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

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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


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

For the quarterly period ended June 30, 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 July 30, 2021, there were 117,213,554 shares of the registrant's common stock outstanding, excluding 2,334,433 shares of unvested restricted stock.

PACWEST BANCORP

JUNE 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	53
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	86
Item 4.	Controls and Procedures	90

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	90
Item 1A.	Risk Factors	90
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	90
Item 6.	Index to Exhibits	91
Signatures		93

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


	June 30,		December 31,
	2021		2020
	(Unaudited)
	(Dollars in thousands, except par value amounts)
ASSETS:
Cash and due from banks	$	179,505	$	150,464
Interest-earning deposits in financial institutions	5,678,587		3,010,197
Total cash, cash equivalents, and restricted cash	5,858,092		3,160,661
Securities available-for-sale, at fair value	7,198,608		5,235,591
Federal Home Loan Bank stock, at cost	17,250		17,250
Total investment securities	7,215,858		5,252,841
Loans held for sale	—		—
Gross loans and leases held for investment	19,580,731		19,153,357
Deferred fees, net	(74,474)		(69,980)
Allowance for loan and lease losses	(225,600)		(348,181)
Total loans and leases held for investment, net	19,280,657		18,735,196
Equipment leased to others under operating leases	313,574		333,846
Premises and equipment, net	39,541		39,234
Foreclosed assets, net	13,227		14,027
Goodwill	1,204,118		1,078,670
Core deposit and customer relationship intangibles, net	18,423		23,641
Other assets	924,497		860,326
Total assets	$	34,867,987	$	29,498,442

LIABILITIES:
Noninterest-bearing deposits	$	11,252,286	$	9,193,827
Interest-bearing deposits	18,394,748		15,746,890
Total deposits	29,647,034		24,940,717
Borrowings	6,625		5,000
Subordinated debt	861,788		465,812
Accrued interest payable and other liabilities	505,859		491,962
Total liabilities	31,021,306		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 June 30, 2021 and
December 31, 2020; 122,066,549 and 120,736,834 shares issued, respectively, includes
2,341,548 and 1,608,126 shares of unvested restricted stock, respectively)	1,221		1,207
Additional paid-in capital	3,056,522		3,100,633
Retained earnings	740,309		409,391
Treasury stock, at cost (2,511,447 and 2,321,981 shares at June 30, 2021 and
December 31, 2020)	(96,887)		(88,803)
Accumulated other comprehensive income, net	145,516		172,523
Total stockholders' equity	3,846,681		3,594,951
Total liabilities and stockholders' equity	$	34,867,987	$	29,498,442

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)


	Three Months Ended						Six Months Ended
	June 30,		March 31,		June 30,		June 30,
	2021		2021		2020		2021		2020
	(Unaudited)
	(Dollars in thousands, except per share amounts)
Interest income:
Loans and leases	$	244,529	$	241,544	$	247,851	$	486,073	$	510,129
Investment securities	33,954		30,265		26,038		64,219		53,484
Deposits in financial institutions	2,022		1,528		186		3,550		1,794
Total interest income	280,505		273,337		274,075		553,842		565,407
Interest expense:
Deposits	7,269		7,500		13,075		14,769		41,322
Borrowings	265		193		1,319		458		8,097
Subordinated debt	6,663		4,375		5,402		11,038		11,962
Total interest expense	14,197		12,068		19,796		26,265		61,381
Net interest income	266,308		261,269		254,279		527,577		504,026
Provision for credit losses	(88,000)		(48,000)		120,000		(136,000)		232,000
Net interest income after provision for credit losses	354,308		309,269		134,279		663,577		272,026
Noninterest income:
Leased equipment income	10,847		11,354		12,037		22,201		24,288
Other commissions and fees	10,704		9,158		10,111		19,862		19,832
Service charges on deposit accounts	3,452		2,934		2,004		6,386		4,662
Gain on sale of loans and leases	1,422		139		346		1,561		433
Gain on sale of securities	—		101		7,715		101		7,897
Other income	13,946		21,143		6,645		35,089		10,846
Total noninterest income	40,371		44,829		38,858		85,200		67,958
Noninterest expense:
Compensation	90,807		79,882		61,910		170,689		123,192
Occupancy	14,784		14,054		14,494		28,838		28,701
Leased equipment depreciation	8,614		8,969		7,102		17,583		14,307
Data processing	7,758		6,957		7,102		14,715		13,556
Other professional services	5,256		5,126		4,146		10,382		8,404
Insurance and assessments	3,745		4,903		9,373		8,648		13,622
Customer related expense	4,973		4,818		4,408		9,791		8,340
Loan expense	4,031		3,193		3,379		7,224		6,029
Intangible asset amortization	2,889		3,079		3,882		5,968		7,830
Acquisition, integration and reorganization costs	200		3,425		—		3,625		—
Foreclosed assets (income) expense, net	(119)		1		(146)		(118)		(80)
Goodwill impairment	—		—		—		—		1,470,000
Other expense	8,812		15,729		11,315		24,541		21,034
Total noninterest expense	151,750		150,136		126,965		301,886		1,714,935
Earnings (loss) before income taxes	242,929		203,962		46,172		446,891		(1,374,951)
Income tax expense	62,417		53,556		12,968		115,973		24,956
Net earnings (loss)	$	180,512	$	150,406	$	33,204	$	330,918	$	(1,399,907)

Earnings (loss) per share:
Basic	$	1.52	$	1.27	$	0.28	$	2.78	$	(11.98)
Diluted	$	1.52	$	1.27	$	0.28	$	2.78	$	(11.98)

See Notes to Condensed Consolidated Financial Statements.

` PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three Months Ended						Six Months Ended
	June 30,		March 31,		June 30,		June 30,
	2021		2021		2020		2021		2020
	(Unaudited)
	(In thousands)
Net earnings (loss)	$	180,512	$	150,406	$	33,204	$	330,918	$	(1,399,907)
Other comprehensive income (loss), net of tax:
Unrealized net holding gains (losses) on securities
available-for-sale arising during the period	54,076		(91,523)		82,780		(37,447)		99,963
Income tax (expense) benefit related to net unrealized
holding gains (losses) arising during the period	(14,941)		25,454		(23,095)		10,513		(27,889)
Unrealized net holding gains (losses) on securities
available-for-sale, net of tax	39,135		(66,069)		59,685		(26,934)		72,074
Reclassification adjustment for net gains
included in net earnings (1)	—		(101)		(7,715)		(101)		(7,897)
Income tax expense related to reclassification
adjustment	—		28		2,152		28		2,203
Reclassification adjustment for net gains
included in net earnings, net of tax	—		(73)		(5,563)		(73)		(5,694)
Other comprehensive income (loss), net of tax	39,135		(66,142)		54,122		(27,007)		66,380
Comprehensive income (loss)	$	219,647	$	84,264	$	87,326	$	303,911	$	(1,333,527)

___________________________________

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

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


	Six Months Ended June 30, 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

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


	Six Months Ended June 30, 2020
	Common Stock									Accumulated
				Additional						Other
		Par		Paid-in		Retained		Treasury		Comprehensive
	Shares	Value		Capital		Earnings		Stock		Income		Total
	(Unaudited)
	(Dollars in thousands)
Balance, December 31, 2019	119,781,605	$	1,219	$	3,306,006	$	1,652,248	$	(83,434)	$	78,658	$	4,954,697
Cumulative effect of change in
accounting principle (1)	—	—		—		(5,283)		—		—		(5,283)
Net loss	—	—		—		(1,433,111)		—		—		(1,433,111)
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax	—	—		—		—		—		12,258		12,258
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	194,916	2		6,492		—		—		—		6,494
Restricted stock surrendered	(106,021)	—		—		—		(3,460)		—		(3,460)
Common stock repurchased under
Stock Repurchase Program	(1,953,711)	(20)		(69,980)		—		—		—		(70,000)
Cash dividends paid:
Common stock, $0.60/share	—	—		(71,206)		—		—		—		(71,206)
Balance, March 31, 2020	117,916,789	$	1,201	$	3,171,312	$	213,854	$	(86,894)	$	90,916	$	3,390,389
Net earnings	—	—		—		33,204		—		—		33,204
Other comprehensive income - net
unrealized gain on securities
available-for-sale, net of tax	—	—		—		—		—		54,122		54,122
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	550,738	6		6,283		—		—		—		6,289
Restricted stock surrendered	(92,924)	—		—		—		(1,601)		—		(1,601)


Cash dividends paid:
Common stock, $0.25/share	—	—		(29,505)		—		—		—		(29,505)
Balance, June 30, 2020	118,374,603	$	1,207	$	3,148,090	$	247,058	$	(88,495)	$	145,038	$	3,452,898

________________________

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

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,
	2021		2020
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net earnings (loss)	$	330,918	$	(1,399,907)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Goodwill impairment	—		1,470,000
Depreciation and amortization	25,564		22,124
Amortization of net premiums on securities available-for-sale	16,561		5,591
Amortization of intangible assets	5,968		7,830
Amortization of operating lease ROU assets	15,215		14,662
Provision for credit losses	(136,000)		232,000
Gain on sale of foreclosed assets	(214)		(112)
Provision for losses on foreclosed assets	14		110
Gain on sale of loans and leases	(1,561)		(433)
(Gain) loss on sale of premises and equipment	(58)		187
Gain on sale of securities	(101)		(7,897)
Gain on BOLI death benefit	(51)		—
Unrealized (gain) loss on derivatives and foreign currencies, net	(995)		564
Earned stock compensation	15,406		12,783

Decrease in other assets	22,808		8,393
Decrease in accrued interest payable and other liabilities	(62,869)		(91,873)
Net cash provided by operating activities	230,605		274,022

Cash flows from investing activities:
Cash paid for acquisition, net	(123,090)		—
Net increase in loans and leases	(477,874)		(887,247)
Proceeds from sales of loans and leases	126,366		3,522
Proceeds from maturities and paydowns of securities available-for-sale	435,761		170,245
Proceeds from sales of securities available-for-sale	44,652		144,997
Purchases of securities available-for-sale	(2,497,439)		(274,824)
Net purchases of Federal Home Loan Bank stock	—		23,674
Proceeds from sales of foreclosed assets	1,647		769
Purchases of premises and equipment, net	(4,547)		(9,772)
Proceeds from sales of premises and equipment	95		2
Proceeds from BOLI death benefit	1,188		761
Net decrease in equipment leased to others under operating leases	12,953		15,147
Net cash used in investing activities	(2,480,288)		(812,726)

Cash flows from financing activities:
Net increase in noninterest-bearing deposits	2,021,120		1,387,698
Net increase in interest-bearing deposits	2,647,858		2,309,298
Net decrease in borrowings	(48,585)		(1,699,008)
Proceeds from subordinated notes offering	394,308		—
Common stock repurchased and restricted stock surrendered	(8,084)		(75,061)
Cash dividends paid	(59,503)		(100,711)
Net cash provided by financing activities	4,947,114		1,822,216

Net increase in cash, cash equivalents, and restricted cash	2,697,431		1,283,512
Cash, cash equivalents, and restricted cash, beginning of period	3,160,661		637,624
Cash, cash equivalents, and restricted cash, end of period	$	5,858,092	$	1,921,136

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,
	2021		2020
	(Unaudited)
	(In thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest	$	24,683	$	68,390
Cash paid for income taxes	74,147		3,850

Loans transferred to foreclosed assets	647		1,776
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 70 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.

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

Significant Accounting Policies

Our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 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

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

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 June 30, 2021 had $662.1 million 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.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Homeowners Association Services Division Acquisition Announcement

On April 1, 2021, PacWest announced that the Bank entered into a definitive agreement to acquire MUFG Union Bank, N.A.’s (“Union Bank”) Homeowners Association (“HOA”) Services Division. The Bank will acquire certain assets and assume certain liabilities related to the HOA Services Division for a premium of 5.9% on deposits plus the net book values of certain assumed assets and liabilities for aggregate cash consideration of approximately $250 million. The final amount of consideration to be paid will be based on balances at closing, which is expected to occur in the fourth quarter of 2021 subject to customary closing conditions.

The HOA Services Division provides a full range of banking services to community HOA management companies and their homeowners associations. This acquisition will significantly expand 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 will diversify the Bank’s existing core deposits and provide an attractive funding source in a rising interest rate environment.

Union Bank’s HOA Services Division is a long-time provider of specialized HOA banking services to a national base of clients with approximately $4 billion in deposits. The existing management team and employees will transition with the HOA Services Division to the Bank in connection with the close of the acquisition.

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 six months ended June 30, 2021. The average reserves required to be held at the FRBSF for the six months ended June 30, 2020 was $83.1 million. As of June 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:


	June 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)
Municipal securities	$	1,735,937	$	83,607	$	(2,045)	$	1,817,499	$	1,438,004	$	93,631	$	(18)	$	1,531,617
Agency commercial MBS	1,203,537		56,261		(2,170)		1,257,628		1,207,676		74,238		(37)		1,281,877
Agency residential CMOs	1,108,587		36,736		(2,925)		1,142,398		1,172,166		47,994		(280)		1,219,880
U.S. Treasury securities	873,480		4,266		(593)		877,153		4,989		313		—		5,302
Agency residential MBS	544,762		11,208		(3,559)		552,411		329,488		12,483		(897)		341,074
Corporate debt securities	496,749		12,457		(498)		508,708		308,803		3,490		(404)		311,889
Collateralized loan obligations	382,935		260		(1,152)		382,043		136,777		23		(924)		135,876
Private label commercial MBS	375,184		3,126		(75)		378,235		81,878		1,089		(10)		82,957
Asset-backed securities	148,965		961		(343)		149,583		166,861		445		(760)		166,546
Private label residential CMOs	93,011		4,141		(230)		96,922		110,891		6,076		(21)		116,946
SBA securities	34,388		1,659		(19)		36,028		39,437		2,217		(27)		41,627


Total	$	6,997,535	$	214,682	$	(13,609)	$	7,198,608	$	4,996,970	$	241,999	$	(3,378)	$	5,235,591

As of June 30, 2021, securities available-for-sale with a fair value of $490.0 million were pledged as collateral for public deposits and other purposes as required by various statutes and agreements.

