PACWEST BANCORP - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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


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

For the quarterly period ended September 30, 2022

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

Depositary Shares, each representing a 1/40th interest

in a share of 7.75% fixed rate reset non-cumulative

perpetual preferred stock, Series A

PACWP

The Nasdaq Stock Market LLC

(Title of Each Class)

(Trading Symbol)

(Name of Exchange on Which Registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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

☑

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of October 28, 2022, there were 117,808,169 shares of the registrant's common stock outstanding, excluding 2,500,858 shares of unvested restricted stock.

PACWEST BANCORP

SEPTEMBER 30, 2022 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 (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	58
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	93
Item 4.	Controls and Procedures	96

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	96
Item 1A.	Risk Factors	96
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96
Item 6.	Index to Exhibits	97
Signatures		98

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

FRBSF

Federal Reserve Bank of San Francisco

AFS

Available-for-Sale

GDP

Gross Domestic Product

AFX

American Financial Exchange

HOA Business

Homeowners Association Services Division of MUFG Union Bank, N.A. (a business acquired on October 8, 2021)

ALLL

Allowance for Loan and Lease Losses

HTM

Held-to-Maturity

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

PPP

Paycheck Protection Program

CMOs

Collateralized Mortgage Obligations

PRSUs

Performance-Based Restricted Stock Units

Core Deposits

Includes noninterest-bearing checking accounts, interest checking accounts, money market accounts, and savings accounts

PWAM

Pacific Western Asset Management Inc.

COVID-19

Coronavirus Disease

ROU

Right-of-use

CPI

Consumer Price Index

S&P

Standard & Poor's

CRA

Community Reinvestment Act

SBA

Small Business Administration

CRE

Commercial Real Estate

SBIC

Small Business Investment Company

CRI

Customer Relationship Intangible Assets

SEC

Securities and Exchange Commission

DFPI

California Department of Financial Protection and Innovation

SOFR

Secured Overnight Financing Rate

DTAs

Deferred Tax Assets

Tax Equivalent Net Interest Income

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

Dodd-Frank Act

Dodd-Frank Wall Street Reform and Consumer Protection Act

Tax Equivalent NIM

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

Efficiency Ratio

Noninterest expense (less intangible asset amortization, net foreclosed assets expense (income), goodwill impairment, and acquisition, integration and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)

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

FRB

Board of Governors of the Federal Reserve System

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,
	2022		2021
	(Unaudited)
	(Dollars in thousands, except par value amounts)
ASSETS:
Cash and due from banks	$	216,436	$	112,548
Interest-earning deposits in financial institutions	2,244,272		3,944,686
Total cash, cash equivalents, and restricted cash	2,460,708		4,057,234
Securities available-for-sale, at fair value	5,891,328		10,694,458
Securities held-to-maturity, at amortized cost, net of allowance for credit losses	2,264,601		—
Federal Home Loan Bank stock, at cost	36,990		17,250
Total investment securities	8,192,919		10,711,708
Loans held for sale	15,534		—
Gross loans and leases held for investment	27,775,962		23,026,308
Deferred fees, net	(115,921)		(84,760)
Allowance for loan and lease losses	(189,327)		(200,564)
Total loans and leases held for investment, net	27,470,714		22,740,984
Equipment leased to others under operating leases	338,691		339,150
Premises and equipment, net	50,781		46,740
Foreclosed assets, net	2,967		12,843
Goodwill	1,405,736		1,405,736
Core deposit and customer relationship intangibles, net	34,010		44,957
Other assets	1,432,532		1,083,992
Total assets	$	41,404,592	$	40,443,344

LIABILITIES:
Noninterest-bearing deposits	$	12,775,756	$	14,543,133
Interest-bearing deposits	21,420,116		20,454,624
Total deposits	34,195,872		34,997,757
Borrowings (including 132,815 at fair value)	1,864,815		—
Subordinated debt	863,379		863,283
Accrued interest payable and other liabilities	604,581		582,674
Total liabilities	37,528,647		36,443,714

Commitments and contingencies

STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 5,000,000 shares authorized; 513,250 Series A shares,
$1,000 per share liquidation preference, issued and outstanding at September 30, 2022)	498,516		—
Common stock ($0.01 par value, 200,000,000 shares authorized at September 30, 2022 and
December 31, 2021; 123,088,671 and 122,105,853 shares issued, respectively, includes
2,505,854 and 2,312,080 shares of unvested restricted stock, respectively)	1,231		1,221
Additional paid-in capital	2,950,088		3,013,399
Retained earnings	1,381,062		1,016,350
Treasury stock, at cost (2,774,648 and 2,520,999 shares at September 30, 2022 and December 31, 2021)	(106,738)		(97,308)
Accumulated other comprehensive (loss) income, net	(848,214)		65,968
Total stockholders' equity	3,875,945		3,999,630
Total liabilities and stockholders' equity	$	41,404,592	$	40,443,344

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(Unaudited)
	(In thousands, except per share amounts)
Interest income:
Loans and leases	$	346,550	$	246,722	$	907,595	$	732,795
Investment securities	53,135		40,780		159,459		104,999
Deposits in financial institutions	10,359		2,580		16,412		6,130
Total interest income	410,044		290,082		1,083,466		843,924
Interest expense:
Deposits	61,288		6,417		82,858		21,186
Borrowings	3,081		101		5,683		559
Subordinated debt	10,494		7,722		27,102		18,760
Total interest expense	74,863		14,240		115,643		40,505
Net interest income	335,181		275,842		967,823		803,419
Provision for credit losses	3,000		(20,000)		14,500		(156,000)
Net interest income after provision for credit losses	332,181		295,842		953,323		959,419
Noninterest income:
Leased equipment income	12,835		10,943		38,264		33,144
Other commissions and fees	10,034		11,792		32,427		31,654
Service charges on deposit accounts	3,608		3,407		10,813		9,793
Gain on sale of loans and leases	58		—		130		1,561
Gain (loss) on sale of securities	86		515		(1,019)		616
Dividends and gains (losses) on equity investments	3,228		8,387		(4,050)		24,685
Warrant income	292		13,578		2,536		25,351
Other income	8,478		2,723		14,682		9,741
Total noninterest income	38,619		51,345		93,783		136,545
Noninterest expense:
Compensation	105,933		98,061		300,715		268,750
Occupancy	15,574		14,928		46,042		43,766
Customer related expense	12,673		4,538		37,076		14,329
Other professional services	10,674		5,164		23,354		15,546
Data processing	9,568		7,391		28,455		22,106
Leased equipment depreciation	8,908		8,603		27,031		26,186
Insurance and assessments	7,159		3,685		18,281		12,333
Loan expense	6,228		4,180		18,422		11,404
Intangible asset amortization	3,649		2,890		10,947		8,858
Foreclosed assets (income) expense, net	(248)		165		(3,629)		47
Acquisition, integration and reorganization costs	—		200		—		3,825
Other expense	15,500		9,616		39,995		34,157
Total noninterest expense	195,618		159,421		546,689		461,307
Earnings before income taxes	175,182		187,766		500,417		634,657
Income tax expense	43,566		47,770		126,313		163,743
Net earnings	131,616		139,996		374,104		470,914
Preferred stock dividends	9,392		—		9,392		—
Net earnings available to common stockholders	$	122,224	$	139,996	$	364,712	$	470,914

Earnings per common share:
Basic	$	1.02	$	1.17	$	3.04	$	3.96
Diluted	$	1.02	$	1.17	$	3.04	$	3.96

