.

Second Quarter of 2020 Compared to Second Quarter of 2019

Net earnings for the second quarter of 2020 were $33.2 million, or $0.28 per diluted share, compared to net earnings for the second quarter of 2019 of $128.1 million, or $1.07 per diluted share. The $94.9 million decrease in net earnings from the year-ago quarter was due primarily to a higher provision for credit losses of $112.0 million, lower noninterest income of $12.0 million, and lower net interest income of $6.6 million, offset partially by lower income tax expense of $37.3 million. The increase in the provision for credit losses for the second quarter of 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 as a result of COVID-19. The decrease in noninterest income in the second quarter of 2020 compared to the year-ago quarter was primarily due to a $14.5 million decrease in the gain on sale of securities. Net interest income decreased due primarily 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. The decrease in income tax expense is mostly due to lower pre-tax net earnings in the second quarter of 2020 compared to the year-ago quarter.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Net loss for the six months ended June 30, 2020 was $1.40 billion, or a loss of $11.98 per diluted share, compared to net earnings for the six months ended June 30, 2019 of $240.7 million, or $1.99 per diluted share. The $1.64 billion decrease in net earnings from the year-ago period was due primarily to a $1.47 billion goodwill impairment charge, a higher provision for credit losses of $220.0 million, lower noninterest income of $14.0 million, and lower net interest income of $11.7 million, offset partially by lower noninterest expense of $6.8 million, excluding the goodwill impairment charge, and lower income tax expense of $68.3 million. The increase in the provision for credit losses for the six months ended June 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 as a result of COVID-19. The decrease in noninterest income for the first six months of 2020 compared to the same period a year ago was due primarily to a $16.5 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. The decrease in noninterest expense, excluding the goodwill impairment charge was due mostly to lower compensation expense of $16.6 million, offset partially by higher insurance and assessments expense of $5.5 million and higher leased equipment depreciation of $3.1 million.

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
	June 30, 2020										March 31, 2020								June 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)	$	19,951,603	$	248,474	5.01	%	$	19,065,035	$	262,764	5.54	%	$	18,239,690	$	284,513	6.26	%
Investment securities ⁽²⁾⁽⁴⁾	3,846,459		27,430		2.87	%	3,853,217		28,641		2.99	%	3,790,436		29,462		3.12	%
Deposits in financial institutions	733,142		186		0.10	%	537,384		1,608		1.20	%	228,702		1,349		2.37	%
Total interest‑earning assets⁽²⁾	24,531,204		276,090		4.53	%	23,455,636		293,013		5.02	%	22,258,828		315,324		5.68	%
Other assets	2,090,023						3,643,404						3,590,361
Total assets	$	26,621,227					$	27,099,040					$	25,775,949

LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking	$	4,001,750	1,573		0.16	%	$	3,466,812	7,135		0.83	%	$	3,242,960	10,644		1.32	%
Money market	6,114,354		2,856		0.19	%	5,247,866		10,016		0.77	%	5,046,021		14,604		1.16	%
Savings	524,335		33		0.03	%	497,959		160		0.13	%	525,648		227		0.17	%
Time	2,475,858		8,613		1.40	%	2,684,143		10,936		1.64	%	2,731,156		13,245		1.95	%
Total interest‑bearing deposits	13,116,297		13,075		0.40	%	11,896,780		28,247		0.95	%	11,545,785		38,720		1.35	%
Borrowings	871,110		1,319		0.61	%	2,026,749		6,778		1.35	%	1,142,223		7,210		2.53	%
Subordinated debentures	459,466		5,402		4.73	%	458,399		6,560		5.76	%	454,901		7,705		6.79	%
Total interest‑bearing liabilities	14,446,873		19,796		0.55	%	14,381,928		41,585		1.16	%	13,142,909		53,635		1.64	%
Noninterest‑bearing demand deposits	8,292,151						7,357,717						7,544,027
Other liabilities	435,353						402,617						343,364
Total liabilities	23,174,377						22,142,262						21,030,300
Stockholders’ equity	3,446,850						4,956,778						4,818,889
Total liabilities and
stockholders' equity	$	26,621,227					$	27,099,040					$	25,849,189
Net interest income ⁽²⁾			$	256,294					$	251,428					$	261,689
Net interest rate spread ⁽²⁾					3.98	%					3.86	%					4.04	%
Net interest margin ⁽²⁾					4.20	%					4.31	%					4.72	%

Total deposits ⁽⁵⁾	$	21,408,448	$	13,075	0.25	%	$	19,254,497	$	28,247	0.59	%	$	19,089,812	$	38,720	0.81	%

_____________________

(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 $2.5 million, $4.8 million, and $3.5 million for the three months ended June 30, 2020, March 31, 2020, and June 30, 2019, respectively.

(4) Includes tax-equivalent adjustments of $1.4 million, $1.2 million, and $0.5 million for the three months ended June 30, 2020, March 31, 2020, and June 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.


	Six Months Ended
	June 30, 2020										June 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)	$	19,508,319	$	511,238	5.27	%	$	18,152,444	$	559,026	6.21	%
Investment securities ⁽²⁾⁽⁴⁾	3,849,838		56,071		2.93	%	3,878,991		60,035		3.12	%
Deposits in financial institutions	635,263		1,794		0.57	%	170,649		1,999		2.36	%
Total interest-earning assets⁽²⁾	23,993,420		569,103		4.77	%	22,202,084		621,060		5.64	%
Other assets	2,866,713						3,610,687
Total assets	$	26,860,133					$	25,812,771

LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking	$	3,734,281	8,708		0.47	%	$	3,142,946	19,965		1.28	%
Money market	5,681,110		12,872		0.46	%	5,159,871		29,512		1.15	%
Savings	511,147		193		0.08	%	539,264		469		0.18	%
Time	2,580,001		19,549		1.52	%	2,510,271		23,009		1.85	%
Total interest-bearing deposits	12,506,539		41,322		0.66	%	11,352,352		72,955		1.30	%
Borrowings	1,448,929		8,097		1.12	%	1,180,060		14,920		2.55	%
Subordinated debentures	458,932		11,962		5.24	%	454,554		15,443		6.85	%
Total interest-bearing liabilities	14,414,400		61,381		0.86	%	12,986,966		103,318		1.60	%
Noninterest-bearing demand deposits	7,824,934						7,663,177
Other liabilities	418,985						345,193
Total liabilities	22,658,319						20,995,336
Stockholders’ equity	4,201,814						4,817,435
Total liabilities and
stockholders' equity	$	26,860,133					$	25,812,771
Net interest income ⁽²⁾			$	507,722					$	517,742
Net interest rate spread ⁽²⁾					3.91	%					4.04	%
Net interest margin ⁽²⁾					4.26	%					4.70	%

Total deposits ⁽⁵⁾	$	20,331,473	$	41,322	0.41	%	$	19,015,529	$	72,955	0.77	%

_____________________

(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 $7.3 million and $6.5 million for the six months ended June 30, 2020 and 2019, respectively.

(4) Includes tax-equivalent adjustments of $2.6 million and $1.4 million for the six months ended June 30, 2020 and 2019, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.

Second Quarter of 2020 Compared to First Quarter of 2020

Net interest income increased by $4.5 million to $254.3 million for the second quarter of 2020 compared to $249.7 million for the first quarter of 2020 due mainly to a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases, offset partially by a lower yield on average loans and leases. The tax-equivalent yield on average loans and leases was 5.01% for the second quarter of 2020 compared to 5.54% for the first quarter of 2020. The decrease in the yield on average loans and leases was due principally to lower market rates, a lower rate on loan production from the impact of the PPP loans, and lower loan discount accretion. Excluding the PPP loans, which have a coupon rate of 1%, the tax equivalent yield on average loans and leases was 5.10%.

