PACWEST BANCORP - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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


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

For the quarterly period ended September 30, 2021

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.

☑

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 October 29, 2021, there were 117,257,813 shares of the registrant's common stock outstanding, excluding 2,298,882 shares of unvested restricted stock.

PACWEST BANCORP

SEPTEMBER 30, 2021 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)	4
	Condensed Consolidated Statements of Earnings (Loss) (Unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	87
Item 4.	Controls and Procedures	91

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	91
Item 1A.	Risk Factors	91
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	91
Item 6.	Index to Exhibits	92
Signatures		94

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."

ACL

Allowance for Credit Losses

FRB

Board of Governors of the Federal Reserve System

AFX

American Financial Exchange

FRBSF

Federal Reserve Bank of San Francisco

ALLL

Allowance for Loan and Lease Losses

GDP

Gross Domestic Product

ALM

Asset Liability Management

IPO

Initial Public Offering

ASC

Accounting Standards Codification

IRR

Interest Rate Risk

ASU

Accounting Standards Update

LIBOR

London Inter-bank Offered Rate

Basel III

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

LIHTC

Low Income Housing Tax Credit

BHCA

Bank Holding Company Act of 1956, as amended

MBS

Mortgage-Backed Securities

BOLI

Bank Owned Life Insurance

MVE

Market Value of Equity

CARES Act

Coronavirus Aid, Relief, and Economic Security Act

NAV

Net Asset Value

CDI

Core Deposit Intangible Assets

NII

Net Interest Income

CECL

Current Expected Credit Loss

NIM

Net Interest Margin

CET1

Common Equity Tier 1

NSF

Non-Sufficient Funds

Civic

Civic Financial Services, LLC (a company acquired on February 1, 2021)

OREO

Other Real Estate Owned

CMBS

Commercial Mortgage-Backed Securities

PD/LGD

Probability of Default/Loss Given Default

CMOs

Collateralized Mortgage Obligations

PPP

Paycheck Protection Program

COVID-19

Coronavirus Disease

PRSUs

Performance-Based Restricted Stock Units

CPI

Consumer Price Index

PWAM

Pacific Western Asset Management Inc.

CRA

Community Reinvestment Act

ROU

Right-of-use

CRE

Commercial Real Estate

SBA

Small Business Administration

CRI

Customer Relationship Intangible Assets

SBIC

Small Business Investment Company

DFPI

California Department of Financial Protection and Innovation

SEC

Securities and Exchange Commission

DTAs

Deferred Tax Assets

SOFR

Secured Overnight Financing Rate

Dodd-Frank Act

Dodd-Frank Wall Street Reform and Consumer Protection Act

Tax Equivalent Net Interest Income

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

EAD

Exposure at Default

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)

TDRs

Troubled Debt Restructurings

FASB

Financial Accounting Standards Board

TRSAs

Time-Based Restricted Stock Awards

FDIC

Federal Deposit Insurance Corporation

U.S. GAAP

U.S. Generally Accepted Accounting Principles

FHLB

Federal Home Loan Bank of San Francisco

VIE

Variable Interest Entity

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,
	2021		2020
	(Unaudited)
	(Dollars in thousands, except par value amounts)
ASSETS:
Cash and due from banks	$	174,585	$	150,464
Interest-earning deposits in financial institutions	3,524,613		3,010,197
Total cash, cash equivalents, and restricted cash	3,699,198		3,160,661
Securities available-for-sale, at fair value	9,276,926		5,235,591
Federal Home Loan Bank stock, at cost	17,250		17,250
Total investment securities	9,294,176		5,252,841

Gross loans and leases held for investment	20,588,255		19,153,357
Deferred fees, net	(77,235)		(69,980)
Allowance for loan and lease losses	(203,733)		(348,181)
Total loans and leases held for investment, net	20,307,287		18,735,196
Equipment leased to others under operating leases	334,275		333,846
Premises and equipment, net	47,246		39,234
Foreclosed assets, net	13,364		14,027
Goodwill	1,204,118		1,078,670
Core deposit and customer relationship intangibles, net	15,533		23,641
Other assets	970,479		860,326
Total assets	$	35,885,676	$	29,498,442

LIABILITIES:
Noninterest-bearing deposits	$	12,881,806	$	9,193,827
Interest-bearing deposits	17,677,939		15,746,890
Total deposits	30,559,745		24,940,717
Borrowings	—		5,000
Subordinated debt	862,447		465,812
Accrued interest payable and other liabilities	545,050		491,962
Total liabilities	31,967,242		25,903,491

Commitments and contingencies

STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)	—		—
Common stock ($0.01 par value, 200,000,000 shares authorized at September 30, 2021 and
December 31, 2020; 122,093,755 and 120,736,834 shares issued, respectively, includes
2,321,753 and 1,608,126 shares of unvested restricted stock, respectively)	1,221		1,207
Additional paid-in capital	3,035,052		3,100,633
Retained earnings	880,305		409,391
Treasury stock, at cost (2,514,189 and 2,321,981 shares at September 30, 2021 and
December 31, 2020)	(97,003)		(88,803)
Accumulated other comprehensive income, net	98,859		172,523
Total stockholders' equity	3,918,434		3,594,951
Total liabilities and stockholders' equity	$	35,885,676	$	29,498,442

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
	2021		2021		2020		2021		2020
	(Unaudited)
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	246,722	$	244,529	$	240,811	$	732,795	$	750,940
Investment securities	40,780		33,954		24,443		104,999		77,927
Deposits in financial institutions	2,580		2,022		654		6,130		2,448
Total interest income	290,082		280,505		265,908		843,924		831,315
Interest expense:
Deposits	6,417		7,269		9,887		21,186		51,209
Borrowings	101		265		27		559		8,124
Subordinated debt	7,722		6,663		4,670		18,760		16,632
Total interest expense	14,240		14,197		14,584		40,505		75,965
Net interest income	275,842		266,308		251,324		803,419		755,350
Provision for credit losses	(20,000)		(88,000)		97,000		(156,000)		329,000
Net interest income after provision for credit losses	295,842		354,308		154,324		959,419		426,350
Noninterest income:
Leased equipment income	10,943		10,847		9,900		33,144		34,188
Other commissions and fees	11,792		10,704		10,541		31,654		30,373
Service charges on deposit accounts	3,407		3,452		2,570		9,793		7,232
Gain on sale of loans and leases	—		1,422		35		1,561		468
Gain on sale of securities	515		—		5,270		616		13,167
Other income	24,688		13,946		9,936		59,777		20,782
Total noninterest income	51,345		40,371		38,252		136,545		106,210
Noninterest expense:
Compensation	98,061		90,807		75,131		268,750		198,323
Occupancy	14,928		14,784		14,771		43,766		43,472
Leased equipment depreciation	8,603		8,614		7,057		26,186		21,364
Data processing	7,391		7,758		6,505		22,106		20,061
Other professional services	5,164		5,256		4,713		15,546		13,117
Insurance and assessments	3,685		3,745		3,939		12,333		17,561
Customer related expense	4,538		4,973		4,762		14,329		13,102
Loan expense	4,180		4,031		3,499		11,404		9,528
Intangible asset amortization	2,890		2,889		3,751		8,858		11,581
Acquisition, integration and reorganization costs	200		200		—		3,825		—
Foreclosed assets expense (income), net	165		(119)		335		47		255
Goodwill impairment	—		—		—		—		1,470,000
Other expense	9,616		8,812		8,939		34,157		29,973
Total noninterest expense	159,421		151,750		133,402		461,307		1,848,337
Earnings (loss) before income taxes	187,766		242,929		59,174		634,657		(1,315,777)
Income tax expense	47,770		62,417		13,671		163,743		38,627
Net earnings (loss)	$	139,996	$	180,512	$	45,503	$	470,914	$	(1,354,404)

Earnings (loss) per share:
Basic	$	1.17	$	1.52	$	0.38	$	3.96	$	(11.60)
Diluted	$	1.17	$	1.52	$	0.38	$	3.96	$	(11.60)

See Notes to Condensed Consolidated Financial Statements.

` PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
	2021		2021		2020		2021		2020
	(Unaudited)
	(In thousands)
Net earnings (loss)	$	139,996	$	180,512	$	45,503	$	470,914	$	(1,354,404)
Other comprehensive income (loss), net of tax:
Unrealized net holding (losses) gains on securities
available-for-sale arising during the period	(63,956)		54,076		19,745		(101,403)		119,708
Income tax benefit (expense) related to net unrealized
holding (losses) gains arising during the period	17,672		(14,941)		(5,510)		28,185		(33,399)
Unrealized net holding (losses) gains on securities
available-for-sale, net of tax	(46,284)		39,135		14,235		(73,218)		86,309
Reclassification adjustment for net gains
included in net earnings (1)	(515)		—		(5,270)		(616)		(13,167)
Income tax expense related to reclassification
adjustment	142		—		1,471		170		3,674
Reclassification adjustment for net gains
included in net earnings, net of tax	(373)		—		(3,799)		(446)		(9,493)
Other comprehensive income (loss), net of tax	(46,657)		39,135		10,436		(73,664)		76,816
Comprehensive income (loss)	$	93,339	$	219,647	$	55,939	$	397,250	$	(1,277,588)

___________________________________

(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


	Nine Months Ended September 30, 2021
	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, 2020	118,414,853	$	1,207	$	3,100,633	$	409,391	$	(88,803)	$	172,523	$	3,594,951
Net earnings	—	—		—		150,406		—		—		150,406
Other comprehensive loss - net
unrealized loss on securities
available-for-sale, net of tax	—	—		—		—		—		(66,142)		(66,142)
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	743,444	8		6,409		—		—		—		6,417
Restricted stock surrendered	(52,655)	—		—		—		(1,908)		—		(1,908)


Cash dividends paid:
Common stock, $0.25/share	—	—		(29,587)		—		—		—		(29,587)
Balance, March 31, 2021	119,105,642	$	1,215	$	3,077,455	$	559,797	$	(90,711)	$	106,381	$	3,654,137
Net earnings	—	—		—		180,512		—		—		180,512
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax	—	—		—		—		—		39,135		39,135
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	586,271	6		8,983		—		—		—		8,989
Restricted stock surrendered	(136,811)	—		—		—		(6,176)		—		(6,176)


Cash dividends paid:
Common stock, $0.25/share	—	—		(29,916)		—		—		—		(29,916)
Balance, June 30, 2021	119,555,102	$	1,221	$	3,056,522	$	740,309	$	(96,887)	$	145,516	$	3,846,681
Net earnings	—	—		—		139,996		—		—		139,996
Other comprehensive loss - net
unrealized loss on securities
available-for-sale, net of tax	—	—		—		—		—		(46,657)		(46,657)
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	27,206	—		8,501		—		—		—		8,501
Restricted stock surrendered	(2,742)	—		—		—		(116)		—		(116)


Cash dividends paid:
Common stock, $0.25/share	—	—		(29,971)		—		—		—		(29,971)
Balance, September 30, 2021	119,579,566	$	1,221	$	3,035,052	$	880,305	$	(97,003)	$	98,859	$	3,918,434

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


	Nine Months Ended September 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
Net earnings	—	—		—		45,503		—		—		45,503
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax	—	—		—		—		—		10,436		10,436
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	119,158	1		7,063		—		—		—		7,064
Restricted stock surrendered	(3,834)	—		—		—		(71)		—		(71)


Cash dividends paid:
Common stock, $0.25/share	—	—		(29,599)		—		—		—		(29,599)
Balance, September 30, 2020	118,489,927	$	1,208	$	3,125,554	$	292,561	$	(88,566)	$	155,474	$	3,486,231

________________________

(1) Impact due to adoption on January 1, 2020 of ASU 2016-13, "Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments," and the related amendments, commonly referred to as CECL.

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30,
	2021		2020
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net earnings (loss)	$	470,914	$	(1,354,404)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Goodwill impairment	—		1,470,000
Depreciation and amortization	38,311		33,303
Amortization of net premiums on securities available-for-sale	28,480		9,994
Amortization of intangible assets	8,858		11,581
Amortization of operating lease ROU assets	22,866		22,080
Provision for credit losses	(156,000)		329,000
Gain on sale of foreclosed assets	(135)		(187)
Provision for losses on foreclosed assets	14		267
Gain on sale of loans and leases	(1,561)		(468)
(Gain) loss on sale of premises and equipment	(5)		309
Gain on sale of securities	(616)		(13,167)
Gain on BOLI death benefit	(491)		—
Unrealized (gain) loss on derivatives and foreign currencies, net	(804)		494
Earned stock compensation	23,907		19,847

Increase in other assets	(1,516)		(60,450)
Decrease in accrued interest payable and other liabilities	(39,911)		(125,262)
Net cash provided by operating activities	392,311		342,937

Cash flows from investing activities:
Cash paid for acquisition, net	(123,090)		—
Net increase in loans and leases	(1,485,780)		(269,253)
Proceeds from sales of loans and leases	128,541		6,536
Proceeds from maturities and paydowns of securities available-for-sale	628,988		292,769
Proceeds from sales of securities available-for-sale	121,351		167,267
Purchases of securities available-for-sale	(4,921,557)		(1,085,749)
Net redemptions of Federal Home Loan Bank stock	—		23,674
Proceeds from sales of foreclosed assets	1,846		983
Purchases of premises and equipment, net	(15,078)		(11,013)
Proceeds from sales of premises and equipment	95		4
Proceeds from BOLI death benefit	4,143		761
Net (increase) decrease in equipment leased to others under operating leases	(16,346)		16,860
Net cash used in investing activities	(5,676,887)		(857,161)

Cash flows from financing activities:
Net increase in noninterest-bearing deposits	3,650,640		2,105,033
Net increase in interest-bearing deposits	1,931,049		2,629,213
Net decrease in borrowings	(55,210)		(1,699,008)
Proceeds from subordinated notes offering	394,308		—
Common stock repurchased and restricted stock surrendered	(8,200)		(75,132)
Cash dividends paid	(89,474)		(130,310)
Net cash provided by financing activities	5,823,113		2,829,796

Net increase in cash, cash equivalents, and restricted cash	538,537		2,315,572
Cash, cash equivalents, and restricted cash, beginning of period	3,160,661		637,624
Cash, cash equivalents, and restricted cash, end of period	$	3,699,198	$	2,953,196

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30,
	2021		2020
	(Unaudited)
	(In thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest	$	35,505	$	86,060
Cash paid for income taxes	94,770		92,953

Loans transferred to foreclosed assets	1,062		14,370
Transfers from loans held for investment to loans held for sale	25,554		—

Effective February 1, 2021, the Company acquired Civic
in a transaction summarized as follows:
Fair value of assets acquired	$	307,997	—
Cash paid	(160,420)		—
Liabilities assumed	$	147,577	—

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 69 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 provides venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. The Bank also offers financing of non-owner-occupied investor properties through Civic Financial Services, a wholly-owned subsidiary. The Bank also offers a specialized suite of services for the HOA industry. 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, 2020 as filed with the Securities and Exchange Commission ("Form 10-K").

Accounting Standards Adopted in 2021

Effective January 1, 2021, the Company adopted ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” which simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

Effective January 1, 2021, the Company adopted ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)” which clarifies that entities that apply the measurement alternative in ASC 321 should consider observable transactions that result in entities initially applying or discontinuing the use of the equity method of accounting under ASC 323. The guidance also clarifies that certain forward contracts and purchased options on equity securities that are not deemed to be in-substance common stock under ASC 323 or accounted for as derivatives under ASC 815 are in the scope of ASC 321. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Effective January 1, 2021, the Company adopted ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs” which clarifies the Company should reevaluate whether a callable debt security that has multiple call dates is within the scope of ASC 310-20-35-33 at each reporting period. ASC 310-20-35-33 requires that, to the extent the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess should be amortized to the earliest call date. As the Company’s accounting policy to amortize premiums on investments in callable debt securities to the earliest call date is consistent with the manner required by ASU 2020-08, the adoption of this standard had no impact on the Company’s condensed consolidated financial statements.

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

Certain prior period amounts have been reclassified to conform to the current period’s presentation format. In our loan and allowance tables, we realigned our venture capital subclasses to better reflect and report our lending. Prior to the realignment, our venture capital subclasses were: (1) equity fund loans, (2) early stage, (3) expansion stage, and (4) late stage. After the realignment, our venture capital subclasses are: (1) equity fund loans and (2) venture lending (which includes early stage, expansion stage, and late stage). Additionally, we realigned our other commercial subclasses by moving our cash flow subclass into the other lending subclass. All of the loan and allowance tables, both current period and prior periods, reflect these realignments. In our securities available-for-sale tables, we are presenting a new line for private label commercial MBS, which had previously been included with the asset-backed securities line. All of the securities available-for-sale tables, both current period and prior periods, reflect this new presentation.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 2. ACQUISITIONS

Acquisition of Civic

On February 1, 2021, the Bank completed the acquisition of Civic in an all-cash transaction. Civic, located in Redondo Beach, California, is one of the leading lenders in the United States specializing in residential non-owner-occupied investment properties. The acquisition of Civic advances the Bank’s strategy to diversify and expand its lending portfolio, diversify its revenue streams, and deploy excess liquidity into higher-yielding assets. Civic operates as a subsidiary of the Bank and at September 30, 2021 had $1.0 billion of loans outstanding. The loans are categorized as either income producing and other residential real estate mortgage or residential real estate construction and land based on their purpose.

The Civic acquisition has been accounted for under the acquisition method of accounting. We acquired $308.0 million of assets and assumed $147.6 million of liabilities upon closing of the acquisition. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The application of the acquisition method of accounting resulted in the recognition of goodwill of $125.4 million. All of the recognized goodwill is expected to be deductible for tax purposes.

The following assets acquired and liabilities assumed, both tangible and intangible, of the acquired entity are presented at estimated fair value as of the acquisition date:


	Acquisition and
	Date Acquired
	Civic Financial
	Services
	February 1, 2021
	(In thousands)
Assets Acquired:
Cash and due from banks	$	37,331




Loans and leases	67,294
Premises and equipment	1,197


Goodwill	125,448
Customer relationship intangible	750
Other assets	75,977
Total assets acquired	$	307,997

Liabilities Assumed:
Noninterest-bearing demand deposits	$	37,339


Borrowings	50,210

Accrued interest payable and other liabilities	60,028
Total liabilities assumed	$	147,577

Total consideration - paid in cash	$	160,420

NOTE 3. 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. There was no average reserves required to be held at the FRBSF for the nine months ended September 30, 2021. The average reserves required to be held at the FRBSF for the nine months ended September 30, 2020 was $55.2 million. As of September 30, 2021 and December 31, 2020, we pledged cash collateral for our derivative contracts of $2.0 million and $2.9 million.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 4. INVESTMENT SECURITIES

Securities Available-for-Sale

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


	September 30, 2021								December 31, 2020
			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 residential MBS	$	2,185,544	$	11,236	$	(15,787)	$	2,180,993	$	329,488	$	12,483	$	(897)	$	341,074
Municipal securities	1,929,753		67,167		(6,991)		1,989,929		1,438,004		93,631		(18)		1,531,617
Agency commercial MBS	1,269,984		49,063		(5,023)		1,314,024		1,207,676		74,238		(37)		1,281,877
Agency residential CMOs	1,062,836		29,440		(3,739)		1,088,537		1,172,166		47,994		(280)		1,219,880
U.S. Treasury securities	973,307		2,060		(4,099)		971,268		4,989		313		—		5,302
Corporate debt securities	505,800		11,976		(1,161)		516,615		308,803		3,490		(404)		311,889
Private label commercial MBS	389,030		716		(1,428)		388,318		81,878		1,089		(10)		82,957
Collateralized loan obligations	359,057		163		(673)		358,547		136,777		23		(924)		135,876
Private label residential CMOs	301,743		3,508		(1,570)		303,681		110,891		6,076		(21)		116,946
Asset-backed securities	132,421		855		(279)		132,997		166,861		445		(760)		166,546
SBA securities	30,849		1,185		(17)		32,017		39,437		2,217		(27)		41,627


Total	$	9,140,324	$	177,369	$	(40,767)	$	9,276,926	$	4,996,970	$	241,999	$	(3,378)	$	5,235,591

As of September 30, 2021, securities available-for-sale with a fair value of $492.0 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				Nine Months Ended
	September 30,				September 30,
Sales of Securities Available-for-Sale	2021		2020		2021		2020
	(In thousands)
Amortized cost of securities sold	$	76,184	$	17,000	$	120,735	$	154,100

Gross realized gains	$	517	$	5,270	$	618	$	13,199
Gross realized losses	(2)		—		(2)		(32)
Net realized gains	$	515	$	5,270	$	616	$	13,167

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Unrealized Losses on Securities Available-for-Sale

The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions as of the dates indicated:


	September 30, 2021
	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 residential MBS	$	1,697,399	$	(15,779)	$	680	$	(8)	$	1,698,079	$	(15,787)
Municipal securities	583,499		(6,860)		2,559		(131)		586,058		(6,991)
Agency commercial MBS	282,753		(5,023)		—		—		282,753		(5,023)
Agency residential CMOs	189,684		(3,700)		11,283		(39)		200,967		(3,739)
U.S. Treasury securities	632,950		(4,099)		—		—		632,950		(4,099)
Corporate debt securities	127,786		(1,161)		—		—		127,786		(1,161)
Private label commercial MBS	266,238		(1,428)		—		—		266,238		(1,428)
Collateralized loan obligations	202,528		(600)		43,930		(73)		246,458		(673)
Private label residential CMOs	234,541		(1,555)		319		(15)		234,860		(1,570)
Asset-backed securities	25,044		(49)		16,126		(230)		41,170		(279)
SBA securities	—		—		1,897		(17)		1,897		(17)


Total	$	4,242,422	$	(40,254)	$	76,794	$	(513)	$	4,319,216	$	(40,767)


	December 31, 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 residential MBS	$	90,722	$	(897)	$	—	$	—	$	90,722	$	(897)
Municipal securities	5,919		(18)		—		—		5,919		(18)
Agency commercial MBS	58,408		(37)		—		—		58,408		(37)
Agency residential CMOs	97,863		(280)		—		—		97,863		(280)
Corporate debt securities	87,596		(404)		—		—		87,596		(404)
Private label commercial MBS	3,058		(10)		—		—		3,058		(10)
Collateralized loan obligations	96,442		(729)		28,972		(195)		125,414		(924)
Private label residential CMOs	788		(19)		74		(2)		862		(21)
Asset-backed securities	14,636		(53)		61,031		(707)		75,667		(760)
SBA securities	2,127		(27)		—		—		2,127		(27)
Total	$	457,559	$	(2,474)	$	90,077	$	(904)	$	547,636	$	(3,378)

The securities that were in an unrealized loss position at September 30, 2021, were considered impaired and required further review to determine if the unrealized losses were credit-related. We concluded the unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. We also considered the seniority of the tranches and U.S. government agency guarantees, if any, to assess whether an unrealized loss was credit-related. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "other comprehensive income" in stockholders' equity. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Contractual Maturities of Securities Available-for-Sale

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


	September 30, 2021
	Amortized		Fair
Maturities	Cost		Value
	(In thousands)
Due in one year or less	$	40,903	$	41,218
Due after one year through five years	578,943		606,629
Due after five years through ten years	2,991,339		3,029,128
Due after ten years	5,529,139		5,599,951
Total securities available-for-sale	$	9,140,324	$	9,276,926

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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(In thousands)
Taxable interest	$	31,980	$	17,835	$	79,156	$	59,457
Non-taxable interest	8,542		6,272		25,113		17,113
Dividend income	258		336		730		1,357
Total interest income on investment securities	$	40,780	$	24,443	$	104,999	$	77,927

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 5. LOANS AND LEASES

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

Loans and Leases Held for Investment

The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:


	September 30,		December 31,
	2021		2020
	(In thousands)
Real estate mortgage	$	9,590,037	$	7,905,193
Real estate construction and land	3,699,435		3,393,145
Commercial	6,892,846		7,534,801
Consumer	405,937		320,218
Total gross loans and leases held for investment	20,588,255		19,153,357
Deferred fees, net	(77,235)		(69,980)
Total loans and leases held for investment, net of deferred fees	20,511,020		19,083,377
Allowance for loan and lease losses	(203,733)		(348,181)
Total loans and leases held for investment, net (1)	$	20,307,287	$	18,735,196

____________________

(1) Excludes accrued interest receivable of $75.7 million and $79.7 million at September 30, 2021 and December 31, 2020, respectively, which is recorded in "Other assets" on the condensed consolidated balance sheets.

The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:


	September 30, 2021
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	899	$	2,954	$	3,853	$	3,690,744	$	3,694,597
Income producing and other residential	3,760		5,661		9,421		5,876,939		5,886,360
Total real estate mortgage	4,659		8,615		13,274		9,567,683		9,580,957
Real estate construction and land:
Commercial	—		—		—		992,003		992,003
Residential	13,017		19,587		32,604		2,627,266		2,659,870
Total real estate construction and land	13,017		19,587		32,604		3,619,269		3,651,873
Commercial:
Asset-based	—		479		479		3,661,290		3,661,769
Venture capital	1,670		—		1,670		1,631,191		1,632,861
Other commercial	561		1,654		2,215		1,575,377		1,577,592
Total commercial	2,231		2,133		4,364		6,867,858		6,872,222
Consumer	1,042		357		1,399		404,569		405,968
Total	$	20,949	$	30,692	$	51,641	$	20,459,379	$	20,511,020

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	December 31, 2020
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	6,750	$	29,145	$	35,895	$	4,060,776	$	4,096,671
Income producing and other residential	600		373		973		3,802,292		3,803,265
Total real estate mortgage	7,350		29,518		36,868		7,863,068		7,899,936
Real estate construction and land:
Commercial	—		—		—		1,117,121		1,117,121
Residential	759		—		759		2,242,401		2,243,160
Total real estate construction and land	759		—		759		3,359,522		3,360,281
Commercial:
Asset-based	—		2,128		2,128		3,427,155		3,429,283
Venture capital	540		—		540		1,697,968		1,698,508
Other commercial	2,323		4,766		7,089		2,368,025		2,375,114
Total commercial	2,863		6,894		9,757		7,493,148		7,502,905
Consumer	1,260		111		1,371		318,884		320,255
Total	$	12,232	$	36,523	$	48,755	$	19,034,622	$	19,083,377

It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more (unless the loan is both well secured and in the process of collection) or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.

The following table presents our nonaccrual and performing loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:


	September 30, 2021						December 31, 2020
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
	(In thousands)
Real estate mortgage:
Commercial	$	25,615	$	3,668,982	$	3,694,597	$	43,731	$	4,052,940	$	4,096,671
Income producing and other residential	7,547		5,878,813		5,886,360		1,826		3,801,439		3,803,265
Total real estate mortgage	33,162		9,547,795		9,580,957		45,557		7,854,379		7,899,936
Real estate construction and land:
Commercial	—		992,003		992,003		315		1,116,806		1,117,121
Residential	19,918		2,639,952		2,659,870		—		2,243,160		2,243,160
Total real estate construction and land	19,918		3,631,955		3,651,873		315		3,359,966		3,360,281
Commercial:
Asset-based	1,605		3,660,164		3,661,769		2,679		3,426,604		3,429,283
Venture capital	2,348		1,630,513		1,632,861		1,980		1,696,528		1,698,508
Other commercial	6,979		1,570,613		1,577,592		40,243		2,334,871		2,375,114
Total commercial	10,932		6,861,290		6,872,222		44,902		7,458,003		7,502,905
Consumer	495		405,473		405,968		389		319,866		320,255
Total	$	64,507	$	20,446,513	$	20,511,020	$	91,163	$	18,992,214	$	19,083,377

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

At September 30, 2021, nonaccrual loans and leases included $30.7 million of loans and leases 90 or more days past due, $0.7 million of loans and leases 30 to 89 days past due, and $33.2 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. At December 31, 2020, nonaccrual loans and leases included $36.5 million of loans and leases 90 or more days past due, $3.4 million of loans and leases 30 to 89 days past due, and $51.3 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.

As of September 30, 2021, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $16.6 million and represented 26% of total nonaccrual loans and leases.

The following tables present the credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated. Classified loans and leases are those with a credit risk rating of either substandard or doubtful.


	September 30, 2021
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	69,059	$	202,029	$	3,423,509	$	3,694,597
Income producing and other residential	13,603		73,831		5,798,926		5,886,360
Total real estate mortgage	82,662		275,860		9,222,435		9,580,957
Real estate construction and land:
Commercial	—		67,649		924,354		992,003
Residential	19,918		7,324		2,632,628		2,659,870
Total real estate construction and land	19,918		74,973		3,556,982		3,651,873
Commercial:
Asset-based	4,734		87,980		3,569,055		3,661,769
Venture capital	4,840		38,281		1,589,740		1,632,861
Other commercial	28,926		17,107		1,531,559		1,577,592
Total commercial	38,500		143,368		6,690,354		6,872,222
Consumer	524		2,165		403,279		405,968
Total	$	141,604	$	496,366	$	19,873,050	$	20,511,020


	December 31, 2020
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	91,543	$	262,462	$	3,742,666	$	4,096,671
Income producing and other residential	8,767		61,384		3,733,114		3,803,265
Total real estate mortgage	100,310		323,846		7,475,780		7,899,936
Real estate construction and land:
Commercial	42,558		107,592		966,971		1,117,121
Residential	—		759		2,242,401		2,243,160
Total real estate construction and land	42,558		108,351		3,209,372		3,360,281
Commercial:
Asset-based	27,867		153,301		3,248,115		3,429,283
Venture capital	6,508		118,125		1,573,875		1,698,508
Other commercial	87,557		14,930		2,272,627		2,375,114
Total commercial	121,932		286,356		7,094,617		7,502,905
Consumer	462		2,732		317,061		320,255
Total	$	265,262	$	721,285	$	18,096,830	$	19,083,377

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 periods indicated:


			Three Months		Nine Months				Three Months		Nine Months
			Ended		Ended				Ended		Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2021		2021		2021		2020		2020		2020
	Nonaccrual		Interest		Interest		Nonaccrual		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
	(In thousands)
With An Allowance Recorded:
Real estate mortgage:
Commercial	$	72	$	—	$	—	$	736	$	—	$	—
Income producing and other residential	3,323		—		—		1,163		—		—
Real estate construction and land:

Residential	1,987		—		—		—		—		—
Commercial:
Asset based	1,126		—		—		2,248		—		—
Venture capital	2,347		—		—		2,001		—		—
Other commercial	1,170		—		—		1,235		—		—
Consumer	495		—		—		404		—		—
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	25,543	$	90	$	511	$	44,384	$	155	$	285
Income producing and other residential	4,224		—		—		845		—		—
Real estate construction and land:
Commercial	—		—		—		324		—		—
Residential	17,931		—		—		—		—		—
Commercial:
Asset based	479		—		—		569		—		—

Other commercial	5,810		3		5		31,706		517		1,628

Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage	$	33,162	$	90	$	511	$	47,128	$	155	$	285
Real estate construction and land	19,918		—		—		324		—		—
Commercial	10,932		3		5		37,759		517		1,628
Consumer	495		—		—		404		—		—
Total	$	64,507	$	93	$	516	$	85,615	$	672	$	1,913

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 dates indicated:


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
September 30, 2021	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Mortgage:
Commercial
Internal risk rating:
1-2 High pass	$	565	$	5,835	$	48,421	$	5,816	$	10,448	$	37,536	$	2	$	—	$	108,623
3-4 Pass	316,700		539,855		344,575		536,615		505,934		1,014,656		44,726		11,825		3,314,886
5 Special mention	—		4,839		67,336		79,223		7,985		42,646		—		—		202,029
6-8 Classified	—		494		17,116		5,767		12,473		33,209		—		—		69,059
Total	$	317,265	$	551,023	$	477,448	$	627,421	$	536,840	$	1,128,047	$	44,728	$	11,825	$	3,694,597
Current YTD period:
Gross charge-offs	$	—	$	—	$	190	$	168	$	53	$	168	$	—	$	—	$	579
Gross recoveries	—		—		—		—		—		(5,934)		—		—		(5,934)
Net	$	—	$	—	$	190	$	168	$	53	$	(5,766)	$	—	$	—	$	(5,355)

Real Estate Mortgage:
Income Producing and
Other Residential
Internal risk rating:
1-2 High pass	$	28,374	$	32,923	$	62,522	$	26,751	$	13,363	$	26,586	$	28,044	$	—	$	218,563
3-4 Pass	2,327,323		625,371		713,871		944,356		594,336		265,707		109,206		193		5,580,363
5 Special mention	384		13,803		17,214		42,270		—		—		160		—		73,831
6-8 Classified	334		4,022		—		3,045		101		5,793		—		308		13,603
Total	$	2,356,415	$	676,119	$	793,607	$	1,016,422	$	607,800	$	298,086	$	137,410	$	501	$	5,886,360
Current YTD period:
Gross charge-offs	$	28	$	1	$	—	$	—	$	—	$	55	$	—	$	—	$	84
Gross recoveries	—		—		—		—		—		(55)		(1)		—		(56)
Net	$	28	$	1	$	—	$	—	$	—	$	—	$	(1)	$	—	$	28

Real Estate Construction
and Land: Commercial
Internal risk rating:
1-2 High pass	$	—	$	—	$	43	$	—	$	—	$	—	$	—	$	—	$	43
3-4 Pass	29,494		100,207		367,405		396,084		725		14,220		16,176		—		924,311
5 Special mention	—		—		—		—		67,649		—		—		—		67,649
6-8 Classified	—		—		—		—		—		—		—		—		—
Total	$	29,494	$	100,207	$	367,448	$	396,084	$	68,374	$	14,220	$	16,176	$	—	$	992,003
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	775	$	—	$	—	$	—	$	—	$	775
Gross recoveries	—		—		—		—		—		—		—		—		—
Net	$	—	$	—	$	—	$	775	$	—	$	—	$	—	$	—	$	775

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
September 30, 2021	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Construction
and Land: Residential
Internal risk rating:
1-2 High pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
3-4 Pass	841,092		532,400		973,649		195,691		51,769		5,471		25,435		7,121		2,632,628
5 Special mention	1,767		5,557		—		—		—		—		—		—		7,324
6-8 Classified	5,398		5,899		8,621		—		—		—		—		—		19,918
Total	$	848,257	$	543,856	$	982,270	$	195,691	$	51,769	$	5,471	$	25,435	$	7,121	$	2,659,870
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Gross recoveries	—		—		—		—		—		—		—		—		—
Net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial: Asset-Based
Internal risk rating:
1-2 High pass	$	103,920	$	76,652	$	172,748	$	120,030	$	67,234	$	183,114	$	577,818	$	54,890	$	1,356,406
3-4 Pass	83,672		86,281		62,353		48,794		16,584		38,221		1,866,135		10,609		2,212,649
5 Special mention	—		—		50,293		20,949		—		—		12,640		4,098		87,980
6-8 Classified	—		—		—		—		—		479		4,029		226		4,734
Total	$	187,592	$	162,933	$	285,394	$	189,773	$	83,818	$	221,814	$	2,460,622	$	69,823	$	3,661,769
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	232	$	232
Gross recoveries	—		—		—		—		—		(451)		(23)		—		(474)
Net	$	—	$	—	$	—	$	—	$	—	$	(451)	$	(23)	$	232	$	(242)

Commercial: Venture
Capital
Internal risk rating:
1-2 High pass	$	—	$	1,999	$	—	$	—	$	(3)	$	15	$	170,192	$	—	$	172,203
3-4 Pass	106,056		67,392		56,089		12,490		5,771		4,791		1,155,622		9,326		1,417,537
5 Special mention	10,992		3,111		20,506		—		—		3,704		(32)		—		38,281
6-8 Classified	—		—		—		2,500		—		—		(7)		2,347		4,840
Total	$	117,048	$	72,502	$	76,595	$	14,990	$	5,768	$	8,510	$	1,325,775	$	11,673	$	1,632,861
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	620	$	—	$	—	$	620
Gross recoveries	—		—		—		(13)		(93)		(27)		—		—		(133)
Net	$	—	$	—	$	—	$	(13)	$	(93)	$	593	$	—	$	—	$	487

____________________

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

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
September 30, 2021	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
	(In thousands)
Commercial: Other
Commercial
Internal risk rating:
1-2 High pass	$	227,874	$	44,485	$	285	$	5	$	278	$	51	$	41,464	$	694	$	315,136
3-4 Pass	270,186		73,562		80,334		78,067		49,397		90,990		564,920		8,967		1,216,423
5 Special mention	—		1,901		658		1,509		97		10,591		2,261		90		17,107
6-8 Classified	2,042		—		414		(2)		229		4,275		20,808		1,160		28,926
Total	$	500,102	$	119,948	$	81,691	$	79,579	$	50,001	$	105,907	$	629,453	$	10,911	$	1,577,592
Current YTD period:
Gross charge-offs	$	—	$	—	$	122	$	47	$	63	$	521	$	75	$	2,122	$	2,950
Gross recoveries	—		—		(27)		—		(44)		(1,423)		(57)		(111)		(1,662)
Net	$	—	$	—	$	95	$	47	$	19	$	(902)	$	18	$	2,011	$	1,288

Consumer
Internal risk rating:
1-2 High pass	$	—	$	11	$	—	$	6	$	6	$	—	$	663	$	—	$	686
3-4 Pass	181,973		31,750		74,081		44,997		23,654		37,991		8,137		10		402,593
5 Special mention	256		377		1,071		210		23		153		—		75		2,165
6-8 Classified	—		—		159		—		173		171		2		19		524
Total	$	182,229	$	32,138	$	75,311	$	45,213	$	23,856	$	38,315	$	8,802	$	104	$	405,968
Current YTD period:
Gross charge-offs	$	—	$	55	$	545	$	259	$	107	$	113	$	—	$	1	$	1,080
Gross recoveries	—		—		—		(27)		(10)		(75)		(1)		—		(113)
Net	$	—	$	55	$	545	$	232	$	97	$	38	$	(1)	$	1	$	967

Total Loans and Leases
Internal risk rating:
1-2 High pass	$	360,733	$	161,905	$	284,019	$	152,608	$	91,326	$	247,302	$	818,183	$	55,584	$	2,171,660
3-4 Pass	4,156,496		2,056,818		2,672,357		2,257,094		1,248,170		1,472,047		3,790,357		48,051		17,701,390
5 Special mention	13,399		29,588		157,078		144,161		75,754		57,094		15,029		4,263		496,366
6-8 Classified	7,774		10,415		26,310		11,310		12,976		43,927		24,832		4,060		141,604
Total	$	4,538,402	$	2,258,726	$	3,139,764	$	2,565,173	$	1,428,226	$	1,820,370	$	4,648,401	$	111,958	$	20,511,020
Current YTD period:
Gross charge-offs	$	28	$	56	$	857	$	1,249	$	223	$	1,477	$	75	$	2,355	$	6,320
Gross recoveries	—		—		(27)		(40)		(147)		(7,965)		(82)		(111)		(8,372)
Net	$	28	$	56	$	830	$	1,209	$	76	$	(6,488)	$	(7)	$	2,244	$	(2,052)

______________________

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

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
December 31, 2020	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Mortgage:
Commercial
Internal risk rating:
1-2 High pass	$	—	$	28,304	$	4,848	$	13,184	$	12,241	$	41,222	$	—	$	—	$	99,799
3-4 Pass	554,143		413,785		574,497		725,503		405,367		893,008		62,586		13,978		3,642,867
5 Special mention	2,622		78,484		99,397		14,625		9,967		57,367		—		—		262,462
6-8 Classified	504		1,255		7,489		7,869		16,797		57,629		—		—		91,543
Total	$	557,269	$	521,828	$	686,231	$	761,181	$	444,372	$	1,049,226	$	62,586	$	13,978	$	4,096,671
Current YTD period:
Gross charge-offs	$	—	$	—	$	154	$	3,330	$	—	$	6,694	$	—	$	—	$	10,178
Gross recoveries	—		—		—		(9)		—		(280)		—		—		(289)
Net	$	—	$	—	$	154	$	3,321	$	—	$	6,414	$	—	$	—	$	9,889

Real Estate Mortgage:
Income Producing and
Other Residential
Internal risk rating:
1-2 High pass	$	58,714	$	55,826	$	28,831	$	33,017	$	18,991	$	9,265	$	—	$	—	$	204,644
3-4 Pass	491,504		850,978		1,067,109		577,906		238,499		187,959		113,987		528		3,528,470
5 Special mention	12,307		4,207		42,455		1,554		—		—		861		—		61,384
6-8 Classified	—		—		2,862		—		—		4,950		118		837		8,767
Total	$	562,525	$	911,011	$	1,141,257	$	612,477	$	257,490	$	202,174	$	114,966	$	1,365	$	3,803,265
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	51	$	—	$	457	$	508
Gross recoveries	—		—		—		—		—		(327)		(1)		—		(328)
Net	$	—	$	—	$	—	$	—	$	—	$	(276)	$	(1)	$	457	$	180

Real Estate Construction
and Land: Commercial
Internal risk rating:
1-2 High pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
3-4 Pass	66,114		369,588		357,295		118,586		36,027		11,778		7,583		—		966,971
5 Special mention	—		—		40,396		67,196		—		—		—		—		107,592
6-8 Classified	—		—		—		—		42,243		315		—		—		42,558
Total	$	66,114	$	369,588	$	397,691	$	185,782	$	78,270	$	12,093	$	7,583	$	—	$	1,117,121
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 (1)	Term Loans by Origination Year												Revolving		to Term
December 31, 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	345,134		670,894		849,819		285,072		28,725		688		9,034		53,035		2,242,401
5 Special mention	759		—		—		—		—		—		—		—		759
6-8 Classified	—		—		—		—		—		—		—		—		—
Total	$	345,893	$	670,894	$	849,819	$	285,072	$	28,725	$	688	$	9,034	$	53,035	$	2,243,160
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Gross recoveries	—		—		—		—		—		(21)		—		—		(21)
Net	$	—	$	—	$	—	$	—	$	—	$	(21)	$	—	$	—	$	(21)