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(Unaudited)
	(In thousands)
Net earnings	$	131,616	$	139,996	$	374,104	$	470,914
Other comprehensive income (loss), net of tax:
Unrealized net holding losses on securities
available-for-sale arising during the period	(288,174)		(63,956)		(970,572)		(101,403)
Income tax benefit related to unrealized net
holding losses arising during the period	79,132		17,672		266,518		28,185
Unrealized net holding losses on securities
available-for-sale, net of tax	(209,042)		(46,284)		(704,054)		(73,218)
Reclassification adjustment for net (gains) losses
included in net earnings (1)	(86)		(515)		1,019		(616)
Income tax expense (benefit) related to reclassification
adjustment	24		142		(279)		170
Reclassification adjustment for net (gains) losses
included in net earnings, net of tax	(62)		(373)		740		(446)
Unrealized net loss on securities transferred from
available-for-sale to held-to-maturity	—		—		(218,326)		—
Amortization of unrealized net loss on securities
transferred from available-for-sale to
held-to-maturity	7,775		—		10,282		—
Income tax benefit related to amortization of
unrealized net loss on securities transferred
from available-for-sale to held-to-maturity	(2,135)		—		(2,824)		—
Amortization of unrealized net loss on securities
transferred from available-for-sale to
held-to-maturity, net of tax	5,640		—		7,458		—
Other comprehensive income (loss), net of tax	(203,464)		(46,657)		(914,182)		(73,664)
Comprehensive income (loss)	$	(71,848)	$	93,339	$	(540,078)	$	397,250

___________________________________

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

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


	Nine Months Ended September 30, 2022
			Common Stock									Accumulated
						Additional						Other
	Preferred			Par		Paid-in		Retained		Treasury		Comprehensive
	Stock (1)		Shares	Value		Capital		Earnings		Stock		(Loss) Income		Total
			(Unaudited)
			(In thousands, except per share amount)
Balance, December 31, 2021	$	—	119,584,854	$	1,221	$	3,013,399	$	1,016,350	$	(97,308)	$	65,968	$	3,999,630
Net earnings	—		—	—		—		120,128		—		—		120,128
Other comprehensive loss,
net of tax	—		—	—		—		—		—		(442,443)		(442,443)
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	—		109,466	1		7,556		—		—		—		7,557


Restricted stock surrendered	—		(92,554)	—		—		—		(4,481)		—		(4,481)
Cash dividends paid:
Common stock, $0.25/share	—		—	—		(29,796)		—		—		—		(29,796)

Balance, March 31, 2022	$	—	119,601,766	$	1,222	$	2,991,159	$	1,136,478	$	(101,789)	$	(376,475)	$	3,650,595
Net earnings	—		—	—		—		122,360		—		—		122,360
Other comprehensive loss,
net of tax	—		—	—		—		—		—		(268,275)		(268,275)
Issuance of preferred stock,
net of offering costs (1)	498,516		—	—		—		—		—		—		498,516
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	—		822,258	8		9,690		—		—		—		9,698
Restricted stock surrendered	—		(136,000)	—		—		—		(4,289)		—		(4,289)


Cash dividends paid:
Common stock, $0.25/share	—		—	—		(30,202)		—		—		—		(30,202)

Balance, June 30, 2022	$	498,516	120,288,024	$	1,230	$	2,970,647	$	1,258,838	$	(106,078)	$	(644,750)	$	3,978,403
Net earnings	—		—	—		—		131,616		—		—		131,616
Other comprehensive loss,
net of tax	—		—	—		—		—		—		(203,464)		(203,464)
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	—		51,094	1		9,650		—		—		—		9,651
Restricted stock surrendered	—		(25,095)	—		—		—		(660)		—		(660)


Cash dividends paid:
Preferred stock, $0.46/share	—		—	—		—		(9,392)		—		—		(9,392)
Common stock, $0.25/share	—		—	—		(30,209)		—		—		—		(30,209)
Balance, September 30, 2022	$	498,516	120,314,023	$	1,231	$	2,950,088	$	1,381,062	$	(106,738)	$	(848,214)	$	3,875,945

___________________________________

(1) There were 513,250 shares of Series A preferred stock issued during the 2nd quarter of 2022 that remained outstanding at September 30, 2022.

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


	Nine Months Ended September 30, 2021
	Common Stock									Accumulated
				Additional						Other
		Par		Paid-in		Retained		Treasury		Comprehensive
	Shares	Value		Capital		Earnings		Stock		(Loss) Income		Total
	(Unaudited)
	(In thousands, except per share amount)
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 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 of tax	—	—		—		—		—		39,135		39,135
Restricted stock awarded and
earned stock compensation,
net of shares forfeited	586,271	6		8,983		—		—		—		8,989
Restricted stock surrendered	(136,811)	—		—		—		(6,176)		—		(6,176)


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


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

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30,
	2022		2021
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net earnings	$	374,104	$	470,914
Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization	40,181		38,311
Amortization of net premiums on investment securities	42,090		28,480
Amortization of intangible assets	10,947		8,858
Amortization of operating lease ROU assets	22,821		22,866
Provision for credit losses	14,500		(156,000)
Gain on sale of foreclosed assets	(3,353)		(135)
Provision for losses on foreclosed assets	—		14
Gain on sale of loans and leases	(130)		(1,561)
Gain on sale of premises and equipment	(3)		(5)
Loss (gain) on sale of securities	1,019		(616)
Gain on BOLI death benefit	—		(491)
Unrealized gain on derivatives and foreign currencies, net	(1,961)		(804)
Earned stock compensation	26,906		23,907

Decrease (increase) in other assets	1,445		(1,516)
Decrease in accrued interest payable and other liabilities	(29,471)		(39,911)
Net cash provided by operating activities	499,095		392,311

Cash flows from investing activities:
Cash paid for acquisition, net	—		(123,090)
Net increase in loans and leases	(4,800,187)		(1,485,780)
Proceeds from sales of loans and leases	60,782		128,541
Proceeds from maturities and paydowns of securities available-for-sale	569,409		628,988
Proceeds from sales of securities available-for-sale	1,038,946		121,351
Purchases of securities available-for-sale	(375,251)		(4,921,557)
Proceeds from maturities and paydowns of securities held-to-maturity	571		—
Net purchases of Federal Home Loan Bank stock	(19,740)		—
Proceeds from sales of foreclosed assets	16,500		1,846
Purchases of premises and equipment, net	(13,075)		(15,078)
Proceeds from sales of premises and equipment	9		95
Proceeds from BOLI death benefit	555		4,143
Net increase in equipment leased to others under operating leases	(26,557)		(16,346)
Net cash used in investing activities	(3,548,038)		(5,676,887)

Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits	(1,767,377)		3,650,640
Net increase in interest-bearing deposits	965,492		1,931,049
Net increase (decrease) in borrowings	1,864,815		(55,210)
Net proceeds from subordinated notes offering	—		394,308
Net proceeds from preferred stock offering	498,516		—
Restricted stock surrendered	(9,430)		(8,200)
Preferred stock dividends paid	(9,392)		—
Common stock dividends paid	(90,207)		(89,474)
Net cash provided by financing activities	1,452,417		5,823,113

Net (decrease) increase in cash, cash equivalents, and restricted cash	(1,596,526)		538,537
Cash, cash equivalents, and restricted cash, beginning of period	4,057,234		3,160,661
Cash, cash equivalents, and restricted cash, end of period	$	2,460,708	$	3,699,198

PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30,
	2022		2021
	(Unaudited)
	(In thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest	$	101,613	$	35,505
Cash paid for income taxes	90,756		94,770
Loans transferred to foreclosed assets	3,271		1,062
Transfers from loans held for investment to loans held for sale	15,534		25,554
Transfer of securities available-for-sale to held-to-maturity	2,260,407		—

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

See Notes to Condensed Consolidated Financial Statements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION

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

We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 69 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank provides venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. The Bank also offers financing of business-purpose, non-owner-occupied investor properties through Civic, a wholly-owned subsidiary. The Bank also provides a specialized suite of services for the HOA industry. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.