Realized Gains and Losses on Securities Available-for-Sale

The following table presents the amortized cost of securities sold with related gross realized gains, gross realized losses, and net realized gains for the years indicated:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
Sales of Securities Available-for-Sale	2021		2020		2021		2020
	(In thousands)
Amortized cost of securities sold	$	—	$	122,334	$	44,551	$	137,100

Gross realized gains	$	—	$	7,747	$	101	$	7,929
Gross realized losses	—		(32)		—		(32)
Net realized gains	$	—	$	7,715	$	101	$	7,897

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Unrealized Losses on Securities Available-for-Sale

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


	June 30, 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)
Municipal securities	$	203,261	$	(2,045)	$	—	$	—	$	203,261	$	(2,045)
Agency commercial MBS	126,899		(2,170)		—		—		126,899		(2,170)
Agency residential CMOs	125,880		(2,925)		—		—		125,880		(2,925)
U.S. Treasury securities	374,149		(593)		—		—		374,149		(593)
Agency residential MBS	303,546		(3,551)		687		(8)		304,233		(3,559)
Corporate debt securities	57,401		(498)		—		—		57,401		(498)
Collateralized loan obligations	201,170		(995)		43,854		(157)		245,024		(1,152)
Private label commercial MBS	13,476		(67)		2,196		(8)		15,672		(75)
Asset-backed securities	—		—		16,381		(343)		16,381		(343)
Private label residential CMOs	24,957		(216)		624		(14)		25,581		(230)
SBA securities	—		—		1,914		(19)		1,914		(19)


Total	$	1,430,739	$	(13,060)	$	65,656	$	(549)	$	1,496,395	$	(13,609)


	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)
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)
Agency residential MBS	90,722		(897)		—		—		90,722		(897)
Asset-backed securities	14,636		(53)		61,031		(707)		75,667		(760)
Corporate debt securities	87,596		(404)		—		—		87,596		(404)
Collateralized loan obligations	96,442		(729)		28,972		(195)		125,414		(924)
Private label commercial MBS	3,058		(10)		—		—		3,058		(10)
Private label residential CMOs	788		(19)		74		(2)		862		(21)
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 June 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:


	June 30, 2021
	Amortized		Fair
Maturities	Cost		Value
	(In thousands)
Due in one year or less	$	27,259	$	27,267
Due after one year through five years	579,444		608,063
Due after five years through ten years	2,657,145		2,713,777
Due after ten years	3,733,687		3,849,501
Total securities available-for-sale	$	6,997,535	$	7,198,608

CMBS, CMOs, and MBS have contractual maturity dates, but require periodic payments based upon scheduled amortization terms. Actual principal collections on these securities usually occur more rapidly than the scheduled amortization terms because of prepayments made by obligors of the underlying loan collateral.

Interest Income on Investment Securities

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Taxable interest	$	25,206	$	19,836	$	47,176	$	41,622
Non-taxable interest	8,493		5,612		16,571		10,841
Dividend income	255		590		472		1,021
Total interest income on investment securities	$	33,954	$	26,038	$	64,219	$	53,484

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:


	June 30,		December 31,
	2021		2020
	(In thousands)
Real estate mortgage	$	8,420,546	$	7,905,193
Real estate construction and land	3,544,890		3,393,145
Commercial	7,249,917		7,534,801
Consumer	365,378		320,218
Total gross loans and leases held for investment	19,580,731		19,153,357
Deferred fees, net	(74,474)		(69,980)
Total loans and leases held for investment, net of deferred fees	19,506,257		19,083,377
Allowance for loan and lease losses	(225,600)		(348,181)
Total loans and leases held for investment, net (1)	$	19,280,657	$	18,735,196

____________________

(1) Excludes accrued interest receivable of $73.5 million and $79.7 million at June 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:


	June 30, 2021
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	445	$	2,955	$	3,400	$	3,788,798	$	3,792,198
Income producing and other residential	2,179		4,957		7,136		4,613,686		4,620,822
Total real estate mortgage	2,624		7,912		10,536		8,402,484		8,413,020
Real estate construction and land:
Commercial	—		—		—		930,785		930,785
Residential	22,714		1,934		24,648		2,550,151		2,574,799
Total real estate construction and land	22,714		1,934		24,648		3,480,936		3,505,584
Commercial:
Asset-based	—		1,484		1,484		3,549,419		3,550,903
Venture capital	—		335		335		1,749,097		1,749,432
Other commercial	320		1,740		2,060		1,919,849		1,921,909
Total commercial	320		3,559		3,879		7,218,365		7,222,244
Consumer	1,454		287		1,741		363,668		365,409
Total	$	27,112	$	13,692	$	40,804	$	19,465,453	$	19,506,257

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:


	June 30, 2021						December 31, 2020
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
	(In thousands)
Real estate mortgage:
Commercial	$	32,065	$	3,760,133	$	3,792,198	$	43,731	$	4,052,940	$	4,096,671
Income producing and other residential	6,133		4,614,689		4,620,822		1,826		3,801,439		3,803,265
Total real estate mortgage	38,198		8,374,822		8,413,020		45,557		7,854,379		7,899,936
Real estate construction and land:
Commercial	284		930,501		930,785		315		1,116,806		1,117,121
Residential	1,934		2,572,865		2,574,799		—		2,243,160		2,243,160
Total real estate construction and land	2,218		3,503,366		3,505,584		315		3,359,966		3,360,281
Commercial:
Asset-based	1,973		3,548,930		3,550,903		2,679		3,426,604		3,429,283
Venture capital	2,717		1,746,715		1,749,432		1,980		1,696,528		1,698,508
Other commercial	11,337		1,910,572		1,921,909		40,243		2,334,871		2,375,114
Total commercial	16,027		7,206,217		7,222,244		44,902		7,458,003		7,502,905
Consumer	360		365,049		365,409		389		319,866		320,255
Total	$	56,803	$	19,449,454	$	19,506,257	$	91,163	$	18,992,214	$	19,083,377

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

At June 30, 2021, nonaccrual loans and leases included $13.7 million of loans and leases 90 or more days past due, $0.5 million of loans and leases 30 to 89 days past due, and $42.6 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 June 30, 2021, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $12.9 million and represented 23% of total nonaccrual loans and leases.

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


	June 30, 2021
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	62,827	$	242,159	$	3,487,212	$	3,792,198
Income producing and other residential	12,681		60,843		4,547,298		4,620,822
Total real estate mortgage	75,508		303,002		8,034,510		8,413,020
Real estate construction and land:
Commercial	284		67,292		863,209		930,785
Residential	1,934		8,234		2,564,631		2,574,799
Total real estate construction and land	2,218		75,526		3,427,840		3,505,584
Commercial:
Asset-based	24,351		102,734		3,423,818		3,550,903
Venture capital	5,708		33,910		1,709,814		1,749,432
Other commercial	39,005		18,340		1,864,564		1,921,909
Total commercial	69,064		154,984		6,998,196		7,222,244
Consumer	477		2,540		362,392		365,409
Total	$	147,267	$	536,052	$	18,822,938	$	19,506,257


	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		Six Months				Three Months		Six Months
			Ended		Ended				Ended		Ended
	June 30,		June 30,		June 30,		June 30,		June 30,		June 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	$	74	$	—	$	—	$	304	$	—	$	—
Income producing and other residential	2,806		—		—		1,445		—		—
Real estate construction and land:

Residential	403		—		—		—		—		—
Commercial:
Asset based	1,484		—		—		2,458		—		—
Venture capital	2,717		—		—		8,270		—		—
Other commercial	1,472		—		—		45,569		—		—
Consumer	360		—		—		520		—		—
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	31,991	$	140	$	430	$	61,467	$	62	$	130
Income producing and other residential	3,327		—		—		762		—		—
Real estate construction and land:
Commercial	284		—		—		337		—		—
Residential	1,531		—		—		—		—		—
Commercial:
Asset based	489		—		—		16,555		—		—

Other commercial	9,865		1,814		3,644		28,426		1,196		1,220

Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage	$	38,198	$	140	$	430	$	63,978	$	62	$	130
Real estate construction and land	2,218		—		—		337		—		—
Commercial	16,027		1,814		3,644		101,278		1,196		1,220
Consumer	360		—		—		520		—		—
Total	$	56,803	$	1,954	$	4,074	$	166,113	$	1,258	$	1,350

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following tables present our loans held for investment by loan portfolio segment and class, by credit quality indicator (internal risk ratings), and by year of origination (vintage year) as of the dates indicated:


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
June 30, 2021	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Mortgage:
Commercial
Internal risk rating:
1-2 High pass	$	—	$	3,604	$	53,211	$	5,853	$	9,062	$	38,846	$	3	$	—	$	110,579
3-4 Pass	171,826		541,881		352,574		532,213		622,252		1,079,673		61,007		15,207		3,376,633
5 Special mention	—		2,596		80,292		94,499		8,158		56,614		—		—		242,159
6-8 Classified	—		500		3,967		7,665		12,648		38,047		—		—		62,827
Total	$	171,826	$	548,581	$	490,044	$	640,230	$	652,120	$	1,213,180	$	61,010	$	15,207	$	3,792,198
Current YTD period:
Gross charge-offs	$	—	$	—	$	190	$	168	$	53	$	168	$	—	$	—	$	579
Gross recoveries	—		—		—		—		—		(5,421)		—		—		(5,421)
Net	$	—	$	—	$	190	$	168	$	53	$	(5,253)	$	—	$	—	$	(4,842)

Real Estate Mortgage:
Income Producing and
Other Residential
Internal risk rating:
1-2 High pass	$	7,474	$	40,341	$	65,881	$	30,001	$	12,927	$	27,593	$	—	$	—	$	184,217
3-4 Pass	632,881		634,036		794,568		1,037,846		644,016		343,522		276,013		199		4,363,081
5 Special mention	358		12,595		4,207		42,581		947		—		155		—		60,843
6-8 Classified	—		2,727		—		3,059		117		6,018		—		760		12,681
Total	$	640,713	$	689,699	$	864,656	$	1,113,487	$	658,007	$	377,133	$	276,168	$	959	$	4,620,822
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	55	$	—	$	—	$	55
Gross recoveries	—		—		—		—		—		(5)		(1)		—		(6)
Net	$	—	$	—	$	—	$	—	$	—	$	50	$	(1)	$	—	$	49

Real Estate Construction
and Land: Commercial
Internal risk rating:
1-2 High pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
3-4 Pass	12,713		88,977		359,970		384,692		730		16,127		—		—		863,209
5 Special mention	—		—		—		—		67,292		—		—		—		67,292
6-8 Classified	—		—		—		—		—		284		—		—		284
Total	$	12,713	$	88,977	$	359,970	$	384,692	$	68,022	$	16,411	$	—	$	—	$	930,785
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
June 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	562,843		487,332		935,712		388,440		111,140		23,121		—		56,043		2,564,631
5 Special mention	3,679		4,555		—		—		—		—		—		—		8,234
6-8 Classified	547		974		413		—		—		—		—		—		1,934
Total	$	567,069	$	492,861	$	936,125	$	388,440	$	111,140	$	23,121	$	—	$	56,043	$	2,574,799
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Gross recoveries	—		—		—		—		—		—		—		—		—
Net	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial: Asset-Based
Internal risk rating:
1-2 High pass	$	58,134	$	82,132	$	165,284	$	113,965	$	72,924	$	203,548	$	480,376	$	73,966	$	1,250,329
3-4 Pass	66,807		104,947		67,780		56,499		20,667		42,132		1,802,197		12,460		2,173,489
5 Special mention	—		—		53,097		31,720		—		—		13,601		4,316		102,734
6-8 Classified	—		—		—		—		—		19,738		5,513		(900)		24,351
Total	$	124,941	$	187,079	$	286,161	$	202,184	$	93,591	$	265,418	$	2,301,687	$	89,842	$	3,550,903
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Gross recoveries	—		—		—		—		—		(359)		(14)		—		(373)
Net	$	—	$	—	$	—	$	—	$	—	$	(359)	$	(14)	$	—	$	(373)

Commercial: Venture
Capital
Internal risk rating:
1-2 High pass	$	—	$	1,999	$	—	$	—	$	(5)	$	22	$	227,411	$	—	$	229,427
3-4 Pass	54,712		63,937		74,756		18,347		2,256		18,158		1,238,948		9,273		1,480,387
5 Special mention	—		8,380		20,625		—		4,986		—		(81)		—		33,910
6-8 Classified	—		—		—		3,000		—		—		326		2,382		5,708
Total	$	54,712	$	74,316	$	95,381	$	21,347	$	7,237	$	18,180	$	1,466,604	$	11,655	$	1,749,432
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	620	$	—	$	—	$	620
Gross recoveries	—		—		—		(13)		(70)		(18)		—		—		(101)
Net	$	—	$	—	$	—	$	(13)	$	(70)	$	602	$	—	$	—	$	519

____________________

(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
June 30, 2021	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
	(In thousands)
Commercial: Other
Commercial
Internal risk rating:
1-2 High pass	$	357,890	$	252,019	$	310	$	9	$	302	$	375	$	77,917	$	695	$	689,517
3-4 Pass	198,420		90,403		79,878		82,235		65,037		95,808		552,735		10,531		1,175,047
5 Special mention	—		1,639		3,364		2,546		115		10,231		445		—		18,340
6-8 Classified	2,042		1		593		23		16		4,611		26,405		5,314		39,005
Total	$	558,352	$	344,062	$	84,145	$	84,813	$	65,470	$	111,025	$	657,502	$	16,540	$	1,921,909
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	47	$	1	$	359	$	53	$	1,771	$	2,231
Gross recoveries	—		—		(18)		—		(34)		(1,127)		—		(73)		(1,252)
Net	$	—	$	—	$	(18)	$	47	$	(33)	$	(768)	$	53	$	1,698	$	979

Consumer
Internal risk rating:
1-2 High pass	$	—	$	12	$	—	$	6	$	9	$	—	$	666	$	—	$	693
3-4 Pass	115,446		34,877		83,346		50,146		27,398		41,878		8,573		35		361,699
5 Special mention	331		602		966		318		54		269		—		—		2,540
6-8 Classified	—		55		262		—		15		121		3		21		477
Total	$	115,777	$	35,546	$	84,574	$	50,470	$	27,476	$	42,268	$	9,242	$	56	$	365,409
Current YTD period:
Gross charge-offs	$	—	$	—	$	209	$	156	$	108	$	71	$	—	$	—	$	544
Gross recoveries	—		—		—		(26)		(5)		(38)		(1)		—		(70)
Net	$	—	$	—	$	209	$	130	$	103	$	33	$	(1)	$	—	$	474