The tax equivalent NIM was 4.20% for the second quarter of 2020 compared to 4.31% for the first quarter of 2020. The decrease in the tax equivalent NIM was due mainly to lower market rates resulting in a lower loan and lease yield, a lower rate on loan production from the impact of the PPP loans, and lower loan discount accretion. Excluding the PPP loans, the tax equivalent NIM was 4.25% for the second quarter of 2020. Despite the above, the NIM proved to be resilient in part due to interest rate floors on variable-rate loans.

The cost of average total deposits decreased to 0.25% for the second quarter of 2020 from 0.59% for the first quarter of 2020. The lower cost of average interest-bearing deposits reflected actions taken to reduce deposit rates in light of the two emergency interest rate cuts by the Federal Reserve in March of 2020. The spot rate of our cost of deposits was 0.19% on June 30, 2020.

Second Quarter of 2020 Compared to Second Quarter of 2019

Net interest income decreased by $6.6 million to $254.3 million for the second quarter of 2020 compared to $260.9 million for the second 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 second quarter of 2020 compared to 6.26% 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 4.20% for the second quarter of 2020 compared to 4.72% 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 five basis points to the NIM for the second quarter of 2020 compared to seven basis points for the second quarter of 2019.

The cost of average total deposits decreased to 0.25% for the second quarter of 2020 from 0.81% for the second quarter of 2019 due mainly to lower rates paid on deposits in conjunction with decreased market rates.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Net interest income decreased by $11.7 million to $504.0 million for the six months ended June 30, 2020 compared to $515.8 million for the six months ended June 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 5.27% for the six months ended June 30, 2020 compared to 6.21% 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 5.32%.

The tax equivalent NIM was 4.26% for the six months ended June 30, 2020 compared to 4.70% 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 4.28% for the six months ended June 30, 2020.

The cost of average total deposits decreased to 0.41% for the six months ended June 30, 2020 from 0.77% for the six months ended June 30, 2019 due mainly to lower rates paid on deposits resulting from decreased market rates.

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 Ended															Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2020			2020			2019			2020			2019
	(Dollars in thousands)
Provision For Credit Losses:
Addition to allowance for loan and lease losses	$	93,000		$	98,000		$	10,000		$	191,000		$	14,000
Addition to (reduction in) reserve for unfunded
loan commitments	27,000			14,000			(2,000)			41,000			(2,000)
Total provision for credit losses	$	120,000		$	112,000		$	8,000		$	232,000		$	12,000

Credit Quality Metrics:
Net charge-offs on loans and leases held for
investment ⁽¹⁾	$	13,242		$	19,110		$	11,244		$	32,352		$	11,435
Annualized net charge-offs to average loans and leases	0.27		%	0.40		%	0.25		%	0.33		%	0.13		%
At quarter-end:
Allowance for credit losses	$	381,621		$	274,863		$	169,898
Allowance for credit losses to loans and leases
held for investment	1.94		%	1.39		%	0.92		%
Allowance for credit losses to nonaccrual
loans and leases held for investment	229.7		%	287.5		%	209.1		%

Nonaccrual loans and leases held for investment	$	166,113		$	95,602		$	81,265
Performing TDRs held for investment	$	15,037		$	8,978		$	16,464
Classified loans and leasesheld for investment	$	293,230		$	147,705		$	190,979

______________________

(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. 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 increased by $8.0 million to $120.0 million for the second quarter of 2020 compared to $112.0 million for the first quarter of 2020 as a result of reserve builds that reflected significant deterioration and continued uncertainty in the key macro-economic forecast variables such as unemployment and GDP as a result of COVID-19.

The provision for credit losses increased by $112.0 million to $120.0 million for the second quarter of 2020 compared to $8.0 million for the second 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 as a result of COVID-19.

The provision for credit losses increased by $220.0 million to $232.0 million for the six months ended June 30, 2020 compared to $12.0 million for the six months ended June 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 as a result of COVID-19.

Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances include an increased amount of classified and/or criticized loans and leases, net loan and lease and unfunded commitment growth, and changes in economic conditions and forecasts. Changes 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 Ended										Six Months Ended
	June 30,		March 31,		June 30,		June 30,
Noninterest Income	2020		2020		2019		2020		2019
	(In thousands)
Leased equipment income	$	12,037	$	12,251	$	9,182	$	24,288	$	18,464
Other commissions and fees	10,111		9,721		11,590		$	19,832	$	22,598
Service charges on deposit accounts	2,004		2,658		3,771		4,662		7,501
Gain on sale of loans and leases	346		87		326		433		326
Gain on sale of securities	7,715		182		22,192		7,897		24,353
Other income:
Dividends and gains (losses) on equity investments	2,947		28		(83)		2,975		213
Warrant income	1,973		837		1,214		2,810		3,493
Other	1,725		3,336		2,701		5,061		5,009
Total noninterest income	$	38,858	$	29,100	$	50,893	$	67,958	$	81,957

Second Quarter of 2020 Compared to First Quarter of 2020

Noninterest income increased by $9.8 million to $38.9 million for the second quarter of 2020 compared to $29.1 million for the first quarter of 2020 due mainly to a $7.5 million increase in gain on sale of securities and a $2.9 million increase in dividends and gains on equity investments, offset partially by a $1.6 million decrease in other income. The increase in gain on sale of securities resulted from the sale of $122.3 million of securities in the second quarter. The increase in dividends and gains on equity investments resulted from increases in the fair value of equity investments still held and a $1.5 million gain on sale of an equity investment. The decrease in other income was primarily due to $1.1 million of bankruptcy proceeds received on a former credit in the first quarter.

Second Quarter of 2020 Compared to Second Quarter of 2019

Noninterest income decreased by $12.0 million to $38.9 million for the second quarter of 2020 compared to $50.9 million for the second quarter of 2019 due mainly to a $14.5 million decrease in gain on sale of securities, a $1.8 million decrease in service charges on deposit accounts, and a $1.5 million decrease in other commissions and fees, offset partially by a $3.0 million increase in dividends and gains on equity investments and a $2.9 million increase in leased equipment income. Gain on sale of securities decreased primarily due to lower sales activity in the second quarter of 2020 as compared to the second quarter of 2019. Service charges on deposit accounts decreased due primarily to lower analysis fees and NSF fees in the second quarter of 2020 as compared to the second quarter of 2019. Other commissions and fees decreased primarily due to lower credit card fee income and lower foreign exchange fees, offset partially by higher customer success fees. The increase in dividends and gains on equity investments resulted primarily from increases in the fair value of equity investments still held and gains on sales of equity investments sold. Leased equipment income increased due to early lease terminations resulting in higher termination gains in the second quarter of 2020 as compared to the second quarter of 2019 and a higher average balance of leases in 2020 resulting in higher lease income as compared to the 2019 period.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Noninterest income decreased by $14.0 million to $68.0 million for the six months ended June 30, 2020 compared to $82.0 million for the six months ended June 30, 2019 due mainly to a $16.5 million decrease in gain on sale of securities, a $2.8 million decrease in service charges on deposit accounts, and a $2.8 million decrease in other commissions and fees, offset partially by a $5.8 million increase in leased equipment income and a $2.8 million increase in dividends and gains on equity investments. Gain on sale of securities decreased primarily due to lower sales activity in the 2020 period as compared to the prior year period. Service charges on deposit accounts decreased due primarily to lower analysis fees and NSF fees for the six months ended June 30, 2020 as compared to the same period last year as we waived certain fees 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. Leased equipment income increased due to early lease terminations resulting in higher termination gains in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 and a higher average balance of leases in 2020 resulting in higher lease income as compared to the 2019 period. The increase in dividends and gains on equity investments resulted primarily from increases in the fair value of equity investments still held.