We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including treasury management and investment management 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, 2021 as filed with the Securities and Exchange Commission ("Form 10-K"). Updates to our significant accounting policies described below reflect the impact of the Company's transfer of $2.3 billion in fair value of debt securities from available-for-sale to held-to-maturity effective June 1, 2022.

Transfer Between Categories of Debt Securities

Upon transfer of a debt security from the available-for-sale category to the held-to-maturity category, the security's new amortized cost is reset to fair value, reduced by any previous write-offs but excluding any allowance for credit losses. Any associated unrealized gains or losses on such investments as of the date of transfer become part of the security's amortized cost and are subsequently amortized or accreted into interest income over the remaining life of the securities as effective yield adjustments using the interest method. In addition, the related unrealized gains and losses included in accumulated other comprehensive income on the date of transfer are also subsequently amortized or accreted into interest income over the remaining life of the securities as effective yield adjustments using the interest method. For transfers of securities from the available-for-sale category to the held-to-maturity category, any allowance for credit losses that was previously recorded under the available-for-sale model is reversed and an allowance for credit losses is subsequently recorded under the held-to-maturity debt security model. The reversal and re-establishment of the allowance for credit losses are recorded in the "Provisions for credit losses" on the Company's condensed consolidated statements of earnings.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Held-to-Maturity Debt Securities

Debt securities that the Company has the intent and ability to hold until maturity are classified as held-to-maturity and are carried at amortized cost, net of the allowance for credit losses. Held-to-maturity debt securities are generally placed on nonaccrual status using factors similar to those described for loans. The amortized cost of the Company's held-to-maturity debt securities excludes accrued interest receivable, which is included in "Other assets" on the Company's condensed consolidated balance sheets. The Company has made an accounting policy election not to recognize an allowance for credit losses for accrued interest receivable on held-to-maturity debt securities, as the Company reverses any accrued interest against interest income if a debt security is placed on nonaccrual status. Any cash collected on nonaccrual held-to-maturity securities is applied to reduce the security's amortized cost basis and not as interest income. Generally, the Company returns a held-to-maturity security to accrual status when all delinquent interest and principal become current under the contractual terms of the security, and the collectability of remaining principal and interest is no longer doubtful.

Allowance for Credit Losses on Held-to-Maturity Debt Securities

The ACL for held-to-maturity debt securities is recorded at the time of purchase, acquisition or when the Company designates securities as held-to-maturity, representing the Company's best estimate of current expected credit losses as of the date of the condensed consolidated balance sheets. For each major held-to-maturity debt security type, the allowance for credit losses is estimated collectively for groups of securities with similar risk characteristics. For debt securities that do not share similar risk characteristics, the losses are estimated individually. Debt securities that are either guaranteed or issued by the U.S. government or government agency, are highly rated by major rating agencies, and have a long history of no credit losses are an example of such securities to which the Company applies a zero credit loss assumption. Any expected credit loss is provided through the allowance for credit losses on held-to-maturity debt securities and deducted from the amortized cost basis of the security, so that the balance sheet reflects the net amount that the Company expects to collect.

Accounting Standards Adopted in 2022

Effective January 1, 2022, the Company partially adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326),” specifically the amendment related to the vintage disclosures, which requires creditors that are public entities to disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, “Financial Instruments – Credit Losses – Measured at Amortized Cost.” The amendment also eliminates the disclosure of gross recoveries by year of origination previously presented in Example 15 in ASC 326-20-50-79, since it is not required under the guidance in ASC 326-20-50-6. The Company updated the vintage table disclosure in Note 4. Loans and Leases to present only current-period gross charge-offs by year of origination. The adoption of this amendment did not have a material 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.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Use of Estimates

We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. 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 combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments), 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. On the consolidated statements of earnings, new lines are presented for "Dividends and gains (losses) on equity investments" and "Warrant income," as those categories exceeded the disclosure materiality threshold in the fourth quarter of 2021, which previously had been included as part of "Other income."

NOTE 2. RESTRICTED CASH

The FRBSF establishes cash reserve requirements that its member banks must maintain based on a percentage of deposit liabilities. There were no reserves required to be held at the FRBSF for the nine months ended September 30, 2022 and 2021. As of September 30, 2022 and December 31, 2021, we pledged cash collateral for our derivative contracts of $2.3 million and $2.0 million. In connection with the issuance of the credit-linked notes on September 29, 2022, the Bank deposited $132.8 million into a correspondent bank account at a third party financial institution as the collateral account for the credit-linked notes. The repayment of principal on the credit-linked notes is secured by this collateral account, which had a balance of $132.8 million at September 30, 2022.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 3. INVESTMENT SECURITIES

Transfer of Securities Available-for-Sale to Held-to Maturity

Effective June 1, 2022, the Company transferred $2.3 billion in fair value of municipal securities, agency commercial MBS, private label commercial MBS, U.S. Treasury securities, and corporate debt securities from available-for-sale to held-to-maturity. At the time of transfer, $218.3 million of unrealized losses, net of tax, was retained in "Accumulated other comprehensive income (loss)" on the condensed consolidated balance sheets.

Securities Available-for-Sale

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


	September 30, 2022								December 31, 2021
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
Security Type	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
	(In thousands)
Agency residential MBS	$	2,760,670	$	—	$	(469,436)	$	2,291,234	$	2,921,993	$	8,866	$	(32,649)	$	2,898,210
Agency commercial MBS	887,781		8		(79,869)		807,920		1,660,516		37,664		(9,213)		1,688,967
Agency residential CMOs	804,561		—		(68,079)		736,482		1,021,716		22,288		(5,870)		1,038,134
U.S. Treasury securities	771,082		—		(107,693)		663,389		973,555		1,641		(8,298)		966,898
Municipal securities	480,131		35		(64,967)		415,199		2,248,749		75,192		(7,973)		2,315,968
Collateralized loan obligations	365,344		—		(11,582)		353,762		385,410		396		(444)		385,362
Corporate debt securities	374,446		—		(28,904)		345,542		514,077		13,774		(757)		527,094
Private label residential CMOs	241,779		—		(43,824)		197,955		265,851		1,857		(3,291)		264,417
Asset-backed securities	32,520		—		(498)		32,022		129,387		484		(324)		129,547
Private label commercial MBS	31,634		—		(2,456)		29,178		453,314		147		(3,244)		450,217
SBA securities	19,993		—		(1,348)		18,645		28,950		726		(32)		29,644


Total	$	6,769,941	$	43	$	(878,656)	$	5,891,328	$	10,603,518	$	163,035	$	(72,095)	$	10,694,458

As of September 30, 2022, the Company had not recorded an allowance for credit losses on securities available-for-sale. The Company does not consider unrealized losses on such securities to be attributable to credit-related factors, as the unrealized losses have occurred as a result of changes in non-credit related factors such as interest rates, market spreads, and market conditions subsequent to purchase.