Total Loans and Leases
Internal risk rating:
1-2 High pass	$	423,498	$	380,107	$	284,686	$	149,834	$	95,219	$	270,384	$	786,373	$	74,661	$	2,464,762
3-4 Pass	1,815,648		2,046,390		2,748,584		2,550,418		1,493,496		1,660,419		3,939,473		103,748		16,358,176
5 Special mention	4,368		30,367		162,551		171,664		81,552		67,114		14,120		4,316		536,052
6-8 Classified	2,589		4,257		5,235		13,747		12,796		68,819		32,247		7,577		147,267
Total	$	2,246,103	$	2,461,121	$	3,201,056	$	2,885,663	$	1,683,063	$	2,066,736	$	4,772,213	$	190,302	$	19,506,257
Current YTD period:
Gross charge-offs	$	—	$	—	$	399	$	1,146	$	162	$	1,273	$	53	$	1,771	$	4,804
Gross recoveries	—		—		(18)		(39)		(109)		(6,968)		(16)		(73)		(7,223)
Net	$	—	$	—	$	381	$	1,107	$	53	$	(5,695)	$	37	$	1,698	$	(2,419)

______________________

(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 June 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	$	—	$	—	7	$	3,745	$	3,745
Income producing and other residential	—	—		—		5	787		787
Real estate construction and land:

Residential	1	208		208		—	—		—
Commercial:
Asset-based	—	—		—		6	1,234		1,234
Venture capital	1	2,408		2,408		—	—		—
Other commercial	25	16,358		16,358		19	18,840		15,726
Consumer	—	—		—		3	212		212
Total	28	$	18,974	$	18,974	40	$	24,818	$	21,704


	Six Months Ended June 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	$	—	8	$	3,745	$	3,745
Income producing and other residential	2	266		266		5	787		787
Real estate construction and land:

Residential	1	208		208		—	—		—
Commercial:
Asset-based	1	503		503		7	1,741		1,741
Venture capital	3	4,502		2,529		2	2,047		2,047
Other commercial	35	48,608		30,634		30	23,219		21,444
Consumer	1	20		20		3	212		212
Total	45	$	54,754	$	34,160	55	$	31,751	$	29,976

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

During the three and six months ended June 30, 2021, there were two other commercial loans totaling $134,000 restructured in the preceding 12-month period that subsequently defaulted. During the three months ended June 30, 2020, there was one $2.0 million venture capital loan restructured in the preceding 12-month period that subsequently defaulted. During the six months ended June 30, 2020, there was one $2.0 million venture capital loan and one $7,000 other commercial loan restructured in the preceding 12-month period that subsequently defaulted.

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				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Component of leases receivable income:
Interest income on net investments in leases	$	2,278	$	2,103	$	4,358	$	4,355

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


	June 30, 2021		December 31, 2020
	(In thousands)
Net investment in direct financing leases:
Lease payments receivable	$	173,058	$	158,740
Unguaranteed residual assets	21,831		19,303
Deferred costs and other	1,285		996
Aggregate net investment in leases	$	196,174	$	179,039

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


	June 30, 2021
	(In thousands)
Period ending December 31,
2021	$	39,885
2022	49,531
2023	36,807
2024	31,357
2025	17,956
Thereafter	16,335
Total undiscounted cash flows	191,871
Less: Unearned income	(18,813)
Present value of lease payments	$	173,058

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Allowance for Loan and Lease Losses

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


	Three Months Ended June 30, 2021
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	141,122	$	66,775	$	78,716	$	5,832	$	292,445
Charge-offs	(266)		(75)		(277)		(198)		(816)
Recoveries	4,882		—		1,029		60		5,971
Net (charge-offs) recoveries	4,616		(75)		752		(138)		5,155
Provision	(38,725)		(12,118)		(21,771)		614		(72,000)
Balance, end of period	$	107,013	$	54,582	$	57,697	$	6,308	$	225,600


	Six Months Ended June 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	(634)		(775)		(2,851)		(544)		(4,804)
Recoveries	5,427		—		1,726		70		7,223
Net (charge-offs) recoveries	4,793		(775)		(1,125)		(474)		2,419
Provision	(36,122)		(22,999)		(67,581)		1,702		(125,000)
Balance, end of period	$	107,013	$	54,582	$	57,697	$	6,308	$	225,600

Ending Allowance by
Evaluation Methodology:
Individually evaluated	$	203	$	—	$	3,265	$	—	$	3,468
Collectively evaluated	$	106,810	$	54,582	$	54,432	$	6,308	$	222,132

Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated	$	41,145	$	3,254	$	46,400	$	—	$	90,799
Collectively evaluated	8,371,875		3,502,330		7,175,844		365,409		19,415,458
Ending balance	$	8,413,020	$	3,505,584	$	7,222,244	$	365,409	$	19,506,257

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


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


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

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

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

The allowance for loan and lease losses decreased by $66.8 million in the second quarter of 2021 to $225.6 million due primarily to a provision for loan and lease losses benefit of $72.0 million driven by improvement in both key macro-economic variables and loan portfolio credit quality metrics along with decreased provisions for individually evaluated loans and leases.

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 June 30, 2021, PPP loans had an outstanding balance of approximately $624.8 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:


	June 30, 2021						December 31, 2020
	Real		Business				Real		Business
	Property		Assets		Total		Property		Assets		Total
	(In thousands)
Real estate mortgage	$	35,146	$	—	$	35,146	$	43,656	$	—	$	43,656
Real estate construction and land	3,254		—		3,254		1,766		—		1,766
Commercial	—		4,100		4,100		—		31,100		31,100
Total	$	38,400	$	4,100	$	42,500	$	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
	June 30, 2021
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	292,445	$	90,571	$	383,016
Charge-offs	(816)		—		(816)
Recoveries	5,971		—		5,971
Net recoveries	5,155		—		5,155
Provision	(72,000)		(16,000)		(88,000)
Balance, end of period	$	225,600	$	74,571	$	300,171


	Six Months Ended
	June 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	(4,804)		—		(4,804)
Recoveries	7,223		—		7,223
Net recoveries	2,419		—		2,419
Provision	(125,000)		(11,000)		(136,000)
Balance, end of period	$	225,600	$	74,571	$	300,171

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


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


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

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:


	June 30,		December 31,
Property Type	2021		2020
	(In thousands)
Commercial real estate	$	12,594	$	12,979
Construction and land development	219		219


Total other real estate owned, net	12,813		13,198
Other foreclosed assets	414		829
Total foreclosed assets, net	$	13,227	$	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	647

Provision for losses	(14)
Reductions related to sales	(1,433)
Balance, June 30, 2021	$	13,227

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, June 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:


	June 30, 2021
	(In thousands)
Period ending December 31,
2021	$	5,252
2022	7,672
2023	3,788
2024	1,711

Net CDI and CRI	$	18,423

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


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

Balance, end of period	100,550		109,646		100,550		109,646
Accumulated Amortization:
Balance, beginning of period	(79,238)		(83,127)		(86,005)		(79,179)
Amortization expense	(2,889)		(3,882)		(5,968)		(7,830)
Fully amortized portion	—		7,927		9,846		7,927

Balance, end of period	(82,127)		(79,082)		(82,127)		(79,082)
Net CDI and CRI, end of period	$	18,423	$	30,564	$	18,423	$	30,564

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:


	June 30,		December 31,
Other Assets	2021		2020
	(In thousands)
LIHTC investments	$	251,570	$	213,034
Cash surrender value of BOLI	204,146		203,031
Operating lease ROU assets, net (1)	120,595		119,787
Interest receivable	103,758		101,596
SBIC investments	36,816		32,327
Equity investments without readily determinable fair values	35,321		34,304
Taxes receivable	27,900		59,565
Prepaid expenses	25,409		22,999
Equity investments with readily determinable fair values	13,063		6,147
Equity warrants (2)	4,391		4,520

Other receivables/assets	101,528		63,016
Total other assets	$	924,497	$	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				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Operating lease expense:
Fixed costs	$	8,776	$	8,832	$	17,272	$	17,077
Variable costs	9		12		24		25
Short-term lease costs	429		102		685		194
Sublease income	(1,084)		(1,003)		(2,183)		(2,019)
Net lease expense	$	8,130	$	7,943	$	15,798	$	15,277

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


	Six Months Ended
	June 30,
	2021		2020
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	18,450	$	16,519
ROU assets obtained in exchange for lease obligations:
Operating leases	$	16,649	$	14,542

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:


	June 30,			December 31,
	2021			2020
	(Dollars in thousands)
Operating leases:
Operating lease right-of-use assets, net	$	120,595		$	119,787
Operating lease liabilities	$	139,435		$	139,501

Weighted average remaining lease term (in years)	5.8			5.8
Weighted average discount rate	2.38		%	2.54		%

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


	June 30, 2021
	(In thousands)
Period ending December 31,
2021	$	17,733
2022	32,298
2023	29,411
2024	22,099
2025	15,293
Thereafter	33,447
Total operating lease liabilities	150,281
Less: Imputed interest	(10,846)
Present value of operating lease liabilities	$	139,435

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 six months ended June 30, 2021 and 2020.

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


	June 30, 2021
	(In thousands)
Period ending December 31,
2021	$	20,687
2022	41,447
2023	32,252
2024	26,567
2025	19,197
Thereafter	42,492
Total undiscounted cash flows	$	182,642

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:


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


Other borrowings	6,625		6.50	%	—		—	%
Total borrowings	$	6,625	6.50	%	$	5,000	—	%

The other borrowings were assumed in connection with the Civic acquisition and have a weighted average remaining term of 3.1 months.

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

FHLB Secured Line of Credit. The Bank had secured financing capacity with the FHLB as of June 30, 2021 of $3.3 billion, collateralized by a blanket lien on $5.5 billion of qualifying loans.

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


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

FHLB term advance	$	—	—	%		$	5,000	—	%	5/6/2021
Other borrowing	6,625		6.50	%	10/1/2021	—		—	%	—

Total	$	6,625	6.50	%		$	5,000	—	%

FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of June 30, 2021, the Bank had secured borrowing capacity of $1.4 billion collateralized by liens covering $1.9 billion of qualifying loans. As of June 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 June 30, 2021 and December 31, 2020.

Federal Funds Arrangements with Commercial Banks. As of June 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 June 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 June 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:


	June 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)	$	394,390	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		2.94	%	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		2.14	%	128,866		2.16	%	12/14/2005	1/30/2036	3-month LIBOR + 1.95
Trust CS 2006-1	51,545		2.14	%	51,545		2.16	%	2/22/2006	4/30/2036	3-month LIBOR + 1.95
Trust CS 2006-2	51,550		2.14	%	51,550		2.16	%	9/27/2006	10/30/2036	3-month LIBOR + 1.95
Trust CS 2006-3 (4)	30,564		1.52	%	31,487		1.54	%	9/29/2006	10/30/2036	3-month EURIBOR + 2.05
Trust CS 2006-4	16,470		2.14	%	16,470		2.16	%	12/5/2006	1/30/2037	3-month LIBOR + 1.95
Trust CS 2006-5	6,650		2.14	%	6,650		2.16	%	12/19/2006	1/30/2037	3-month LIBOR + 1.95
Trust CS 2007-2	39,177		2.14	%	39,177		2.16	%	6/13/2007	7/30/2037	3-month LIBOR + 1.95
Total subordinated debt	936,742		2.65	%	543,275		2.24	%
Acquisition discount (5)	(74,954)				(77,463)
Net subordinated debt	$	861,788			$	465,812

___________________

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

(2) Net of issuance costs of $5.6 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 252 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:


	June 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	$	88,381	$	916	$	59,867	$	1,028
Foreign exchange contracts	28,463		2,411		73,108		3,202
Interest rate and economic contracts	116,844		3,327		132,975		4,230
Equity warrant assets	22,345		4,391		24,081		4,520
Total	$	139,189	$	7,718	$	157,056	$	8,750

Derivative Liabilities:
Interest rate contracts	$	88,381	$	844	$	59,867	$	1,004
Foreign exchange contracts	28,463		—		73,108		146
Total	$	116,844	$	844	$	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:


	June 30,		December 31,
	2021		2020
	(In thousands)
Loan commitments to extend credit	$	7,891,875	$	7,601,390
Standby letters of credit	343,719		337,336
Commitments to contribute capital to SBICs
and CRA-related loan pools	55,906		55,499



Total	$	8,291,500	$	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 $74.6 million at June 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 June 30, 2021 and December 31, 2020, we had commitments to contribute capital to these entities totaling $55.9 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:


	June 30, 2021
	(In thousands)
Period ending December 31,
2021	$	27,953
2022	27,953




Total	$	55,906

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 June 30, 2021, the fair value of these investments was $36.8 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
	June 30, 2021
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Municipal securities	$	1,817,499	$	—	$	1,817,499	$	—
Agency commercial MBS	1,257,628		—		1,257,628		—
Agency residential CMOs	1,142,398		—		1,142,398		—
U.S. Treasury securities	877,153		877,153		—		—
Agency residential MBS	552,411		—		552,411		—
Corporate debt securities	508,708		—		508,708		—
Collateralized loan obligations	382,043		—		382,043		—
Private label commercial MBS	378,235		—		356,392		21,843
Asset-backed securities	149,583		—		149,583		—
Private label residential CMOs	96,922		—		92,778		4,144
SBA securities	36,028		—		36,028		—
Total securities available-for-sale	$	7,198,608	$	877,153	$	6,295,468	$	25,987
Equity investments with readily determinable fair values	$	13,063	$	13,063	$	—	$	—
Derivatives (1):
Equity warrants	4,391		—		—		4,391
Interest rate and economic contracts	3,327		—		3,327		—
Derivative liabilities	844		—		844		—

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 six months ended June 30, 2021, there was a $131,000 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:


	June 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	4.3% - 20.6%	11.8%	10.0% - 15.0%	12.2%
Annual default rates (3)	0.9% - 10.3%	2.3%	2.0%	2.0%
Loss severity rates (3)	22.7% - 122.5%	55.1%	60.0%	60.0%
Discount rates	1.6% - 10.4%	6.9%	2.6% - 3.8%	2.8%

____________________

(1) Unobservable inputs for private label residential CMOs were weighted by the relative fair values of the instruments.