Noninterest Expense

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


	Three Months Ended										Six Months Ended
	June 30,		March 31,		June 30,		June 30,
Noninterest Expense	2020		2020		2019		2020		2019
	(In thousands)
Compensation	$	61,910	$	61,282	$	68,956	$	123,192	$	139,801
Occupancy	14,494		14,207		14,457		28,701		28,777
Leased equipment depreciation	7,102		7,205		5,558		14,307		11,209
Data processing	7,102		6,454		6,817		13,556		13,742
Other professional services	4,146		4,258		4,629		8,404		9,142
Insurance and assessments	9,373		4,249		4,098		13,622		8,136
Intangible asset amortization	3,882		3,948		4,870		7,830		9,740
Customer related expense	4,408		3,932		3,405		8,340		6,348
Loan expense	3,379		2,650		3,451		6,029		6,336
Foreclosed assets (income) expense, net	(146)		66		(146)		(80)		(117)
Acquisition, integration and reorganization costs	—		—		—		—		618
Other	11,315		9,719		9,332		21,034		17,982
Total operating expense	126,965		117,970		125,427		244,935		251,714
Goodwill impairment	—		1,470,000		—		1,470,000		—
Total noninterest expense	$	126,965	$	1,587,970	$	125,427	$	1,714,935	$	251,714

Second Quarter of 2020 Compared to First Quarter of 2020

Noninterest expense decreased by $1.46 billion to $127.0 million for the second quarter of 2020 compared to $1.59 billion for the first quarter of 2020 attributable primarily to a $1.47 billion goodwill impairment charge in the first quarter. Excluding the goodwill impairment charge, noninterest expense increased by $9.0 million to $127.0 million. This increase was due mainly to a $5.1 million increase in insurance and assessments expense, a $1.6 million increase in other expense, a $0.7 million increase in loan expense, and a $0.6 million increase in data processing expense. The increase in insurance and assessments expense was due to an increase in FDIC assessment expense resulting from an increase in our assessment rate due primarily to the first quarter loss from the goodwill impairment charge. The higher assessment rate will continue for one year. The increase in other expense was due to $6.6 million in prepayment penalties incurred from the early payoff of $750 million of FHLB term advances, offset partially by the reversal of a $1.5 million accrual for operational loss contingencies and decreases in various business expenses due to less activity as a result of COVID-19. 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 rates in March and the expectation of continued low rates for extended time. The increase in loan expense was due primarily to higher loan-related legal and workout expenses. The increase in data processing expense was due to a one-time expense to purchase systems for the origination and loan documentation submissions necessary for the Paycheck Protection Program.

Second Quarter of 2020 Compared to Second Quarter of 2019

Noninterest expense increased by $1.5 million to $127.0 million for the second quarter of 2020 compared to $125.4 million for the second quarter of 2019 due mainly to a $5.3 million increase in insurance and assessments, a $2.0 million increase in other expense and a $1.5 million increase in leased equipment depreciation, offset partially by a $7.0 million decrease in compensation expense. 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. The increase in other expense was due mainly to $6.6 million in prepayment penalties incurred from the early payoff of $750 million of FHLB term advances, offset partially by decreases in various business expenses due to less activity as a result of COVID-19. The increase in leased equipment depreciation is due mainly to a higher average balance in the 2020 quarter as compared to the 2019 quarter. The decrease in compensation expense was due mainly to lower bonus expense in the 2020 quarter compared to the 2019 quarter.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Noninterest expense increased by $1.46 billion to $1.71 billion for the six months ended June 30, 2020 compared to $251.7 million for the six months ended June 30, 2019 due mainly to a $1.47 billion goodwill impairment charge. Excluding the goodwill impairment charge, noninterest expense decreased by $6.8 million to $244.9 million. This decrease was due mainly to a $16.6 million decrease in compensation expense, offset partially by a $5.5 million increase in insurance and assessments due primarily to an increase in our FDIC assessment rate as a result of the first quarter 2020 loss from the goodwill impairment charge, and a $3.1 million increase in leased equipment depreciation due to a higher average balance of leased equipment. The decrease in compensation expense was due mainly to lower bonus expense in the 2020 period compared to the prior year.

Income Taxes

The effective tax rate for the second quarter of 2020 was 28.1% compared to (0.8)% for the first quarter of 2020 and 28.2% for the second quarter of 2019. Excluding non-deductible goodwill impairment, the effective income tax rate was 24.5% for the first quarter of 2020. The higher effective tax rate in the second quarter was mainly due to tax expense related to restricted stock vestings combined with benefits recorded in the first quarter related to the filing of amended state returns. The effective tax rate for the six months ended June 30, 2020 was (1.8)% compared to 27.9% for the six months ended June 30, 2019. Excluding non-deductible goodwill impairment, the effective income tax rate was 26.3% for the six months ended June 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 26-28%.

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:


	June 30, 2020									March 31, 2020						December 31, 2019
	Fair		% of		Duration	Fair		% of		Duration	Fair		% of		Duration
Security Type	Value		Total		(in years)	Value		Total		(in years)	Value		Total		(in years)
	(Dollars in thousands)
Agency commercial MBS	$	1,133,086	29	%	2.8	$	1,125,432	30	%	3.1	$	1,108,224	29	%	4.4
Agency residential CMOs	1,049,742		27	%	2.9	1,102,097		29	%	2.8	1,136,397		30	%	3.7
Municipal securities	888,338		23	%	7.2	733,884		20	%	6.7	735,159		19	%	7.6
Agency residential MBS	248,934		6	%	2.5	289,831		8	%	2.6	305,198		8	%	3.3
Asset-backed securities	227,206		6	%	0.6	210,699		6	%	0.8	214,783		6	%	1.1
Collateralized loan obligations	136,663		4	%	(0.1)	130,082		3	%	(0.2)	123,756		3	%	0.2
Private label residential CMOs	96,775		3	%	2.3	97,862		3	%	2.4	99,483		3	%	3.2
SBA securities	44,576		1	%	3.0	45,441		1	%	3.1	48,258		1	%	4.0
Corporate debt securities	20,458		1	%	9.9	16,957		—	%	9.4	20,748		1	%	11.3
U.S. Treasury securities	5,363		—	%	1.6	5,378		—	%	1.9	5,181		—	%	3.2
Total securities available-
for-sale	$	3,851,141	100	%	3.6	$	3,757,663	100	%	3.5	$	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:


	June 30, 2020
	Fair		% of
Municipal Securities by State	Value		Total
	(Dollars in thousands)
California	$	309,659	35	%
Washington	126,840		14	%
Texas	92,695		10	%
New York	52,236		6	%
Utah	42,620		5	%
Oregon	31,530		4	%
Florida	24,456		3	%
Illinois	23,556		3	%
Ohio	20,738		2	%
Nebraska	19,642		2	%
Total of ten largest states	743,972		84	%
All other states	144,366		16	%
Total municipal securities	$	888,338	100	%