As of September 30, 2022, securities available-for-sale with a fair value of $1.7 billion 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 (losses) gains for the years indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Sales of Securities Available-for-Sale	2022		2021		2022		2021
	(In thousands)
Amortized cost of securities sold	$	440,445	$	76,184	$	1,039,965	$	120,735

Gross realized gains	$	3,226	$	517	$	5,960	$	618
Gross realized losses	(3,140)		(2)		(6,979)		(2)
Net realized gains (losses)	$	86	$	515	$	(1,019)	$	616

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Unrealized Losses on Securities Available-for-Sale

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


	September 30, 2022
	Less Than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Security Type	Value		Losses		Value		Losses		Value		Losses
	(In thousands)
Agency residential MBS	$	828,719	$	(154,049)	$	1,462,515	$	(315,387)	$	2,291,234	$	(469,436)
Agency commercial MBS	679,617		(58,395)		114,979		(21,474)		794,596		(79,869)
Agency residential CMOs	518,065		(31,153)		218,418		(36,926)		736,483		(68,079)
U.S. Treasury securities	117,110		(16,858)		546,279		(90,835)		663,389		(107,693)
Municipal securities	325,040		(47,929)		83,882		(17,038)		408,922		(64,967)
Collateralized loan obligations	260,188		(7,935)		93,574		(3,647)		353,762		(11,582)
Corporate debt securities	341,017		(28,429)		4,525		(475)		345,542		(28,904)
Private label residential CMOs	50,799		(2,535)		147,156		(41,289)		197,955		(43,824)
Asset-backed securities	32,022		(498)		—		—		32,022		(498)
Private label commercial MBS	11,695		(696)		17,483		(1,760)		29,178		(2,456)
SBA securities	18,626		(1,347)		18		(1)		18,644		(1,348)


Total	$	3,182,898	$	(349,824)	$	2,688,829	$	(528,832)	$	5,871,727	$	(878,656)


	December 31, 2021
	Less Than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Security Type	Value		Losses		Value		Losses		Value		Losses
	(In thousands)
Agency residential MBS	$	2,502,536	$	(31,670)	$	57,329	$	(979)	$	2,559,865	$	(32,649)
Agency commercial MBS	440,938		(5,066)		106,745		(4,147)		547,683		(9,213)
Agency residential CMOs	216,445		(3,757)		67,340		(2,113)		283,785		(5,870)
U.S. Treasury securities	628,767		(8,298)		—		—		628,767		(8,298)
Municipal securities	505,080		(6,965)		29,726		(1,008)		534,806		(7,973)
Collateralized loan obligations	137,619		(374)		43,730		(70)		181,349		(444)
Corporate debt securities	32,761		(757)		—		—		32,761		(757)
Private label residential CMOs	201,988		(3,291)		—		—		201,988		(3,291)
Asset-backed securities	38,742		(137)		15,762		(187)		54,504		(324)
Private label commercial MBS	397,619		(3,244)		—		—		397,619		(3,244)
SBA securities	—		—		1,864		(32)		1,864		(32)
Total	$	5,102,495	$	(63,559)	$	322,496	$	(8,536)	$	5,424,991	$	(72,095)

The securities that were in an unrealized loss position at September 30, 2022, 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 "Accumulated other comprehensive (loss) income" of "Stockholders' equity" on the condensed consolidated balance sheets. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Contractual Maturities of Securities Available-for-Sale

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


	September 30, 2022
			Due After		Due After
	Due		One Year		Five Years		Due
	Within		Through		Through		After
Security Type	One Year		Five Years		Ten Years		Ten Years		Total
	(In thousands)
Amortized Cost:
Agency residential MBS	$	—	$	—	$	—	$	2,760,670	$	2,760,670
Agency commercial MBS	—		500,086		358,770		28,925		887,781
Agency residential CMOs	—		—		201,260		603,301		804,561
U.S. Treasury securities	4,997		—		766,085		—		771,082
Municipal securities	7,557		44,019		338,647		89,908		480,131
Collateralized loan obligations	—		—		101,156		264,188		365,344
Corporate debt securities	—		20,500		353,946		—		374,446
Private label residential CMOs	—		—		—		241,779		241,779
Asset-backed securities	—		—		1,218		31,302		32,520
Private label commercial MBS	—		—		—		31,634		31,634
SBA securities	19		4,551		—		15,423		19,993
Total	$	12,573	$	569,156	$	2,121,082	$	4,067,130	$	6,769,941

Fair Value:
Agency residential MBS	$	—	$	—	$	—	$	2,291,234	$	2,291,234
Agency commercial MBS	—		469,960		310,816		27,144		807,920
Agency residential CMOs	—		—		178,062		558,420		736,482
U.S. Treasury securities	4,965		—		658,424		—		663,389
Municipal securities	7,536		38,940		284,872		83,851		415,199
Collateralized loan obligations	—		—		98,676		255,086		353,762
Corporate debt securities	—		19,475		326,067		—		345,542
Private label residential CMOs	—		—		—		197,955		197,955
Asset-backed securities	—		—		1,208		30,814		32,022
Private label commercial MBS	—		—		—		29,178		29,178
SBA securities	18		4,289		—		14,338		18,645
Total	$	12,519	$	532,664	$	1,858,125	$	3,488,020	$	5,891,328

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.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Securities Held-to-Maturity

The following table presents amortized cost, allowance for credit losses, gross unrealized gains and losses, and fair values of securities held-to-maturity as of the date indicated:


	September 30, 2022
			Allowance
			for		Net		Gross		Gross
	Amortized		Credit		Carrying		Unrealized		Unrealized		Fair
Security Type	Cost		Losses		Amount		Gains		Losses		Value
	(In thousands)

Municipal securities	$	1,242,427	$	(140)	$	1,242,287	$	—	$	(119,417)	$	1,122,870
Agency commercial MBS	425,831		—		425,831		—		(35,662)		390,169
Private label commercial MBS	344,673		—		344,673		—		(29,030)		315,643
U.S. Treasury securities	183,457		—		183,457		—		(13,447)		170,010
Corporate debt securities	69,713		(1,360)		68,353		—		(6,199)		62,154





Total (1)	$	2,266,101	$	(1,500)	$	2,264,601	$	—	$	(203,755)	$	2,060,846

__________________________

(1) Excludes accrued interest receivable of $11.3 million at September 30, 2022 which is recorded in "Other assets" on the condensed consolidated balance sheets.

As of September 30, 2022, securities held-to-maturity with a fair value of $890.0 million were pledged as collateral for public deposits and other purposes as required by various statutes and agreements.