Commercial: Asset-Based
Internal risk rating:
1-2 High pass	$	116,247	$	173,457	$	111,630	$	69,244	$	121,838	$	88,201	$	275,093	$	72,017	$	1,027,727
3-4 Pass	155,221		84,798		85,539		42,928		8,227		46,663		1,750,934		46,078		2,220,388
5 Special mention	—		59,822		41,789		9,022		14,274		482		23,257		4,655		153,301
6-8 Classified	—		—		—		—		19,417		551		8,799		(900)		27,867
Total	$	271,468	$	318,077	$	238,958	$	121,194	$	163,756	$	135,897	$	2,058,083	$	121,850	$	3,429,283
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	11,817	$	—	$	—	$	11,817
Gross recoveries	(52)		—		—		—		—		(420)		(236)		—		(708)
Net	$	(52)	$	—	$	—	$	—	$	—	$	11,397	$	(236)	$	—	$	11,109

Commercial: Venture
Capital
Internal risk rating:
1-2 High pass	$	1,999	$	4,797	$	—	$	(4)	$	(4)	$	52	$	167,296	$	—	$	174,136
3-4 Pass	48,132		103,437		37,818		7,789		29,738		5,494		1,161,606		5,725		1,399,739
5 Special mention	21,645		42,499		2,202		—		—		—		46,765		5,014		118,125
6-8 Classified	—		(1,710)		4,000		—		—		3,690		528		—		6,508
Total	$	71,776	$	149,023	$	44,020	$	7,785	$	29,734	$	9,236	$	1,376,195	$	10,739	$	1,698,508
Current YTD period:
Gross charge-offs	$	—	$	—	$	6,533	$	—	$	(8)	$	150	$	144	$	—	$	6,819
Gross recoveries	—		—		(478)		(176)		(154)		(3)		(450)		—		(1,261)
Net	$	—	$	—	$	6,055	$	(176)	$	(162)	$	147	$	(306)	$	—	$	5,558

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
December 31, 2020	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
	(In thousands)
Commercial: Other
Commercial
Internal risk rating:
1-2 High pass	$	1,057,405	$	380	$	4	$	366	$	69	$	1,350	$	74,206	$	80	$	1,133,860
3-4 Pass	88,875		95,110		99,434		77,557		23,305		89,865		657,088		7,533		1,138,767
5 Special mention	—		40		2,145		564		484		10,440		335		922		14,930
6-8 Classified	2		564		80		230		755		3,813		75,046		7,067		87,557
Total	$	1,146,282	$	96,094	$	101,663	$	78,717	$	24,613	$	105,468	$	806,675	$	15,602	$	2,375,114
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	506	$	239	$	33,521	$	27,332	$	1,871	$	63,469
Gross recoveries	—		(18)		(8)		(34)		(226)		(3,155)		(100)		(19)		(3,560)
Net	$	—	$	(18)	$	(8)	$	472	$	13	$	30,366	$	27,232	$	1,852	$	59,909

Consumer
Internal risk rating:
1-2 High pass	$	15	$	—	$	8	$	14	$	—	$	—	$	509	$	—	$	546
3-4 Pass	40,585		110,993		62,833		39,036		41,623		12,831		8,536		78		316,515
5 Special mention	45		137		1,628		261		422		239		—		—		2,732
6-8 Classified	—		35		—		36		56		306		2		27		462
Total	$	40,645	$	111,165	$	64,469	$	39,347	$	42,101	$	13,376	$	9,047	$	105	$	320,255
Current YTD period:
Gross charge-offs	$	—	$	97	$	86	$	177	$	363	$	44	$	22	$	9	$	798
Gross recoveries	—		—		(1)		(10)		(16)		(174)		—		—		(201)
Net	$	—	$	97	$	85	$	167	$	347	$	(130)	$	22	$	9	$	597

Total Loans and Leases
Internal risk rating:
1-2 High pass	$	1,234,380	$	262,764	$	145,321	$	115,821	$	153,135	$	140,090	$	517,104	$	72,097	$	2,640,712
3-4 Pass	1,789,708		2,699,583		3,134,344		1,874,377		811,511		1,248,286		3,771,354		126,955		15,456,118
5 Special mention	37,378		185,189		230,012		93,222		25,147		68,528		71,218		10,591		721,285
6-8 Classified	506		144		14,431		8,135		79,268		71,254		84,493		7,031		265,262
Total	$	3,061,972	$	3,147,680	$	3,524,108	$	2,091,555	$	1,069,061	$	1,528,158	$	4,444,169	$	216,674	$	19,083,377
Current YTD period:
Gross charge-offs	$	—	$	97	$	6,773	$	4,013	$	594	$	52,277	$	27,498	$	2,337	$	93,589
Gross recoveries	(52)		(18)		(487)		(229)		(396)		(4,380)		(787)		(19)		(6,368)
Net	$	(52)	$	79	$	6,286	$	3,784	$	198	$	47,897	$	26,711	$	2,318	$	87,221

______________________

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

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

TDRs are a result of rate reductions, term extensions, fee concessions, transfers to foreclosed assets, discounted loan payoffs, and debt forgiveness, or a combination thereof. The Company has granted various commercial and consumer loan modifications to provide borrowers relief from the economic impacts of COVID-19. In accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, the Company has elected to not apply TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act. The following table presents our troubled debt restructurings of loans held for investment by loan portfolio segment and class for the periods indicated:


	Three Months Ended September 30,
	2021					2020
		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	—	$	—	$	—	1	$	12,594	$	—
Income producing and other residential	3	297		297		2	157		157



Commercial:
Asset-based	1	1,484		1,484		1	15,267		—
Venture capital	2	2,382		2,382		1	2,015		2,015
Other commercial	2	85		85		5	7,105		100

Total	8	$	4,248	$	4,248	10	$	37,138	$	2,272


	Nine Months Ended September 30,
	2021					2020
		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	2	$	647	$	—	9	$	16,339	$	3,745
Income producing and other residential	4	518		518		6	911		911
Real estate construction and land:

Residential	1	208		208		—	—		—
Commercial:
Asset-based	2	1,987		1,987		8	17,008		1,741
Venture capital	4	4,502		2,529		2	2,047		2,047
Other commercial	37	48,694		30,719		33	30,324		21,544
Consumer	1	20		20		3	212		212
Total	51	$	56,576	$	35,981	61	$	66,841	$	30,200

During the three and nine months ended September 30, 2021, there was one asset-based loan for $479,000 and two other commercial loans totaling $95,000 restructured in the preceding 12-month period that subsequently defaulted. During the three months ended September 30, 2020, there was one $412,000 real estate mortgage commercial loan restructured in the preceding 12-month period that subsequently defaulted. During the nine months ended September 30, 2020, there was one $412,000 real estate mortgage commercial loan and one $5,000 other commercial loan restructured in the preceding 12-month period that subsequently defaulted.

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 9. 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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(In thousands)
Component of leases receivable income:
Interest income on net investments in leases	$	2,287	$	1,869	$	6,645	$	6,224

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


	September 30, 2021		December 31, 2020
	(In thousands)
Net investment in direct financing leases:
Lease payments receivable	$	171,412	$	158,740
Unguaranteed residual assets	24,862		19,303
Deferred costs and other	1,257		996
Aggregate net investment in leases	$	197,531	$	179,039

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


	September 30, 2021
	(In thousands)
Period ending December 31,
2021	$	18,527
2022	52,542
2023	39,820
2024	35,214
2025	20,231
Thereafter	24,163
Total undiscounted cash flows	190,497
Less: Unearned income	(19,085)
Present value of lease payments	$	171,412

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Allowance for Loan and Lease Losses

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


	Three Months Ended September 30, 2021
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	107,013	$	54,582	$	57,697	$	6,308	$	225,600
Charge-offs	(29)		—		(951)		(536)		(1,516)
Recoveries	563		—		543		43		1,149
Net (charge-offs) recoveries	534		—		(408)		(493)		(367)
Provision	(11,344)		(1,923)		(9,792)		1,559		(21,500)
Balance, end of period	$	96,203	$	52,659	$	47,497	$	7,374	$	203,733


	Nine Months Ended September 30, 2021
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	138,342	$	78,356	$	126,403	$	5,080	$	348,181



Charge-offs	(663)		(775)		(3,802)		(1,080)		(6,320)
Recoveries	5,990		—		2,269		113		8,372
Net (charge-offs) recoveries	5,327		(775)		(1,533)		(967)		2,052
Provision	(47,466)		(24,922)		(77,373)		3,261		(146,500)
Balance, end of period	$	96,203	$	52,659	$	47,497	$	7,374	$	203,733

Ending Allowance by
Evaluation Methodology:
Individually evaluated	$	189	$	—	$	2,721	$	—	$	2,910
Collectively evaluated	$	96,014	$	52,659	$	44,776	$	7,374	$	200,823

Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated	$	34,822	$	19,364	$	38,647	$	—	$	92,833
Collectively evaluated	9,546,135		3,632,509		6,833,575		405,968		20,418,187
Ending balance	$	9,580,957	$	3,651,873	$	6,872,222	$	405,968	$	20,511,020

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Three Months Ended September 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	$	130,724	$	70,113	$	97,947	$	2,266	$	301,050
Charge-offs	(1,551)		—		(35,666)		(67)		(37,284)
Recoveries	109		21		1,063		7		1,200
Net (charge-offs) recoveries	(1,442)		21		(34,603)		(60)		(36,084)
Provision	(7,588)		20,039		64,921		3,628		81,000
Balance, end of period	$	121,694	$	90,173	$	128,265	$	5,834	$	345,966


	Nine Months Ended September 30, 2020
			Real Estate
	Real 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
Cumulative effect of change in accounting
principle - CECL	5,308		(8,592)		6,860		41		3,617
Balance, January 1, 2020	49,883		21,952		68,388		2,179		142,402
Charge-offs	(6,233)		—		(66,337)		(705)		(73,275)
Recoveries	360		21		4,410		48		4,839
Net (charge-offs) recoveries	(5,873)		21		(61,927)		(657)		(68,436)
Provision	77,684		68,200		121,804		4,312		272,000
Balance, end of period	$	121,694	$	90,173	$	128,265	$	5,834	$	345,966

Ending Allowance by
Evaluation Methodology:
Individually evaluated	$	340	$	—	$	2,584	$	—	$	2,924
Collectively evaluated	$	121,354	$	90,173	$	125,681	$	5,834	$	343,042

Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated	$	51,852	$	1,782	$	41,501	$	—	$	95,135
Collectively evaluated	7,825,193		3,421,965		7,321,673		362,234		18,931,065
Ending balance	$	7,877,045	$	3,423,747	$	7,363,174	$	362,234	$	19,026,200

The allowance for loan and lease losses decreased by $21.9 million in the third quarter of 2021 to $203.7 million due primarily to a provision for loan and lease losses benefit of $21.5 million driven by improvement in both key macro-economic variables and loan portfolio credit quality metrics, offset partially by increased provisions for unfunded commitments and loan growth.

We actively participated in both rounds of the Paycheck Protection Program ("PPP") under the provisions of the CARES Act during 2020 and 2021. As of September 30, 2021, PPP loans had an outstanding balance of approximately $279.4 million. The loans 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 dates:


	September 30, 2021						December 31, 2020
	Real		Business				Real		Business
	Property		Assets		Total		Property		Assets		Total
	(In thousands)
Real estate mortgage	$	28,195	$	—	$	28,195	$	43,656	$	—	$	43,656
Real estate construction and land	19,364		—		19,364		1,766		—		1,766
Commercial	—		3,662		3,662		—		31,100		31,100
Total	$	47,559	$	3,662	$	51,221	$	45,422	$	31,100	$	76,522

Allowance for Credit Losses

The allowance for credit losses is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets.

The following tables present a summary of the activity in the allowance for loan and lease losses and reserve for unfunded loan commitments for the periods indicated:


	Three Months Ended
	September 30, 2021
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	225,600	$	74,571	$	300,171
Charge-offs	(1,516)		—		(1,516)
Recoveries	1,149		—		1,149
Net charge-offs	(367)		—		(367)
Provision	(21,500)		1,500		(20,000)
Balance, end of period	$	203,733	$	76,071	$	279,804


	Nine Months Ended
	September 30, 2021
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	348,181	$	85,571	$	433,752
Charge-offs	(6,320)		—		(6,320)
Recoveries	8,372		—		8,372
Net recoveries	2,052		—		2,052
Provision	(146,500)		(9,500)		(156,000)
Balance, end of period	$	203,733	$	76,071	$	279,804

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Three Months Ended
	September 30, 2020
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	301,050	$	80,571	$	381,621
Charge-offs	(37,284)		—		(37,284)
Recoveries	1,200		—		1,200
Net charge-offs	(36,084)		—		(36,084)
Provision	81,000		16,000		97,000
Balance, end of period	$	345,966	$	96,571	$	442,537


	Nine Months Ended
	September 30, 2020
	Allowance for		Reserve 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
Cumulative effect of change in accounting
principle - CECL	3,617		3,710		7,327
Balance, January 1, 2020	142,402		39,571		181,973
Charge-offs	(73,275)		—		(73,275)
Recoveries	4,839		—		4,839
Net charge-offs	(68,436)		—		(68,436)
Provision	272,000		57,000		329,000
Balance, end of period	$	345,966	$	96,571	$	442,537

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 6. FORECLOSED ASSETS, NET

The following table summarizes foreclosed assets, net of the valuation allowance, as of the dates indicated:


	September 30,		December 31,
Property Type	2021		2020
	(In thousands)
Commercial real estate	$	12,594	$	12,979
Construction and land development	—		219
Single-family residence	415		—

Total other real estate owned, net	13,009		13,198
Other foreclosed assets	355		829
Total foreclosed assets, net	$	13,364	$	14,027

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, 2020	$	14,027

Transfers to foreclosed assets from loans	1,062

Provision for losses	(14)
Reductions related to sales	(1,711)
Balance, September 30, 2021	$	13,364

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment annually unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings (loss).

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


	Goodwill
	(In thousands)
Balance, December 31, 2020	$	1,078,670
Addition from the Civic acquisition	125,448
Balance, September 30, 2021	$	1,204,118

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Our other intangible assets with definite lives are 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 following table presents the estimated aggregate future amortization expense for our current intangible assets as of the date indicated:


	September 30, 2021
	(In thousands)
Period ending December 31,
2021	$	2,362
2022	7,672
2023	3,788
2024	1,711

Net CDI and CRI	$	15,533

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(In thousands)
Gross Amount of CDI and CRI:
Balance, beginning of period	$	100,550	$	109,646	$	109,646	$	117,573
Addition from Civic acquisition	—		—		750		—
Fully amortized portion	—		—		(9,846)		(7,927)

Balance, end of period	100,550		109,646		100,550		109,646
Accumulated Amortization:
Balance, beginning of period	(82,127)		(79,082)		(86,005)		(79,179)
Amortization expense	(2,890)		(3,751)		(8,858)		(11,581)
Fully amortized portion	—		—		9,846		7,927

Balance, end of period	(85,017)		(82,833)		(85,017)		(82,833)
Net CDI and CRI, end of period	$	15,533	$	26,813	$	15,533	$	26,813

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 8. OTHER ASSETS

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


	September 30,		December 31,
Other Assets	2021		2020
	(In thousands)
LIHTC investments	$	279,608	$	213,034
Cash surrender value of BOLI	202,725		203,031
Operating lease ROU assets, net (1)	124,926		119,787
Interest receivable	109,855		101,596
SBIC investments	42,553		32,327
Equity investments without readily determinable fair values	36,787		34,304
Prepaid expenses	28,512		22,999
Equity investments with readily determinable fair values	18,829		6,147
Taxes receivable	16,898		59,565
Equity warrants (2)	3,747		4,520

Other receivables/assets	106,039		63,016
Total other assets	$	970,479	$	860,326

____________________

(1) See Note 9. Leases for further details regarding the operating lease ROU assets.

(2) See Note 11. Derivatives for information regarding equity warrants.

NOTE 9. 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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(In thousands)
Operating lease expense:
Fixed costs	$	8,678	$	8,950	$	25,950	$	26,027
Variable costs	18		15		42		40
Short-term lease costs	357		117		1,042		312
Sublease income	(1,114)		(1,081)		(3,297)		(3,100)
Net lease expense	$	7,939	$	8,001	$	23,737	$	23,279

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


	Nine Months Ended
	September 30,
	2021		2020
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	27,386	$	25,198
ROU assets obtained in exchange for lease obligations:
Operating leases	$	29,840	$	19,027

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	September 30,			December 31,
	2021			2020
	(Dollars in thousands)
Operating leases:
Operating lease right-of-use assets, net	$	124,926		$	119,787
Operating lease liabilities	$	144,259		$	139,501

Weighted average remaining lease term (in years)	5.7			5.8
Weighted average discount rate	2.27		%	2.54		%

The following table presents the maturities of operating lease liabilities as of the date indicated:


	September 30, 2021
	(In thousands)
Period ending December 31,
2021	$	8,840
2022	34,415
2023	31,900
2024	24,810
2025	18,100
Thereafter	36,547
Total operating lease liabilities	154,612
Less: Imputed interest	(10,353)
Present value of operating lease liabilities	$	144,259

Operating Leases as a Lessor

We provide equipment financing to our customers through operating leases where we facilitate the purchase of equipment leased to our customers. The equipment is shown on the condensed consolidated balance sheets as "Equipment leased to others under operating leases" and is depreciated to its estimated residual value at the end of the lease term, shown as "Leased equipment depreciation" in the condensed consolidated statements of earnings (loss), according to our fixed asset accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Noninterest Income" in the condensed consolidated statements of earnings (loss). The equipment is tested periodically for impairment. No impairment was recorded on "Equipment leased to others under operating leases" in the three or nine months ended September 30, 2021 and 2020.

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


	September 30, 2021
	(In thousands)
Period ending December 31,
2021	$	10,678
2022	45,363
2023	36,169
2024	30,483
2025	23,114
Thereafter	47,870
Total undiscounted cash flows	$	193,677

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 10. BORROWINGS AND SUBORDINATED DEBT

Borrowings

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


	September 30, 2021				December 31, 2020
			Weighted				Weighted
			Average				Average
	Balance		Rate		Balance		Rate
	(Dollars in thousands)
FHLB secured advances	$	—	—	%	$	5,000	—	%



Total borrowings	$	—	—	%	$	5,000	—	%

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

FHLB Secured Line of Credit. The Bank had secured financing capacity with the FHLB as of September 30, 2021 of $3.6 billion, collateralized by a blanket lien on $5.9 billion of qualifying loans.

The following table presents the interest rates and maturity dates of FHLB secured advances as of the dates indicated:


	September 30, 2021					December 31, 2020
					Maturity					Maturity
	Balance		Rate		Date	Balance		Rate		Date
	(Dollars in thousands)

FHLB term advance	$	—	—	%		$	5,000	—	%	5/6/2021


Total	$	—	—	%		$	5,000	—	%

FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of September 30, 2021, the Bank had secured borrowing capacity of $1.4 billion collateralized by liens covering $1.8 billion of qualifying loans. As of September 30, 2021 and December 31, 2020, there were no balances outstanding.

FHLB Unsecured Line of Credit. The Bank has a $112.0 million unsecured line of credit with the FHLB for the purchase of overnight funds, of which there were no balances outstanding at September 30, 2021 and December 31, 2020.

Federal Funds Arrangements with Commercial Banks. As of September 30, 2021, the Bank had unsecured lines of credit of $180.0 million in the aggregate with several correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and have no unused commitment fees. As of September 30, 2021 and December 31, 2020, there were no balances outstanding. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2021 and December 31, 2020, there were no borrowings outstanding.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Subordinated Debt

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


	September 30, 2021				December 31, 2020				Date	Maturity	Rate Index
Series	Balance		Rate (1)		Balance		Rate (1)		Issued	Date	(Quarterly Reset)
	(Dollars in thousands)
Subordinated notes, net (2)	$	394,511	3.25	%	$	—	—	%	4/30/2021	5/1/2031	Fixed rate (3)
Trust V	10,310		3.22	%	10,310		3.33	%	8/15/2003	9/17/2033	3-month LIBOR + 3.10
Trust VI	10,310		3.17	%	10,310		3.27	%	9/3/2003	9/15/2033	3-month LIBOR + 3.05
Trust CII	5,155		3.07	%	5,155		3.18	%	9/17/2003	9/17/2033	3-month LIBOR + 2.95
Trust VII	61,856		2.88	%	61,856		2.96	%	2/5/2004	4/23/2034	3-month LIBOR + 2.75
Trust CIII	20,619		1.81	%	20,619		1.91	%	8/15/2005	9/15/2035	3-month LIBOR + 1.69
Trust FCCI	16,495		1.72	%	16,495		1.82	%	1/25/2007	3/15/2037	3-month LIBOR + 1.60
Trust FCBI	10,310		1.67	%	10,310		1.77	%	9/30/2005	12/15/2035	3-month LIBOR + 1.55
Trust CS 2005-1	82,475		2.07	%	82,475		2.17	%	11/21/2005	12/15/2035	3-month LIBOR + 1.95
Trust CS 2005-2	128,866		2.08	%	128,866		2.16	%	12/14/2005	1/30/2036	3-month LIBOR + 1.95
Trust CS 2006-1	51,545		2.08	%	51,545		2.16	%	2/22/2006	4/30/2036	3-month LIBOR + 1.95
Trust CS 2006-2	51,550		2.08	%	51,550		2.16	%	9/27/2006	10/30/2036	3-month LIBOR + 1.95
Trust CS 2006-3 (4)	29,847		1.50	%	31,487		1.54	%	9/29/2006	10/30/2036	3-month EURIBOR + 2.05
Trust CS 2006-4	16,470		2.08	%	16,470		2.16	%	12/5/2006	1/30/2037	3-month LIBOR + 1.95
Trust CS 2006-5	6,650		2.08	%	6,650		2.16	%	12/19/2006	1/30/2037	3-month LIBOR + 1.95
Trust CS 2007-2	39,177		2.08	%	39,177		2.16	%	6/13/2007	7/30/2037	3-month LIBOR + 1.95
Total subordinated debt	936,146		2.62	%	543,275		2.24	%
Acquisition discount (5)	(73,699)				(77,463)
Net subordinated debt	$	862,447			$	465,812

___________________

(1) Rates do not include the effects of discounts and issuance costs.