(2) Voluntary annual prepayment speeds and discount rates for 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:


	June 30, 2021
	Equity Warrants
		Weighted
	Range	Average
Unobservable Inputs	of Inputs	Input (1)
Volatility	18.4% - 166.3%	30.1%
Risk-free interest rate	0.1% - 0.9%	0.4%
Remaining life assumption (in years)	0.08 - 4.99	2.90

____________________

(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	166		(42)		11,773
Total included in other comprehensive income	(155)		28		—

Issuances	—		—		173
Sales	—		—		(11,944)


Net settlements	(514)		(3,868)		—

Transfers to Level 1 (equity investments with readily
determinable fair values)	—		—		(131)
Balance, June 30, 2021	$	4,144	$	21,843	$	4,391

Unrealized net gains (losses) for the period included in other
comprehensive income for securities held at quarter-end	$	939	$	183

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


	Fair Value Measurement as of
	June 30, 2021
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases (1)	$	39,538	$	—	$	—	$	39,538


Total non-recurring	$	39,538	$	—	$	—	$	39,538

______________________

(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				Six Months Ended
Losses on Assets	June 30,				June 30,
Measured on a Non-Recurring Basis	2021		2020		2021		2020
	(In thousands)
Individually evaluated loans and leases	$	1,951	$	9,483	$	2,653	$	29,317

OREO	—		5		14		110
Total losses	$	1,951	$	9,488	$	2,667	$	29,427

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

June 30, 2021

Valuation

Unobservable

Input or

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(In thousands)

Individually evaluated

loans and leases

33,413

Discounted cash flows

Discount rates

3.75% - 7.75%

6.20%

Individually evaluated

loans and leases

6,125

Third party appraisals

No discounts

Total non-recurring Level 3

39,538

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	June 30, 2021
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	179,505	$	179,505	$	179,505	$	—	$	—
Interest-earning deposits in financial institutions	5,678,587		5,678,587		5,678,587		—		—
Securities available-for-sale	7,198,608		7,198,608		877,153		6,295,468		25,987
Investment in FHLB stock	17,250		17,250		—		17,250		—

Loans and leases held for investment, net	19,280,657		19,844,500		—		—		19,844,500
Equity warrants	4,391		4,391		—		—		4,391
Interest rate and economic contracts	3,327		3,327		—		3,327		—
Equity investments with readily determinable fair values	13,063		13,063		13,063		—		—
Servicing rights	2,628		2,628		—		—		2,628

Financial Liabilities:
Core deposits	27,038,161		27,038,161		—		27,038,161		—
Non-core non-maturity deposits	1,122,971		1,122,971		—		1,122,971		—
Time deposits	1,485,902		1,487,302		—		1,487,302		—
Borrowings	6,625		6,734		—		6,734		—
Subordinated debt	861,788		916,612		—		916,612		—
Derivative liabilities	844		844		—		844		—


	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 warrants	4,520		4,520		—		—		4,520
Interest rate and economic contracts	4,230		4,230		—		4,230		—
Equity investments with readily determinable fair values	6,147		6,147		6,147		—		—

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 June 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				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	(Dollars in thousands, except per share data)
Basic Earnings (Loss) Per Share:
Net earnings (loss)	$	180,512	$	33,204	$	330,918	$	(1,399,907)
Less: Earnings allocated to unvested restricted stock(1)	(3,172)		(362)		(5,495)		(1,251)
Net earnings (loss) allocated to common shares	$	177,340	$	32,842	$	325,423	$	(1,401,158)

Weighted-average basic shares and unvested restricted
stock outstanding	119,386		118,192		119,121		118,484
Less: Weighted-average unvested restricted stock
outstanding	(2,356)		(1,606)		(2,181)		(1,551)
Weighted-average basic shares outstanding	117,030		116,586		116,940		116,933

Basic earnings (loss) per share	$	1.52	$	0.28	$	2.78	$	(11.98)

Diluted Earnings (Loss) Per Share:
Net earnings (loss) allocated to common shares	$	177,340	$	32,842	$	325,423	$	(1,401,158)

Weighted-average diluted shares outstanding	117,030		116,586		116,940		116,933

Diluted earnings (loss) per share	$	1.52	$	0.28	$	2.78	$	(11.98)

________________________

(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 June 30,
	2021				2020
	Total		Revenue from		Total		Revenue from
	Recorded		Contracts with		Recorded		Contracts with
	Revenue		Customers		Revenue		Customers
	(In thousands)
Total interest income	$	280,505	$	—	$	274,075	$	—
Noninterest income:
Service charges on deposit accounts	3,452		3,452		2,004		2,004
Other commissions and fees	10,704		2,603		10,111		3,006
Leased equipment income	10,847		—		12,037		—
Gain on sale of loans	1,422		—		346		—
Gain on sale of securities	—		—		7,715		—
Other income	13,946		394		6,645		336
Total noninterest income	40,371		6,449		38,858		5,346
Total revenue	$	320,876	$	6,449	$	312,933	$	5,346

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


	Three Months Ended
	June 30,
	2021		2020
	(In thousands)
Products and services transferred at a point in time	$	3,068	$	2,727
Products and services transferred over time	3,381		2,619
Total revenue from contracts with customers	$	6,449	$	5,346

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Six Months Ended June 30,
	2021				2020
	Total		Revenue from		Total		Revenue from
	Recorded		Contracts with		Recorded		Contracts with
	Revenue		Customers		Revenue		Customers
	(In thousands)
Total interest income	$	553,842	$	—	$	565,407	$	—
Noninterest income:
Service charges on deposit accounts	6,386		6,386		4,662		4,662
Other commissions and fees	19,862		5,460		19,832		7,160
Leased equipment income	22,201		—		24,288		—
Gain on sale of loans	1,561		—		433		—
Gain on sale of securities	101		—		7,897		—
Other income	35,089		574		10,846		672
Total noninterest income	85,200		12,420		67,958		12,494
Total revenue	$	639,042	$	12,420	$	633,365	$	12,494

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


	Six Months Ended
	June 30,
	2021		2020
	(In thousands)
Products and services transferred at a point in time	$	6,065	$	6,963
Products and services transferred over time	6,355		5,531
Total revenue from contracts with customers	$	12,420	$	12,494

Contract Balances

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


	June 30, 2021		December 31, 2020
	(In thousands)
Receivables, which are included in "Other assets"	$	1,296	$	1,046
Contract assets, which are included in "Other assets"	$	—	$	—
Contract liabilities, which are included in "Accrued interest payable and other liabilities"	$	294	$	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 six months ended June 30, 2021 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $65,000.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 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 June 30, 2021, there were 3,054,299 shares available for grant under the Amended and Restated 2017 Plan.

Restricted Stock

Restricted stock amortization totaled $8.2 million and $5.7 million for the three months ended June 30, 2021 and 2020 and $14.6 million and $12.2 million for the six months ended June 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 June 30, 2021 totaled $83.7 million.

Time-Based Restricted Stock Awards

At June 30, 2021, there were 2,341,548 shares of unvested TRSAs outstanding. RSAs 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 June 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 June 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 will 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 plans to adopt these Updates this year. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 18. SUBSEQUENT EVENTS

Common Stock Dividends

On August 2, 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 August 31, 2021 to stockholders of record at the close of business on August 17, 2021.

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

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

Forward-Looking Information

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

•the COVID-19 pandemic 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 70 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.

In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin. Net interest income, on a year-to-date basis in 2021, accounted for 86.1% of net revenue (net interest income plus noninterest income).

At June 30, 2021, the Company had total assets of $34.9 billion, including $19.5 billion of total loans and leases, net of deferred fees, $7.2 billion of securities available-for-sale, and $5.7 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 $5.4 billion increase in total assets since year-end was due primarily to a $2.7 billion increase in interest-earning deposits in financial institutions, a $2.0 billion increase in securities available-for-sale, and a $422.9 million increase in loans and leases, net of deferred fees.

At June 30, 2021, the Company had total liabilities of $31.0 billion, including total deposits of $29.6 billion and subordinated debt of $861.8 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 $5.1 billion increase in total liabilities since year-end was due mainly to increases of $4.8 billion in core deposits and $396.0 million in subordinated debt. The increase in core deposits was due primarily to continued strong deposit growth from our venture banking clients. At June 30, 2021, core deposits totaled $27.0 billion, or 91% of total deposits, including $11.3 billion of noninterest-bearing demand deposits, or 38% 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 June 30, 2021, the Company had total stockholders' equity of $3.8 billion compared to $3.6 billion at December 31, 2020. The $251.7 million increase in stockholders' equity since year-end was due mainly to $330.9 million in net earnings, offset partially by a $27.0 million decrease in accumulated other comprehensive income and $59.5 million of cash dividends paid. Consolidated capital ratios remained strong with Tier 1 capital and total capital ratios of 10.41% and 14.99% at June 30, 2021.

Recent Events

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)."

Homeowners Association Services Division Acquisition Announcement

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)."

COVID-19 Pandemic - Impact to Our Business

From a business perspective, the impact in 2021 from the 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 June 30, 2021, there were 29 loans with a balance of $48.4 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 June 30, 2021, PPP loans had an outstanding balance of approximately $624.8 million. In the second quarter of 2021, we originated approximately $31.0 million in PPP loans with a five-year term, while loans forgiven under the PPP program totaled approximately $505.5 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 second quarter of 2021 were $8.8 million. As of June 30, 2021, the remaining unamortized fees, net of deferred costs, totaled $15.6 million. The PPP loans are fully guaranteed by the SBA and do not carry an allowance. Our participation in the PPP contributed to the increase in core deposits beginning in the second quarter of 2020 due to PPP loan proceeds being deposited into customers' accounts.

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 June 30, 2021 is comprised of hotel CRE loans of $521.9 million, hotel construction loans of $482.9 million, and hotel SBA loans of $29.5 million. In July 2021, our single classified commercial aviation loan paid off.

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


	June 30, 2021
									% of
			Special						Total Loans
Loan and Lease Portfolio	Classified		Mention		Pass		Total		and Leases
	(Dollars in thousands)
Hotel	$	16,678	$	224,812	$	792,773	$	1,034,263	5.3	%
Retail CRE	233		1,449		432,533		434,215		2.2	%
Commercial aviation	19,248		77,236		89,410		185,894		1.0	%
Restaurant	5,090		28,883		121,672		155,645		0.8	%
Total	$	41,249	$	332,380	$	1,436,388	$	1,810,017	9.3	%

From a credit perspective, most of our credit metrics improved during the second quarter of 2021 as economic conditions and economic forecasts continued to improve. This improvement led to a provision for credit losses benefit of $88.0 million for the second quarter of 2021 compared to a provision for credit losses benefit of $48.0 million for the first quarter of 2021 compared to a provision for credit losses of $120.0 million for the second 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. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic, interest-rate risk, credit risk, and product composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.

The Magnitude of Credit Losses

We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified loans and leases, nonaccrual loans and leases, and net charge-offs. We maintain an allowance for credit losses on loans and leases, which is the sum of the allowance for loan and lease losses and the reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off-balance sheet credit exposures. Loans and leases that are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology, which considers the impact of assumptions and is reflective of historical experience, economic forecasts viewed to be reasonable and supportable by management, the current loan and lease composition, and relative credit risks known as of the balance sheet date. For originated and acquired credit-deteriorated loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively.

We regularly review loans and leases to determine whether there has been any deterioration in credit quality resulting from borrower operations or changes in collateral value or other factors which may affect collectability of our loans and leases. Changes in economic conditions, such as the rate of economic growth, the unemployment rate, rate of inflation, increases in the general level of interest rates, declines in real estate values, changes in commodity prices, and adverse conditions in borrowers’ businesses, could negatively impact our borrowers and cause us to adversely classify loans and leases. An increase in classified loans and leases generally results in increased provisions for credit losses and an increased allowance for credit losses. Any deterioration in the commercial real estate market may lead to increased provisions for credit losses because our loans are concentrated in commercial real estate loans.

The Level of Noninterest Expense

Our noninterest expense includes fixed and controllable overhead, the largest components of which are compensation and occupancy expense. It also includes costs that tend to vary based on the volume of activity, such as loan and lease production and the number and complexity of foreclosed assets. We measure success in controlling both fixed and variable costs through monitoring of the efficiency ratio, which is calculated by dividing noninterest expense (less intangible asset amortization, net foreclosed assets expense (income), goodwill impairment, and acquisition, integration and reorganization costs) by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain (loss) on sale of securities and gain (loss) on sales of assets other than loans and leases).