Allowance for Credit Losses on Securities Held-to-Maturity

The following table presents the changes by major security type in our allowance for credit losses on securities held-to-maturity for the periods indicated:


	Allowance for		Provision						Allowance for
	Credit Losses,		for						Credit Losses,
	Beginning		Credit						End of
Security Type	of Period		Losses		Charge-offs		Recoveries		Period
	(In thousands)
Three Months Ended September 30, 2022
Municipal securities	$	140	$	—	$	—	$	—	$	140
Corporate debt securities	1,360		—		—		—		1,360
Total	$	1,500	$	—	$	—	$	—	$	1,500

Nine Months Ended September 30, 2022
Municipal securities	$	—	$	140	$	—	$	—	$	140
Corporate debt securities	—		1,360		—		—		1,360
Total	$	—	$	1,500	$	—	$	—	$	1,500

Credit losses on HTM securities are recorded at the time of purchase, acquisition, or when the Company designates securities as held-to-maturity. Credit losses on HTM securities are representative of current expected credit losses that may be incurred over the life of the investment. Accrued interest receivable on HTM securities, which is included in other assets on the condensed consolidated balance sheets, is excluded from the estimate of expected credit losses. HTM U.S. treasury securities and agency-backed MBS securities are considered to have no risk of loss as they are either explicitly or implicitly guaranteed by the U.S. government. The change in fair value in the HTM private label CMBS portfolio is solely driven by changes in interest rates. The Company has no knowledge of any underlying credit issues and the cash flows underlying the debt securities have not changed and are not expected to be impacted by changes in interest rates and, thus, there is no related ACL for this portfolio. The underlying bonds in the Company’s HTM municipal securities and HTM corporate debt securities portfolios are evaluated for credit losses in conjunction with management’s estimate of the allowance for credit losses based primarily on credit ratings.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Securities Held-to-Maturity by Credit Quality Indicator

The Company uses S&P, Moody's, Fitch, Kroll, and Egan Jones ratings as the credit quality indicators for its held-to-maturity securities. The following table presents our securities held-to-maturity portfolio by the lowest available credit rating as of the date indicated:


	September 30, 2022
Security Type	AAA		AA+		AA		AA-		A		A-		BBB		NR		Total
	(In thousands)
Amortized Cost:
Municipal securities	$	568,454	$	385,823	$	173,226	$	95,374	$	1,905	$	—	$	—	$	17,645	$	1,242,427
Agency commercial MBS	—		425,831		—		—		—		—		—		—		425,831
Private label commercial
MBS	344,673		—		—		—		—		—		—		—		344,673
U.S. Treasury securities	—		183,457		—		—		—		—		—		—		183,457
Corporate debt securities	—		—		—		—		—		23,220		20,993		25,500		69,713
Total	$	913,127	$	995,111	$	173,226	$	95,374	$	1,905	$	23,220	$	20,993	$	43,145	$	2,266,101

Contractual Maturities of Securities Held-to-Maturity

The following table presents the contractual maturities of our securities held-to-maturity portfolio based on amortized cost and carrying value as of the date indicated:


	September 30, 2022
			Due After		Due After
	Due		One Year		Five Years		Due
	Within		Through		Through		After
Security Type	One Year		Five Years		Ten Years		Ten Years		Total
	(In thousands)
Amortized Cost:

Municipal securities	$	—	$	—	$	334,877	$	907,550	$	1,242,427
Agency commercial MBS	—		—		402,141		23,690		425,831
Private label commercial MBS	—		—		35,882		308,791		344,673
U.S. Treasury securities	—		—		183,457		—		183,457
Corporate debt securities	—		—		—		69,713		69,713





Total	$	—	$	—	$	956,357	$	1,309,744	$	2,266,101

Fair Value:

Municipal securities	$	—	$	—	$	310,064	$	812,806	$	1,122,870
Agency commercial MBS	—		—		368,418		21,751		390,169
Private label commercial MBS	—		—		33,115		282,528		315,643
U.S. Treasury securities	—		—		170,010		—		170,010
Corporate debt securities	—		—		—		62,154		62,154





Total	$	—	$	—	$	881,607	$	1,179,239	$	2,060,846

CMBS 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.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Interest Income on Investment Securities

The following table presents the composition of our interest income on investment securities, including available-for-sale and held-to-maturity, for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(In thousands)
Taxable interest	$	45,772	$	31,980	$	134,881	$	79,156
Non-taxable interest	6,872		8,542		23,571		25,113
Dividend income	491		258		1,007		730
Total interest income on investment securities	$	53,135	$	40,780	$	159,459	$	104,999

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 4. LOANS AND LEASES

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

Loans and Leases Held for Investment

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


	September 30,		December 31,
	2022		2021
	(In thousands)
Real estate mortgage	$	14,656,888	$	11,189,278
Real estate construction and land (1)	4,366,162		3,491,340
Commercial	8,288,359		7,888,068
Consumer	464,553		457,622
Total gross loans and leases held for investment	27,775,962		23,026,308
Deferred fees, net	(115,921)		(84,760)
Total loans and leases held for investment, net of deferred fees	27,660,041		22,941,548
Allowance for loan and lease losses	(189,327)		(200,564)
Total loans and leases held for investment, net (2)	$	27,470,714	$	22,740,984

____________________

(1) Includes land and acquisition and development loans of $151.2 million and $151.8 million at September 30, 2022 and December 31, 2021.

(2) Excludes accrued interest receivable of $106.1 million and $80.3 million at September 30, 2022 and December 31, 2021, respectively, which is recorded in "Other assets" on the condensed consolidated balance sheets.

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


	September 30, 2022
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	381	$	14,084	$	14,465	$	3,756,241	$	3,770,706
Residential	23,653		12,267		35,920		10,824,123		10,860,043
Total real estate mortgage	24,034		26,351		50,385		14,580,364		14,630,749
Real estate construction and land:
Commercial	—		—		—		843,086		843,086
Residential	3,051		7,020		10,071		3,440,359		3,450,430
Total real estate construction and land	3,051		7,020		10,071		4,283,445		4,293,516
Commercial:
Asset-based	—		437		437		5,154,217		5,154,654
Venture capital	—		—		—		2,001,086		2,001,086
Other commercial	452		3,963		4,415		1,111,027		1,115,442
Total commercial	452		4,400		4,852		8,266,330		8,271,182
Consumer	1,996		350		2,346		462,248		464,594
Total	$	29,533	$	38,121	$	67,654	$	27,592,387	$	27,660,041

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	December 31, 2021
	30 - 89		90 or More
	Days		Days		Total
	Past Due		Past Due		Past Due		Current		Total
	(In thousands)
Real estate mortgage:
Commercial	$	5,307	$	2,236	$	7,543	$	3,754,756	$	3,762,299
Residential	40,505		9,666		50,171		7,366,250		7,416,421
Total real estate mortgage	45,812		11,902		57,714		11,121,006		11,178,720
Real estate construction and land:
Commercial	—		—		—		832,591		832,591
Residential	7,271		2,223		9,494		2,595,042		2,604,536
Total real estate construction and land	7,271		2,223		9,494		3,427,633		3,437,127
Commercial:
Asset-based	—		464		464		4,075,013		4,075,477
Venture capital	—		—		—		2,320,593		2,320,593
Other commercial	955		3,601		4,556		1,467,425		1,471,981
Total commercial	955		4,065		5,020		7,863,031		7,868,051
Consumer	1,004		276		1,280		456,370		457,650
Total	$	55,042	$	18,466	$	73,508	$	22,868,040	$	22,941,548

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

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


	September 30, 2022						December 31, 2021
	Nonaccrual		Performing		Total		Nonaccrual		Performing		Total
	(In thousands)
Real estate mortgage:
Commercial	$	42,772	$	3,727,934	$	3,770,706	$	27,540	$	3,734,759	$	3,762,299
Residential	25,950		10,834,093		10,860,043		12,292		7,404,129		7,416,421
Total real estate mortgage	68,722		14,562,027		14,630,749		39,832		11,138,888		11,178,720
Real estate construction and land:
Commercial	—		843,086		843,086		—		832,591		832,591
Residential	7,101		3,443,329		3,450,430		4,715		2,599,821		2,604,536
Total real estate construction and land	7,101		4,286,415		4,293,516		4,715		3,432,412		3,437,127
Commercial:
Asset-based	2,127		5,152,527		5,154,654		1,464		4,074,013		4,075,477
Venture capital	3,809		1,997,277		2,001,086		2,799		2,317,794		2,320,593
Other commercial	7,616		1,107,826		1,115,442		11,950		1,460,031		1,471,981
Total commercial	13,552		8,257,630		8,271,182		16,213		7,851,838		7,868,051
Consumer	367		464,227		464,594		414		457,236		457,650
Total	$	89,742	$	27,570,299	$	27,660,041	$	61,174	$	22,880,374	$	22,941,548

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

At September 30, 2022, nonaccrual loans and leases included $38.1 million of loans and leases 90 or more days past due, $2.5 million of loans and leases 30 to 89 days past due, and $49.1 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, 2021, nonaccrual loans and leases included $18.5 million of loans and leases 90 or more days past due, $6.3 million of loans and leases 30 to 89 days past due, and $36.4 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.