(2) Net of unamortized issuance costs of $5.5 million.

(3) Interest rate is fixed until May 1, 2026, when it changes to a floating rate and resets quarterly at a benchmark rate plus 25,200 basis points.

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

(5) Amount represents the fair value adjustment on trust preferred securities assumed in acquisitions.

Subordinated Notes Offering

On April 30, 2021, the Bank completed the sale of $400 million aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes (the "Notes") due May 1, 2031 (the “Maturity Date”). Subject to any redemption prior to the Maturity Date, the Notes will bear interest from and including the original issue date to, but excluding, May 1, 2026 (the “Reset Date”), at a fixed rate of 3.25% per annum and from and including the Reset Date, but excluding the Maturity Date, the Notes will bear interest at a floating per annum rate equal to a benchmark rate (which is expected to be the Three-Month Term SOFR) plus 252 basis points.

Interest on the Notes will be payable on May 1 and November 1 of each year through, but not including, the Reset Date, and quarterly thereafter on February 1, May 1, August 1, and November 1 of each year to, but not including, the Maturity Date or earlier redemption date. The first interest payment will be made on November 1, 2021. The Bank may, at its option, beginning with the interest payment date of May 1, 2026, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, from time to time, subject to any required regulatory approval to the extent such approval is then required, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption, subject to certain conditions. The costs incurred in connection with the Notes offering amortize to interest expense over the term of the Notes. The Notes qualify as Tier 2 capital for regulatory capital purposes.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 11. DERIVATIVES

The following table presents the U.S. dollar notional amounts and fair values of our derivative instruments included in the condensed consolidated balance sheets as of the dates indicated:


	September 30, 2021				December 31, 2020
	Notional		Fair		Notional		Fair
Derivatives Not Designated As Hedging Instruments	Amount		Value		Amount		Value
	(In thousands)
Derivative Assets:
Interest rate contracts	$	87,927	$	952	$	59,867	$	1,028
Foreign exchange contracts	28,463		1,711		73,108		3,202
Interest rate and economic contracts	116,390		2,663		132,975		4,230
Equity warrant assets	19,539		3,747		24,081		4,520
Total	$	135,929	$	6,410	$	157,056	$	8,750

Derivative Liabilities:
Interest rate contracts	$	87,927	$	878	$	59,867	$	1,004
Foreign exchange contracts	28,463		—		73,108		146
Total	$	116,390	$	878	$	132,975	$	1,150

For further information regarding our derivatives, see Note 1. Nature of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of the Form 10-K.

NOTE 12. COMMITMENTS AND CONTINGENCIES

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


	September 30,		December 31,
	2021		2020
	(In thousands)
Loan commitments to extend credit	$	8,480,599	$	7,601,390
Standby letters of credit	344,383		337,336
Commitments to contribute capital to SBICs
and CRA-related loan pools	78,551		55,499
Total	$	8,903,533	$	7,994,225

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.

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. The estimated exposure to loss from these commitments is included in the reserve for unfunded loan commitments, which amounted to $76.1 million at September 30, 2021 and $85.6 million at December 31, 2020.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 SBICs that call for capital contributions up to an amount specified in the partnership agreements, and in CRA-related loan pools. As of September 30, 2021 and December 31, 2020, we had commitments to contribute capital to these entities totaling $78.6 million and $55.5 million.

The following table presents the years in which commitments are expected to be paid for our commitments to contribute capital to small business investment companies and CRA-related loan pools as of the date indicated:


	September 30, 2021
	(In thousands)
Period ending December 31,
2021	$	34,229
2022	35,112
2023	3,652
2024	5,558


Total	$	78,551

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 13. 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 13. Fair Value Measurements, to the Consolidated Financial Statements of the Company's Form 10-K.

The Company also holds SBIC investments measured at fair value using the NAV per share practical expedient that are not required to be classified in the fair value hierarchy. At September 30, 2021, the fair value of these investments was $42.6 million.

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


	Fair Value Measurements as of
	September 30, 2021
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency residential MBS	$	2,180,993	$	—	$	2,180,993	$	—
Municipal securities	1,989,929		—		1,989,929		—
Agency commercial MBS	1,314,024		—		1,314,024		—
Agency residential CMOs	1,088,537		—		1,088,537		—
U.S. Treasury securities	971,268		971,268		—		—
Corporate debt securities	516,615		—		516,615		—
Private label commercial MBS	388,318		—		369,989		18,329
Collateralized loan obligations	358,547		—		358,547		—
Private label residential CMOs	303,681		—		299,860		3,821
Asset-backed securities	132,997		—		132,997		—
SBA securities	32,017		—		32,017		—
Total securities available-for-sale	$	9,276,926	$	971,268	$	8,283,508	$	22,150
Equity investments with readily determinable fair values	$	18,829	$	18,829	$	—	$	—
Derivatives (1):
Equity warrants	3,747		—		—		3,747
Interest rate and economic contracts	2,663		—		2,663		—
Derivative liabilities	878		—		878		—

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Fair Value Measurements as of
	December 31, 2020
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Municipal securities	$	1,531,617	$	—	$	1,531,617	$	—
Agency commercial MBS	1,281,877		—		1,281,877		—
Agency residential CMOs	1,219,880		—		1,219,880		—
Agency residential MBS	341,074		—		341,074		—
Corporate debt securities	311,889		—		311,889		—
Asset-backed securities	166,546		—		166,546		—
Collateralized loan obligations	135,876		—		135,876		—
Private label residential CMOs	116,946		—		112,299		4,647
Private label commercial MBS	82,957		—		57,232		25,725
SBA securities	41,627		—		41,627		—
U.S. Treasury securities	5,302		5,302		—		—
Total securities available-for-sale	$	5,235,591	$	5,302	$	5,199,917	$	30,372
Equity investments with readily determinable fair values	$	6,147	$	6,147	$	—	$	—
Derivatives (1):
Equity warrants	4,520		—		—		4,520
Interest rate and economic contracts	4,230		—		4,230		—
Derivative liabilities	1,150		—		1,150		—

____________________

(1) For information regarding derivative instruments, see Note 11. Derivatives.

During the nine months ended September 30, 2021, there was a $582,000 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 private label commercial MBS available-for-sale measured at fair value on a recurring basis as of the date indicated:


	September 30, 2021
	Private Label Residential CMOs		Private Label Commercial MBS
		Weighted	Input or	Weighted
	Range	Average	Range	Average
Unobservable Inputs	of Inputs	Input (1)	of Inputs	Input (2)
Voluntary annual prepayment speeds	4.0% - 31.3%	12.5%	10.0% - 15.0%	11.9%
Annual default rates (3)	0.1% - 12.0%	2.4%	2.0%	2.0%
Loss severity rates (3)	16.5% - 82.1%	56.5%	60.0%	60.0%
Discount rates	0.0% - 10.5%	6.7%	2.7% - 3.3%	2.9%

____________________

(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 private label commercial MBS 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 private label commercial MBS.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	September 30, 2021
	Equity Warrants
		Weighted
	Range	Average
Unobservable Inputs	of Inputs	Input (1)
Volatility	19.7% - 145.9%	29.4%
Risk-free interest rate	0.0% - 1.0%	0.5%
Remaining life assumption (in years)	0.08 - 4.99	2.91

____________________

(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, private label commercial MBS available-for-sale, and equity warrants measured at fair value on a recurring basis for the period indicated:


	Private Label		Private Label		Equity
	Residential CMOs		Commercial MBS		Warrants
	(In thousands)
Balance, December 31, 2020	$	4,647	$	25,725	$	4,520
Total included in earnings	263		(64)		25,351
Total included in other comprehensive income	(270)		(20)		—

Issuances	—		—		267
Sales	—		—		(25,809)


Net settlements	(819)		(7,312)		—

Transfers to Level 1 (equity investments with readily
determinable fair values)	—		—		(582)
Balance, September 30, 2021	$	3,821	$	18,329	$	3,747

Unrealized net gains (losses) for the period included in other
comprehensive income for securities held at quarter-end	$	823	$	136

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


	Fair Value Measurement as of
	September 30, 2021
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases (1)	$	32,765	$	—	$	654	$	32,111


Total non-recurring	$	32,765	$	—	$	654	$	32,111

______________________

(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, 2020
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases (1)	$	102,274	$	—	$	4,160	$	98,114

Total non-recurring	$	102,274	$	—	$	4,160	$	98,114

_____________________

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

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


	Three Months Ended				Nine Months Ended
Losses on Assets	September 30,				September 30,
Measured on a Non-Recurring Basis	2021		2020		2021		2020
	(In thousands)
Individually evaluated loans and leases	$	243	$	29,047	$	2,499	$	40,920

OREO	—		157		14		267
Total losses	$	243	$	29,204	$	2,513	$	41,187

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

September 30, 2021

Valuation

Unobservable

Input or

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(In thousands)

Individually evaluated

loans and leases

26,278

Discounted cash flows

Discount rates

3.75% - 7.75%

6.21%

Individually evaluated

loans and leases

5,833

Third party appraisals

No discounts

Total non-recurring Level 3

32,111

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	September 30, 2021
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	174,585	$	174,585	$	174,585	$	—	$	—
Interest-earning deposits in financial institutions	3,524,613		3,524,613		3,524,613		—		—
Securities available-for-sale	9,276,926		9,276,926		971,268		8,283,508		22,150
Investment in FHLB stock	17,250		17,250		—		17,250		—

Loans and leases held for investment, net	20,307,287		20,904,189		—		654		20,903,535
Equity investments with readily determinable fair values	18,829		18,829		18,829		—		—
Equity warrants	3,747		3,747		—		—		3,747
Interest rate and economic contracts	2,663		2,663		—		2,663		—
Servicing rights	1,636		1,636		—		—		1,636

Financial Liabilities:
Core deposits	28,140,708		28,140,708		—		28,140,708		—
Non-core non-maturity deposits	960,438		960,438		—		960,438		—
Time deposits	1,458,599		1,459,457		—		1,459,457		—
Borrowings	—		—		—		—		—
Subordinated debt	862,447		923,374		—		923,374		—
Derivative liabilities	878		878		—		878		—


	December 31, 2020
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	150,464	$	150,464	$	150,464	$	—	$	—
Interest-earning deposits in financial institutions	3,010,197		3,010,197		3,010,197		—		—
Securities available-for-sale	5,235,591		5,235,591		5,302		5,199,917		30,372
Investment in FHLB stock	17,250		17,250		—		17,250		—
Loans and leases held for investment, net	18,735,196		19,305,998		—		4,160		19,301,838
Equity investments with readily determinable fair values	6,147		6,147		6,147		—		—
Equity warrants	4,520		4,520		—		—		4,520
Interest rate and economic contracts	4,230		4,230		—		4,230		—

Financial Liabilities:
Core deposits	22,264,480		22,264,480		—		22,264,480		—
Non-core non-maturity deposits	1,149,467		1,149,467		—		1,149,467		—
Time deposits	1,526,770		1,527,639		—		1,527,639		—
Borrowings	5,000		4,995		—		4,995		—
Subordinated debt	465,812		448,036		—		448,036		—
Derivative liabilities	1,150		1,150		—		1,150		—

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Limitations

Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on what management believes to be reasonable judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of September 30, 2021, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

NOTE 14. 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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(Dollars in thousands, except per share data)
Basic Earnings (Loss) Per Share:
Net earnings (loss)	$	139,996	$	45,503	$	470,914	$	(1,354,404)
Less: Earnings allocated to unvested restricted stock(1)	(2,417)		(578)		(7,930)		(1,603)
Net earnings (loss) allocated to common shares	$	137,579	$	44,925	$	462,984	$	(1,356,007)

Weighted-average basic shares and unvested restricted
stock outstanding	119,569		118,438		119,272		118,469
Less: Weighted-average unvested restricted stock
outstanding	(2,340)		(1,684)		(2,235)		(1,596)
Weighted-average basic shares outstanding	117,229		116,754		117,037		116,873

Basic earnings (loss) per share	$	1.17	$	0.38	$	3.96	$	(11.60)

Diluted Earnings (Loss) Per Share:
Net earnings (loss) allocated to common shares	$	137,579	$	44,925	$	462,984	$	(1,356,007)

Weighted-average diluted shares outstanding	117,229		116,754		117,037		116,873

Diluted earnings (loss) per share	$	1.17	$	0.38	$	3.96	$	(11.60)

________________________

(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 15. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

The following table presents interest income and noninterest income, the components of total revenue, as disclosed in the condensed consolidated statements of earnings (loss) and the related amounts which are from contracts with customers within the scope of ASC Topic 606, "Revenue from Contracts with Customers," for the periods indicated. As illustrated here, substantially all of our revenue is specifically excluded from the scope of ASC Topic 606.


	Three Months Ended September 30,
	2021				2020
	Total		Revenue from		Total		Revenue from
	Recorded		Contracts with		Recorded		Contracts with
	Revenue		Customers		Revenue		Customers
	(In thousands)
Total interest income	$	290,082	$	—	$	265,908	$	—
Noninterest income:
Service charges on deposit accounts	3,407		3,407		2,570		2,570
Other commissions and fees	11,792		2,680		10,541		3,228
Leased equipment income	10,943		—		9,900		—
Gain on sale of loans	—		—		35		—
Gain on sale of securities	515		—		5,270		—
Other income	24,688		(14)		9,936		289
Total noninterest income	51,345		6,073		38,252		6,087
Total revenue	$	341,427	$	6,073	$	304,160	$	6,087

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


	Three Months Ended
	September 30,
	2021		2020
	(In thousands)
Products and services transferred at a point in time	$	2,754	$	3,189
Products and services transferred over time	3,319		2,898
Total revenue from contracts with customers	$	6,073	$	6,087

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Nine Months Ended September 30,
	2021				2020
	Total		Revenue from		Total		Revenue from
	Recorded		Contracts with		Recorded		Contracts with
	Revenue		Customers		Revenue		Customers
	(In thousands)
Total interest income	$	843,924	$	—	$	831,315	$	—
Noninterest income:
Service charges on deposit accounts	9,793		9,793		7,232		7,232
Other commissions and fees	31,654		8,140		30,373		10,388
Leased equipment income	33,144		—		34,188		—
Gain on sale of loans	1,561		—		468		—
Gain on sale of securities	616		—		13,167		—
Other income	59,777		560		20,782		961
Total noninterest income	136,545		18,493		106,210		18,581
Total revenue	$	980,469	$	18,493	$	937,525	$	18,581

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


	Nine Months Ended
	September 30,
	2021		2020
	(In thousands)
Products and services transferred at a point in time	$	8,819	$	10,152
Products and services transferred over time	9,674		8,429
Total revenue from contracts with customers	$	18,493	$	18,581

Contract Balances

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


	September 30, 2021		December 31, 2020
	(In thousands)
Receivables, which are included in "Other assets"	$	1,219	$	1,046
Contract assets, which are included in "Other assets"	$	—	$	—
Contract liabilities, which are included in "Accrued interest payable and other liabilities"	$	261	$	359

Contract liabilities relate to advance consideration received from customers for which revenue is recognized over the life of the contract. The change in contract liabilities for the nine months ended September 30, 2021 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $98,000.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 16. STOCK-BASED COMPENSATION

At the annual meeting of stockholders held on May 11, 2021, the Company's stockholders approved the Amended and Restated PacWest Bancorp 2017 Stock Incentive Plan (the “Amended and Restated 2017 Plan”). The Company’s Amended and Restated 2017 Plan permits stock-based compensation awards to officers, directors, employees, and consultants and will remain in effect until December 31, 2026.

The Amended and Restated 2017 Plan authorizes grants of stock-based compensation instruments to purchase or issue up to 6,650,000 shares, representing 4,000,000 shares originally approved for grant under the Original 2017 Stock Incentive Plan plus 2,650,000 shares added as result of the approval of the Amended and Restated 2017 Plan. As of September 30, 2021, there were 3,027,093 shares available for grant under the Amended and Restated 2017 Plan.

Restricted Stock

Restricted stock amortization totaled $8.4 million and $7.1 million for the three months ended September 30, 2021 and 2020 and $23.0 million and $19.2 million for the nine months ended September 30, 2021 and 2020. Such amounts are included in "Compensation expense" on the condensed consolidated statements of earnings (loss). The amount of unrecognized compensation expense related to unvested TRSAs and PRSUs as of September 30, 2021 totaled $76.5 million.

Time-Based Restricted Stock Awards

At September 30, 2021, there were 2,321,753 shares of unvested TRSAs outstanding. TRSAs generally vest ratably over a service period of three or four years from the date of the grant or immediately upon death of an employee. Compensation expense related to TRSAs is based on the fair value of the underlying award on the grant date and is recognized over the vesting period using the straight-line method.

Performance-Based Restricted Stock Units

At September 30, 2021, there were 512,863 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 17. RECENTLY ISSUED ACCOUNTING STANDARDS

Effective

Effect on the Financial Statements

Standard

Description

Date

or Other Significant Matters

ASU 2020-04, "Reference Rate Reform (Topic 848)" and ASU 2021-01, “Reference Rate Reform (Topic 848): Scope)"

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. Additionally, the amendments in ASU 2021-01 clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. ASU 2020-04 is effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. ASU 2021-01 is also effective immediately. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to January 7, 2021 and up to December 31, 2022.

Effective upon the issuance date of March 12, 2020, and once adopted, will apply to contract modifications made and hedging relationships entered into on or before December 31, 2022.

The Company has established a cross-functional project team and implementation plan to facilitate the LIBOR transition. As of September 30, 2021, the Company has completed its readiness efforts to identify loans and other financial instruments that are impacted by the discontinuance of LIBOR. We have also completed our review for fallback language contained in contracts for LIBOR-based loans and other financial instruments and have begun to execute a transition plan to amend those legacy contracts that do not have or have inadequate fallback language. With the impending phase-out of LIBOR, the Company has considered several viable alternative reference rates. Based on our current assessment, we plan to offer SOFR as the primary alternative reference rate, but may consider alternate rates such as the American Interbank Offered Rate (“Ameribor”) and others based on customer demands and/or the type of loan or financial instrument. The Company will also continue to assess impacts to our operations, financial models, data and technology as part of our transition plan. The Company is currently evaluating the impact of this Update on its consolidated financial statements but does not expect it to have a material impact.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Effective

Effect on the Financial Statements

Standard

Description

Date

or Other Significant Matters

ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services— Investment Companies (Topic 946), Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants

This Update amends certain SEC paragraphs from the Codification to reflect the SEC’s recent issuance of rules intended to modernize and streamline disclosure requirements, including:
(1) SEC Final Rule No. 33-10786 was issued on May 20, 2020, which amended Regulation S-X financial disclosure requirements applicable to acquisition and dispositions of business. It also changes the significant tests registrants must use to determine what to disclosure, the periods the financial statements must cover and the form of pro forma financial information that must be included in certain reports.
(2) SEC Final Rule No. 33-10835 was issued on September 11, 2020, which updated the statistical disclosure requirements for bank and savings and loan registrants. It also (1) eliminates disclosure items that overlap with SEC rules, U.S. GAAP or IFRS Standards, and (2) replaces Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” with updated disclosure requirements codified in a new Subpart 1400 of Regulation S-K.

Effective upon issuance.

The Company adopted Rule 33-10786 on January 1, 2021 on its effective date and it did not have a material impact on the Company’s consolidated financial statements. The Company plans to adopt Rule 33-10835 on the presentation of financial statements and update of statistical disclosures for bank and savings and loan registrants in conjunction with the completion of our Annual Report on Form 10-K for the fiscal year ending December 31, 2021. The adoption of this disclosure guidance is not expected to have a material impact on our consolidated financial statements.