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


		Three Months Ended									Six Months Ended
		June 30,			March 31,			June 30,			June 30,
Efficiency Ratio		2021			2021			2020			2021			2020
		(Dollars in thousands)
Noninterest expense		$	151,750		$	150,136		$	126,965		$	301,886		$	1,714,935
Less:	Intangible asset amortization	2,889			3,079			3,882			5,968			7,830
	Foreclosed assets (income) expense, net	(119)			1			(146)			(118)			(80)
	Goodwill impairment	—			—			—			—			1,470,000
	Acquisition, integration and reorganization costs	200			3,425			—			3,625			—
	Noninterest expense used for efficiency ratio	$	148,780		$	143,631		$	123,229		$	292,411		$	237,185

Net interest income (tax equivalent)		$	270,083		$	264,635		$	256,294		$	534,718		$	507,722
Noninterest income		40,371			44,829			38,858			85,200			67,958
	Net revenues	310,454			309,464			295,152			619,918			575,680
Less:	Gain on sale of securities	—			101			7,715			101			7,897
	Net revenues used for efficiency ratio	$	310,454		$	309,363		$	287,437		$	619,817		$	567,783

Efficiency ratio		47.9		%	46.4		%	42.9		%	47.2		%	41.8		%

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									Six Months Ended
		June 30,			March 31,			June 30,			June 30,
Return on Average Tangible Equity		2021			2021			2020			2021			2020
		(Dollars in thousands)
Net earnings (loss)		$	180,512		$	150,406		$	33,204		$	330,918		$	(1,399,907)
Add:	Intangible asset amortization	2,889			3,079			3,882			5,968			7,830
	Goodwill impairment	—			—			—			—			1,470,000
	Adjusted net earnings used for return on
	average tangible equity	$	183,401		$	153,485		$	37,086		$	336,886		$	77,923

Average stockholders' equity		$	3,739,042		$	3,617,248		$	3,446,850		$	3,678,481		$	4,201,814
Less:	Average intangible assets	1,224,208			1,192,780			1,111,302			1,208,581			1,840,246
	Average tangible common equity	$	2,514,834		$	2,424,468		$	2,335,548		$	2,469,900		$	2,361,568

Return on average equity (1)		19.36		%	16.86		%	3.87		%	18.14		%	(67.00)		%
Return on average tangible equity (2)		29.25		%	25.67		%	6.39		%	27.51		%	6.64		%

___________________________________

(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	June 30,			December 31,
Tangible Book Value Per Share	2021			2020
	(Dollars in thousands, except per share data)
Stockholders’ equity	$	3,846,681		$	3,594,951
Less: Intangible assets	1,222,541			1,102,311
Tangible common equity	$	2,624,140		$	2,492,640

Total assets	$	34,867,987		$	29,498,442
Less: Intangible assets	1,222,541			1,102,311
Tangible assets	$	33,645,446		$	28,396,131

Equity to assets ratio	11.03		%	12.19		%
Tangible common equity ratio (1)	7.80		%	8.78		%
Book value per share	$	32.17		$	30.36
Tangible book value per share (2)	$	21.95		$	21.05
Shares outstanding	119,555,102			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						Six Months Ended
Adjusted Net Earnings and		June 30,		March 31,		June 30,		June 30,
Adjusted Earnings Per Share		2021		2021		2020		2021		2020
		(Dollars in thousands)
Adjusted Net Earnings:
Net earnings (loss)		$	180,512	$	150,406	$	33,204	$	330,918	$	(1,399,907)
Add:	Goodwill impairment	—		—		—		—		1,470,000
	Adjusted net earnings	$	180,512	$	150,406	$	33,204	$	330,918	$	70,093

Adjusted Basic Earnings Per Share:
Adjusted net earnings		$	180,512	$	150,406	$	33,204	$	330,918	$	70,093
Less:	Earnings allocated to unvested restricted stock	(3,172)		(2,355)		(362)		(5,495)		(1,251)
	Adjusted net earnings allocated to
	common shares	$	177,340	$	148,051	$	32,842	$	325,423	$	68,842

Weighted-average basic shares and unvested restricted
	stock outstanding	119,386		118,852		118,192		119,121		118,484
Less:	Weighted-average unvested restricted stock
	outstanding	(2,356)		(2,003)		(1,606)		(2,181)		(1,551)
	Weighted-average basic shares outstanding	117,030		116,849		116,586		116,940		116,933

Adjusted basic earnings per share		$	1.52	$	1.27	$	0.28	$	2.78	$	0.59

Adjusted Diluted Earnings Per Share:
Adjusted net earnings allocated to common shares		$	177,340	$	148,051	$	32,842	$	325,423	$	68,842
Weighted-average diluted shares outstanding		117,030		116,849		116,586		116,940		116,933
Adjusted diluted earnings per share		$	1.52	$	1.27	$	0.28	$	2.78	$	0.59

Results of Operations

Earnings Performance

The following table presents performance metrics for the periods indicated:


	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2021			2021			2020			2021			2020
	(Dollars in thousands, except per share data)
Earnings Summary:
Interest income	$	280,505		$	273,337		$	274,075		$	553,842		$	565,407
Interest expense	(14,197)			(12,068)			(19,796)			(26,265)			(61,381)
Net interest income	266,308			261,269			254,279			527,577			504,026
Provision for credit losses	88,000			48,000			(120,000)			136,000			(232,000)
Noninterest income	40,371			44,829			38,858			85,200			67,958
Operating expense	(151,750)			(150,136)			(126,965)			(301,886)			(244,935)
Goodwill impairment	—			—			—			—			(1,470,000)

Earnings (loss) before income taxes	242,929			203,962			46,172			446,891			(1,374,951)
Income tax expense	(62,417)			(53,556)			(12,968)			(115,973)			(24,956)
Net earnings (loss)	$	180,512		$	150,406		$	33,204		$	330,918		$	(1,399,907)

Per Common Share Data:
Diluted earnings (loss) per share	$	1.52		$	1.27		$	0.28		$	2.78		$	(11.98)
Book value per share	$	32.17		$	30.68		$	29.17
Tangible book value per share (1)	$	21.95		$	20.39		$	19.80

Performance Ratios:
Return on average assets	2.11		%	1.94		%	0.50		%	2.03		%	(10.48)		%
Return on average tangible equity (1)	29.25		%	25.67		%	6.39		%	27.51		%	6.64		%
Net interest margin (tax equivalent)	3.40		%	3.69		%	4.20		%	3.53		%	4.26		%
Yield on average loans and leases (tax equivalent)	5.18		%	5.20		%	5.01		%	5.19		%	5.27		%
Cost of average total deposits	0.10		%	0.11		%	0.25		%	0.11		%	0.41		%
Efficiency ratio	47.9		%	46.4		%	42.9		%	47.2		%	41.8		%

Capital Ratios (consolidated):
Common equity tier 1 capital ratio	10.41		%	10.39		%	9.97		%
Total capital ratio	14.99		%	13.60		%	13.18		%

_____________________________

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

Second Quarter of 2021 Compared to First Quarter of 2021

Net earnings for the second quarter of 2021 were $180.5 million, or $1.52 per diluted share, compared to net earnings for the first quarter of 2021 of $150.4 million, or $1.27 per diluted share. The $30.1 million increase in net earnings from the prior quarter was due to a lower provision for credit losses of $40.0 million and higher net interest income of $5.0 million, offset partially by higher income tax expense of $8.9 million, lower noninterest income of $4.5 million, and higher noninterest expense of $1.6 million. The decrease in the provision for credit losses reflected improvement in both macro-economic forecast variables and loan portfolio credit quality metrics along with decreased provisions for individually evaluated loans and leases and for unfunded commitments in the second quarter of 2021. 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 higher interest expense resulting from the $400 million of subordinated debt issued on April 30, 2021. The increase in income tax expense was primarily due to higher pre-tax earnings in the second quarter of 2021 compared to the first quarter of 2021. Noninterest income decreased due primarily to a decrease of $5.5 million in dividends and gains on equity investments and a $1.2 million decrease in other income, offset partially by increases of $1.5 million in other commissions and fees and $1.3 million in gain on sale of loans and leases. Noninterest expense increased due mostly to a $10.9 million increase in compensation expense, offset partially by decreases of $6.9 million in other expense, $3.2 million in acquisition, integration and reorganization costs, and $1.2 million in insurance and assessments expense.

Second Quarter of 2021 Compared to Second Quarter of 2020

Net earnings for the second quarter of 2021 were $180.5 million, or $1.52 per diluted share, compared to net earnings for the second quarter of 2020 of $33.2 million, or $0.28 per diluted share. The $147.3 million increase in net earnings from the year-ago quarter was due mainly to a lower provision for credit losses of $208.0 million and higher net interest income of $12.0 million, offset partially by higher income tax expense of $49.4 million and higher operating expense of $24.8 million. The decrease in the provision for credit losses for the second 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 to a lower cost of average interest-bearing liabilities and a higher balance of average-interest earning assets, offset partially by a lower yield on average interest-earning assets and the negative impact on net interest income due to the change in the mix of average interest-earning assets. The increase in income tax expense was due primarily to higher pre-tax earnings in the second quarter of 2021 compared to the year-ago quarter. Noninterest expense increased due mostly to an increase of $28.9 million in compensation expense, due mostly to the incremental expense of the Civic operations in 2021, offset partially by a $5.6 million decrease in insurance and assessments expense due to lower FDIC assessment expense attributable to a decrease in the assessment rate.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Net earnings for the six months ended June 30, 2021 were $330.9 million, or $2.78 per diluted share, compared to a net loss for the six months ended June 30, 2020 of $1.40 billion, or $11.98 loss per diluted share. The $1.73 billion increase in net earnings from the year-ago period was due mainly to a $1.47 billion decrease in goodwill impairment expense combined with a decrease in the provision for credit losses of $368.0 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
	June 30, 2021						March 31, 2021						June 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)	$	19,057,420	$	246,147	5.18	%	$	18,927,314	$	242,846	5.20	%	$	19,951,603	$	248,474	5.01	%
Investment securities (2)(4)	6,492,721		36,111		2.23	%	5,383,140		32,329		2.44	%	3,846,459		27,430		2.87	%
Deposits in financial institutions	6,347,764		2,022		0.13	%	4,790,231		1,528		0.13	%	733,142		186		0.10	%
Total interest‑earning assets (2)	31,897,905		284,280		3.57	%	29,100,685		276,703		3.86	%	24,531,204		276,090		4.53	%
Other assets	2,428,207						2,315,197						2,090,023
Total assets	$	34,326,112					$	31,415,882					$	26,621,227

LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking	$	7,235,726	2,394		0.13	%	$	6,401,869	2,232		0.14	%	$	4,001,750	1,573		0.16	%
Money market	8,484,933		3,318		0.16	%	7,975,996		3,278		0.17	%	6,114,354		2,856		0.19	%
Savings	598,225		36		0.02	%	572,959		35		0.02	%	524,335		33		0.03	%
Time	1,498,169		1,521		0.41	%	1,493,267		1,955		0.53	%	2,475,858		8,613		1.40	%
Total interest‑bearing deposits	17,817,053		7,269		0.16	%	16,444,091		7,500		0.18	%	13,116,297		13,075		0.40	%
Borrowings	225,446		265		0.47	%	226,053		193		0.35	%	871,110		1,319		0.61	%
Subordinated debt	735,725		6,663		3.63	%	466,101		4,375		3.81	%	459,466		5,402		4.73	%
Total interest‑bearing liabilities	18,778,224		14,197		0.30	%	17,136,245		12,068		0.29	%	14,446,873		19,796		0.55	%
Noninterest‑bearing demand deposits	11,304,757						10,173,459						8,292,151
Other liabilities	504,089						488,930						435,353
Total liabilities	30,587,070						27,798,634						23,174,377
Stockholders’ equity	3,739,042						3,617,248						3,446,850
Total liabilities and
stockholders' equity	$	34,326,112					$	31,415,882					$	26,621,227
Net interest income (2)			$	270,083					$	264,635					$	256,294
Net interest rate spread (2)					3.27	%					3.57	%					3.98	%
Net interest margin (2)					3.40	%					3.69	%					4.20	%

Total deposits (5)	$	29,121,810	$	7,269	0.10	%	$	26,617,550	$	7,500	0.11	%	$	21,408,448	$	13,075	0.25	%

_____________________

(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 $1.5 million and $1.2 million and net loan discount accretion of $1.2 million for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively.

(4) Includes tax-equivalent adjustments of $2.2 million, $2.1 million, and $1.4 million for the three months ended June 30, 2021, March 31, 2021, and June 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.


	Six Months Ended
	June 30, 2021						June 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)	$	18,992,727	$	488,993	5.19	%	$	19,508,319	$	511,238	5.27	%
Investment securities (2)(4)	5,940,995		68,440		2.32	%	3,849,838		56,071		2.93	%
Deposits in financial institutions	5,573,300		3,550		0.13	%	635,263		1,794		0.57	%
Total interest-earning assets (2)	30,507,022		560,983		3.71	%	23,993,420		569,103		4.77	%
Other assets	2,372,015						2,866,713
Total assets	$	32,879,037					$	26,860,133

LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking	$	6,821,101	4,626		0.14	%	$	3,734,281	8,708		0.47	%
Money market	8,231,870		6,596		0.16	%	5,681,110		12,872		0.46	%
Savings	585,662		71		0.02	%	511,147		193		0.08	%
Time	1,495,731		3,476		0.47	%	2,580,001		19,549		1.52	%
Total interest-bearing deposits	17,134,364		14,769		0.17	%	12,506,539		41,322		0.66	%
Borrowings	225,748		458		0.41	%	1,448,929		8,097		1.12	%
Subordinated debt	601,658		11,038		3.70	%	458,932		11,962		5.24	%
Total interest-bearing liabilities	17,961,770		26,265		0.29	%	14,414,400		61,381		0.86	%
Noninterest-bearing demand deposits	10,742,233						7,824,934
Other liabilities	496,553						418,985
Total liabilities	29,200,556						22,658,319
Stockholders’ equity	3,678,481						4,201,814
Total liabilities and
stockholders' equity	$	32,879,037					$	26,860,133
Net interest income (2)			$	534,718					$	507,722
Net interest rate spread (2)					3.42	%					3.91	%
Net interest margin (2)					3.53	%					4.26	%

Total deposits (5)	$	27,876,597	$	14,769	0.11	%	$	20,331,473	$	41,322	0.41	%

_____________________

(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 $2.7 million and net loan discount accretion of $4.4 million for the six months ended June 30, 2021 and 2020, respectively.

(4) Includes tax-equivalent adjustments of $4.2 million and $2.6 million for the six months ended June 30, 2021 and 2020, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.

Second Quarter of 2021 Compared to First Quarter of 2021

Net interest income increased by $5.0 million to $266.3 million for the second quarter of 2021 compared to $261.3 million for the first quarter of 2021 due mainly to higher income on investment securities and loans and leases due mostly to higher average balances, offset partially by higher interest expense resulting from the $400 million of subordinated debt issued on April 30, 2021. The tax-equivalent yield on average loans and leases was 5.18% for the second quarter of 2021 compared to 5.20% for the first quarter of 2021.

The tax equivalent NIM was 3.40% for the second quarter of 2021 compared to 3.69% for the first 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 investment securities and deposits in financial institutions as a percentage of earning assets. The average balance of deposits in financial institutions increased by $1.6 billion to $6.3 billion, the average balance of investment securities increased by $1.1 billion to $6.5 billion, and the average balance of loans and leases increased by $130.1 million to $19.1 billion in the second quarter of 2021. Average loans and leases as a percentage of average interest-earning assets was 60% for the second quarter of 2021 compared to 65% for the first quarter of 2021. This excess liquidity had a negative impact on the second quarter tax equivalent NIM of approximately 73 basis points.

The cost of average total deposits decreased to 0.10% for the second quarter of 2021 from 0.11% for the first quarter of 2021. The lower cost of average total deposits was due primarily to the increased average balance of noninterest-bearing deposits.