As of September 30, 2022, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $30.8 million and represented 34% of total nonaccrual loans and leases.

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


	September 30, 2022
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	44,014	$	215,057	$	3,511,635	$	3,770,706
Residential	31,892		28,660		10,799,491		10,860,043
Total real estate mortgage	75,906		243,717		14,311,126		14,630,749
Real estate construction and land:
Commercial	—		—		843,086		843,086
Residential	7,543		68,586		3,374,301		3,450,430
Total real estate construction and land	7,543		68,586		4,217,387		4,293,516
Commercial:
Asset-based	2,127		79,991		5,072,536		5,154,654
Venture capital	3,803		56,974		1,940,309		2,001,086
Other commercial	6,864		8,235		1,100,343		1,115,442
Total commercial	12,794		145,200		8,113,188		8,271,182
Consumer	442		6,491		457,661		464,594
Total	$	96,685	$	463,994	$	27,099,362	$	27,660,041


	December 31, 2021
	Classified		Special Mention		Pass		Total
	(In thousands)
Real estate mortgage:
Commercial	$	62,206	$	191,809	$	3,508,284	$	3,762,299
Residential	17,700		19,848		7,378,873		7,416,421
Total real estate mortgage	79,906		211,657		10,887,157		11,178,720
Real estate construction and land:
Commercial	—		67,727		764,864		832,591
Residential	4,715		1,720		2,598,101		2,604,536
Total real estate construction and land	4,715		69,447		3,362,965		3,437,127
Commercial:
Asset-based	4,591		78,305		3,992,581		4,075,477
Venture capital	4,794		14,833		2,300,966		2,320,593
Other commercial	21,659		15,528		1,434,794		1,471,981
Total commercial	31,044		108,666		7,728,341		7,868,051
Consumer	439		1,841		455,370		457,650
Total	$	116,104	$	391,611	$	22,433,833	$	22,941,548

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents our nonaccrual loans and leases by loan portfolio segment and class and by with and without an allowance recorded as of the date indicated and interest income recognized on nonaccrual loans and leases for the periods indicated:


			Three Months		Nine Months				Three Months		Nine Months
			Ended		Ended				Ended		Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2022		2022		2022		2021		2021		2021
	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	$	15,546	$	—	$	—	$	72	$	—	$	—
Residential	4,412		—		—		3,323		—		—
Real estate construction and land:
Commercial	—		—		—		—		—		—
Residential	1,103		—		—		1,987		—		—
Commercial:
Asset based	587		—		—		1,126		—		—
Venture capital	3,809		—		—		2,347		—		—
Other commercial	933		—		—		1,170		—		—
Consumer	367		—		—		495		—		—
With No Related Allowance Recorded:
Real estate mortgage:
Commercial	$	27,227	$	16	$	113	$	25,543	$	90	$	511
Residential	21,537		—		—		4,224		—		—
Real estate construction and land:
Commercial	—		—		—		—		—		—
Residential	5,998		—		—		17,931		—		—
Commercial:
Asset based	1,539		—		—		479		—		—
Venture capital	—		—		—		—		—		—
Other commercial	6,684		7		368		5,810		3		5
Consumer	—		—		—		—		—		—
Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage	$	68,722	$	16	$	113	$	33,162	$	90	$	511
Real estate construction and land	7,101		—		—		19,918		—		—
Commercial	13,552		7		368		10,932		3		5
Consumer	367		—		—		495		—		—
Total	$	89,742	$	23	$	481	$	64,507	$	93	$	516

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
September 30, 2022	2022		2021		2020		2019		2018		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Mortgage:
Commercial
Internal risk rating:
1-2 High pass	$	2,801	$	2,549	$	7,263	$	26,769	$	6,587	$	40,878	$	1,290	$	—	$	88,137
3-4 Pass	439,549		502,035		487,182		261,639		465,339		1,178,198		79,452		10,104		3,423,498
5 Special mention	—		—		3,259		73,740		50,770		87,288		—		—		215,057
6-8 Classified	—		—		471		2,021		27,371		14,151		—		—		44,014
Total	$	442,350	$	504,584	$	498,175	$	364,169	$	550,067	$	1,320,515	$	80,742	$	10,104	$	3,770,706
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	62	$	2,258	$	229	$	—	$	—	$	2,549

Real Estate Mortgage:
Residential
Internal risk rating:
1-2 High pass	$	—	$	83,666	$	21,749	$	69,618	$	49,468	$	43,981	$	1,000	$	—	$	269,482
3-4 Pass	3,738,534		4,312,948		603,627		692,921		481,322		610,842		89,709		106		10,530,009
5 Special mention	5,471		9,152		1,098		12,939		—		—		—		—		28,660
6-8 Classified	3,951		15,442		5,627		419		2,762		3,474		—		217		31,892
Total	$	3,747,956	$	4,421,208	$	632,101	$	775,897	$	533,552	$	658,297	$	90,709	$	323	$	10,860,043
Current YTD period:
Gross charge-offs	$	228	$	398	$	135	$	—	$	—	$	—	$	—	$	—	$	761

Real Estate Construction
and Land: Commercial
Internal risk rating:
1-2 High pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
3-4 Pass	96,495		156,338		82,003		355,819		144,407		8,034		(10)		—		843,086
5 Special mention	—		—		—		—		—		—		—		—		—
6-8 Classified	—		—		—		—		—		—		—		—		—
Total	$	96,495	$	156,338	$	82,003	$	355,819	$	144,407	$	8,034	$	(10)	$	—	$	843,086
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

____________________

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

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
September 30, 2022	2022		2021		2020		2019		2018		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Construction
and Land: Residential
Internal risk rating:
1-2 High pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
3-4 Pass	736,072		1,177,709		870,592		403,791		119,138		308		66,691		—		3,374,301
5 Special mention	16,483		5,076		2,068		44,959		—		—		—		—		68,586
6-8 Classified	(771)		8,092		222		—		—		—		—		—		7,543
Total	$	751,784	$	1,190,877	$	872,882	$	448,750	$	119,138	$	308	$	66,691	$	—	$	3,450,430
Current YTD period:
Gross charge-offs	$	—	$	241	$	772	$	—	$	—	$	—	$	—	$	—	$	1,013

Commercial: Asset-Based
Internal risk rating:
1-2 High pass	$	204,759	$	186,276	$	53,885	$	195,491	$	127,280	$	213,054	$	787,447	$	—	$	1,768,192
3-4 Pass	489,877		272,795		57,635		25,262		32,247		45,743		2,288,106		92,679		3,304,344
5 Special mention	—		—		—		60,618		8,200		3,620		7,553		—		79,991
6-8 Classified	—		—		—		—		—		437		1,103		587		2,127
Total	$	694,636	$	459,071	$	111,520	$	281,371	$	167,727	$	262,854	$	3,084,209	$	93,266	$	5,154,654
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	750	$	—	$	750