Effective

Effect on the Financial Statements

Standard

Description

Date

or Other Significant Matters

ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

The Update requires that an entity (acquirer) recognizes and measures contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At acquisition date, an acquirer should account for the related revenue contracts with customers in accordance with Topic 606 as if it had originated the contracts. The acquirer should consider the terms of the acquired contracts, such as timing of payment, identify each performance obligation in the contracts and allocate the total transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception or contract modification to determine what should be recorded at the acquisition date. The amendments improve comparability by providing consistent recognition and measurement guidance for revenue contracts with customers whether they are acquired and not acquired in a business combination. The amendments should be applied prospectively to business combinations occurring on or after the effective date. Additionally, early adoption is permitted.

January 1, 2023

The Company has not yet determined the effect of the adoption of ASU 2021-08 on the Company’s consolidated financial statements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 18. SUBSEQUENT EVENTS

Acquisition of Homeowners Association Services Division

On October 8, 2021, the Bank completed its previously announced acquisition of the Homeowners Association (“HOA”) Services Division of MUFG Union Bank, N.A. (“Union Bank”) pursuant to the terms of the Purchase and Assumption Agreement (the “Purchase Agreement”), dated March 31, 2021, between the Bank and Union Bank.

Under the terms of the Purchase Agreement, the Bank acquired certain assets and assumed certain liabilities related to Union Bank’s HOA Services Division for cash consideration of approximately $255 million, which represents the aggregate of a 5.9% deposit premium and the net book value of certain acquired assets and assumed liabilities. At closing, there were approximately $4.1 billion of deposits related to Union Bank’s HOA Services Division and approximately $6.4 million in related loans. Due to the timing of the acquisition, the Company is currently in the process of completing the purchase accounting and has not made all of the remaining disclosures required by ASC 805-10-50, "Business Combinations - Overall - Disclosure," such as the fair value of assets acquired, which will be disclosed in subsequent filings. The existing management team and employees transitioned with the HOA Services Division to the Bank in connection with the close of the acquisition.

The HOA Services Division provides a full range of banking services to community HOA management companies and their homeowners associations. This acquisition significantly expands the Bank’s existing HOA banking practice, which provides lockbox, electronic receivables processing and other financial services to HOA management companies. This acquisition advances the Bank’s strategy to expand its product offerings to its customers and to diversify its revenue and funding sources. Management believes that the HOA business unit’s high quality, low-cost deposits further diversifies the Bank’s existing core deposits and provides an attractive funding source in a rising interest rate environment.

Common Stock Dividends

On November 1, 2021, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.25 per common share. The cash dividend is payable on November 30, 2021 to stockholders of record at the close of business on November 15, 2021.

The Company has evaluated events that have occurred subsequent to September 30, 2021 and have concluded there are no other subsequent events that would require recognition in the accompanying condensed consolidated financial statements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 ongoing COVID-19 pandemic continues to affect 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 still uncertain, due in part to the Delta variant of COVID-19. Weaker than expected improvement in general business and economic conditions could adversely affect the Company’s revenues, the values of its assets and liabilities and continue to negatively impact loan growth;

•our ability to complete pending and 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 credit losses;

•our ability to attract deposits and other sources of funding or liquidity;

•our ability to efficiently deploy excess 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 69 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 provides venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. The Bank also offers financing of non-owner-occupied investor properties through Civic Financial Services, a wholly-owned subsidiary. The Bank also offers a specialized suite of services for the HOA industry. 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 2021, accounted for 85.5% of net revenue (net interest income plus noninterest income).

At September 30, 2021, the Company had total assets of $35.9 billion, including $20.5 billion of total loans and leases, net of deferred fees, $9.3 billion of securities available-for-sale, and $3.5 billion of interest-earning deposits in financial institutions compared to $29.5 billion of total assets, including $19.1 billion of total loans and leases, net of deferred fees, $5.2 billion of securities available-for-sale, and $3.0 billion of interest-earning deposits in financial institutions at December 31, 2020. The $6.4 billion increase in total assets since year-end was due primarily to a $4.0 billion increase in securities available-for-sale, a $1.4 billion increase in loans and leases, net of deferred fees, and a $514.4 million increase in interest-earning deposits in financial institutions.

At September 30, 2021, the Company had total liabilities of $32.0 billion, including total deposits of $30.6 billion and subordinated debt of $862.4 million, compared to $25.9 billion of total liabilities, including $24.9 billion of total deposits and $465.8 million of subordinated debt at December 31, 2020. The $6.1 billion increase in total liabilities since year-end was due mainly to increases of $5.9 billion in core deposits and $396.6 million in subordinated debt. The increase in core deposits was due primarily to continued strong deposit growth from our venture banking and community banking clients. At September 30, 2021, core deposits totaled $28.1 billion, or 92% of total deposits, including $12.9 billion of noninterest-bearing demand deposits, or 42% of total deposits. The increase in subordinated debt was due to the $400 million of subordinated notes issued by the Bank on April 30, 2021. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.

At September 30, 2021, the Company had total stockholders' equity of $3.9 billion compared to $3.6 billion at December 31, 2020. The $323.5 million increase in stockholders' equity since year-end was due mainly to $470.9 million in net earnings, offset partially by a $73.7 million decrease in accumulated other comprehensive income and $89.5 million of cash dividends paid. Consolidated capital ratios remained strong with Tier 1 capital and total capital ratios of 10.65% and 14.36% at September 30, 2021.

Recent Events

Acquisition of Homeowners Association Services Division

Under the terms of the Purchase Agreement, the Bank acquired certain assets and assumed certain liabilities related to Union Bank’s HOA Services Division for cash consideration of approximately $255 million, which represents the aggregate of a 5.9% deposit premium and the net book value of certain acquired assets and assumed liabilities. At closing, there were approximately $4.1 billion of deposits related to Union Bank’s HOA Services Division and approximately $6.4 million in related loans. For further information, see Note 18. Subsequent Events in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

Subordinated Notes Offering

On April 30, 2021, the Bank issued $400 million aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes (the “Notes”) due May 1, 2031 (the “Maturity Date”), if not previously redeemed. Subject to any redemption prior to the Maturity Date, the Notes will bear interest from and including the original issue date to, but excluding, May 1, 2026 (the “Reset Date”), at a fixed rate of 3.25% per annum and from and including the Reset Date to, but excluding the Maturity Date, the Notes will bear interest at a floating per annum rate equal to a benchmark rate (which is expected to be the Three-Month Term SOFR) plus 252 basis points. For further information, see Note 10. Borrowings and Subordinated Debt in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

Acquisition of Civic

The Civic acquisition has been accounted for under the acquisition method of accounting which resulted in the recognition of goodwill of $125.4 million. All of the recognized goodwill is expected to be deductible for tax purposes. For further information, see Note 2. Acquisitions in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

COVID-19 Pandemic - Impact to Our Business

From a business perspective, the impact in 2021 from the ongoing COVID-19 pandemic has decreased, however, new variants may continue to impact key macro-economic indicators such as unemployment and GDP and we will continue to closely monitor our loan portfolio. In the early stages of the COVID-19 pandemic, we experienced an increase in customers seeking loan modifications through payment deferrals and extension of terms. Most of the modifications were for payment deferrals for three months, while some deferrals were up to six months. Some loans were subsequently modified with deferrals of three to twelve months. As of September 30, 2021, there were 17 loans with a balance of $50.2 million on deferral. The Company did not apply a TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act.

We actively participated in both rounds of the Paycheck Protection Program ("PPP"), under the provisions of the CARES Act. As of September 30, 2021, PPP loans had an outstanding balance of approximately $279.4 million. In the third quarter of 2021, we did not originate any PPP loans, while loans forgiven under the PPP program totaled approximately $337.7 million. The loans have origination fees that are recognized over the life of the loan with the fee recognition accelerated upon forgiveness or repayment of the loan. Fees recognized in the third quarter of 2021 were $7.9 million. As of September 30, 2021, the remaining unamortized fees, net of deferred costs, totaled $7.7 million. The PPP loans are fully guaranteed by the SBA and do not carry an allowance.

As the COVID-19 pandemic unfolded in March 2020, we immediately enhanced the 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 the hotel, retail, commercial aviation, restaurant, and oil services loan and lease portfolios. We continue to closely monitor all of our portfolios, although with the increase in oil prices, the credit risk in the oil services portfolio has diminished. The hotel portfolio as of September 30, 2021 is comprised of hotel CRE loans of $506.4 million, hotel construction loans of $521.8 million, and hotel SBA loans of $29.2 million.

The tables below shows our exposure to these loan and lease portfolios, which includes equipment leased to others under operating leases, as of the dates indicated:


	September 30, 2021
									% of
			Special						Total Loans
Loan and Lease Portfolio	Classified		Mention		Pass		Total		and Leases
	(Dollars in thousands)
Hotel	$	16,141	$	199,346	$	841,934	$	1,057,421	5.2	%
Retail CRE	224		1,433		422,757		424,414		2.1	%
Commercial aviation	—		65,370		84,661		150,031		0.7	%
Restaurant	4,885		26,325		118,101		149,311		0.7	%
Total	$	21,250	$	292,474	$	1,467,453	$	1,781,177	8.7	%


	September 30, 2020
									% of
			Special						Total Loans
Loan and Lease Portfolio	Classified		Mention		Pass		Total		and Leases
	(Dollars in thousands)
Hotel	$	57,635	$	281,044	$	847,960	$	1,186,639	6.2	%
Retail CRE	27,678		497		417,311		445,486		2.3	%
Commercial aviation	19,397		140,246		96,335		255,978		1.3	%
Restaurant	8,379		8,920		131,497		148,796		0.8	%
Oil services	$	12,883	$	5,438	$	74,305	$	92,626	0.5	%
Total	$	125,972	$	436,145	$	1,567,408	$	2,129,525	11.2	%

From a credit perspective, most of our credit metrics improved during the third quarter of 2021 as economic conditions and economic forecasts continued to improve. This improvement led to a provision for credit losses benefit of $20.0 million for the third quarter of 2021, compared to a provision for credit losses benefit of $88.0 million for the second quarter of 2021 and compared to a provision for credit losses of $97.0 million for the third quarter of 2020. For further details on CECL and the impacts to our process, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.

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 and recently have begun to purchase owner-occupied, single-family residential loans from other banks as well. 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									Nine Months Ended
		September 30,			June 30,			September 30,			September 30,
Efficiency Ratio		2021			2021			2020			2021			2020
		(Dollars in thousands)
Noninterest expense		$	159,421		$	151,750		$	133,402		$	461,307		$	1,848,337
Less:	Intangible asset amortization	2,890			2,889			3,751			8,858			11,581
	Foreclosed assets expense (income), net	165			(119)			335			47			255
	Goodwill impairment	—			—			—			—			1,470,000
	Acquisition, integration and reorganization costs	200			200			—			3,825			—
	Noninterest expense used for efficiency ratio	$	156,166		$	148,780		$	129,316		$	448,577		$	366,501

Net interest income (tax equivalent)		$	279,777		$	270,083		$	253,632		$	814,495		$	761,354
Noninterest income		51,345			40,371			38,252			136,545			106,210
	Net revenues	331,122			310,454			291,884			951,040			867,564
Less:	Gain on sale of securities	515			—			5,270			616			13,167
	Net revenues used for efficiency ratio	$	330,607		$	310,454		$	286,614		$	950,424		$	854,397

Efficiency ratio		47.2		%	47.9		%	45.1		%	47.2		%	42.9		%

The increase in the efficiency ratio was attributable primarily to higher noninterest expense related to the Civic acquisition that closed on February 1, 2021. The level of revenues related to Civic lag the level of their noninterest expense as we shift from a gain on loan sales model pre-acquisition to a hold for portfolio model post-acquisition. Therefore, it will take time for the revenues to build as the on-balance sheet loan portfolio grows.

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 Form 10-K.

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									Nine Months Ended
		September 30,			June 30,			September 30,			September 30,
Return on Average Tangible Equity		2021			2021			2020			2021			2020
		(Dollars in thousands)
Net earnings (loss)		$	139,996		$	180,512		$	45,503		$	470,914		$	(1,354,404)
Add:	Intangible asset amortization	2,890			2,889			3,751			8,858			11,581
	Goodwill impairment	—			—			—			—			1,470,000
	Adjusted net earnings used for return on
	average tangible equity	$	142,886		$	183,401		$	49,254		$	479,772		$	127,177

Average stockholders' equity		$	3,916,621		$	3,739,042		$	3,497,869		$	3,758,733		$	3,965,453
Less:	Average intangible assets	1,221,253			1,224,208			1,107,548			1,212,851			1,594,231
	Average tangible common equity	$	2,695,368		$	2,514,834		$	2,390,321		$	2,545,882		$	2,371,222

Return on average equity (1)		14.18		%	19.36		%	5.18		%	16.75		%	(45.62)		%
Return on average tangible equity (2)		21.03		%	29.25		%	8.20		%	25.20		%	7.16		%

___________________________________

(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 and	September 30,			December 31,
Tangible Book Value Per Share	2021			2020
	(Dollars in thousands, except per share data)
Stockholders’ equity	$	3,918,434		$	3,594,951
Less: Intangible assets	1,219,651			1,102,311
Tangible common equity	$	2,698,783		$	2,492,640

Total assets	$	35,885,676		$	29,498,442
Less: Intangible assets	1,219,651			1,102,311
Tangible assets	$	34,666,025		$	28,396,131

Equity to assets ratio	10.92		%	12.19		%
Tangible common equity ratio (1)	7.79		%	8.78		%
Book value per share	$	32.77		$	30.36
Tangible book value per share (2)	$	22.57		$	21.05
Shares outstanding	119,579,566			118,414,853

_______________________________________

(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 14. Earnings (Loss) Per Share for the GAAP calculation of earnings per share.


		Three Months Ended						Nine Months Ended
Adjusted Net Earnings and		September 30,		June 30,		September 30,		September 30,
Adjusted Earnings Per Share		2021		2021		2020		2021		2020
		(Dollars in thousands)
Adjusted Net Earnings:
Net earnings (loss)		$	139,996	$	180,512	$	45,503	$	470,914	$	(1,354,404)
Add:	Goodwill impairment	—		—		—		—		1,470,000
	Adjusted net earnings	$	139,996	$	180,512	$	45,503	$	470,914	$	115,596

Adjusted Basic Earnings Per Share:
Adjusted net earnings		$	139,996	$	180,512	$	45,503	$	470,914	$	115,596
Less:	Earnings allocated to unvested restricted stock	(2,417)		(3,172)		(578)		(7,930)		(1,603)
	Adjusted net earnings allocated to
	common shares	$	137,579	$	177,340	$	44,925	$	462,984	$	113,993

Weighted-average basic shares and unvested restricted
	stock outstanding	119,569		119,386		118,438		119,272		118,469
Less:	Weighted-average unvested restricted stock
	outstanding	(2,340)		(2,356)		(1,684)		(2,235)		(1,596)
	Weighted-average basic shares outstanding	117,229		117,030		116,754		117,037		116,873

Adjusted basic earnings per share		$	1.17	$	1.52	$	0.38	$	3.96	$	0.98

Adjusted Diluted Earnings Per Share:
Adjusted net earnings allocated to common shares		$	137,579	$	177,340	$	44,925	$	462,984	$	113,993
Weighted-average diluted shares outstanding		117,229		117,030		116,754		117,037		116,873
Adjusted diluted earnings per share		$	1.17	$	1.52	$	0.38	$	3.96	$	0.98

Results of Operations

Earnings Performance

The following table presents performance metrics for the periods indicated:


	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2021			2021			2020			2021			2020
	(Dollars in thousands, except per share data)
Earnings Summary:
Interest income	$	290,082		$	280,505		$	265,908		$	843,924		$	831,315
Interest expense	(14,240)			(14,197)			(14,584)			(40,505)			(75,965)
Net interest income	275,842			266,308			251,324			803,419			755,350
Provision for credit losses	20,000			88,000			(97,000)			156,000			(329,000)
Noninterest income	51,345			40,371			38,252			136,545			106,210
Operating expense	(159,421)			(151,750)			(133,402)			(461,307)			(378,337)
Goodwill impairment	—			—			—			—			(1,470,000)

Earnings (loss) before income taxes	187,766			242,929			59,174			634,657			(1,315,777)
Income tax expense	(47,770)			(62,417)			(13,671)			(163,743)			(38,627)
Net earnings (loss)	$	139,996		$	180,512		$	45,503		$	470,914		$	(1,354,404)

Per Common Share Data:
Diluted earnings (loss) per share	$	1.17		$	1.52		$	0.38		$	3.96		$	(11.60)
Book value per share	$	32.77		$	32.17		$	29.42
Tangible book value per share (1)	$	22.57		$	21.95		$	20.09

Performance Ratios:
Return on average assets	1.55		%	2.11		%	0.65		%	1.86		%	(6.65)		%
Return on average tangible equity (1)	21.03		%	29.25		%	8.20		%	25.20		%	7.16		%
Net interest margin (tax equivalent)	3.33		%	3.40		%	3.90		%	3.46		%	4.13		%
Yield on average loans and leases (tax equivalent)	5.01		%	5.18		%	5.01		%	5.13		%	5.18		%
Cost of average total deposits	0.08		%	0.10		%	0.17		%	0.10		%	0.32		%
Efficiency ratio	47.2		%	47.9		%	45.1		%	47.2		%	42.9		%

Capital Ratios (consolidated):
Common equity tier 1 capital ratio	10.15		%	10.41		%	10.45		%
Tier 1 capital ratio	10.65		%	10.41		%	10.45		%
Total capital ratio	14.36		%	14.99		%	13.74		%

_____________________________

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

Third Quarter of 2021 Compared to Second Quarter of 2021

Net earnings for the third quarter of 2021 were $140.0 million, or $1.17 per diluted share, compared to net earnings for the second quarter of 2021 of $180.5 million, or $1.52 per diluted share. The $40.5 million decrease in net earnings from the prior quarter was due to a lower provision for credit losses benefit of $68.0 million and higher noninterest expense of $7.7 million, offset partially by lower income tax expense of $14.6 million, higher noninterest income of $11.0 million, and higher net interest income of $9.5 million. The third quarter provision for credit losses benefit reflected improvement in both macro-economic forecast variables and loan portfolio credit quality metrics, offset partially by increased provisions for unfunded commitments and loan growth in the third quarter of 2021. Noninterest expense increased due mostly to a $7.3 million increase in compensation expense attributable mainly to higher bonus and incentives expense as we updated our full-year bonus estimates based on the growth in loans and deposits in the third quarter of 2021, overall year-to-date performance, and increased warrant income. The decrease in income tax expense was primarily due to lower pre-tax earnings in the third quarter of 2021 compared to the second quarter of 2021. Noninterest income increased due primarily to increases of $7.9 million in warrant income and $3.0 million in dividends and gains on equity investments. Net interest income increased due mainly to higher income on investment securities and loans and leases as a result of higher average balances.

Third Quarter of 2021 Compared to Third Quarter of 2020

Net earnings for the third quarter of 2021 were $140.0 million, or $1.17 per diluted share, compared to net earnings for the third quarter of 2020 of $45.5 million, or $0.38 per diluted share. The $94.5 million increase in net earnings from the year-ago quarter was due mainly to a lower provision for credit losses of $117.0 million, higher net interest income of $24.5 million, and higher noninterest income of $13.1 million, offset partially by higher income tax expense of $34.1 million and higher operating expense of $26.0 million. The decrease in the provision for credit losses for the third quarter of 2021 from the year-ago quarter reflected improvement in certain key macro-economic forecast variables and loan portfolio credit quality metrics. Net interest income increased due mainly to higher income on investment securities and loans and leases as a result of higher average balances, offset partially by a lower yield on average investment securities and the negative impact on net interest income due to the change in the mix of average interest-earning assets. Noninterest income increased due primarily to a $13.1 million increase in warrant income. The increase in income tax expense was due primarily to higher pre-tax earnings in the third quarter of 2021 compared to the year-ago quarter. Noninterest expense increased due mostly to an increase of $22.9 million in compensation expense, due mostly to the incremental expense of the Civic operations in 2021 and higher bonus expense due to year-to-date performance.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Net earnings for the nine months ended September 30, 2021 were $470.9 million, or $3.96 per diluted share, compared to a net loss for the nine months ended September 30, 2020 of $1.35 billion, or $11.60 loss per diluted share. The $1.83 billion increase in net earnings from the year-ago period was due mainly to $1.47 billion of goodwill impairment expense recognized in 2020 combined with a decrease in the provision for credit losses of $485.0 million due to improvements in both macro-economic forecast variables and loan portfolio credit quality metrics.