Second Quarter of 2021 Compared to Second Quarter of 2020

Net interest income increased by $12.0 million to $266.3 million for the second quarter of 2021 compared to $254.3 million for the second quarter of 2020 due mainly to higher income on investment securities attributable to a higher average balance combined with lower interest expense, offset partially by lower income on loans and leases due mainly to a lower average balance. Interest expense declined due principally to lower rates and average balances for time deposits and borrowings, 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 5.18% for the second quarter of 2021 compared to 5.01% for the same quarter of 2020. The increase in the yield on average loans and leases was due mainly to higher loan prepayment fees and higher amortized loan fee income (mainly from PPP loans), offset partially by lower loan coupon interest from the repricing of variable-rate loans in conjunction with decreased market rates.

The tax equivalent NIM was 3.40% for the second quarter of 2021 compared to 4.20% 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, offset partially by lower deposit and borrowing costs. The change in mix of average interest-earning assets was due to a $5.6 billion increase in average deposits in financial institutions, a $2.6 billion increase in average investment securities, and a $894.1 million decrease in average loans and leases. Average loans and leases as a percentage of average interest-earning assets was 60% for the second quarter of 2021 compared to 81% for the second quarter of 2020.

The cost of average total deposits decreased to 0.10% for the second quarter of 2021 from 0.25% for the second quarter of 2020 due mainly to lower rates paid on deposits in conjunction with decreased market rates.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Net interest income increased by $23.6 million to $527.6 million for the six months ended June 30, 2021 compared to $504.0 million for the six months ended June 30, 2020 due mainly to higher income on investment securities attributable to a higher average balance combined with lower interest expense due to lower rates paid on deposits and borrowings in conjunction with decreased market rates, offset partially by lower income on loans and leases due to a lower average loans and leases balance coupled with a lower loan and lease yield in conjunction with decreased market rates. The tax equivalent yield on average loans and leases was 5.19% for the six months ended June 30, 2021 compared to 5.27% for the same period in 2020.

The tax equivalent NIM was 3.53% for the six months ended June 30, 2021 compared to 4.26% 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, offset partially by lower deposit and borrowing costs. The change in mix of average interest-earning assets was due to a $4.9 billion increase in average deposits in financial institutions, a $2.1 billion increase in average investment securities, and a $515.6 million decrease in average loans and leases. Average loans and leases as a percentage of average interest-earning assets was 62% for the six months ended June 30, 2021 compared to 81% for the six months ended June 30, 2020.

The cost of average total deposits decreased to 0.11% for the six months ended June 30, 2021 from 0.41% 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									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
	2021			2021			2020			2021			2020
	(Dollars in thousands)
Provision For Credit Losses:
(Reduction in) addition to allowance for loan and lease losses	$	(72,000)		$	(53,000)		$	93,000		$	(125,000)		$	191,000
(Reduction in) addition to reserve for unfunded
loan commitments	(16,000)			5,000			27,000			(11,000)			41,000
Total provision for credit losses	$	(88,000)		$	(48,000)		$	120,000		$	(136,000)		$	232,000

Credit Quality Metrics:
Net (recoveries) charge-offs on loans and leases
held for investment (1)	$	(5,155)		$	2,736		$	13,242		$	(2,419)		$	32,352
Annualized net charge-offs to average loans and leases	(0.11)		%	0.06		%	0.27		%	(0.03)		%	0.33		%
At quarter-end:
Allowance for credit losses	$	300,171		$	383,016		$	381,621
Allowance for credit losses to loans and leases
held for investment	1.54		%	2.02		%	1.94		%
Allowance for credit losses to nonaccrual
loans and leases held for investment	528.4		%	566.2		%	229.7		%
Nonaccrual loans and leases held for investment	$	56,803		$	67,652		$	166,113
Performing TDRs held for investment	$	40,129		$	27,999		$	15,037
Classified loans and leases held for investment	$	147,267		$	163,117		$	293,230

______________________

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

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

The provision for credit losses decreased by $40.0 million to a benefit of $88.0 million for the second quarter of 2021 compared to a benefit of $48.0 million for the first quarter of 2021 as a result of improvement in both macro-economic forecast variables and loan portfolio credit quality metrics along with decreased provisions for individually evaluated loans and leases and for unfunded commitments.

The provision for credit losses decreased by $208.0 million to a benefit of $88.0 million for the second quarter of 2021 compared to a provision of $120.0 million for the second 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 decreased by $368.0 million to a benefit of $136.0 million for the six months ended June 30, 2021 compared to a provision of $232.0 million for the six months ended June 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						Six Months Ended
	June 30,		March 31,		June 30,		June 30,
Noninterest Income	2021		2021		2020		2021		2020
	(In thousands)
Leased equipment income	$	10,847	$	11,354	$	12,037	$	22,201	$	24,288
Other commissions and fees	10,704		9,158		10,111		19,862		19,832
Service charges on deposit accounts	3,452		2,934		2,004		6,386		4,662
Gain on sale of loans and leases	1,422		139		346		1,561		433
Gain on sale of securities	—		101		7,715		101		7,897
Other income:
Dividends and gains (losses) on equity investments	5,394		10,904		2,947		16,298		2,975
Warrant income	5,650		6,123		1,973		11,773		2,810
Other	2,902		4,116		1,725		7,018		5,061
Total noninterest income	$	40,371	$	44,829	$	38,858	$	85,200	$	67,958

Second Quarter of 2021 Compared to First Quarter of 2021

Noninterest income decreased by $4.5 million to $40.4 million for the second quarter of 2021 compared to $44.8 million for the first quarter of 2021 due mostly to a decrease of $5.5 million in dividends and gains on equity investments and a $1.2 million decrease in other income, offset partially by increases of $1.5 million in other commissions and fees and $1.3 million in gain on sale of loans and leases. The decrease in dividends and gains on equity investments was due primarily to a $10.1 million gain on one equity investment in the first quarter of 2021, offset partially by higher net fair value gains on equity investments still held. The decrease in other income was due primarily to lower foreign currency translation gains and negative fair value adjustments related to servicing assets. The increase in gain on sale of loans and leases resulted from the sales of $52.2 million of loans for gains of $1.4 million in the second quarter of 2021 compared to sales of $72.6 million for gains of $0.1 million in the first quarter of 2021. The decrease in warrant income was primarily attributable to lower gains from exercised warrants due to elevated gains in the first quarter of 2021.

Second Quarter of 2021 Compared to Second Quarter of 2020

Noninterest income increased by $1.5 million to $40.4 million for the second quarter of 2021 compared to $38.9 million for the second quarter of 2020 due mainly to increases of $3.7 million in warrant income, $2.4 million in dividends and gains on equity investments, $1.2 million in other income, and $1.1 million in gain on sale of loans, offset partially by a $7.7 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 and higher fair value gains on equity investments still held. The increase in gain on sale of loans was primarily due to a $1.4 million gain on one loan sold in the second quarter of 2021. The decrease in gain on sale of securities was due to no sales in the second quarter of 2021.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Noninterest income increased by $17.2 million to $85.2 million for the six months ended June 30, 2021 compared to $68.0 million for the six months ended June 30, 2020 due mainly to increases of $13.3 million in dividends and gains on equity investments, $9.0 million in warrant income, and $1.7 million in service charges on deposit accounts, offset partially by a $7.8 million decrease in gain on sale of securities. The increase in dividends and gains on equity investments was due primarily to higher gains on sales and higher fair value gains on equity investments still held. Warrant income increased due principally to higher gains from exercised warrants, driven by the active capital markets. The increase in service charges on deposit accounts was due primarily to fee waivers we granted customers in 2020 during the COVID pandemic. The decrease in gain on sale of securities was due to minimal sales in the 2021 period.

Noninterest Expense

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


	Three Months Ended						Six Months Ended
	June 30,		March 31,		June 30,		June 30,
Noninterest Expense	2021		2021		2020		2021		2020
	(In thousands)
Compensation	$	90,807	$	79,882	$	61,910	$	170,689	$	123,192
Occupancy	14,784		14,054		14,494		28,838		28,701
Leased equipment depreciation	8,614		8,969		7,102		17,583		14,307
Data processing	7,758		6,957		7,102		14,715		13,556
Other professional services	5,256		5,126		4,146		10,382		8,404
Customer related expense	4,973		4,818		4,408		9,791		8,340
Loan expense	4,031		3,193		3,379		7,224		6,029
Insurance and assessments	3,745		4,903		9,373		8,648		13,622
Intangible asset amortization	2,889		3,079		3,882		5,968		7,830
Acquisition, integration and reorganization costs	200		3,425		—		3,625		—
Foreclosed assets (income) expense, net	(119)		1		(146)		(118)		(80)
Other	8,812		15,729		11,315		24,541		21,034
Total operating expense	151,750		150,136		126,965		301,886		244,935
Goodwill impairment	—		—		—		—		1,470,000
Total noninterest expense	$	151,750	$	150,136	$	126,965	$	301,886	$	1,714,935

Second Quarter of 2021 Compared to First Quarter of 2021

Noninterest expense increased by $1.6 million to $151.8 million for the second quarter of 2021 compared to $150.1 million for the first quarter of 2021 due mostly to an increase of $10.9 million in compensation expense, offset partially by decreases of $6.9 million in other expense, $3.2 million in acquisition, integration and reorganization costs, and $1.2 million in insurance and assessments expense. The increase in compensation expense was due mostly to compensation expense related to the Civic operations as a result of three months of activity in the second quarter of 2021 compared to two months of activity in the first quarter of 2021, in addition to growth across the Company which contributed to an increase in variable compensation during the second quarter of 2021. The decrease in other expense was due largely to a legal settlement accrual in the first quarter of 2021. The decrease in acquisition, integration and reorganization costs was due to lower advisory services and integration expenses related to the closed Civic acquisition and the pending acquisition of MUFG Union Bank's HOA Services Division. The decrease in insurance and assessments expense was due primarily to lower FDIC assessment expense resulting from a lower assessment rate, offset partially by a higher assessment base.

Second Quarter of 2021 Compared to Second Quarter of 2020

Noninterest expense increased by $24.8 million to $151.8 million for the second quarter of 2021 compared to $127.0 million for the second quarter of 2020 due primarily to a $28.9 million increase in compensation expense due mostly to the incremental compensation expense for Civic, which was acquired on February 1, 2021.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Noninterest expense decreased by $1.41 billion to $301.9 million for the six months ended June 30, 2021 compared to $1.71 billion for the six months ended June 30, 2020 due primarily to a $1.47 billion goodwill impairment in the 2020 period. Excluding the goodwill impairment, noninterest expense increased by $57.0 million in the 2021 period compared to the 2020 period. This increase was due primarily to a $47.5 million increase in compensation expense and a $3.6 million increase in acquisition, integration and reorganization costs. The increase in compensation expense was due to the incremental compensation expense from five 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. 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 pending acquisition of MUFG Union Bank's HOA Services Division.

Income Taxes

The effective tax rate for the second quarter of 2021 was 25.7% compared to 26.3% for the first quarter of 2021 and 28.1% for the second quarter of 2020. The decreased effective tax rate in the second quarter of 2021 compared to the first quarter of 2021 and the second quarter of 2020 was primarily due to tax benefits resulting from the vesting of restricted stock and return-to-provision adjustments recorded in the second quarter of 2021. The effective tax rate for the six months ended June 30, 2021 was 26.0% compared to (1.8)% for the six months ended June 30, 2020. Excluding non-deductible goodwill impairment, the effective income tax rate was 26.3% for the six months ended June 30, 2020. The Company’s blended statutory tax rate for federal and state is 27.6% 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:


	June 30, 2021					March 31, 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)
Municipal securities	$	1,817,499	25	%	8.2	$	1,646,054	28	%	8.5	$	1,531,617	29	%	8.2
Agency commercial MBS	1,257,628		18	%	3.6	1,273,402		22	%	3.8	1,281,877		24	%	3.2
Agency residential CMOs	1,142,398		16	%	3.0	1,108,828		19	%	2.8	1,219,880		23	%	2.7
U.S. Treasury securities	877,153		12	%	7.7	491,358		8	%	7.4	5,302		—	%	1.3
Agency residential MBS	552,411		8	%	3.3	433,100		7	%	2.5	341,074		7	%	1.9
Corporate debt securities	508,708		7	%	3.8	380,407		6	%	3.9	311,889		6	%	3.7
Collateralized loan obligations	382,043		5	%	—	244,240		4	%	—	135,876		3	%	—
Private label commercial MBS	378,235		5	%	7.4	71,033		1	%	2.2	82,957		2	%	1.8
Asset-backed securities	149,583		2	%	0.1	152,982		3	%	0.1	166,546		3	%	0.1
Private label residential CMOs	96,922		1	%	2.5	103,376		2	%	2.6	116,946		2	%	2.1
SBA securities	36,028		1	%	3.7	36,910		—	%	3.7	41,627		1	%	3.2
Total securities available-
for-sale	$	7,198,608	100	%	5.1	$	5,941,690	100	%	4.8	$	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:


	June 30, 2021
	Fair		% of
Municipal Securities by State	Value		Total
	(Dollars in thousands)
California	$	471,398	26	%
Texas	325,433		18	%
Washington	284,026		15	%
Maryland	74,684		4	%
Oregon	71,513		4	%
Georgia	68,952		4	%
New York	67,159		4	%
Colorado	58,954		3	%
Ohio	39,666		2	%
Tennessee	35,617		2	%
Total of ten largest states	1,497,402		82	%
All other states	320,097		18	%
Total municipal securities	$	1,817,499	100	%