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:


	June 30, 2020						March 31, 2020						December 31, 2019
			% of				% of				% of
Loan and Lease Portfolio	Balance		Total		Balance		Total		Balance		Total
	(Dollars in thousands)
Real estate mortgage:
Healthcare real estate	$	237,287	1	%	$	290,636	1	%	$	334,070	2	%
Hotel	648,081		4	%	621,375		3	%	625,798		3	%
SBA program	573,149		3	%	560,384		3	%	556,889		3	%
Other commercial real estate	2,763,558		14	%	2,748,254		14	%	2,685,930		14	%
Total commercial real estate mortgage	4,222,075		22	%	4,220,649		21	%	4,202,687		22	%
Income producing and other residential	3,638,835		19	%	3,688,642		19	%	3,665,790		19	%
Other residential real estate	94,824		—	%	99,653		—	%	104,270		1	%
Total income producing and other
residential real estate mortgage	3,733,659		19	%	3,788,295		19	%	3,770,060		20	%
Total real estate mortgage	7,955,734		41	%	8,008,944		40	%	7,972,747		42	%
Real estate construction and land:
Commercial	1,167,609		6	%	1,087,505		6	%	1,082,368		6	%
Residential	2,172,919		11	%	1,792,748		9	%	1,655,434		9	%
Total real estate construction and land ⁽¹⁾	3,340,528		17	%	2,880,253		15	%	2,737,802		15	%
Total real estate	11,296,262		58	%	10,889,197		55	%	10,710,549		57	%
Commercial:
Lender finance & timeshare	1,979,392		10	%	2,293,613		12	%	2,118,767		11	%
Equipment finance	786,388		4	%	822,491		4	%	852,278		5	%
Premium finance	420,479		2	%	490,439		2	%	467,469		2	%
Other asset-based	226,172		1	%	331,859		2	%	309,893		2	%
Total asset-based	3,412,431		17	%	3,938,402		20	%	3,748,407		20	%
Equity fund loans	739,761		4	%	1,402,464		7	%	1,199,268		6	%
Early stage	211,703		1	%	242,106		1	%	212,509		1	%
Expansion stage	738,427		4	%	934,420		5	%	693,459		4	%
Late stage	124,450		—	%	136,847		1	%	74,186		1	%
Total venture capital	1,814,341		9	%	2,715,837		14	%	2,179,422		12	%
Paycheck Protection Program	1,211,163		6	%	—		—	%	—		—	%
Secured business loans	501,680		3	%	667,439		3	%	583,300		3	%
Security monitoring	498,895		2	%	539,038		3	%	619,260		3	%
Other lending	511,655		3	%	527,281		3	%	527,049		3	%
Cash flow	36,885		—	%	38,227		—	%	38,058		—	%
Total other commercial	2,760,278		14	%	1,771,985		9	%	1,767,667		9	%
Total commercial	7,987,050		40	%	8,426,224		43	%	7,695,496		41	%
Consumer	411,319		2	%	429,884		2	%	440,827		2	%
Total loans and leases held for investment,
net of deferred fees	$	19,694,631	100	%	$	19,745,305	100	%	$	18,846,872	100	%

________________________________

(1) Includes $145.5 million, $169.4 million, and $173.4 million at June 30, 2020, March 31, 2020 and December 31, 2019 of land, acquisition and development loans.

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:


	June 30, 2020						December 31, 2019
			% of				% of
Real Estate Loans by State	Balance		Total		Balance		Total
	(Dollars in thousands)
California	$	6,811,720	60	%	$	6,510,094	61	%
New York	731,872		7	%	711,301		7	%
Florida	632,517		6	%	598,561		6	%
Washington	357,491		3	%	324,588		3	%
Colorado	314,122		3	%	126,370		1	%
Oregon	302,588		3	%	288,764		3	%
Texas	267,000		2	%	260,513		2	%
Arizona	174,731		2	%	162,317		2	%
District of Columbia	154,119		1	%	166,641		1	%
North Carolina	152,053		1	%	124,738		1	%
Total of 10 largest states	9,898,213		88	%	9,273,887		87	%
All other states	1,398,049		12	%	1,436,662		13	%
Total real estate loans held for investment, net of deferred fees	$	11,296,262	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 Ended			Six Months Ended
Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees ⁽¹⁾	June 30, 2020			June 30, 2020
	(Dollars in thousands)
Balance, beginning of period	$	19,745,305		$	18,846,872
Additions:
Production	1,802,956			2,592,702
Disbursements	800,458			2,797,538
Total production and disbursements	2,603,414			5,390,240
Reductions:
Payoffs	(612,837)			(1,425,544)
Paydowns	(2,022,376)			(3,076,081)
Total payoffs and paydowns	(2,635,213)			(4,501,625)
Sales	(3,089)			(3,089)
Transfers to foreclosed assets	—			(1,776)
Charge-offs	(15,786)			(35,991)

Total reductions	(2,654,088)			(4,542,481)

Net (decrease) increase	(50,674)			847,759
Balance, end of period	$	19,694,631		$	19,694,631

Weighted average rate on production ⁽²⁾	2.33		%	2.93		%

_______________________________________

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

(2) The weighted average rate on production presents contractual rates on a tax equivalent basis and does not include amortized fees. Amortized fees added approximately 21 basis points to loan yields for the three and six months ended June 30, 2020.

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.

•Pass: (Risk ratings 3-4) Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.

In calculating our allowance for credit losses in the second quarter of 2020, we continued to consider the impacts of the COVID-19 pandemic on our processes outlined above given the changes in economic forecasts and assumptions along with the uncertainty as to the severity and duration of the economic consequences of the COVID-19 pandemic. Our methodology and framework is consistent with the description above and consistent with what we did in the first quarter as we did not change any of the macroeconomic variables themselves, such as GDP, unemployment, BBB spreads and the CRE index, used in our models; nor did we change our loan segmentation, our reasonable and supportable forecast period of four quarters or our reversion period of two quarters. Other assumptions which are assessed and updated on an annual basis in the second quarter were updated including our estimated prepayment rates and our expected future utilization rates for the reserve for unfunded commitments. In the second quarter, we used the Moody’s Consensus Scenario Forecast dated June 11, 2020 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 was not updated to reflect the pandemic and rapidly changing environment. Similar to the first quarter, 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. Consistent with our allowance for credit losses methodology, we also incorporated the qualitative factors as prescribed in U.S. GAAP and existing regulatory guidance.

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;

•Collateral Dependency - considers changes in collateral values;

•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.

Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio 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. In addition, current credit risk ratings are subject to change as we continue to monitor our loans and leases. To the extent we experience increased levels of borrower loan defaults, borrowers’ noncompliance with loan agreements, adverse changes in collateral values, or changes in economic and business conditions that adversely affect our borrowers, classified loans and leases may increase. Higher levels of classified loans and leases generally result in increased provisions for credit losses and an increased allowance for credit losses. In addition, economic forecasts utilized in the estimation process will change in future periods, which will result in changes to the estimates made for current expected credit losses as of a point in time. However, as noted above, economic forecasts are just one of many assumptions and components that go into estimating the allowance for credit losses.

As noted above, the use of different economic forecasts, whether based on different scenarios or updated economic forecasts and scenarios, will change the outcome of the calculations. However, there are numerous components and assumptions that are integral to the overall allowance for credit losses calculation process. 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 loan portfolio and allowance for credit losses calculations. 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, however, 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. 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.