Commercial: Venture
Capital
Internal risk rating:
1-2 High pass	$	6,450	$	—	$	2,000	$	—	$	134	$	7	$	199,456	$	503	$	208,550
3-4 Pass	68,823		157,404		18,285		2,210		3,277		886		1,456,269		24,605		1,731,759
5 Special mention	1,995		26,698		—		23,548		—		—		4,733		—		56,974
6-8 Classified	—		473		1,000		—		1,220		—		(6)		1,116		3,803
Total	$	77,268	$	184,575	$	21,285	$	25,758	$	4,631	$	893	$	1,660,452	$	26,224	$	2,001,086
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

____________________

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

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


															Revolving
															Converted
Amortized Cost Basis (1)	Term Loans by Origination Year												Revolving		to Term
September 30, 2022	2022		2021		2020		2019		2018		Prior		Loans		Loans		Total
	(In thousands)
Commercial: Other
Commercial
Internal risk rating:
1-2 High pass	$	3,495	$	12,010	$	1,995	$	187	$	6	$	112	$	21,102	$	—	$	38,907
3-4 Pass	58,573		293,987		63,757		45,138		49,346		90,893		456,738		3,004		1,061,436
5 Special mention	—		813		179		—		2,506		4,627		16		94		8,235
6-8 Classified	—		1,150		—		532		(3)		3,376		900		909		6,864
Total	$	62,068	$	307,960	$	65,931	$	45,857	$	51,855	$	99,008	$	478,756	$	4,007	$	1,115,442
Current YTD period:
Gross charge-offs	$	—	$	209	$	—	$	—	$	—	$	2,096	$	1,817	$	394	$	4,516

Consumer
Internal risk rating:
1-2 High pass	$	—	$	32	$	8	$	—	$	2	$	—	$	718	$	—	$	760
3-4 Pass	65,245		234,722		21,905		50,988		33,432		40,644		9,965		—		456,901
5 Special mention	931		3,124		307		1,555		147		332		95		—		6,491
6-8 Classified	144		—		128		—		—		152		1		17		442
Total	$	66,320	$	237,878	$	22,348	$	52,543	$	33,581	$	41,128	$	10,779	$	17	$	464,594
Current YTD period:
Gross charge-offs	$	6	$	227	$	22	$	601	$	—	$	240	$	—	$	—	$	1,096

Total Loans and Leases
Internal risk rating:
1-2 High pass	$	217,505	$	284,533	$	86,900	$	292,065	$	183,477	$	298,032	$	1,011,013	$	503	$	2,374,028
3-4 Pass	5,693,168		7,107,938		2,204,986		1,837,768		1,328,508		1,975,548		4,446,920		130,498		24,725,334
5 Special mention	24,880		44,863		6,911		217,359		61,623		95,867		12,397		94		463,994
6-8 Classified	3,324		25,157		7,448		2,972		31,350		21,590		1,998		2,846		96,685
Total	$	5,938,877	$	7,462,491	$	2,306,245	$	2,350,164	$	1,604,958	$	2,391,037	$	5,472,328	$	133,941	$	27,660,041
Current YTD period:
Gross charge-offs	$	234	$	1,075	$	929	$	663	$	2,258	$	2,565	$	2,567	$	394	$	10,685

______________________

(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	Term Loans by Origination Year												Revolving		to Term
December 31, 2021	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
	(In thousands)
Real Estate Mortgage:
Commercial
Internal risk rating:
1-2 High pass	$	561	$	9,148	$	32,304	$	8,289	$	6,248	$	33,493	$	3	$	—	$	90,046
3-4 Pass	499,626		531,989		321,728		578,436		489,727		932,950		51,805		11,977		3,418,238
5 Special mention	—		4,811		63,381		76,372		6,533		40,712		—		—		191,809
6-8 Classified	—		488		17,037		5,340		6,278		33,063		—		—		62,206
Total	$	500,187	$	546,436	$	434,450	$	668,437	$	508,786	$	1,040,218	$	51,808	$	11,977	$	3,762,299
Current YTD period:
Gross charge-offs	$	—	$	—	$	189	$	168	$	344	$	264	$	—	$	—	$	965
Gross recoveries	—		—		—		—		(8)		(6,073)		—		—		(6,081)
Net	$	—	$	—	$	189	$	168	$	336	$	(5,809)	$	—	$	—	$	(5,116)

Real Estate Mortgage:
Residential
Internal risk rating:
1-2 High pass	$	95,016	$	29,339	$	57,874	$	47,688	$	11,776	$	16,703	$	28,115	$	—	$	286,511
3-4 Pass	4,405,055		623,207		573,718		616,515		547,531		234,525		91,655		156		7,092,362
5 Special mention	2,871		3,810		13,007		—		—		—		160		—		19,848
6-8 Classified	5,161		5,217		—		3,323		304		3,424		—		271		17,700
Total	$	4,508,103	$	661,573	$	644,599	$	667,526	$	559,611	$	254,652	$	119,930	$	427	$	7,416,421
Current YTD period:
Gross charge-offs	$	28	$	80	$	—	$	—	$	—	$	55	$	—	$	—	$	163
Gross recoveries	(28)		—		—		—		—		(357)		—		(301)		(686)
Net	$	—	$	80	$	—	$	—	$	—	$	(302)	$	—	$	(301)	$	(523)

Real Estate Construction
and Land: Commercial
Internal risk rating:
1-2 High pass	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
3-4 Pass	96,108		96,448		386,832		152,444		720		14,122		18,190		—		764,864
5 Special mention	—		—		—		—		67,727		—		—		—		67,727
6-8 Classified	—		—		—		—		—		—		—		—		—
Total	$	96,108	$	96,448	$	386,832	$	152,444	$	68,447	$	14,122	$	18,190	$	—	$	832,591
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
December 31, 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	849,188		672,864		851,127		163,950		17,526		3,970		28,804		10,672		2,598,101
5 Special mention	276		1,185		—		—		259		—		—		—		1,720
6-8 Classified	849		3,278		588		—		—		—		—		—		4,715
Total	$	850,313	$	677,327	$	851,715	$	163,950	$	17,785	$	3,970	$	28,804	$	10,672	$	2,604,536
Current YTD period:
Gross charge-offs	$	7	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	7
Gross recoveries	—		—		—		—		—		—		—		—		—
Net	$	7	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	7

Commercial: Asset-Based
Internal risk rating:
1-2 High pass	$	138,836	$	72,725	$	178,291	$	123,947	$	71,940	$	188,411	$	706,656	$	50,495	$	1,531,301
3-4 Pass	242,209		71,930		59,748		45,375		8,350		34,833		1,992,677		6,158		2,461,280
5 Special mention	—		—		48,796		13,138		—		—		12,393		3,978		78,305
6-8 Classified	—		—		—		—		—		464		4,027		100		4,591
Total	$	381,045	$	144,655	$	286,835	$	182,460	$	80,290	$	223,708	$	2,715,753	$	60,731	$	4,075,477
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	232	$	232
Gross recoveries	—		—		—		—		—		(691)		(28)		—		(719)
Net	$	—	$	—	$	—	$	—	$	—	$	(691)	$	(28)	$	232	$	(487)