Loans and Leases Held for Investment

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


	June 30, 2021				March 31, 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	$	2,483,856	13	%	$	2,617,227	14	%	$	2,747,526	14	%
SBA program	625,023		3	%	610,086		3	%	599,788		3	%
Hotel	521,869		2	%	539,139		3	%	571,917		3	%
Healthcare real estate	161,450		1	%	175,158		1	%	177,440		1	%
Total commercial real estate mortgage	3,792,198		19	%	3,941,610		21	%	4,096,671		21	%
Income producing and other residential	4,378,932		23	%	3,823,179		20	%	3,718,457		20	%
Other residential real estate	241,890		1	%	222,424		1	%	84,808		—	%
Total income producing and other
residential real estate mortgage	4,620,822		24	%	4,045,603		21	%	3,803,265		20	%
Total real estate mortgage	8,413,020		43	%	7,987,213		42	%	7,899,936		41	%
Real estate construction and land:
Commercial	930,785		5	%	990,035		5	%	1,117,121		6	%
Residential	2,574,799		13	%	2,575,788		14	%	2,243,160		12	%
Total real estate construction and land (1)	3,505,584		18	%	3,565,823		19	%	3,360,281		18	%
Total real estate	11,918,604		61	%	11,553,036		61	%	11,260,217		59	%
Commercial:
Lender finance	2,256,828		12	%	2,113,395		11	%	2,095,963		11	%
Equipment finance	638,898		3	%	647,423		4	%	700,042		4	%
Premium finance	482,822		2	%	449,440		2	%	438,761		2	%
Other asset-based	172,355		1	%	173,145		1	%	194,517		1	%
Total asset-based	3,550,903		18	%	3,383,403		18	%	3,429,283		18	%
Equity fund loans	1,245,283		6	%	889,828		5	%	1,032,718		5	%
Venture lending	504,149		3	%	605,970		3	%	665,790		4	%
Total venture capital	1,749,432		9	%	1,495,798		8	%	1,698,508		9	%
Paycheck Protection Program	609,200		3	%	1,079,258		5	%	1,057,422		5	%
Secured business loans	434,032		2	%	397,558		2	%	430,263		2	%
Security monitoring	207,232		1	%	205,798		1	%	329,312		2	%
Other lending	671,445		4	%	524,025		3	%	558,117		3	%
Total other commercial	1,921,909		10	%	2,206,639		11	%	2,375,114		12	%
Total commercial	7,222,244		37	%	7,085,840		37	%	7,502,905		39	%
Consumer	365,409		2	%	340,352		2	%	320,255		2	%
Total loans and leases held for investment,
net of deferred fees	$	19,506,257	100	%	$	18,979,228	100	%	$	19,083,377	100	%

________________________________

(1) Includes land and acquisition and development loans of $153.1 million at June 30, 2021, $148.1 million at March 31, 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:


	June 30, 2021				December 31, 2020
			% of				% of
Real Estate Loans by State	Balance		Total		Balance		Total
	(Dollars in thousands)
California	$	7,238,094	61	%	$	6,942,768	62	%
New York	728,125		6	%	716,329		6	%
Florida	715,790		6	%	598,167		5	%
Colorado	560,049		5	%	386,480		3	%
Washington	408,010		3	%	413,014		4	%
Oregon	299,084		2	%	269,600		2	%
Texas	243,830		2	%	263,731		2	%
Arizona	197,542		2	%	171,533		2	%
Nevada	185,716		2	%	195,663		2	%
Georgia	172,794		1	%	116,444		1	%
Total of 10 largest states	10,749,034		90	%	10,073,729		89	%
All other states	1,169,570		10	%	1,186,488		11	%
Total real estate loans held for investment, net of deferred fees	$	11,918,604	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			Six Months Ended
Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees (1)	June 30, 2021			June 30, 2021
	(Dollars in thousands)
Balance, beginning of period	$	18,979,228		$	19,083,377
Additions:
Production	1,663,151			3,275,928
Disbursements	1,662,644			2,685,630
Total production and disbursements	3,325,795			5,961,558
Reductions:
Payoffs	(1,969,118)			(3,604,382)
Paydowns	(802,222)			(1,869,640)
Total payoffs and paydowns	(2,771,340)			(5,474,022)
Sales	(26,610)			(99,251)
Transfers to foreclosed assets	—			(647)
Charge-offs	(816)			(4,804)
Transfers to loans held for sale	—			(25,554)
Total reductions	(2,798,766)			(5,604,278)
Loans and leases acquired through acquisition	—			65,600
Net increase	527,029			422,880
Balance, end of period	$	19,506,257		$	19,506,257

Weighted average rate on production (2)	4.55		%	4.46		%

_______________________________________

(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 41 basis points to loan yields for the six months ended June 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 second quarter of 2021, we used the Moody’s Consensus Forecast dated June 9, 2021 for the calculation of our quantitative component, which is consistent with the first quarter of 2021 when the Moody's Consensus Forecast dated March 20, 2021 was used. The key macro-economic variables used improved from previous economic forecasts 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 second quarter. 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 second 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 quarter 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:


	June 30,			March 31,			December 31,			June 30,
Allowance for Credit Losses Data	2021			2021			2020			2020
	(Dollars in thousands)
Allowance for loan and lease losses	$	225,600		$	292,445		$	348,181		$	301,050
Reserve for unfunded loan commitments	74,571			90,571			85,571			80,571
Total allowance for credit losses	$	300,171		$	383,016		$	433,752		$	381,621

Allowance for loan and lease losses to loans and leases held for investment	1.16		%	1.54		%	1.82		%	1.53		%
Allowance for loan and lease losses to loans and leases held for investment,
excluding PPP loans	1.19		%	1.63		%	1.93		%	1.63		%
Allowance for credit losses to loans and leases held for investment	1.54		%	2.02		%	2.27		%	1.94		%
Allowance for credit losses to loans and leases held for investment,
excluding PPP loans	1.59		%	2.14		%	2.41		%	2.06		%

The following table presents the changes in our allowance for credit losses on loans and leases held for investment for the periods indicated:


	Three Months Ended									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
Allowance for Credit Losses Roll Forward	2021			2021			2020			2021			2020
	(Dollars in thousands)
Balance, beginning of period	$	383,016		$	433,752		$	274,863		$	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	(72,000)			(53,000)			93,000			(125,000)			191,000
Addition to (reduction in) reserve for unfunded
loan commitments	(16,000)			5,000			27,000			(11,000)			41,000
Total provision for credit losses	(88,000)			(48,000)			120,000			(136,000)			232,000
Loans and leases charged off:
Real estate mortgage	(266)			(368)			(4,182)			(634)			(4,682)
Real estate construction and land	(75)			(700)			—			(775)			—
Commercial	(277)			(2,574)			(11,439)			(2,851)			(30,671)
Consumer	(198)			(346)			(165)			(544)			(638)
Total loans and leases charged off	(816)			(3,988)			(15,786)			(4,804)			(35,991)
Recoveries on loans charged off:
Real estate mortgage	4,882			545			127			5,427			251
Real estate construction and land	—			—			—			—			—
Commercial	1,029			697			2,392			1,726			3,347
Consumer	60			10			25			70			41
Total recoveries on loans charged off	5,971			1,252			2,544			7,223			3,639
Net recoveries (charge-offs)	5,155			(2,736)			(13,242)			2,419			(32,352)
Balance, end of period	$	300,171		$	383,016		$	381,621		$	300,171		$	381,621

Annualized net (recoveries) charge-offs to
average loans and leases	(0.11)		%	0.06		%	0.27		%	(0.03)		%	0.33		%

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


	Three Months Ended						Six Months Ended
	June 30,		March 31,		June 30,		June 30,
Allowance for Credit Losses Charge-offs	2021		2021		2020		2021		2020
	(In thousands)
Real estate mortgage:
Healthcare real estate	$	—	$	—	$	—	$	—	$	—
Hotel	—		343		—		343		—
SBA program	211		25		76		236		274
Other commercial real estate	—		—		4,106		—		4,233
Total commercial real estate mortgage	211		368		4,182		579		4,507
Income producing and other residential	55		—		—		55		—
Other residential real estate	—		—		—		—		175
Total income producing and other residential
real estate mortgage	55		—		—		55		175
Total real estate mortgage	266		368		4,182		634		4,682
Real estate construction and land:
Commercial	75		700		—		775		—
Residential	—		—		—		—		—
Total real estate construction and land	75		700		—		775		—
Commercial:
Lender finance	—		—		—		—		—
Equipment finance	—		—		—		—		11,550
Premium finance	—		—		—		—		—
Other asset-based	—		—		—		—		—
Total asset-based	—		—		—		—		11,550
Equity fund loans	—		—		—		—		—
Venture lending	—		620		6,470		620		6,813
Total venture capital	—		620		6,470		620		6,813
Paycheck Protection Program	—		—		—		—		—
Security monitoring	—		—		4,180		—		10,236
Secured business loans	—		47		—		47		2,072
Other lending	277		1,907		789		2,184		—
Total other commercial	277		1,954		4,969		2,231		12,308
Total commercial	277		2,574		11,439		2,851		30,671
Consumer	198		346		165		544		638
Total charge-offs	$	816	$	3,988	$	15,786	$	4,804	$	35,991

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


	Three Months Ended						Six Months Ended
	June 30,		March 31,		June 30,		June 30,
Allowance for Credit Losses Recoveries	2021		2021		2020		2021		2020
	(In thousands)
Real estate mortgage:
Healthcare real estate	$	—	$	—	$	—	$	—	$	—
Hotel	—		—		—		—		—
SBA program	20		17		15		37		122
Other commercial real estate	4,860		524		103		5,384		115
Total commercial real estate mortgage	4,880		541		118		5,421		237
Income producing and other residential	—		—		—		—		—
Other residential real estate	2		4		9		6		14
Total income producing and other
residential real estate mortgage	2		4		9		6		14
Total real estate mortgage	4,882		545		127		5,427		251
Real estate construction and land:
Commercial	—		—		—		—		—
Residential	—		—		—		—		—
Total real estate construction and land	—		—		—		—		—
Commercial:
Lender finance	—		—		—		—		—
Equipment finance	7		107		8		114		238
Premium finance	—		—		—		—		—
Other asset-based	98		161		14		259		149
Total asset-based	105		268		22		373		387
Equity fund loans	—		—		—		—		—
Venture lending	44		57		114		101		299
Total venture capital	44		57		114		101		299
Paycheck Protection Program	—		—		—		—		—
Security monitoring	—		—		—		—		—
Secured business loans	73		126		139		199		217
Other lending	807		246		2,117		1,053		2,444
Total other commercial	880		372		2,256		1,252		2,661
Total commercial	1,029		697		2,392		1,726		3,347
Consumer	60		10		25		70		41
Total recoveries	$	5,971	$	1,252	$	2,544	$	7,223	$	3,639

The increase in recoveries during the second quarter of 2021 was due mainly to a single commercial real estate loan related to a lifestyle retail center which paid off in full during the second quarter.

Deposits

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


	June 30, 2021				March 31, 2021				December 31, 2020
			% of				% of				% of
Deposit Composition	Balance		Total		Balance		Total		Balance		Total
	(Dollars in thousands)
Noninterest-bearing demand	$	11,252,286	38	%	$	11,017,462	39	%	$	9,193,827	37	%
Interest checking	7,394,472		25	%	6,862,398		25	%	5,974,910		24	%
Money market	7,777,199		26	%	7,112,610		25	%	6,532,917		26	%
Savings	614,204		2	%	583,878		2	%	562,826		2	%
Total core deposits	27,038,161		91	%	25,576,348		91	%	22,264,480		89	%
Non-core non-maturity deposits	1,122,971		4	%	1,162,590		4	%	1,149,467		5	%
Total non-maturity deposits	28,161,132		95	%	26,738,938		95	%	23,413,947		94	%
Time deposits $250,000 and under	913,371		3	%	940,340		3	%	994,197		4	%
Time deposits over $250,000	572,531		2	%	544,013		2	%	532,573		2	%
Total time deposits	1,485,902		5	%	1,484,353		5	%	1,526,770		6	%
Total deposits	$	29,647,034	100	%	$	28,223,291	100	%	$	24,940,717	100	%

During the second quarter of 2021, total deposits increased by $1.4 billion to $29.6 billion, due primarily to an increase of $1.5 billion in core deposits. The increase in core deposits in the second quarter of 2021 was driven primarily by continued strong deposit growth from our venture banking customers. At June 30, 2021, core deposits totaled $27.0 billion, or 91% of total deposits, including $11.3 billion of noninterest-bearing demand deposits, or 38% of total deposits.

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


	Time Deposits
	$250,000		Over
June 30, 2021	and Under		$250,000		Total
	(In thousands)
Maturities:
Due in three months or less	$	247,102	$	94,967	$	342,069
Due in over three months through six months	198,239		129,168		327,407
Due in over six months through twelve months	231,172		337,799		568,971
Total due within twelve months	676,513		561,934		1,238,447
Due in over 12 months through 24 months	101,988		8,296		110,284
Due in over 24 months	134,870		2,301		137,171
Total	$	913,371	$	572,531	$	1,485,902

Client Investment Funds

In addition to deposit products, we also offer select clients non-depository cash investment options through PWAM, our registered investment adviser subsidiary, and third-party money market sweep products. PWAM provides customized investment advisory and asset management solutions. At June 30, 2021, total off-balance sheet client investment funds were $1.3 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:


	June 30,			March 31,			December 31,			June 30,
	2021			2021			2020			2020
	(Dollars in thousands)
Nonaccrual loans and leases held for investment	$	56,803		$	67,652		$	91,163		$	166,113

Foreclosed assets, net	13,227			14,298			14,027			1,449
Total nonperforming assets	$	70,030		$	81,950		$	105,190		$	167,562

Performing TDRs held for investment	$	40,129		$	27,999		$	14,254		$	15,037
Classified loans and leases held for investment	$	147,267		$	163,117		$	265,262		$	293,230
Nonaccrual loans and leases held for investment to
loans and leases held for investment	0.29		%	0.36		%	0.48		%	0.84		%
Nonperforming assets to loans and leases held for investment
and foreclosed assets, net	0.36		%	0.43		%	0.55		%	0.85		%
Allowance for credit losses to nonaccrual loans and leases
held for investment	528.4		%	566.2		%	475.8		%	229.7		%
Classified loans and leases held for investment
to loans and leases held for investment	0.75		%	0.86		%	1.39		%	1.49		%

Nonaccrual Loans and Leases Held for Investment

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


	June 30, 2021				March 31, 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	$	32,065	$	—	$	46,436	$	5	$	(14,371)	$	(5)
Income producing and other residential	6,133		2,179		2,471		6,339		3,662		(4,160)
Total real estate mortgage	38,198		2,179		48,907		6,344		(10,709)		(4,165)
Real estate construction and land:
Commercial	284		—		302		—		(18)		—
Residential	1,934		22,714		416		1,241		1,518		21,473
Total real estate construction and land	2,218		22,714		718		1,241		1,500		21,473
Commercial:
Asset-based	1,973		—		2,379		—		(406)		—
Venture capital	2,717		—		2,432		6,750		285		(6,750)
Other commercial	11,337		270		12,660		1,251		(1,323)		(981)
Total commercial	16,027		270		17,471		8,001		(1,444)		(7,731)
Consumer	360		1,454		556		954		(196)		500
Total held for investment	$	56,803	$	26,617	$	67,652	$	16,540	$	(10,849)	$	10,077

The increase in 30-89 days delinquent residential construction loans in the second quarter of 2021 is due to an increase in delinquent short-term, single-family renovation loans. With this product, it is common for the borrower to let the loan become delinquent once they enter escrow to sell the renovated home as the loan will be paid off through the close of escrow.