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


	June 30,			March 31,			December 31,			June 30,
Allowance for Credit Losses Data	2020			2020			2019			2019
	(Dollars in thousands)
Allowance for loan and lease losses	$	301,050		$	221,292		$	138,785		$	135,037
Reserve for unfunded loan commitments	80,571			53,571			35,861			34,861
Total allowance for credit losses	$	381,621		$	274,863		$	174,646		$	169,898

Allowance for loan and lease losses to loans and leases held for investment	1.53		%	1.12		%	0.74		%	0.73		%
Allowance for credit losses to loans and leases held for investment	1.94		%	1.39		%	0.93		%	0.92		%
Allowance for credit losses to nonaccrual loans and leases held for investment	229.7		%	287.5		%	189.1		%	209.1		%

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 Ended															Six Months Ended
	June 30,			March 31,			June 30,			June 30,
Allowance for Credit Losses Roll Forward	2020			2020			2019			2020			2019
	(Dollars in thousands)
Balance, beginning of period	$	274,863		$	174,646		$	173,142		$	174,646		$	169,333
Provision for credit losses:
Addition to allowance for loan and lease losses	93,000			98,000			10,000			191,000			14,000
Addition to (reduction in) reserve for unfunded
loan commitments	27,000			14,000			(2,000)			41,000			(2,000)
Total provision for credit losses	120,000			112,000			8,000			232,000			12,000
Loans and leases charged off:
Real estate mortgage	(4,182)			(500)			(534)			(4,682)			(730)
Real estate construction and land	—			—			—			—			—
Commercial	(11,439)			(19,232)			(16,927)			(30,671)			(19,930)
Consumer	(165)			(473)			(176)			(638)			(442)
Total loans and leases charged off	(15,786)			(20,205)			(17,637)			(35,991)			(21,102)
Recoveries on loans charged off:
Real estate mortgage	127			124			240			251			383
Real estate construction and land	—			—			—			—			—
Commercial	2,392			955			6,080			3,347			9,186
Consumer	25			16			73			41			98
Total recoveries on loans charged off	2,544			1,095			6,393			3,639			9,667
Net charge-offs	(13,242)			(19,110)			(11,244)			(32,352)			(11,435)
Cumulative effect of change in accounting
principle - CECL:
Allowance for loan and lease losses	—			3,617			—			3,617			—
Reserve for unfunded loan commitments	—			3,710			—			3,710			—
Total cumulative effect	—			7,327			—			7,327			—
Balance, end of period	$	381,621		$	274,863		$	169,898		$	381,621		$	169,898

Annualized net charge-offs to average loans and leases	0.27		%	0.40		%	0.25		%	0.33		%	0.13		%

The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:


	Three Months Ended										Six Months Ended
	June 30,		March 31,		June 30,		June 30,
Allowance for Credit Losses Charge-offs	2020		2020		2019		2020		2019
	(In thousands)
Real estate mortgage:
Healthcare real estate	$	—	$	—	$	—	$	—	$	—
Hotel	—		—		—		—		—
SBA program	76		198		534		274		630
Other commercial real estate	4,106		127		—		4,233		9
Total commercial real estate mortgage	4,182		325		534		4,507		639
Income producing and other residential	—		—		—		—		—
Other residential real estate	—		175		—		175		91
Total income producing and other residential
real estate mortgage	—		175		—		175		91
Total real estate mortgage	4,182		500		534		4,682		730
Real estate construction and land:
Commercial	—		—		—		—		—
Residential	—		—		—		—		—
Total real estate construction and land	—		—		—		—		—
Commercial:
Lender finance & timeshare	—		—		—		—		—
Equipment finance	—		11,550		—		11,550		—
Premium finance	—		—		—		—		—
Other asset-based	—		—		11,800		—		11,800
Total asset-based	—		11,550		11,800		11,550		11,800
Expansion stage	21		270		1,463		291		1,667
Early stage	6,449		73		—		6,522		96
Equity fund loans	—		—		—		—		—
Late stage	—		—		—		—		—
Total venture capital	6,470		343		1,463		6,813		1,763
Paycheck Protection Program	—		—		—		—		—
Security monitoring	4,180		6,056		—		10,236		1,707
Secured business loans	—		—		100		—		109
Other lending	789		1,283		1,182		2,072		1,696
Cash flow	—		—		2,382		—		2,855
Total other commercial	4,969		7,339		3,664		12,308		6,367
Total commercial	11,439		19,232		16,927		30,671		19,930
Consumer	165		473		176		638		442
Total charge-offs	$	15,786	$	20,205	$	17,637	$	35,991	$	21,102

The following table presents recoveries by portfolio segment, class, and subclass for the periods indicated:


	Three Months Ended										Six Months Ended
	June 30,		March 31,		June 30,		June 30,
Allowance for Credit Losses Recoveries	2020		2020		2019		2020		2019
	(In thousands)
Real estate mortgage:
Healthcare real estate	$	—	$	—	$	—	$	—	$	—
Hotel	—		—		—		—		—
SBA program	15		107		88		122		121
Other commercial real estate	103		12		59		115		131
Total commercial real estate mortgage	118		119		147		237		252
Income producing and other residential	—		—		—		—		—
Other residential real estate	9		5		93		14		131
Total income producing and other
residential real estate mortgage	9		5		93		14		131
Total real estate mortgage	127		124		240		251		383
Real estate construction and land:
Commercial	—		—		—		—		—
Residential	—		—		—		—		—
Total real estate construction and land	—		—		—		—		—
Commercial:
Lender finance & timeshare	—		—		1		—		2
Equipment finance	8		230		—		238		11
Premium finance	—		—		—		—		—
Other asset-based	14		135		239		149		318
Total asset-based	22		365		240		387		331
Expansion stage	52		46		1,961		98		2,058
Early stage	62		139		2,862		201		5,017
Equity fund loans	—		—		—		—		—
Late stage	—		—		—		—		—
Total venture capital	114		185		4,823		299		7,075
Paycheck Protection Program	—		—		—		—		—
Security monitoring	—		—		—		—		—
Secured business loans	139		78		818		217		1,445
Other lending	117		265		190		382		315
Cash flow	2,000		62		9		2,062		20
Total other commercial	2,256		405		1,017		2,661		1,780
Total commercial	2,392		955		6,080		3,347		9,186
Consumer	25		16		73		41		98
Total recoveries	$	2,544	$	1,095	$	6,393	$	3,639	$	9,667

Deposits

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


	June 30, 2020						March 31, 2020						December 31, 2019
			% of				% of				% of
Deposit Composition	Balance		Total		Balance		Total		Balance		Total
	(Dollars in thousands)
Noninterest-bearing demand	$	8,629,543	38	%	$	7,510,218	38	%	$	7,243,298	38	%
Interest checking	4,858,168		21	%	3,333,147		17	%	3,753,978		19	%
Money market	5,498,150		24	%	4,712,118		24	%	4,690,420		24	%
Savings	549,953		2	%	495,039		3	%	499,591		3	%
Total core deposits	19,535,814		85	%	16,050,522		82	%	16,187,287		84	%
Non-core non-maturity deposits	1,217,266		5	%	836,157		4	%	496,407		3	%
Total non-maturity deposits	20,753,080		90	%	16,886,679		86	%	16,683,694		87	%
Time deposits $250,000 and under	1,522,928		7	%	2,086,188		11	%	2,065,733		11	%
Time deposits over $250,000	652,571		3	%	602,970		3	%	483,609		2	%
Total time deposits	2,175,499		10	%	2,689,158		14	%	2,549,342		13	%
Total deposits	$	22,928,579	100	%	$	19,575,837	100	%	$	19,233,036	100	%

During the second quarter of 2020, total deposits increased by $3.4 billion to $22.9 billion, due mainly to increases of $3.5 billion in core deposits and $381.1 million in non-core non-maturity deposits, offset partially by a decrease of $513.7 million in time deposits. The $3.5 billion increase in core deposits in the second quarter was driven by PPP loan proceeds being deposited into customers' accounts and venture banking which saw deposits increase by $2.0 billion to a record $8.7 billion at June 30, 2020. At June 30, 2020, core deposits totaled $19.5 billion, or 85% of total deposits, including $8.6 billion of noninterest-bearing demand deposits, or 38% of total deposits.