Net Interest Income

The following tables summarize the distribution of average assets, liabilities, and stockholders’ equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, presented on a tax equivalent basis, for the periods indicated:


	Three Months Ended
	September 30, 2021						June 30, 2021						September 30, 2020
			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)	$	19,670,671	$	248,485	5.01	%	$	19,057,420	$	246,147	5.18	%	$	19,195,737	$	241,547	5.01	%
Investment securities (2)(4)	8,047,098		42,952		2.12	%	6,492,721		36,111		2.23	%	4,107,915		26,015		2.52	%
Deposits in financial institutions	5,657,768		2,580		0.18	%	6,347,764		2,022		0.13	%	2,554,349		654		0.10	%
Total interest‑earning assets (2)	33,375,537		294,017		3.50	%	31,897,905		284,280		3.57	%	25,858,001		268,216		4.13	%
Other assets	2,496,127						2,428,207						2,077,192
Total assets	$	35,871,664					$	34,326,112					$	27,935,193

LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking	$	7,372,859	2,042		0.11	%	$	7,235,726	2,394		0.13	%	$	4,904,614	2,019		0.16	%
Money market	8,662,449		2,997		0.14	%	8,484,933		3,318		0.16	%	7,170,842		3,081		0.17	%
Savings	620,079		38		0.02	%	598,225		36		0.02	%	565,395		35		0.02	%
Time	1,475,307		1,340		0.36	%	1,498,169		1,521		0.41	%	1,876,072		4,752		1.01	%
Total interest‑bearing deposits	18,130,694		6,417		0.14	%	17,817,053		7,269		0.16	%	14,516,923		9,887		0.27	%
Borrowings	238,335		101		0.17	%	225,446		265		0.47	%	181,315		27		0.06	%
Subordinated debt	862,272		7,722		3.55	%	735,725		6,663		3.63	%	462,375		4,670		4.02	%
Total interest‑bearing liabilities	19,231,301		14,240		0.29	%	18,778,224		14,197		0.30	%	15,160,613		14,584		0.38	%
Noninterest‑bearing demand deposits	12,198,313						11,304,757						8,812,391
Other liabilities	525,429						504,089						464,320
Total liabilities	31,955,043						30,587,070						24,437,324
Stockholders’ equity	3,916,621						3,739,042						3,497,869
Total liabilities and
stockholders' equity	$	35,871,664					$	34,326,112					$	27,935,193
Net interest income (2)			$	279,777					$	270,083					$	253,632
Net interest rate spread (2)					3.21	%					3.27	%					3.75	%
Net interest margin (2)					3.33	%					3.40	%					3.90	%

Total deposits (5)	$	30,329,007	$	6,417	0.08	%	$	29,121,810	$	7,269	0.10	%	$	23,329,314	$	9,887	0.17	%

_____________________

(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 net loan premium amortization of $2.4 million and $1.5 million and net loan discount accretion of $35,000 for the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, respectively.

(4) Includes tax-equivalent adjustments of $2.2 million, $2.2 million, and $1.6 million for the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, 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.


	Nine Months Ended
	September 30, 2021						September 30, 2020
			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)	$	19,221,192	$	737,478	5.13	%	$	19,403,365	$	752,785	5.18	%
Investment securities (2)(4)	6,650,744		111,392		2.24	%	3,936,492		82,086		2.79	%
Deposits in financial institutions	5,601,765		6,130		0.15	%	1,279,628		2,448		0.26	%
Total interest-earning assets (2)	31,473,701		855,000		3.63	%	24,619,485		837,319		4.54	%
Other assets	2,413,840						2,601,617
Total assets	$	33,887,541					$	27,221,102

LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking	$	7,007,042	6,668		0.13	%	$	4,127,239	10,727		0.35	%
Money market	8,376,974		9,593		0.15	%	6,181,312		15,953		0.34	%
Savings	597,260		109		0.02	%	529,362		228		0.06	%
Time	1,488,848		4,816		0.43	%	2,343,645		24,301		1.39	%
Total interest-bearing deposits	17,470,124		21,186		0.16	%	13,181,558		51,209		0.52	%
Borrowings	229,990		559		0.32	%	1,023,307		8,124		1.06	%
Subordinated debt	689,484		18,760		3.64	%	460,088		16,632		4.83	%
Total interest-bearing liabilities	18,389,598		40,505		0.29	%	14,664,953		75,965		0.69	%
Noninterest-bearing demand deposits	11,232,927						8,157,169
Other liabilities	506,283						433,527
Total liabilities	30,128,808						23,255,649
Stockholders’ equity	3,758,733						3,965,453
Total liabilities and
stockholders' equity	$	33,887,541					$	27,221,102
Net interest income (2)			$	814,495					$	761,354
Net interest rate spread (2)					3.34	%					3.85	%
Net interest margin (2)					3.46	%					4.13	%

Total deposits (5)	$	28,703,051	$	21,186	0.10	%	$	21,338,727	$	51,209	0.32	%

_____________________

(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 net loan premium amortization of $5.0 million and net loan discount accretion of $4.4 million for the nine months ended September 30, 2021 and 2020, respectively.

(4) Includes tax-equivalent adjustments of $6.4 million and $4.2 million for the nine months ended September 30, 2021 and 2020, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.

Third Quarter of 2021 Compared to Second Quarter of 2021

Net interest income increased by $9.5 million to $275.8 million for the third quarter of 2021 compared to $266.3 million for the second quarter of 2021 due mainly to higher income on investment securities and loans and leases due mostly to higher average balances as we deployed our excess liquidity. Income on investment securities increased by $6.8 million in the third quarter of 2021 due to a $1.6 billion increase in the average balance of investment securities, offset partially by an 11 basis point decrease in the yield on average investment securities. Income on loans and leases increased by $2.2 million in the third quarter of 2021 due to a $613.3 million increase in the average balance of loans and leases, offset partially by a 17 basis point decrease in the yield on average loans and leases. The tax-equivalent yield on average loans and leases was 5.01% for the third quarter of 2021 compared to 5.18% for the second quarter of 2021.

The tax equivalent NIM was 3.33% for the third quarter of 2021 compared to 3.40% for the second quarter of 2021. The decrease in the tax equivalent NIM was due primarily to the change in the earning assets mix driven by the increase in the investment portfolio as a percentage of earning assets. The average balance of investment securities increased by $1.6 billion to $8.0 billion, the average balance of deposits in financial institutions decreased by $690.0 million to $5.7 billion, and the average balance of loans and leases increased by $613.3 million in the third quarter of 2021 to $19.7 billion. The increase in average balances of investment securities and loans and leases was the result of prudently deploying some of our excess liquidity ahead of the closing of the acquisition of the HOA Services Division of MUFG Union Bank that added approximately $4.1 billion of deposits on October 8, 2021. Excess liquidity continues to negatively impact the tax equivalent NIM, however, the impact decreased from approximately 73 basis points in the second quarter of 2021 to approximately 57 basis points in the third quarter of 2021. Average loans and leases as a percentage of average interest-earning assets was 59% for the third quarter of 2021 compared to 60% for the second quarter of 2021.

The cost of average total deposits decreased to 0.08% for the third quarter of 2021 from 0.10% for the second quarter of 2021. The lower cost of average total deposits was due primarily to the $894 million increase in the average balance of noninterest-bearing deposits.

Third Quarter of 2021 Compared to Third Quarter of 2020

Net interest income increased by $24.5 million to $275.8 million for the third quarter of 2021 compared to $251.3 million for the third quarter of 2020 due mainly to higher income on investment securities attributable to a higher average balance offset partially by a lower yield, higher income on loans and leases due to a higher average balance, and lower interest expense. Interest expense declined due principally to a lower cost of average interest-bearing deposits, offset partially by a higher balance of average subordinated debt attributable to the $400 million of subordinated notes issued in the second quarter of 2021. The tax equivalent yield on average loans and leases was 5.01% for the third quarter of 2021, unchanged compared to 5.01% for the same quarter of 2020.

The tax equivalent NIM was 3.33% for the third quarter of 2021 compared to 3.90% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to the change in the mix of average interest-earning assets and the lower yield on average investment securities, offset partially by lower deposit costs. The change in mix of average interest-earning assets was due to a $3.9 billion increase in average investment securities, a $3.1 billion increase in average deposits in financial institutions, and a $474.9 million increase in average loans and leases. Average loans and leases as a percentage of average interest-earning assets was 59% for the third quarter of 2021 compared to 74% for the third quarter of 2020.

The cost of average total deposits decreased to 0.08% for the third quarter of 2021 from 0.17% for the third quarter of 2020 due mainly to lower rates paid on deposits in conjunction with decreased market rates.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Net interest income increased by $48.1 million to $803.4 million for the nine months ended September 30, 2021 compared to $755.4 million for the nine months ended September 30, 2020 due mainly to higher income on investment securities attributable to a higher average balance offset partially by a lower yield combined with lower interest expense due to lower rates paid on deposits, borrowings, and subordinated debt in conjunction with decreased market rates; the aforementioned increase in net interest income is offset partially by lower income on loans and leases due to a lower average loans and leases balance coupled with a lower loans and leases yield also attributable to decreased market rates. The tax equivalent yield on average loans and leases was 5.13% for the nine months ended September 30, 2021 compared to 5.18% for the same period in 2020.

The tax equivalent NIM was 3.46% for the nine months ended September 30, 2021 compared to 4.13% for the same period last year. The decrease in the tax equivalent NIM was due mostly to the change in the mix of average interest-earning assets and the lower yields on average investment securities and loans and leases, offset partially by lower costs of deposits, borrowings, and subordinated debt. The change in mix of average interest-earning assets was due to a $4.3 billion increase in average deposits in financial institutions, a $2.7 billion increase in average investment securities, and a $182.2 million decrease in average loans and leases. Average loans and leases as a percentage of average interest-earning assets was 61% for the nine months ended September 30, 2021 compared to 79% for the nine months ended September 30, 2020.

The cost of average total deposits decreased to 0.10% for the nine months ended September 30, 2021 from 0.32% for the same period last year due mainly to lower rates paid on deposits in conjunction with 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									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
	2021			2021			2020			2021			2020
	(Dollars in thousands)
Provision For Credit Losses:
(Reduction in) addition to allowance for loan and lease losses	$	(21,500)		$	(72,000)		$	81,000		$	(146,500)		$	272,000
Addition to (reduction in) reserve for unfunded
loan commitments	1,500			(16,000)			16,000			(9,500)			57,000
Total provision for credit losses	$	(20,000)		$	(88,000)		$	97,000		$	(156,000)		$	329,000

Credit Quality Metrics:
Net charge-offs (recoveries) on loans and leases
held for investment (1)	$	367		$	(5,155)		$	36,084		$	(2,052)		$	68,436
Annualized net charge-offs to average loans and leases	0.01		%	(0.11)		%	0.75		%	(0.01)		%	0.47		%
At quarter-end:
Allowance for credit losses	$	279,804		$	300,171		$	442,537
Allowance for credit losses to loans and leases
held for investment	1.36		%	1.54		%	2.33		%
Allowance for credit losses to nonaccrual
loans and leases held for investment	433.8		%	528.4		%	516.9		%
Nonaccrual loans and leases held for investment	$	64,507		$	56,803		$	85,615
Performing TDRs held for investment	$	36,750		$	40,129		$	13,679
Classified loans and leases held for investment	$	141,604		$	147,267		$	274,572

______________________

(1) See "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" for detail of charge-offs and recoveries by loan portfolio segment, class, and subclass for the periods presented.

Provisions for credit losses are charged to earnings for both the allowance for loan and lease losses and the reserve for unfunded loan commitments (collectively, the allowance for credit losses). The provision for credit losses on our loans and leases held for investment is based on our allowance methodology and is an expense that, in our judgment, is required to maintain an adequate allowance for credit losses. For further details on our allowance for credit losses methodology, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.

The provision for credit losses benefit was $20.0 million for the third quarter of 2021 compared to a benefit of $88.0 million for the second quarter of 2021. The third quarter benefit reflected improvement in both macro-economic forecast variables and loan portfolio credit quality metrics, offset partially by increased provisions for unfunded commitments and loan growth.

The provision for credit losses benefit was $20.0 million for the third quarter of 2021 compared to a provision of $97.0 million for the third quarter of 2020 as a result of improvement in both macro-economic forecast variables and loan portfolio credit quality metrics.

The provision for credit losses benefit was $156.0 million for the nine months ended September 30, 2021 compared to a provision of $329.0 million for the nine months ended September 30, 2020 as a result of improvement in both macro-economic forecast variables and loan portfolio credit quality metrics.

Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances include deterioration in economic conditions and forecasts, an increased amount of classified and/or criticized loans and leases, and net loan and lease and unfunded commitment growth. Deterioration in economic conditions and forecasts include the rate of economic growth, the unemployment rate, the rate of inflation, changes in the general level of interest rates, changes in real estate values, and adverse conditions in borrowers’ businesses. See further discussion in “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.

Noninterest Income

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


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
Noninterest Income	2021		2021		2020		2021		2020
	(In thousands)
Other commissions and fees	$	11,792	$	10,704	$	10,541	$	31,654	$	30,373
Leased equipment income	10,943		10,847		9,900		33,144		34,188
Service charges on deposit accounts	3,407		3,452		2,570		9,793		7,232
Gain on sale of loans and leases	—		1,422		35		1,561		468
Gain on sale of securities	515		—		5,270		616		13,167
Other income:
Dividends and gains (losses) on equity investments	8,387		5,394		6,945		24,685		9,920
Warrant income	13,578		5,650		500		25,351		3,310
Other	2,723		2,902		2,491		9,741		7,552
Total noninterest income	$	51,345	$	40,371	$	38,252	$	136,545	$	106,210

Third Quarter of 2021 Compared to Second Quarter of 2021

Noninterest income increased by $11.0 million to $51.3 million for the third quarter of 2021 compared to $40.4 million for the second quarter of 2021 due primarily to increases of $7.9 million in warrant income and $3.0 million in dividends and gains on equity investments. Warrant income increased due to a higher number of and dollar amount of gains on warrant exercises given the active capital markets, including one warrant gain of approximately $8.2 million. Dividends and gains on equity investments increased due primarily to higher gains on sales of equity investments and higher income distributions on SBIC investments, offset partially by lower net fair value gains on equity investments still held.

Third Quarter of 2021 Compared to Third Quarter of 2020

Noninterest income increased by $13.1 million to $51.3 million for the third quarter of 2021 compared to $38.3 million for the third quarter of 2020 due mainly to increases of $13.1 million in warrant income, $1.4 million in dividends and gains on equity investments, and $1.3 million in other commissions and fees, offset partially by a $4.8 million decrease in gain on sale of securities. Warrant income increased due principally to higher gains from exercised warrants, driven by the active capital markets. The increase in dividends and gains on equity investments was due primarily to higher gains on sales of equity investments and higher income distributions on SBIC investments, offset partially by lower net fair value gains on equity investments still held. The increase in other commissions and fees was primarily due to higher foreign exchange fees and customer success fees. Gain on sale of securities decreased due to a net gain of $0.5 million on sales of $76.2 million for the third quarter of 2021 compared to a net gain of $5.3 million on sales of $17.0 million for the third quarter of 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Noninterest income increased by $30.3 million to $136.5 million for the nine months ended September 30, 2021 compared to $106.2 million for the nine months ended September 30, 2020 due mainly to increases of $22.0 million in warrant income, $14.8 million in dividends and gains on equity investments, and $2.6 million in service charges on deposit accounts, offset partially by a $12.6 million decrease in gain on sale of securities. Warrant income increased due principally to higher gains from exercised warrants, driven by the active capital markets. The increase in dividends and gains on equity investments was due primarily to higher gains on sales of equity investments and higher income distributions on SBIC investments, offset partially by lower net fair value gains on equity investments still held. The increase in service charges on deposit accounts was due primarily to a higher volume of fee waivers that we granted customers in 2020 during the COVID pandemic. Gain on sale of securities decreased due to a net gain of $0.6 million on sales of $120.7 million for the nine months ended September 30, 2021 compared to a net gain of $13.2 million on sales of $154.1 million for the same period last year.

Noninterest Expense

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


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
Noninterest Expense	2021		2021		2020		2021		2020
	(In thousands)
Compensation	$	98,061	$	90,807	$	75,131	$	268,750	$	198,323
Occupancy	14,928		14,784		14,771		43,766		43,472
Leased equipment depreciation	8,603		8,614		7,057		26,186		21,364
Data processing	7,391		7,758		6,505		22,106		20,061
Other professional services	5,164		5,256		4,713		15,546		13,117
Customer related expense	4,538		4,973		4,762		14,329		13,102
Loan expense	4,180		4,031		3,499		11,404		9,528
Insurance and assessments	3,685		3,745		3,939		12,333		17,561
Intangible asset amortization	2,890		2,889		3,751		8,858		11,581
Acquisition, integration and reorganization costs	200		200		—		3,825		—
Foreclosed assets expense (income), net	165		(119)		335		47		255
Other	9,616		8,812		8,939		34,157		29,973
Total operating expense	159,421		151,750		133,402		461,307		378,337
Goodwill impairment	—		—		—		—		1,470,000
Total noninterest expense	$	159,421	$	151,750	$	133,402	$	461,307	$	1,848,337

Third Quarter of 2021 Compared to Second Quarter of 2021

Noninterest expense increased by $7.7 million to $159.4 million for the third quarter of 2021 compared to $151.8 million for the second quarter of 2021 due mostly to an increase of $7.3 million in compensation expense attributable mainly to higher bonus and incentives expense as we updated our full-year bonus estimates based on the growth in loans and deposits in the third quarter of 2021, overall year-to-date performance, and increased warrant income.

Third Quarter of 2021 Compared to Third Quarter of 2020

Noninterest expense increased by $26.0 million to $159.4 million for the third quarter of 2021 compared to $133.4 million for the third quarter of 2020 due primarily to increases of $22.9 million in compensation expense due mostly to the incremental compensation expense for Civic that was acquired on February 1, 2021 and higher bonus expense due to year-to-date performance in 2021, and $1.5 million in leased equipment depreciation due to a higher balance of leased equipment.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Noninterest expense decreased by $1.39 billion to $461.3 million for the nine months ended September 30, 2021 compared to $1.85 billion for the nine months ended September 30, 2020 due primarily to a $1.47 billion goodwill impairment in the 2020 period. Excluding the goodwill impairment, noninterest expense increased by $83.0 million in the 2021 period compared to the 2020 period. This increase was due primarily to increases of $70.4 million increase in compensation expense, $4.8 million in leased equipment depreciation, $4.2 million in other expense, and $3.8 million increase in acquisition, integration and reorganization costs. The increase in compensation expense was due to the incremental compensation expense from eight months of Civic operations in the 2021 period and higher bonus expense, given the operating results in 2021, while the 2020 bonus amounts were below historical levels as a result of the higher provisions for credit losses in 2020. Leased equipment depreciation increased due to a higher balance of leased equipment. Other expense increased due mainly to higher legal settlement costs. The increase in acquisition, integration, and reorganization costs was due to the costs in the 2021 period related to the closed Civic acquisition and the acquisition of MUFG Union Bank's HOA Services Division that closed on October 8, 2021.

Income Taxes

The effective tax rate for the third quarter of 2021 was 25.4% compared to 25.7% for the second quarter of 2021 and 23.1% for the third quarter of 2020. The increased effective tax rate for the third quarter of 2021 compared to the third quarter of 2020 was primarily due to higher book income in 2021. The effective tax rate for the nine months ended September 30, 2021 was 25.8% compared to (2.9)% for the nine months ended September 30, 2020. Excluding non-deductible goodwill impairment, the effective income tax rate was 25.0% for the nine months ended September 30, 2020. The Company’s blended statutory tax rate for federal and state is 27.6% and the effective tax rate for the full year 2021 is estimated to be in the range of 25-27%.