During the second quarter of 2021, nonaccrual loan and leases held for investment decreased by $10.8 million to $56.8 million at June 30, 2021 due mainly to charge-offs of $0.5 million and principal payments and other reductions of $26.7 million, offset partially by additions of $16.3 million. Included in principal payments and other reductions was the payoff of one nonaccrual commercial real estate mortgage loan for $22.6 million. As of June 30, 2021, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $12.9 million and represented 23% 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:


	June 30,		March 31,		December 31,		June 30,
Property Type	2021		2021		2020		2020
	(In thousands)
Commercial real estate	$	12,594	$	13,612	$	12,979	$	28
Single-family residence	—		—		—		—
Construction and land development	219		219		219		219

Total OREO, net	12,813		13,831		13,198		247
Other foreclosed assets	414		467		829		1,202
Total foreclosed assets, net	$	13,227	$	14,298	$	14,027	$	1,449

During the second quarter of 2021, foreclosed assets decreased by $1.1 million to $13.2 million at June 30, 2021 due to sales of $1.1 million.

Performing TDRs Held for Investment

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


	June 30, 2021			March 31, 2021			December 31, 2020
			Number			Number			Number
			of			of			of
Performing TDRs	Balance		Loans	Balance		Loans	Balance		Loans
	(Dollars in thousands)
Real estate mortgage	$	6,415	19	$	6,584	20	$	6,631	20
Real estate construction and land	1,439		1	1,445		1	1,451		1
Commercial	32,250		20	19,944		23	6,146		21
Consumer	25		1	26		1	26		1
Total performing TDRs held for investment	$	40,129	41	$	27,999	45	$	14,254	43

During the second quarter of 2021, performing TDRs held for investment increased by $12.1 million to $40.1 million at June 30, 2021 attributable primarily to the addition of a $13.2 million security monitoring loan, offset by principal payments and other reductions of $1.1 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:


	June 30,		March 31,		December 31,		June 30,
Loan and Lease Credit Risk Ratings	2021		2021		2020		2020
	(Dollars in thousands)
Pass	$	18,822,938	$	18,183,114	$	18,096,830	$	18,635,004
Special mention	536,052		632,997		721,285		766,397
Classified	147,267		163,117		265,262		293,230
Total loans and leases held for investment, net of deferred fees	$	19,506,257	$	18,979,228	$	19,083,377	$	19,694,631

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

During the second quarter of 2021, classified loans and leases decreased by $15.9 million to $147.3 million at June 30, 2021 due mostly to a decrease of $14.6 million in commercial real estate mortgage loans. Classified loans and leases peaked in the second quarter of 2020 at $293.2 million.

During the second quarter of 2021, special mention loans and leases decreased by $96.9 million to $536.1 million at June 30, 2021 due mainly to decreases of $55.5 million in venture capital loans and $39.4 million in asset-based 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:


	June 30, 2021				March 31, 2021				Increase (Decrease)
			Special				Special				Special
	Classified		Mention		Classified		Mention		Classified		Mention
	(In thousands)
Real estate mortgage:
Commercial	$	62,827	$	242,159	$	77,444	$	254,463	$	(14,617)	$	(12,304)
Income producing and other residential	12,681		60,843		9,064		63,231		3,617		(2,388)
Total real estate mortgage	75,508		303,002		86,508		317,694		(11,000)		(14,692)
Real estate construction and land:
Commercial	284		67,292		302		66,790		(18)		502
Residential	1,934		8,234		416		602		1,518		7,632
Total real estate construction and land	2,218		75,526		718		67,392		1,500		8,134
Commercial:
Asset-based	24,351		102,734		24,941		142,122		(590)		(39,388)
Venture capital	5,708		33,910		8,727		89,423		(3,019)		(55,513)
Other commercial	39,005		18,340		41,597		13,535		(2,592)		4,805
Total commercial	69,064		154,984		75,265		245,080		(6,201)		(90,096)
Consumer	477		2,540		626		2,831		(149)		(291)
Total	$	147,267	$	536,052	$	163,117	$	632,997	$	(15,850)	$	(96,945)

Regulatory Matters

Capital

Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines that compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. At June 30, 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 June 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 June 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 June 30, 2021 ranged from 0 basis points to 14 basis points for the capital ratios below.

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


		Minimum Required
		For Capital	For Capital	For Well
		Adequacy	Conservation	Capitalized
	Actual	Purposes	Buffer	Classification
June 30, 2021
PacWest Bancorp Consolidated
Tier 1 leverage capital ratio	7.67%	4.00%	4.00%	N/A
CET1 capital ratio	10.41%	4.50%	7.00%	N/A
Tier 1 capital ratio	10.41%	6.00%	8.50%	N/A
Total capital ratio	14.99%	8.00%	10.50%	N/A

Pacific Western Bank
Tier 1 leverage capital ratio	8.47%	4.00%	4.00%	5.00%
CET1 capital ratio	11.51%	4.50%	7.00%	6.50%
Tier 1 capital ratio	11.51%	6.00%	8.50%	8.00%
Total capital ratio	14.22%	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 $861.8 million at June 30, 2021. At June 30, 2021, none of the trust preferred securities was included in the Company's Tier I capital under the phase-out limitations of Basel III, and $847.8 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 $3.3 billion at June 30, 2021, of which all was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $5.5 billion of certain qualifying loans. The Bank also had secured borrowing capacity with the FRBSF of $1.4 billion at June 30, 2021, all of which was available on that date. The FRBSF secured credit line was collateralized by liens on $1.9 billion of qualifying loans.

In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit for the purpose of borrowing overnight funds, subject to availability, of $112.0 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of June 30, 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 June 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:


	June 30,			March 31,			December 31,
Primary Liquidity - On-Balance Sheet	2021			2021			2020
	(Dollars in thousands)
Cash and due from banks	$	179,505		$	177,199		$	150,464
Interest-earning deposits in financial institutions	5,678,587			5,517,667			3,010,197
Securities available-for-sale	7,198,608			5,941,690			5,235,591
Less: pledged securities	(489,976)			(488,047)			(449,330)
Total primary liquidity	$	12,566,724		$	11,148,509		$	7,946,922

Ratio of primary liquidity to total deposits	42.4		%	39.5		%	31.9		%


Secondary Liquidity - Off-Balance Sheet	June 30,		March 31,		December 31,
Available Secured Borrowing Capacity	2021		2021		2020
	(In thousands)
Secured borrowing capacity with the FHLB	$	3,307,329	$	3,459,294	$	3,330,715
Less: secured advances outstanding	—		(5,000)		(5,000)
Available secured borrowing capacity with the FHLB	3,307,329		3,454,294		3,325,715
Available secured borrowing capacity with the FRBSF	1,436,648		1,413,182		1,409,452
Total secondary liquidity	$	4,743,977	$	4,867,476	$	4,735,167

During the three months ended June 30, 2021, the Company's primary liquidity increased by $1.4 billion to $12.6 billion at June 30, 2021 due mainly to a $1.3 billion increase in securities available-for-sale and a $160.9 million increase in interest-earning deposits in financial institutions. During the second quarter of 2021, the Company's secondary liquidity decreased by $123.5 million to $4.7 billion at June 30, 2021 due primarily to a $147.0 million decrease in secured borrowing capacity with the FHLB, offset partially by a $23.5 million increase 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 June 30, 2021, core deposits totaled $27.0 billion and represented 91% of the Company's total deposits. Core deposits are normally less volatile, often with customer relationships tied to other products offered by the Bank promoting long-standing relationships and stable funding sources. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our core deposits.

Our deposit balances may decrease if customers withdraw funds from the Bank. In order to address the Bank’s liquidity risk from fluctuating deposit balances, the Bank maintains adequate levels of available liquidity on and off the balance sheet.

We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At June 30, 2021, brokered deposits totaled $1.3 billion, consisting primarily of $1.1 billion 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 June 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 six months ended June 30, 2021, PacWest received $33.0 million and $66.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $1.7 billion at June 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 June 30, 2021, PacWest had $133.4 million in cash and cash equivalents, of which substantially all is on deposit at the Bank. We believe this amount of cash, along with anticipated future dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months.

Contractual Obligations

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


			Due After		Due After
	Due		One Year		Three Years		Due
	Within		Through		Through		After
June 30, 2021	One Year		Three Years		Five Years		Five Years		Total
	(In thousands)
Time deposits	$	1,238,447	$	168,107	$	79,348	$	—	$	1,485,902
Short-term borrowings	6,625		—		—		—		6,625
Long-term debt obligations (1)	—		—		—		942,352		942,352
Contractual interest (2)	14,891		28,153		25,558		—		68,602
Operating lease obligations	35,231		59,113		31,109		28,309		153,762
Other contractual obligations	76,958		113,426		11,150		25,822		227,356
Total	$	1,372,152	$	368,799	$	147,165	$	996,483	$	2,884,599

_______________________________________

(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 June 30, 2021, our loan commitments and standby letters of credit were $7.9 billion and $343.7 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 June 30, 2021, the U.S. Dollar notional amounts of subordinated debt payable denominated in foreign currencies was $30.6 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 $218,000 for the six months ended June 30, 2021 and a foreign currency translation net loss of $614,000 for the six months ended June 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 June 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 June 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 June 30, 2021. In order to arrive at the base case, we extend our balance sheet at June 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 June 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 June 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
June 30, 2021	(Tax Equivalent)		From Base	(Tax Equivalent)	From Base
	(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points	$	1,296.5	25.1%	4.08%	0.82%
Up 200 basis points	$	1,192.6	15.1%	3.75%	0.49%
Up 100 basis points	$	1,101.1	6.3%	3.47%	0.21%
BASE CASE	$	1,036.1	—	3.26%	—
Down 25 basis points	$	1,033.3	(0.3)%	3.25%	(0.01)%
Down 50 basis points	$	1,026.4	(0.9)%	3.23%	(0.03)%
Down 100 basis points	$	1,022.0	(1.4)%	3.22%	(0.04)%

During the second quarter of 2021, total base case year 1 tax equivalent NII increased by $1.7 million to $1.0 billion at June 30, 2021, and the base case tax equivalent NIM decreased to 3.26% from 3.48%. The increase in year 1 NII compared to March 31, 2021 NII was attributable to balance sheet growth (interest-earning deposits in financial institutions, investment securities, and loans and leases), offset partially by lower loan yields. The tax equivalent NIM decreased due to the lower loan yields and the earning assets mix shift from the increase in the balance of low yielding interest-earning deposits in financial institutions during the second quarter of 2021.

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 4.79%. Because of the low level of market interest rates and the assumption that market rates contain a 0% floor, the ad hoc scenarios that assume decreasing interest rates do not differ materially from the base case scenario.

At June 30, 2021, we had $19.6 billion of total loans that included $10.9 billion with variable interest rate terms (excluding hybrid loans discussed below). Of the variable interest rate loans, $9.1 billion, or 83%, contained interest rate floor provisions, which included $9.0 billion of loans with "in-the-money" floors, meaning the loan coupon will not adjust down if there are future decreases to the index interest rate. The following table summarizes the estimated balance of loans with "in-the-money" floors for the indicated increases in interest rates:


June 30, 2021
						Total Amount of
						Loans With
Basis Points of						"In-the-Money"
Rate Increases						Loan Floors
(Dollars in millions)
50 bps						$5,932
100 bps						$3,728
150 bps						$2,518
200 bps						$1,044
250 bps						$76

At June 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 $144.5 million, $486.2 million, and $925.1 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. 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 June 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
June 30, 2021	of Equity		From Base		From Base		Assets		to Book Value
	(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points	$	6,927.4	$	882.7	14.6	%	19.9	%	180.1	%
Up 200 basis points	$	6,661.4	$	616.7	10.2	%	19.1	%	173.2	%
Up 100 basis points	$	6,361.2	$	316.5	5.2	%	18.2	%	165.4	%
BASE CASE	$	6,044.7	$	—	—	%	17.3	%	157.1	%
Down 50 basis points	$	5,885.1	$	(159.6)	(2.6)	%	16.9	%	153.0	%
Down 100 basis points	$	5,771.4	$	(273.3)	(4.5)	%	16.6	%	150.0	%

During the second quarter of 2021, total base case projected market value of equity increased by $45.3 million to $6.0 billion. This increase in base case projected MVE was due mostly to: (1) a $192.5 million increase in the book value of stockholders' equity due mainly to $180.5 million of net earnings and a $39.1 million increase in accumulated other comprehensive income, offset partially by $29.9 of cash dividends paid; offset partially by (2) a $62.2 million decrease in the mark-to-market adjustment for loans and leases; (3) a $16.3 million increase in the mark-to-market adjustment for total deposits; and (4) a $72.4 million increase in the mark-to-market adjustment for subordinated debt due primarily to the updated tighter credit spreads used for the valuation of holding company TRUPS.

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 second 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)
April 1 - April 30, 2021	—	$	—	—	$	—
May 1 - May 31, 2021	135,663	$	45.17	—	$	—
June 1 - June 30, 2021	1,148	$	41.16	—	$	—
Total	136,811	$	45.14	—

__________________________

(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 (Filed herewith)
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 June 30, 2021 and December 31, 2020, (ii) the Condensed Consolidated Statements of Earnings (Loss) for the three months ended June 30, 2021, March 31, 2021 and June 30, 2020 and six months ended June 30, 2021 and 2020, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2021, March 31, 2021 and June 30, 2020 and six months ended June 30, 2021 and 2020, (iv) the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2021 and 2020, (v) the Condensed Consolidated Statements of Cash Flows for the six months ended June 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:	August 6, 2021	/s/ Bart R. Olson
		Bart R. Olson
		Chief Financial Officer and Principal Financial Officer