The following table summarizes the maturities of time deposits as of the date indicated:


	Time Deposits
	$250,000		Over
June 30, 2020	and Under		$250,000		Total
	(In thousands)
Maturities:
Due in three months or less	$	809,617	$	258,067	$	1,067,684
Due in over three months through six months	248,787		108,896		357,683
Due in over six months through twelve months	281,924		273,111		555,035
Total due within twelve months	1,340,328		640,074		1,980,402
Due in over 12 months through 24 months	75,883		10,080		85,963
Due in over 24 months	106,717		2,417		109,134
Total	$	1,522,928	$	652,571	$	2,175,499

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 June 30, 2020, total off-balance sheet client investment funds were $1.4 billion, of which $1.1 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.

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:


	June 30,			March 31,			December 31,			June 30,
	2020			2020			2019			2019
	(Dollars in thousands)
Nonaccrual loans and leases held for investment	$	166,113		$	95,602		$	92,353		$	81,265

Foreclosed assets, net	1,449			1,701			440			1,472
Total nonperforming assets	$	167,562		$	97,303		$	92,793		$	82,737

Performing TDRs held for investment	$	15,037		$	8,978		$	12,257		$	16,464
Classified loans and leases held for investment	$	293,230		$	147,705		$	175,912		$	190,979
Nonaccrual loans and leases held for investment to
loans and leases held for investment	0.84		%	0.48		%	0.49		%	0.44		%
Nonperforming assets to loans and leases held for investment
and foreclosed assets, net	0.85		%	0.49		%	0.49		%	0.45		%
Classified loans and leases held for investment
to loans and leases held for investment	1.49		%	0.75		%	0.93		%	1.03		%

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:


	June 30, 2020						March 31, 2020						Increase (Decrease)
			Accruing				Accruing				Accruing
			and 30-89				and 30-89				and 30-89
			Days Past				Days Past				Days Past
	Nonaccrual		Due		Nonaccrual		Due		Nonaccrual		Due
	(Dollars in thousands)
Real estate mortgage:
Commercial	$	61,771	$	—	$	19,088	$	1,807	$	42,683	$	(1,807)
Income producing and other residential	2,207		—		2,308		1,064		(101)		(1,064)
Total real estate mortgage	63,978		—		21,396		2,871		42,582		(2,871)
Real estate construction and land:
Commercial	337		—		351		—		(14)		—
Residential	—		1,021		—		241		—		780
Total real estate construction and land	337		1,021		351		241		(14)		780
Commercial:
Asset-based	19,013		3,697		17,104		—		1,909		3,697
Venture capital	8,270		1,924		18,612		183		(10,342)		1,741
Other commercial	73,995		191		37,726		4,393		36,269		(4,202)
Total commercial	101,278		5,812		73,442		4,576		27,836		1,236
Consumer	520		1,067		413		518		107		549
Total held for investment	$	166,113	$	7,900	$	95,602	$	8,206	$	70,511	$	(306)

During the second quarter of 2020, nonaccrual loan and leases held for investment increased by $70.5 million to $166.1 million at June 30, 2020 due mainly to the addition of two retail real estate loans and one security monitoring loan. As of June 30, 2020, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $86.5 million and represented 52% of total nonaccrual loans and leases.

Foreclosed Assets

The following table presents foreclosed assets (primarily OREO) by property type as of the dates indicated:


	June 30,		March 31,		December 31,		June 30,
Property Type	2020		2019		2019		2019
	(In thousands)
Commercial real estate	$	28	$	33	$	221	$	253
Single-family residence	—		—		—		953
Construction and land development	219		219		219		219

Total OREO, net	247		252		440		1,425
Other foreclosed assets	1,202		1,449		—		47
Total foreclosed assets	$	1,449	$	1,701	$	440	$	1,472

During the second quarter of 2020, foreclosed assets decreased by $0.3 million to $1.4 million at June 30, 2020, due mainly to sales of $0.2 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:


	June 30, 2020					March 31, 2020				December 31, 2019
			Number			Number			Number
			of			of			of
Performing TDRs	Balance		Loans	Balance		Loans	Balance		Loans
	(Dollars in thousands)
Real estate mortgage	$	6,900	21	$	7,095	21	$	10,165	22
Real estate construction and land	1,462		1	1,466		1	1,470		1
Commercial	6,612		12	350		10	550		12
Consumer	63		2	67		2	72		2
Total performing TDRs held for investment	$	15,037	36	$	8,978	34	$	12,257	37

During the second quarter of 2020, performing TDRs held for investment increased by $6.1 million to $15.0 million at June 30, 2020 attributable to $6.1 million of TDRs transferred from nonaccrual status. The majority of the number of performing TDRs were on accrual status prior to the restructurings and have remained on accrual status after the restructurings due to the borrowers making payments before and after the restructurings.

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:


	June 30,		March 31,		December 31,		June 30,
Loan and Lease Credit Risk Ratings	2020		2020		2019		2019
	(Dollars in thousands)
Pass	$	18,635,004	$	18,698,942	$	18,348,004	$	18,042,569
Special mention	766,397		898,658		322,956		239,304
Classified	293,230		147,705		175,912		190,979
Total loans and leases held for investment, net of deferred fees	$	19,694,631	$	19,745,305	$	18,846,872	$	18,472,852

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 second quarter of 2020, classified loans and leases increased by $145.5 million to $293.2 million at June 30, 2020. This increase was due mostly to three security monitoring loans totaling $119.2 million and two retail real estate loans totaling $42.0 million migrating out of special mention and into the classified category.

During the second quarter of 2020, special mention loans and leases decreased by $132.3 million to $766.4 million at June 30, 2020. This decrease was due primarily to loan downgrades into the classified category discussed above.