Balance Sheet Analysis

Securities Available-for-Sale

The following table presents the composition and durations of our securities available-for-sale as of the dates indicated:


	September 30, 2021					June 30, 2021					December 31, 2020
	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 residential MBS	$	2,180,993	24	%	3.3	$	552,411	8	%	3.3	$	341,074	7	%	1.9
Municipal securities	1,989,929		21	%	8.3	1,817,499		25	%	8.2	1,531,617		29	%	8.2
Agency commercial MBS	1,314,024		14	%	3.9	1,257,628		18	%	3.6	1,281,877		24	%	3.2
Agency residential CMOs	1,088,537		12	%	3.0	1,142,398		16	%	3.0	1,219,880		23	%	2.7
U.S. Treasury securities	971,268		10	%	6.8	877,153		12	%	7.7	5,302		—	%	1.3
Corporate debt securities	516,615		6	%	3.7	508,708		7	%	3.8	311,889		6	%	3.7
Private label commercial MBS	388,318		4	%	7.4	378,235		5	%	7.4	82,957		2	%	1.8
Collateralized loan obligations	358,547		4	%	0.2	382,043		5	%	—	135,876		3	%	—
Private label residential CMOs	303,681		3	%	3.3	96,922		1	%	2.5	116,946		2	%	2.1
Asset-backed securities	132,997		2	%	0.1	149,583		2	%	0.1	166,546		3	%	0.1
SBA securities	32,017		—	%	3.7	36,028		1	%	3.7	41,627		1	%	3.2
Total securities available-
for-sale	$	9,276,926	100	%	4.8	$	7,198,608	100	%	5.1	$	5,235,591	100	%	4.3

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


	September 30, 2021
	Fair		% of
Municipal Securities by State	Value		Total
	(Dollars in thousands)
California	$	542,158	27	%
Texas	325,478		16	%
Washington	279,348		14	%
Oregon	121,199		6	%
Maryland	73,467		4	%
Georgia	68,062		4	%
New York	66,378		3	%
Colorado	57,940		3	%
Minnesota	55,694		3	%
Florida	45,659		2	%
Total of ten largest states	1,635,383		82	%
All other states	354,546		18	%
Total municipal securities	$	1,989,929	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:


	September 30, 2021				June 30, 2021				December 31, 2020
			% of				% of				% of
Loan and Lease Portfolio	Balance		Total		Balance		Total		Balance		Total
	(Dollars in thousands)
Real estate mortgage:
Other commercial real estate	$	2,438,398	12	%	$	2,483,856	13	%	$	2,747,526	14	%
SBA program	628,112		3	%	625,023		3	%	599,788		3	%
Hotel	506,355		2	%	521,869		2	%	571,917		3	%
Healthcare real estate	121,732		1	%	161,450		1	%	177,440		1	%
Total commercial real estate mortgage	3,694,597		18	%	3,792,198		19	%	4,096,671		21	%
Income producing and other residential	4,561,758		23	%	4,378,932		23	%	3,718,457		20	%
Other residential real estate	1,324,602		6	%	241,890		1	%	84,808		—	%
Total income producing and other
residential real estate mortgage	5,886,360		29	%	4,620,822		24	%	3,803,265		20	%
Total real estate mortgage	9,580,957		47	%	8,413,020		43	%	7,899,936		41	%
Real estate construction and land:
Commercial	992,003		5	%	930,785		5	%	1,117,121		6	%
Residential	2,659,870		13	%	2,574,799		13	%	2,243,160		12	%
Total real estate construction and land (1)	3,651,873		18	%	3,505,584		18	%	3,360,281		18	%
Total real estate	13,232,830		65	%	11,918,604		61	%	11,260,217		59	%
Commercial:
Lender finance	2,373,810		12	%	2,256,828		12	%	2,095,963		11	%
Equipment finance	574,531		3	%	638,898		3	%	700,042		4	%
Premium finance	522,406		2	%	482,822		2	%	438,761		2	%
Other asset-based	191,022		1	%	172,355		1	%	194,517		1	%
Total asset-based	3,661,769		18	%	3,550,903		18	%	3,429,283		18	%
Equity fund loans	1,114,292		5	%	1,245,283		6	%	1,032,718		5	%
Venture lending	518,569		3	%	504,149		3	%	665,790		4	%
Total venture capital	1,632,861		8	%	1,749,432		9	%	1,698,508		9	%
Secured business loans	471,869		2	%	434,032		2	%	430,263		2	%
Paycheck Protection Program	271,679		1	%	609,200		3	%	1,057,422		5	%
Security monitoring	160,483		1	%	207,232		1	%	329,312		2	%
Other lending	673,561		3	%	671,445		4	%	558,117		3	%
Total other commercial	1,577,592		7	%	1,921,909		10	%	2,375,114		12	%
Total commercial	6,872,222		33	%	7,222,244		37	%	7,502,905		39	%
Consumer	405,968		2	%	365,409		2	%	320,255		2	%
Total loans and leases held for investment,
net of deferred fees	$	20,511,020	100	%	$	19,506,257	100	%	$	19,083,377	100	%

________________________________

(1) Includes land and acquisition and development loans of $144.9 million at September 30, 2021, $153.1 million at June 30, 2021 and $167.1 million at December 31, 2020.

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


	September 30, 2021				December 31, 2020
			% of				% of
Real Estate Loans by State	Balance		Total		Balance		Total
	(Dollars in thousands)
California	$	7,920,685	60	%	$	6,942,768	62	%
Florida	778,466		6	%	598,167		5	%
New York	725,657		5	%	716,329		6	%
Colorado	647,441		5	%	386,480		3	%
Washington	392,674		3	%	413,014		4	%
Oregon	356,233		3	%	269,600		2	%
Texas	332,886		2	%	263,731		2	%
Nevada	236,419		2	%	195,663		2	%
Arizona	212,762		2	%	171,533		2	%
Virginia	203,839		1	%	135,501		2	%
Total of 10 largest states	11,807,062		89	%	10,092,786		90	%
All other states	1,425,768		11	%	1,167,431		10	%
Total real estate loans held for investment, net of deferred fees	$	13,232,830	100	%	$	11,260,217	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			Nine Months Ended
Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees (1)	September 30, 2021			September 30, 2021
	(Dollars in thousands)
Balance, beginning of period	$	19,506,257		$	19,083,377
Additions:
Production	2,406,024			5,681,952
Disbursements	1,349,333			4,034,963
Total production and disbursements	3,755,357			9,716,915
Reductions:
Payoffs	(1,732,621)			(5,337,003)
Paydowns	(1,013,867)			(2,883,507)
Total payoffs and paydowns	(2,746,488)			(8,220,510)
Sales	(2,175)			(101,426)
Transfers to foreclosed assets	(415)			(1,062)
Charge-offs	(1,516)			(6,320)
Transfers to loans held for sale	—			(25,554)
Total reductions	(2,750,594)			(8,354,872)
Loans and leases acquired through acquisition	—			65,600
Net increase	1,004,763			1,427,643
Balance, end of period	$	20,511,020		$	20,511,020

Weighted average rate on production (2)	4.24		%	4.37		%

_______________________________________

(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 40 basis points to loan yields for the nine months ended September 30, 2021.

Allowance for Credit Losses on Loans and Leases Held for Investment

The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The amortized cost basis of loans and leases does not include interest receivable, which is included in "Other assets" on the condensed consolidated balance sheets. The "Provision for credit losses" on the condensed consolidated statement of earnings (loss) is a combination of the provision for loan and lease losses and the provision for unfunded loan commitments.

Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates.

For further information regarding the calculation of the allowance for credit losses on loans and leases held for investment using the CECL methodology, see Note 1. Nature of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" of our Form 10-K.

In calculating our allowance for credit losses, we continued to consider the impacts of the ongoing COVID-19 pandemic on our estimation of expected credit losses given the changes in economic forecasts and assumptions along with the uncertainty related to the severity and duration of the economic consequences of the COVID-19 pandemic. Our methodology and framework along with the 4-quarter reasonable and supportable forecast period and 2-quarter reversion period have remained consistent since the implementation of CECL on January 1, 2020. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis.

In the third quarter of 2021, we used the Moody’s Consensus Forecast dated September 9, 2021 for the calculation of our quantitative component, which is consistent with the second quarter and first quarter of 2021 when we also used the Moody's Consensus Forecast. The key macro-economic variables used improved from the prior quarter as a result of updating and advancing the forecast by a quarter which, when combined with improvements in other credit quality metrics such as a decline in classified and special mention loans, drove the decrease in the quantitative calculation of the allowance for credit losses in the third quarter. This decrease was offset partially by provisions for net loan growth. During the first quarter of 2021, we added qualitative components that were based on management’s assessment of various qualitative factors such as economic conditions and collateral dependency. These qualitative components were primarily related to certain loan portfolios including hotels, retail, and office properties that may react more slowly to the improvements in the general economic conditions. These sectors may see a slower economic recovery to pre-pandemic levels due to changes in consumer behavior such as less business travel due to more virtual meetings, more online shopping versus in person shopping, or the potential for more permanent shifts to remote or hybrid working arrangements. Additionally, small businesses in these sectors may face greater challenges once debt relief and PPP funding is exhausted. During the third quarter of 2021, these qualitative adjustments were updated resulting in a decrease in the qualitative component, primarily to reflect an improved forecast for hotel properties, compared to the first and second quarters of 2021.

The determination of the allowance for credit losses is complex and highly dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses as quantified in the allowance for credit losses considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan and lease composition, and relative credit risks known as of the balance sheet date.

Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements.

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


	September 30,			June 30,			December 31,			September 30,
Allowance for Credit Losses Data	2021			2021			2020			2020
	(Dollars in thousands)
Allowance for loan and lease losses	$	203,733		$	225,600		$	348,181		$	345,966
Reserve for unfunded loan commitments	76,071			74,571			85,571			96,571
Total allowance for credit losses	$	279,804		$	300,171		$	433,752		$	442,537

Allowance for loan and lease losses to loans and leases held for investment	0.99		%	1.16		%	1.82		%	1.82		%
Allowance for loan and lease losses to loans and leases held for investment,
excluding PPP loans	1.01		%	1.19		%	1.93		%	1.94		%
Allowance for credit losses to loans and leases held for investment	1.36		%	1.54		%	2.27		%	2.33		%
Allowance for credit losses to loans and leases held for investment,
excluding PPP loans	1.38		%	1.59		%	2.41		%	2.48		%

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									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,
Allowance for Credit Losses Roll Forward	2021			2021			2020			2021			2020
	(Dollars in thousands)
Balance, beginning of period	$	300,171		$	383,016		$	381,621		$	433,752		$	174,646
Cumulative effect of change in accounting
principle - CECL, as of January 1, 2020:
Allowance for loan and lease losses	—			—			—			—			3,617
Reserve for unfunded loan commitments	—			—			—			—			3,710
Total cumulative effect	—			—			—			—			7,327
Provision for credit losses:
(Reduction in) addition to allowance for loan and lease losses	(21,500)			(72,000)			81,000			(146,500)			272,000
Addition to (reduction in) reserve for unfunded
loan commitments	1,500			(16,000)			16,000			(9,500)			57,000
Total provision for credit losses	(20,000)			(88,000)			97,000			(156,000)			329,000
Loans and leases charged off:
Real estate mortgage	(29)			(266)			(1,551)			(663)			(6,233)
Real estate construction and land	—			(75)			—			(775)			—
Commercial	(951)			(277)			(35,666)			(3,802)			(66,337)
Consumer	(536)			(198)			(67)			(1,080)			(705)
Total loans and leases charged off	(1,516)			(816)			(37,284)			(6,320)			(73,275)
Recoveries on loans charged off:
Real estate mortgage	563			4,882			109			5,990			360
Real estate construction and land	—			—			21			—			21
Commercial	543			1,029			1,063			2,269			4,410
Consumer	43			60			7			113			48
Total recoveries on loans charged off	1,149			5,971			1,200			8,372			4,839
Net (charge-offs) recoveries	(367)			5,155			(36,084)			2,052			(68,436)
Balance, end of period	$	279,804		$	300,171		$	442,537		$	279,804		$	442,537

Annualized net charge-offs (recoveries) to
average loans and leases	0.01		%	(0.11)		%	0.75		%	(0.01)		%	0.47		%

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


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
Allowance for Credit Losses Charge-offs	2021		2021		2020		2021		2020
	(In thousands)
Real estate mortgage:
Healthcare real estate	$	—	$	—	$	—	$	—	$	—
Hotel	—		—		—		343		—
SBA program	—		211		6		236		280
Other commercial real estate	—		—		1,494		—		5,727
Total commercial real estate mortgage	—		211		1,500		579		6,007
Income producing and other residential	29		55		—		84		—
Other residential real estate	—		—		51		—		226
Total income producing and other residential
real estate mortgage	29		55		51		84		226
Total real estate mortgage	29		266		1,551		663		6,233
Real estate construction and land:
Commercial	—		75		—		775		—
Residential	—		—		—		—		—
Total real estate construction and land	—		75		—		775		—
Commercial:
Lender finance	232		—		—		232		—
Equipment finance	—		—		267		—		11,817
Premium finance	—		—		—		—		—
Other asset-based	—		—		—		—		—
Total asset-based	232		—		267		232		11,817
Equity fund loans	—		—		—		—		—
Venture lending	—		—		5		620		6,818
Total venture capital	—		—		5		620		6,818
Paycheck Protection Program	—		—		—		—		—
Security monitoring	—		—		33,796		—		44,032
Secured business loans	73		—		—		120		—
Other lending	646		277		1,598		2,830		3,670
Total other commercial	719		277		35,394		2,950		47,702
Total commercial	951		277		35,666		3,802		66,337
Consumer	536		198		67		1,080		705
Total charge-offs	$	1,516	$	816	$	37,284	$	6,320	$	73,275

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


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,
Allowance for Credit Losses Recoveries	2021		2021		2020		2021		2020
	(In thousands)
Real estate mortgage:
Healthcare real estate	$	—	$	—	$	—	$	—	$	—
Hotel	—		—		—		—		—
SBA program	513		20		31		550		153
Other commercial real estate	—		4,860		3		5,384		118
Total commercial real estate mortgage	513		4,880		34		5,934		271
Income producing and other residential	—		—		—		—		—
Other residential real estate	50		2		75		56		89
Total income producing and other
residential real estate mortgage	50		2		75		56		89
Total real estate mortgage	563		4,882		109		5,990		360
Real estate construction and land:
Commercial	—		—		—		—		—
Residential	—		—		21		—		21
Total real estate construction and land	—		—		21		—		21
Commercial:
Lender finance	—		—		—		—		—
Equipment finance	—		7		31		114		269
Premium finance	—		—		—		—		—
Other asset-based	101		98		175		360		324
Total asset-based	101		105		206		474		593
Equity fund loans	—		—		—		—		—
Venture lending	32		44		604		133		903
Total venture capital	32		44		604		133		903
Paycheck Protection Program	—		—		—		—		—
Security monitoring	—		—		—		—		—
Secured business loans	125		73		56		324		273
Other lending	285		807		197		1,338		2,641
Total other commercial	410		880		253		1,662		2,914
Total commercial	543		1,029		1,063		2,269		4,410
Consumer	43		60		7		113		48
Total recoveries	$	1,149	$	5,971	$	1,200	$	8,372	$	4,839

Deposits

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


	September 30, 2021				June 30, 2021				December 31, 2020
			% of				% of				% of
Deposit Composition	Balance		Total		Balance		Total		Balance		Total
	(Dollars in thousands)
Noninterest-bearing demand	$	12,881,806	42	%	$	11,252,286	38	%	$	9,193,827	37	%
Interest checking	7,168,472		24	%	7,394,472		25	%	5,974,910		24	%
Money market	7,463,261		24	%	7,777,199		26	%	6,532,917		26	%
Savings	627,169		2	%	614,204		2	%	562,826		2	%
Total core deposits	28,140,708		92	%	27,038,161		91	%	22,264,480		89	%
Non-core non-maturity deposits	960,438		3	%	1,122,971		4	%	1,149,467		5	%
Total non-maturity deposits	29,101,146		95	%	28,161,132		95	%	23,413,947		94	%
Time deposits $250,000 and under	882,551		3	%	913,371		3	%	994,197		4	%
Time deposits over $250,000	576,048		2	%	572,531		2	%	532,573		2	%
Total time deposits	1,458,599		5	%	1,485,902		5	%	1,526,770		6	%
Total deposits	$	30,559,745	100	%	$	29,647,034	100	%	$	24,940,717	100	%

During the third quarter of 2021, total deposits increased by $912.7 million to $30.6 billion, due primarily to an increase of $1.1 billion in core deposits. The increase in core deposits in the third quarter of 2021 was driven by continued strong deposit growth from our venture banking and community banking customers. At September 30, 2021, core deposits totaled $28.1 billion, or 92% of total deposits, including $12.9 billion of noninterest-bearing demand deposits, or 42% of total deposits.

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


	Time Deposits
	$250,000		Over
September 30, 2021	and Under		$250,000		Total
	(In thousands)
Maturities:
Due in three months or less	$	281,940	$	161,805	$	443,745
Due in over three months through six months	155,375		185,918		341,293
Due in over six months through twelve months	225,713		217,151		442,864
Total due within twelve months	663,028		564,874		1,227,902
Due in over 12 months through 24 months	97,078		8,802		105,880
Due in over 24 months	122,445		2,372		124,817
Total	$	882,551	$	576,048	$	1,458,599

Client Investment Funds

In addition to deposit products, we also offer select clients non-depository cash investment options through PWAM, our registered investment adviser subsidiary, and third-party money market sweep products. PWAM provides customized investment advisory and asset management solutions. At September 30, 2021, total off-balance sheet client investment funds were $1.4 billion, of which $1.0 billion was managed by PWAM. At December 31, 2020, total off-balance sheet client investment funds were $1.3 billion, of which $1.0 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:


	September 30,			June 30,			December 31,			September 30,
	2021			2021			2020			2020
	(Dollars in thousands)
Nonaccrual loans and leases held for investment	$	64,507		$	56,803		$	91,163		$	85,615

Foreclosed assets, net	13,364			13,227			14,027			13,747
Total nonperforming assets	$	77,871		$	70,030		$	105,190		$	99,362

Performing TDRs held for investment	$	36,750		$	40,129		$	14,254		$	13,679
Classified loans and leases held for investment	$	141,604		$	147,267		$	265,262		$	274,572
Nonaccrual loans and leases held for investment to
loans and leases held for investment	0.31		%	0.29		%	0.48		%	0.45		%
Nonperforming assets to loans and leases held for investment
and foreclosed assets, net	0.38		%	0.36		%	0.55		%	0.52		%
Allowance for credit losses to nonaccrual loans and leases
held for investment	433.8		%	528.4		%	475.8		%	516.9		%
Classified loans and leases held for investment
to loans and leases held for investment	0.69		%	0.75		%	1.39		%	1.44		%

Nonaccrual Loans and Leases Held for Investment

The following table presents our nonaccrual loans and leases held for investment and accruing loans and leases past due between 30 and 89 days by loan portfolio segment and class as of the dates indicated:


	September 30, 2021				June 30, 2021				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	$	25,615	$	676	$	32,065	$	—	$	(6,450)	$	676
Income producing and other residential	7,547		3,760		6,133		2,179		1,414		1,581
Total real estate mortgage	33,162		4,436		38,198		2,179		(5,036)		2,257
Real estate construction and land:
Commercial	—		—		284		—		(284)		—
Residential	19,918		12,809		1,934		22,714		17,984		(9,905)
Total real estate construction and land	19,918		12,809		2,218		22,714		17,700		(9,905)
Commercial:
Asset-based	1,605		—		1,973		—		(368)		—
Venture capital	2,348		1,670		2,717		—		(369)		1,670
Other commercial	6,979		340		11,337		270		(4,358)		70
Total commercial	10,932		2,010		16,027		270		(5,095)		1,740
Consumer	495		1,042		360		1,454		135		(412)
Total held for investment	$	64,507	$	20,297	$	56,803	$	26,617	$	7,704	$	(6,320)

During the third quarter of 2021, nonaccrual loan and leases held for investment increased by $7.7 million to $64.5 million at September 30, 2021 due mainly to additions of $21.6 million, offset partially by returns to accrual status of $5.9 million and charge-offs of $1.0 million and principal payments and other reductions of $7.1 million. Additionally, a residential real estate construction loan of $7.5 million on nonaccrual status as of September 30, 2021, which was also the largest nonaccrual loan as of this date, paid off on October 1, 2021. As of September 30, 2021, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $16.6 million and represented 26% of total nonaccrual loans and leases.

Foreclosed Assets

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


	September 30,		June 30,		December 31,		September 30,
Property Type	2021		2021		2020		2020
	(In thousands)
Commercial real estate	$	12,594	$	12,594	$	12,979	$	12,594
Single-family residence	415		—		—		—
Construction and land development	—		219		219		219

Total OREO, net	13,009		12,813		13,198		12,813
Other foreclosed assets	355		414		829		934
Total foreclosed assets, net	$	13,364	$	13,227	$	14,027	$	13,747

During the third quarter of 2021, foreclosed assets increased by $0.1 million to $13.4 million at September 30, 2021 due mainly to additions of $0.4 million, offset partially by sales of $0.3 million.

Performing TDRs Held for Investment

The following table presents our performing TDRs held for investment by loan portfolio segment as of the dates indicated:


	September 30, 2021			June 30, 2021			December 31, 2020
			Number			Number			Number
			of			of			of
Performing TDRs	Balance		Loans	Balance		Loans	Balance		Loans
	(Dollars in thousands)
Real estate mortgage	$	5,926	18	$	6,415	19	$	6,631	20
Real estate construction and land	1,433		1	1,439		1	1,451		1
Commercial	29,366		24	32,250		20	6,146		21
Consumer	25		1	25		1	26		1
Total performing TDRs held for investment	$	36,750	44	$	40,129	41	$	14,254	43

During the third quarter of 2021, performing TDRs held for investment decreased by $3.4 million to $36.8 million at September 30, 2021 attributable primarily to payments and other reductions of $7.0 million, offset partially by transfers from nonaccrual status to performing TDRs of $3.6 million.

Classified and Special Mention Loans and Leases Held for Investment

The following table presents the credit risk ratings of our loans and leases held for investment, net of deferred fees, as of the dates indicated:


	September 30,		June 30,		December 31,		September 30,
Loan and Lease Credit Risk Ratings	2021		2021		2020		2020
	(Dollars in thousands)
Pass	$	19,873,050	$	18,822,938	$	18,096,830	$	17,967,872
Special mention	496,366		536,052		721,285		783,756
Classified	141,604		147,267		265,262		274,572
Total loans and leases held for investment, net of deferred fees	$	20,511,020	$	19,506,257	$	19,083,377	$	19,026,200

Classified and special mention loans and leases fluctuate from period to period as a result of loan repayments and downgrades or upgrades from our ongoing active portfolio management.