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:


	June 30, 2020								March 31, 2020					Increase (Decrease)
			Special				Special					Special
	Classified		Mention		Classified		Mention			Classified		Mention
	(In thousands)
Real estate mortgage:
Commercial	$	71,446	$	322,312	$	33,908	$	371,668		$	37,538	$	(49,356)
Income producing and other residential	6,941		6,150		7,083		2,491			(142)		3,659
Total real estate mortgage	78,387		328,462		40,991		374,159			37,396		(45,697)
Real estate construction and land:
Commercial	337		12,354		351		10,577			(14)		1,777
Residential	—		—		—		—			—		—
Total real estate construction and land	337		12,354		351		10,577			(14)		1,777
Commercial:
Asset-based	25,008		186,813		23,218		152,136			1,790		34,677
Venture capital	29,054		138,403		31,110		173,947			(2,056)		(35,544)
Other commercial	159,814		82,313		51,498		186,368			108,316		(104,055)
Total commercial	213,876		407,529		105,826		512,451			108,050		(104,922)
Consumer	630		18,052		537		1,471			93		16,581
Total	$	293,230	$	766,397	$	147,705	$	898,658		$	145,525	$	(132,261)

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 June 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 June 30, 2020, the Company and Bank were in compliance with the capital conservation buffer requirement. The Company and Bank elected the CECL 5-year transition guidance for calculating regulatory capital ratios and the June 30, 2020 ratios include this election. This 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. The add-back as of June 30, 2020 added approximately 20 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 Capital	For Capital	For Well
		Adequacy	Conservation	Capitalized
	Actual	Purposes	Buffer	Classification
June 30, 2020
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)	8.93%	4.00%	4.00%	N/A
CET1 capital (to risk weighted assets)	9.97%	4.50%	7.00%	N/A
Tier 1 capital (to risk weighted assets)	9.97%	6.00%	8.50%	N/A
Total capital (to risk weighted assets)	13.18%	8.00%	10.50%	N/A

Pacific Western Bank
Tier 1 capital (to average assets)	10.03%	4.00%	4.00%	5.00%
CET1 capital (to risk weighted assets)	11.18%	4.50%	7.00%	6.50%
Tier 1 capital (to risk weighted assets)	11.18%	6.00%	8.50%	8.00%
Total capital (to risk weighted assets)	12.44%	8.00%	10.50%	10.00%


		Minimum Required
		For Capital	For Capital	For Well
		Adequacy	Conservation	Capitalized
	Actual	Purposes	Buffer	Classification
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 $460.8 million at June 30, 2020. At June 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 $446.9 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 now required to receive such approval from the FRB prior to declaring a dividend. We received the FRB approval for our second quarter dividend and are currently awaiting their approval for our third quarter dividend. We expect to make an announcement on our dividends in August and anticipate similar timing, such as the second month following quarter-end, in future periods as long as this approval is required.

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.

As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB of $4.20 billion at June 30, 2020, of which $4.19 billion was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $6.4 billion of certain qualifying loans. The Bank also had secured borrowing capacity with the FRBSF of $1.6 billion at June 30, 2020, all of which was available on that date. The FRBSF secured credit line was collateralized by liens on $2.2 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 June 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 June 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:


	June 30,			March 31,			December 31,
Primary Liquidity - On-Balance Sheet	2020			2020			2019
	(Dollars in thousands)
Cash and due from banks	$	174,059		$	172,570		$	172,585
Interest-earning deposits in financial institutions	1,747,077			439,690			465,039
Securities available-for-sale	3,851,141			3,757,663			3,797,187
Less: pledged securities	(642,029)			(2,522,520)			(486,200)
Total primary liquidity	$	5,130,248		$	1,847,403		$	3,948,611

Ratio of primary liquidity to total deposits	22.4		%	9.4		%	20.5		%


Secondary Liquidity - Off-Balance Sheet	June 30,		March 31,		December 31,
Available Secured Borrowing Capacity	2020		2020		2019
	(In thousands)
Secured borrowing capacity with the FHLB	$	4,201,095	$	5,975,220	$	4,229,788
Less: secured advances outstanding	(10,000)		(1,904,000)		(1,318,000)
Available secured borrowing capacity with the FHLB	4,191,095		4,071,220		2,911,788
Available secured borrowing capacity with the FRBSF	1,552,204		1,898,666		1,988,028
Total secondary liquidity	$	5,743,299	$	5,969,886	$	4,899,816

During the three months ended June 30, 2020, the Company's primary liquidity increased by $3.3 billion to $5.1 billion at June 30, 2020 due mainly to a $1.9 billion decrease in pledged securities, a $1.3 billion increase in interest-earning deposits in financial institutions, and a $93.5 million increase in securities available-for-sale. During the second quarter of 2020, the Company's secondary liquidity decreased by $226.6 million to $5.7 billion at June 30, 2020 due to a $346.5 million decrease in available borrowing capacity on the secured credit line with the FRBSF, offset partially by a $119.9 million increase in available secured borrowing capacity with the FHLB. The increase in the available secured borrowing capacity with the FHLB resulted primarily from a $1.9 billion decrease in the amount borrowed from the secured borrowing line with the FHLB, offset partially by a $1.8 billion decrease in the FHLB borrowing capacity due to the decrease in pledged securities.

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 June 30, 2020, core deposits totaled $19.5 billion and represented 85% 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.

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 June 30, 2020, brokered deposits totaled $1.9 billion, consisting primarily of $718.3 million of brokered time deposits and $1.2 billion of non-maturity brokered accounts. 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 June 30, 2020, the Bank was in compliance with all of our 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. Our 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. We may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, now or in the future, from paying dividends to our stockholders. Due to the impact of the goodwill impairment charge on net income 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 and the DBO under their general supervisory authority as it relates to a bank’s capital requirements. The Bank may declare a dividend without the approval of the DBO and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for 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 by the Bank during that same period by $34.8 million. During the three and six months ended June 30, 2020, PacWest received $35.0 million and $192.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $2.1 billion at June 30, 2020, for the foreseeable future any dividends from the Bank to the holding company will continue to require DBO 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 last financial crisis in 2008.

At June 30, 2020, PacWest had $113.4 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.

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 June 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 After		Due After
	Due		One Year		Three Years		Due
	Within		Through		Through		After
June 30, 2020	One Year		Three Years		Five Years		Five Years		Total
	(In thousands)
Time deposits	$	1,980,402	$	131,560	$	63,537	$	—	$	2,175,499
Short-term borrowings	60,000		—		—		—		60,000
Long-term debt obligations ⁽¹⁾	—		—		—		540,744		540,744
Contractual interest ⁽²⁾	7,823		2,022		3,165		—		13,010
Operating lease obligations	34,790		55,348		34,376		32,567		157,081
Other contractual obligations	80,249		82,045		9,059		25,861		197,214
Total	$	2,163,264	$	270,975	$	110,137	$	599,172	$	3,143,548

_______________________________________

(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 June 30, 2020, our loan commitments and standby letters of credit were $7.7 billion and $365.8 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)."

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 June 30, 2020, the U.S. Dollar notional amounts of loans receivable and subordinated debentures payable denominated in foreign currencies were $48.0 million and $29.0 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures were $51.8 million and $28.5 million. We recognized a foreign currency translation net loss of $614,000 for the six months ended June 30, 2020 and a foreign currency translation net gain of $57,000 for the six months ended June 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 June 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 June 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 June 30, 2020. In order to arrive at the base case, we extend our balance sheet at June 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 June 30, 2020. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.

The NII simulation model is dependent upon numerous assumptions. For example, the majority of our loans are variable rate, which are assumed to reprice in accordance with their contractual terms. Some loans and investment securities include the opportunity of prepayment (embedded options) and the simulation model uses prepayment assumptions to estimate these prepayments and reinvest these proceeds at current simulated yields. Our 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 June 30, 2020 assumes interest-bearing deposits reprice at 32% 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:


	Forecasted			Forecasted	Forecasted
	Net Interest		Percentage	Net Interest	Net Interest
	Income		Change	Margin	Margin Change
June 30, 2020	(Tax Equivalent)		From Base	(Tax Equivalent)	From Base
	(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points	$	1,168.5	16.3%	4.74%	0.66%
Up 200 basis points	$	1,092.7	8.7%	4.44%	0.36%
Up 100 basis points	$	1,034.0	2.9%	4.20%	0.12%
BASE CASE	$	1,005.1	—	4.08%	—
Down 25 basis points	$	1,005.5	—%	4.08%	—%
Down 50 basis points	$	1,003.0	(0.2)%	4.07%	(0.01)%
Down 100 basis points	$	1,002.8	(0.2)%	4.07%	(0.01)%

During the second quarter of 2020, total base case year 1 tax equivalent NII decreased by $3.6 million to $1.0 billion at June 30, 2020, and the base case tax equivalent NIM decreased to 4.08% from 4.20%. 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 $1.3 billion from the large increase in core deposits during the second quarter. A portion of the core deposits increase relates to activity of a large Venture Banking customer and to deposits from PPP loan originations which are not expected to remain over the long term.