During the third quarter of 2021, classified loans and leases decreased by $5.7 million to $141.6 million at September 30, 2021 due mostly to decreases of $19.6 million in asset-based loans and $10.1 million in other commercial loans, offset partially by increases of $18.0 million in residential real estate construction and land loans and $6.2 million in commercial real estate mortgage loans. Classified loans and leases peaked in the second quarter of 2020 at $293.2 million.

During the third quarter of 2021, special mention loans and leases decreased by $39.7 million to $496.4 million at September 30, 2021 due mainly to a decrease of $40.1 million in commercial real estate mortgage loans. Special mention loans and leases peaked in the first quarter of 2020 at $898.7 million, as we proactively downgraded certain loans at the onset of the COVID-19 pandemic.

The following table presents the classified and special mention credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class and the related net changes as of the dates indicated:


	September 30, 2021				June 30, 2021				Increase (Decrease)
			Special				Special				Special
	Classified		Mention		Classified		Mention		Classified		Mention
	(In thousands)
Real estate mortgage:
Commercial	$	69,059	$	202,029	$	62,827	$	242,159	$	6,232	$	(40,130)
Income producing and other residential	13,603		73,831		12,681		60,843		922		12,988
Total real estate mortgage	82,662		275,860		75,508		303,002		7,154		(27,142)
Real estate construction and land:
Commercial	—		67,649		284		67,292		(284)		357
Residential	19,918		7,324		1,934		8,234		17,984		(910)
Total real estate construction and land	19,918		74,973		2,218		75,526		17,700		(553)
Commercial:
Asset-based	4,734		87,980		24,351		102,734		(19,617)		(14,754)
Venture capital	4,840		38,281		5,708		33,910		(868)		4,371
Other commercial	28,926		17,107		39,005		18,340		(10,079)		(1,233)
Total commercial	38,500		143,368		69,064		154,984		(30,564)		(11,616)
Consumer	524		2,165		477		2,540		47		(375)
Total	$	141,604	$	496,366	$	147,267	$	536,052	$	(5,663)	$	(39,686)

Regulatory Matters

Capital

Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines that compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. At September 30, 2021, banks considered to be “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5.00%, a minimum common equity Tier 1 risk-based capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, and a minimum total risk-based capital ratio of 10.00%.

Basel III currently requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. Effective January 1, 2019, the common equity tier 1, tier 1, and total capital ratio minimums inclusive of the capital conservation buffer were 7.00%, 8.50%, and 10.50%. At September 30, 2021, the Company and Bank were in compliance with the capital conservation buffer requirement.

The Company and Bank elected the CECL 5-year regulatory transition guidance for calculating regulatory capital ratios and the September 30, 2021 ratios include this election. This regulatory guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through December 31, 2022. This cumulative amount will then be phased out of regulatory capital over the next three years from 2023 to 2025. The add-back as of September 30, 2021 ranged from 0 basis points to 11 basis points for the capital ratios below.

In the third quarter of 2021, approximately $131 million of trust preferred securities were reclassified from Tier II capital to Tier I capital due to a reassessment of the Basel III implementation rule that permitted the grandfathering of certain trust preferred securities as Tier I capital. This change increased the Tier I leverage capital ratio by approximately 38 basis points and increased the Tier I capital ratio by approximately 50 basis points in the third quarter of 2021. Prior periods were not required to be revised for this change.

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
September 30, 2021
PacWest Bancorp Consolidated
Tier 1 leverage capital ratio	8.05%	4.00%	4.00%	N/A
CET1 capital ratio	10.15%	4.50%	7.00%	N/A
Tier 1 capital ratio	10.65%	6.00%	8.50%	N/A
Total capital ratio	14.36%	8.00%	10.50%	N/A

Pacific Western Bank
Tier 1 leverage capital ratio	8.40%	4.00%	4.00%	5.00%
CET1 capital ratio	11.12%	4.50%	7.00%	6.50%
Tier 1 capital ratio	11.12%	6.00%	8.50%	8.00%
Total capital ratio	13.59%	8.00%	10.50%	10.00%


		Minimum Required
		For Capital	For Capital	For Well
		Adequacy	Conservation	Capitalized
	Actual	Purposes	Buffer	Classification
December 31, 2020
PacWest Bancorp Consolidated
Tier 1 leverage capital ratio	8.55%	4.00%	4.00%	N/A
CET1 capital ratio	10.53%	4.50%	7.00%	N/A
Tier 1 capital ratio	10.53%	6.00%	8.50%	N/A
Total capital ratio	13.76%	8.00%	10.50%	N/A

Pacific Western Bank
Tier 1 leverage capital ratio	9.53%	4.00%	4.00%	5.00%
CET1 capital ratio	11.73%	4.50%	7.00%	6.50%
Tier 1 capital ratio	11.73%	6.00%	8.50%	8.00%
Total capital ratio	12.99%	8.00%	10.50%	10.00%

Subordinated Debt

We issued or assumed through mergers subordinated debt to trusts that were established by us or entities we acquired, which, in turn, issued trust preferred securities. On April 30, 2021, the Bank completed the sale of $400 million aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due May 1, 2031. For further information, see Note 10. Borrowings and Subordinated Debt in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

The carrying value of subordinated debt totaled $862.4 million at September 30, 2021. At September 30, 2021, $131.0 million of the trust preferred securities were included in the Company's Tier I capital and $717.4 million were included in Tier II capital.

Dividends on Common Stock and Interest on Subordinated Debt

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 debt 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. Given the impact of the goodwill impairment charge on net earnings in the first quarter of 2020, we were required to receive approval from the FRB prior to declaring a dividend from March 31, 2020 through March 31, 2021, but are no longer required to obtain such approval.

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 credit 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 $3.6 billion at September 30, 2021, of which all was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $5.9 billion of certain qualifying loans. The Bank also had secured borrowing capacity with the FRBSF of $1.4 billion at September 30, 2021, all of which was available on that date. The FRBSF secured credit line was collateralized by liens on $1.8 billion of qualifying loans.

In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit for the purpose of borrowing overnight funds, subject to availability, of $112.0 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of September 30, 2021, there was no balance outstanding related to the FHLB unsecured line of credit. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2021, the Bank had borrowed nothing through the AFX.

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


	September 30,			June 30,			December 31,
Primary Liquidity - On-Balance Sheet	2021			2021			2020
	(Dollars in thousands)
Cash and due from banks	$	174,585		$	179,505		$	150,464
Interest-earning deposits in financial institutions	3,524,613			5,678,587			3,010,197
Securities available-for-sale	9,276,926			7,198,608			5,235,591
Less: pledged securities	(492,046)			(489,976)			(449,330)
Total primary liquidity	$	12,484,078		$	12,566,724		$	7,946,922

Ratio of primary liquidity to total deposits	40.9		%	42.4		%	31.9		%


Secondary Liquidity - Off-Balance Sheet	September 30,		June 30,		December 31,
Available Secured Borrowing Capacity	2021		2021		2020
	(In thousands)
Secured borrowing capacity with the FHLB	$	3,624,409	$	3,307,329	$	3,330,715
Less: secured advances outstanding	—		—		(5,000)
Available secured borrowing capacity with the FHLB	3,624,409		3,307,329		3,325,715
Available secured borrowing capacity with the FRBSF	1,376,803		1,436,648		1,409,452
Total secondary liquidity	$	5,001,212	$	4,743,977	$	4,735,167

During the three months ended September 30, 2021, the Company's primary liquidity decreased by $82.6 million to $12.5 billion at September 30, 2021 due mainly to a $2.2 billion decrease in interest-earning deposits in financial institutions, offset partially by a $2.1 billion increase in securities available-for-sale. During the third quarter of 2021, the Company's secondary liquidity increased by $257.2 million to $5.0 billion at September 30, 2021 due primarily to a $317.1 million increase in secured borrowing capacity with the FHLB, offset partially by a $59.8 million decrease in secured borrowing capacity with the FRBSF.

In addition to our primary liquidity, we generate liquidity from cash flows from our loan and securities portfolios and from our large base of core deposits, defined as noninterest-bearing demand, interest checking, savings, and non-brokered money market accounts. At September 30, 2021, core deposits totaled $28.1 billion and represented 92% 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 September 30, 2021, brokered deposits totaled $1.2 billion, consisting primarily of $960.4 million of non-maturity brokered accounts and $195.7 million of brokered time deposits. At December 31, 2020, brokered deposits totaled $1.3 billion, consisting mainly of $1.1 billion of non-maturity brokered accounts and $195.7 million of brokered time deposits.

Our liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Liquidity Buffer Coverage Ratio (the ratio of cash and unpledged securities to the estimated 30 day cash outflow in a defined stress scenario), Liquidity Stress Test Survival Horizon (the number of days that the Bank’s liquidity buffer plus available secured borrowing capacity is sufficient to offset cumulative cash outflow in a defined stress scenario), Loan to Funding Ratio (measurement of gross loans net of fees divided by deposits plus borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. At September 30, 2021, the Bank was in compliance with all established liquidity guidelines.

Holding Company Liquidity

PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and PacWest's ability to raise capital, issue subordinated debt, and secure outside borrowings. PacWest's ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common stock, and other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company through intercompany loans, advances, or cash dividends. PacWest's 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 debt. Approval by the FRB is required prior to our declaring and paying a cash dividend during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. PacWest may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, now or in the future, from paying dividends. Due to the impact of the goodwill impairment charge on net earnings in the first quarter of 2020, we were required to receive approval from the FRB, as described above, prior to declaring a dividend, for the period of March 31, 2020 to March 31, 2021, but are no longer required to obtain such approval.

Dividends paid by California state-chartered banks are regulated by the FDIC for non-member banks and the DFPI under their general supervisory authority. The Bank may declare a dividend without the approval of the DFPI and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for the three previous fiscal years less any dividends paid during such period. The Bank had a net loss of $256.7 million during the three fiscal years of 2020, 2019, and 2018, compared to dividends of $1.3 billion paid by the Bank during that same period. During the three and nine months ended September 30, 2021, PacWest received $33.0 million and $99.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $1.6 billion at September 30, 2021, for the foreseeable future any dividends from the Bank to PacWest will continue to require DFPI and FDIC approval consistent with what has been required since 2008 when Bank first had an accumulated deficit triggered by goodwill impairment write-downs during the financial crisis of 2007-2008.

At September 30, 2021, PacWest had $144.9 million in cash and cash equivalents, of which substantially all was 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.

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
September 30, 2021	One Year		Three Years		Five Years		Five Years		Total
	(In thousands)
Time deposits	$	1,227,902	$	170,978	$	59,553	$	166	$	1,458,599

Long-term debt obligations (1)	—		—		—		941,635		941,635
Contractual interest (2)	14,257		28,096		22,388		6		64,747
Operating lease obligations	35,339		59,671		33,021		26,265		154,296
Other contractual obligations	78,700		140,952		25,838		22,409		267,899
Total	$	1,356,198	$	399,697	$	140,800	$	990,481	$	2,887,176

_______________________________________

(1) Excludes issuance costs and purchase accounting fair value adjustments.

(2) Excludes interest on variable rate subordinated debt instruments.

Long-term debt obligations include subordinated debt. Debt obligations are also discussed in Note 10. Borrowings and Subordinated Debt, 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 Form 10-K. The other contractual obligations relate to our minimum liability associated with our data and item processing contract with a third-party provider, commitments to contribute capital to investments in low income housing project partnerships and private equity funds, and commitments under deferred compensation arrangements.

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

Off-Balance Sheet Arrangements

Our obligations also include off-balance sheet arrangements consisting of loan commitments, of which only a portion is expected to be funded, and standby letters of credit. At September 30, 2021, our loan commitments and standby letters of credit were $8.5 billion and $344.4 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 12. 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 Form 10-K, 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 Exposure

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 to hedge exposures to debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar, and the derivatives that hedge those exposures. As of September 30, 2021, the U.S. Dollar notional amounts of subordinated debt payable denominated in foreign currencies was $29.8 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures was $28.5 million. We recognized a foreign currency translation net gain of $129,000 for the nine months ended September 30, 2021 and a foreign currency translation net loss of $368,000 for the nine months ended September 30, 2020.

Asset/Liability Management and Interest Rate Sensitivity

Interest Rate Risk

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

We evaluated the results of our NII simulation model and MVE model prepared as of September 30, 2021, the results of which are presented below. Our NII simulation and MVE model indicate that our balance sheet is asset-sensitive. An asset-sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated NII and MVE, while a liability-sensitive profile would suggest that these amounts would decrease.

Net Interest Income Simulation

We used a NII simulation model to measure the estimated changes in NII that would result over the next 12 months from immediate and sustained changes in interest rates as of September 30, 2021. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. We have assumed no growth or changes in the product mix of either our total interest-sensitive assets or liabilities over the next 12 months, therefore the results reflect an interest rate shock to a static balance sheet.

This analysis calculates the difference between NII forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at September 30, 2021. In order to arrive at the base case, we extend our balance sheet at September 30, 2021 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products’ pricing as of September 30, 2021. 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 that are assumed to reprice in accordance with their contractual terms. Some loans and investment securities include the opportunity of prepayment (embedded options) and the simulation model uses prepayment assumptions to estimate these accelerated cash flows and reinvest these proceeds at current simulated yields. Our interest-bearing deposits reprice at our discretion and are assumed to reprice at a rate less than the change in market rates. The 12-month NII simulation model as of September 30, 2021 assumes interest-bearing deposits reprice at 28% 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
September 30, 2021	(Tax Equivalent)		From Base	(Tax Equivalent)	From Base
	(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points	$	1,306.9	20.4%	3.96%	0.67%
Up 200 basis points	$	1,224.0	12.8%	3.71%	0.42%
Up 100 basis points	$	1,145.1	5.5%	3.47%	0.18%
BASE CASE	$	1,085.4	—	3.29%
Down 25 basis points	$	1,082.9	(0.2)%	3.28%	(0.01)%
Down 50 basis points	$	1,070.3	(1.4)%	3.24%	(0.05)%
Down 100 basis points	$	1,059.1	(2.4)%	3.21%	(0.08)%

During the third quarter of 2021, total base case year 1 tax equivalent NII increased by $49.3 million to $1.1 billion at September 30, 2021, and the base case tax equivalent NIM increased to 3.29% from 3.26%. The increase in year 1 NII and tax equivalent NIM compared to June 30, 2021 NII and NIM was attributable to growth in the balance of and shift in the mix of interest-earning assets resulting from the increases in loans and leases and investment securities and decrease in interest-earning deposits in financial institutions.

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 Severe” scenario, when short-term rates increase faster than long-term rates. In the “Bear Flattener Severe” scenario, Year 1 tax equivalent NII increases by 3.6%. 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 September 30, 2021, we had $20.6 billion of total loans that included $10.8 billion with variable interest rate terms (excluding hybrid loans discussed below). Of the variable interest rate loans, $9.1 billion, or 85%, contained interest rate floor provisions, which included $8.9 billion of loans with "in-the-money" floors, meaning the loan coupon will not adjust down if there are future decreases to the index interest rate. The following table summarizes the estimated balance of loans with "in-the-money" floors for the indicated increases in interest rates:


September 30, 2021
						Total Amount of
						Loans With
Basis Points of						"In-the-Money"
Rate Increases						Loan Floors
(Dollars in millions)
50 bps						$5,711
100 bps						$3,500
150 bps						$2,390
200 bps						$937
250 bps						$20

At September 30, 2021, we also had $2.9 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 $139.6 million, $483.0 million, and $824.7 million 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 debt, both of which are indexed to LIBOR. In the third quarter of 2021 we began using SOFR for some of our newly originated loans as we began to phase out LIBOR. We have included fallback language in loan documents going back to the third quarter of 2020 and continue to complete other aspects of our LIBOR transition plan. For further information, see Item 1A. "Risk Factors" of our Form 10-K.

Market Value of Equity

We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities, and off-balance sheet items, defined as the market value of equity, using our MVE model. This simulation model assesses the changes in the market value of our interest-sensitive financial instruments that would occur in response to an instantaneous and sustained increase in market interest rates of 100, 200, and 300 basis points and sustained decrease in market interest rates of 50 and 100 basis points. This analysis assigns significant value to our noninterest-bearing deposit balances. The projections include various assumptions regarding cash flows and interest rates and are by their nature forward-looking and inherently uncertain.

The MVE model is an interest rate risk management tool and the results are not necessarily an indication of our actual future results. Actual results may vary significantly from the results suggested by the market value of equity table. Loan prepayments and deposit attrition, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions. The base case is determined by applying various current market discount rates to the estimated cash flows from the different types of assets, liabilities, and off-balance sheet items existing at September 30, 2021.

The following table shows the projected change in the market value of equity for the rate scenarios presented as of the date indicated:


									Ratio of
	Projected		Dollar		Percentage		Percentage		Projected
	Market Value		Change		Change		of Total		Market Value
September 30, 2021	of Equity		From Base		From Base		Assets		to Book Value
	(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points	$	6,905.7	$	489.2	7.6	%	19.2	%	176.2	%
Up 200 basis points	$	6,793.8	$	377.4	5.9	%	18.9	%	173.4	%
Up 100 basis points	$	6,644.6	$	228.2	3.6	%	18.5	%	169.6	%
BASE CASE	$	6,416.5	$	—	—	%	17.9	%	163.8	%
Down 50 basis points	$	6,276.0	$	(140.5)	(2.2)	%	17.5	%	160.2	%
Down 100 basis points	$	6,151.8	$	(264.7)	(4.1)	%	17.1	%	157.0	%

During the third quarter of 2021, total base case projected market value of equity increased by $371.8 million to $6.4 billion. This increase in base case projected MVE was due mostly to: (1) a $267.7 million decrease in the mark-to-market adjustment for total deposits, borrowings, and subordinated debt (due primarily to the increase in FHLB rates used as discount rates in deposit valuations); (2) a $71.8 million increase in the book value of stockholders' equity due mainly to $140.0 million of net earnings, offset partially by a $46.7 million decrease in accumulated other comprehensive income and $30.0 million of cash dividends paid; and (3) a $33.1 million increase in the mark-to-market adjustment for loans and leases.

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 12. 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, 2020. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this quarterly report on Form 10-Q.

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

The following table presents stock purchases made during the third quarter of 2021:


				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)
July 1 - July 31, 2021	—	$	—	—	$	—
August 1 - August 31, 2021	2,742	$	42.55	—	$	—
September 1 - September 30, 2021	—	$	—	—	$	—
Total	2,742	$	42.55	—

__________________________

(1) Shares repurchased pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of Company stock awards.

(2) On February 12, 2020, PacWest's Board authorized a new Stock Repurchase Program to purchase shares of its common stock for an aggregate purchase price not to exceed $200 million, effective February 29, 2020. No shares were repurchased under the new Stock Repurchase Program prior to expiration on February 28, 2021.

ITEM 6. INDEX TO EXHIBITS


Exhibit Number			Description
2.1			Purchase and Assumption Agreement, dated March 31, 2021, between Pacific Western Bank and MUFG Union Bank, N.A. (Exhibit 2.1 to Form 8-K filed on April 1, 2021 and incorporated herein by this reference).*
3.1			Certificate of Incorporation, as amended, of PacWest Bancorp, a Delaware corporation, dated April 22, 2008 (Exhibit 3.1 to Form 8-K filed on May 14, 2008 and incorporated herein by this reference).
3.2			Certificate of Amendment of Certificate of Incorporation of PacWest Bancorp, a Delaware Corporation, dated May 14, 2010 (Exhibit 3.1 to Form 8-K filed on May 14, 2010 and incorporated herein by this reference).
3.3			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 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).
10.2			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).
10.3			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).
10.4			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).
10.5			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).
10.6			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).
10.7			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).
10.8			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).
10.9			Amended and Restated PacWest Bancorp 2017 Stock Incentive Plan (Appendix A to the Company's Definitive Proxy Statement filed on March 26, 2021 and incorporated herein by this reference).
10.10			Form of Stock Award Agreement and Grant Notice pursuant to the Company's Amended and Restated 2017 Stock Incentive Plan (Exhibit 10.10 to Form 10-Q filed on August 6, 2021 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 formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, (ii) the Condensed Consolidated Statements of Earnings (Loss) for the three months ended September 30, 2021, June 30, 2021 and September 30, 2020 and nine months ended September 30, 2021 and 2020, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2021, June 30, 2021 and September 30, 2020 and nine months ended September 30, 2021 and 2020, (iv) the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2021 and 2020, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, 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			Cover page of PacWest Bancorp’s Quarterly Report on Form 10-Q formatted as Inline XBRL and contained in Exhibit 101.

* Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.

Signatures

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


		PACWEST BANCORP

Date:	November 8, 2021	/s/ Bart R. Olson
		Bart R. Olson
		Chief Financial Officer and Principal Financial Officer