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 6.6%. 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.

At June 30, 2020, we had $19.8 billion of total loans that included $11.0 billion with variable interest rate terms (excluding hybrid loans discussed below). Of the variable interest rate loans, $9.0 billion, or 81%, contained interest rate floor provisions, which included $8.8 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:

June 30, 2020

Total Amount of

Loans With

Basis Points of

"In-the-Money"

Rate Increases

Loan Floors

(Dollars in millions)

50 bps

$6,715

100 bps

$4,872

150 bps

$2,912

200 bps

$1,028

250 bps

$154

At June 30, 2020, we also had $3.7 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 $299 million, $749 million, and $1.3 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 June 30, 2020.

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
June 30, 2020	of Equity		From Base		From Base		Assets		to Book Value
	(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points	$	6,031.4	$	881.6	17.1	%	22.0	%	174.7	%
Up 200 basis points	$	5,760.9	$	611.1	11.9	%	21.1	%	166.8	%
Up 100 basis points	$	5,479.6	$	329.8	6.4	%	20.0	%	158.7	%
BASE CASE	$	5,149.8	$	—	—	%	18.8	%	149.1	%
Down 50 basis points	$	4,881.0	$	(268.8)	(5.2)	%	17.8	%	141.4	%
Down 100 basis points	$	4,567.2	$	(582.6)	(11.3)	%	16.7	%	132.3	%

During the second quarter of 2020, total base case projected market value of equity increased by $441 million to $5.1 billion. This increase in base case projected MVE was due primarily to: (1) a $662 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 (2) a $63 million increase in the book value of stockholders' equity due mainly to $33 million of net earnings and a $54 million increase in accumulated other comprehensive income, offset partially by $30 million of cash dividends paid; offset partially by (3) a $288 million increase in the mark-to-market adjustment for total deposits from the lower market interest rates used for the deposit valuation.

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.

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.

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

The following table presents stock purchases made during the second quarter of 2020:


				Total Number of	Maximum Dollar
				Shares Purchased	Value of Shares
	Total			as Part of	That May Yet
	Number of	Average		Publicly	Be Purchased
	Shares	Price Paid		Announced	Under the
Purchase Dates	Purchased ⁽¹⁾	Per Share		Program ⁽²⁾	Program ⁽²⁾
					(In thousands)
April 1 – April 30, 2020	—	$	—	—	$	200,000
May 1 – May 31, 2020	89,369	$	17.12	—	$	200,000
June 1 – June 30, 2020	3,555	$	19.71	—	$	200,000
Total	92,924	$	17.22	—

__________________________

(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.

ITEM 6. INDEX TO EXHIBITS


Exhibit Number			Description
3.1			Certificate of Incorporation, as amended, of PacWest Bancorp, a Delaware corporation, dated April 22, 2008 (Exhibit 3.1 to Form 8-K filed on May 14, 2008 and incorporated herein by this reference).
3.2			Certificate of Amendment of Certificate of Incorporation of PacWest Bancorp, a Delaware Corporation, dated May 14, 2010 (Exhibit 3.1 to Form 8-K filed on May 14, 2010 and incorporated herein by this reference).
3.3			Second Amended and Restated Bylaws of PacWest Bancorp, a Delaware Corporation, dated October 25, 2019 (Exhibit 3.5 to Form 8-K filed on October 29, 2019 and incorporated herein by this reference).
4.1			Description of Registered Securities (Exhibit 4.2 to Form 10-K filed on February 28, 2020 and incorporated herein by this reference).
10.1			PacWest Bancorp 2003 Stock Incentive Plan, as amended and restated, dated May 16, 2016 (Exhibit 10.1 to Form 8-K filed on May 18, 2016 and incorporated herein by this reference).
10.2			Form of Stock Award Agreement and Grant Notice pursuant to the Company's 2003 Stock Incentive Plan, as amended and restated (Exhibit 10.2 to Form 10-Q filed on November 7, 2016 and incorporated herein by this reference).
10.3			Form of Stock Unit Award Agreement pursuant to the Company's 2003 Stock Incentive Plan, as amended and restated (Exhibit 10.3 to Form 10-Q filed on November 7, 2016 and incorporated herein by this reference).
10.4			PacWest Bancorp 2017 Stock Incentive Plan, as amended, dated May 15, 2017 (Exhibit 10.1 to Form S-8 filed on May 15, 2017 and incorporated herein by this reference).
10.5			Form of Stock Unit Award Agreement and Grant Notice pursuant to the Company's 2017 Stock Incentive Plan (Exhibit 10.2 to Form 8-K filed on May 18, 2017 and incorporated herein by reference).
10.6			Form of Stock Award Agreement and Grant Notice pursuant to the Company's 2017 Stock Incentive Plan (Exhibit 10.3 to Form 8-K filed on May 18, 2017 and incorporated herein by reference).
10.7			Form of Stock Unit Award Agreement and Grant Notice pursuant to the Company's 2017 Stock Incentive Plan, as amended (Exhibit 10.7 to Form 10-Q filed on August 8, 2019 and incorporated herein by this reference).
10.8			Form of Stock Award Agreement and Grant Notice pursuant to the Company's 2017 Stock Incentive Plan, as amended (Exhibit 10.8 for Form 10-Q filed on August 8, 2019 and incorporated herein by this reference).
10.9			2018 Executive Incentive Plan, as amended and restated February 14, 2018 (Exhibit 10.1 to Form 8-K filed on February 16, 2018 and incorporated herein by this reference).
10.10			Indemnification Agreement applicable to the directors and executive officers of the Company (Exhibit 10.10 to Form 10-K filed on February 28, 2020 and incorporated herein by this reference).
10.11			PacWest Bancorp Change in Control Severance Plan, dated February 12, 2020 (Exhibit 10.1 to Form 8-K filed on February 14, 2020 and incorporated herein by this reference).
31.1			Section 302 Certification of Chief Executive Officer (Filed herewith).
31.2			Section 302 Certification of Chief Financial Officer (Filed herewith).
32.1			Section 906 Certification of Chief Executive Officer (Filed herewith).
32.2			Section 906 Certification of Chief Financial Officer (Filed herewith).


Exhibit Number			Description
101			Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, (ii) the Condensed Consolidated Statements of Earnings (Loss) for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019 and six months ended June 30, 2020 and 2019, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019 and six months ended June 30, 2020 and 2019, (iv) the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended June 30, 2020, March 31, 2020, and June 30, 2019 and the six months ended June 30, 2020 and 2019, (v) the Condensed Consolidated Statements of Cash Flows for the six months ended June 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).
104			The cover page of PacWest Bancorp’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, formatted in Inline XBRL (contained in Exhibit 101).

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:	August 7, 2020	/s/ Bart R. Olson
		Bart R. Olson
		Executive Vice President and Chief Accounting Officer