Commercial: Venture
Capital
Internal risk rating:
1-2 High pass	$	—	$	1,999	$	—	$	—	$	(4)	$	14	$	228,820	$	—	$	230,829
3-4 Pass	229,567		58,283		46,007		7,241		1,614		4,166		1,715,057		8,202		2,070,137
5 Special mention	8,980		2,778		499		—		—		2,593		(17)		—		14,833
6-8 Classified	500		—		—		2,000		—		—		(6)		2,300		4,794
Total	$	239,047	$	63,060	$	46,506	$	9,241	$	1,610	$	6,773	$	1,943,854	$	10,502	$	2,320,593
Current YTD period:
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	620	$	—	$	—	$	620
Gross recoveries	—		—		(127)		(37)		(158)		(82)		—		—		(404)
Net	$	—	$	—	$	(127)	$	(37)	$	(158)	$	538	$	—	$	—	$	216

____________________

(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, 2021	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
	(In thousands)
Commercial: Other
Commercial
Internal risk rating:
1-2 High pass	$	134,825	$	22,556	$	261	$	4	$	246	$	(50)	$	18,206	$	693	$	176,741
3-4 Pass	286,281		73,328		77,487		67,591		46,939		89,408		607,197		9,822		1,258,053
5 Special mention	—		291		1		2,088		115		11,911		1,061		61		15,528
6-8 Classified	53		1		395		(3)		223		4,212		15,731		1,047		21,659
Total	$	421,159	$	96,176	$	78,144	$	69,680	$	47,523	$	105,481	$	642,195	$	11,623	$	1,471,981
Current YTD period:
Gross charge-offs	$	1,992	$	—	$	122	$	47	$	139	$	797	$	985	$	2,364	$	6,446
Gross recoveries	—		—		(42)		—		(268)		(4,076)		(57)		(145)		(4,588)
Net	$	1,992	$	—	$	80	$	47	$	(129)	$	(3,279)	$	928	$	2,219	$	1,858

Consumer
Internal risk rating:
1-2 High pass	$	36	$	11	$	—	$	5	$	4	$	—	$	646	$	—	$	702
3-4 Pass	261,678		24,195		73,860		35,623		21,707		31,916		5,689		—		454,668
5 Special mention	797		363		496		—		50		135		—		—		1,841
6-8 Classified	—		22		123		111		21		143		—		19		439
Total	$	262,511	$	24,591	$	74,479	$	35,739	$	21,782	$	32,194	$	6,335	$	19	$	457,650
Current YTD period:
Gross charge-offs	$	—	$	185	$	654	$	156	$	270	$	188	$	—	$	54	$	1,507
Gross recoveries	—		—		—		(27)		(13)		(79)		(1)		—		(120)
Net	$	—	$	185	$	654	$	129	$	257	$	109	$	(1)	$	54	$	1,387

Total Loans and Leases
Internal risk rating:
1-2 High pass	$	369,274	$	135,778	$	268,730	$	179,933	$	90,210	$	238,571	$	982,446	$	51,188	$	2,316,130
3-4 Pass	6,869,712		2,152,244		2,390,507		1,667,175		1,134,114		1,345,890		4,511,074		46,987		20,117,703
5 Special mention	12,924		13,238		126,180		91,598		74,684		55,351		13,597		4,039		391,611
6-8 Classified	6,563		9,006		18,143		10,771		6,826		41,306		19,752		3,737		116,104
Total	$	7,258,473	$	2,310,266	$	2,803,560	$	1,949,477	$	1,305,834	$	1,681,118	$	5,526,869	$	105,951	$	22,941,548
Current YTD period:
Gross charge-offs	$	2,027	$	265	$	965	$	1,146	$	753	$	1,924	$	985	$	2,650	$	10,715
Gross recoveries	(28)		—		(169)		(64)		(447)		(11,358)		(86)		(446)		(12,598)
Net	$	1,999	$	265	$	796	$	1,082	$	306	$	(9,434)	$	899	$	2,204	$	(1,883)

____________________

(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 following table presents our troubled debt restructurings of loans held for investment by loan portfolio segment and class for the periods indicated:


	Three Months Ended September 30,
	2022					2021
		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:

Residential	10	$	3,596	$	1,050	3	$	297	$	297
Real estate construction and land:

Residential	2	422		—		—	—		—
Commercial:
Asset-based	—	—		—		1	1,484		1,484
Venture capital	2	1,649		1,649		2	2,382		2,382
Other commercial	2	102		102		2	85		85

Total	16	$	5,769	$	2,801	8	$	4,248	$	4,248


	Nine Months Ended September 30,
	2022					2021
		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	$	—
Residential	11	3,903		1,053		4	518		518
Real estate construction and land:

Residential	2	422		—		1	208		208
Commercial:
Asset-based	—	—		—		2	1,987		1,987
Venture capital	5	3,330		3,330		4	4,502		2,529
Other commercial	21	1,233		1,233		37	48,694		30,719
Consumer	1	18		18		1	20		20
Total	40	$	8,906	$	5,634	51	$	56,576	$	35,981

During the three months and nine months ended September 30, 2022, there was one residential real estate mortgage loan for $97,000 restructured in the preceding 12-month period that subsequently defaulted. During the three months and nine months ended September 30, 2021, there was one asset-based loan for $479,000 and two other commercial loans totaling $95,000 restructured in the preceding 12-month period that subsequently defaulted.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Leases Receivable

We provide equipment financing to our customers primarily with operating and direct financing leases. For direct financing leases, lease receivables are recorded on the balance sheet but the leased equipment is not, although we generally retain legal title to the leased equipment until the end of each lease. Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value, less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized using the effective interest method over the life of the leases. Direct financing leases are subject to our accounting for allowance for loan and lease losses. See Note 8. Leases for information regarding operating leases where we are the lessor.

The following table provides the components of leases receivable income for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(In thousands)
Component of leases receivable income:
Interest income on net investments in leases	$	2,815	$	2,287	$	7,694	$	6,645

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


	September 30, 2022		December 31, 2021
	(In thousands)
Net Investment in Direct Financing Leases:
Lease payments receivable	$	228,192	$	190,025
Unguaranteed residual assets	24,862		21,487
Deferred costs and other	1,802		1,373
Aggregate net investment in leases	$	254,856	$	212,885

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


	September 30, 2022
	(In thousands)
Period ending December 31,
2022	$	15,098
2023	66,313
2024	61,901
2025	43,908
2026	32,184
Thereafter	36,641
Total undiscounted cash flows	256,045
Less: Unearned income	(27,853)
Present value of lease payments	$	228,192

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Allowance for Loan and Lease Losses

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


	Three Months Ended September 30, 2022
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	85,287	$	41,778	$	54,031	$	7,609	$	188,705
Charge-offs	(1,604)		(1,006)		(1,522)		(520)		(4,652)
Recoveries	231		29		1,996		18		2,274
Net (charge-offs) recoveries	(1,373)		(977)		474		(502)		(2,378)
Provision	(5,018)		9,427		(3,284)		1,875		3,000
Balance, end of period	$	78,896	$	50,228	$	51,221	$	8,982	$	189,327


	Nine Months Ended September 30, 2022
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	98,053	$	45,079	$	48,718	$	8,714	$	200,564



Charge-offs	(3,310)		(1,013)		(5,266)		(1,096)		(10,685)
Recoveries	1,699		178		6,521		50		8,448
Net (charge-offs) recoveries	(1,611)		(835)		1,255		(1,046)		(2,237)
Provision	(17,546)		5,984		1,248		1,314		(9,000)
Balance, end of period	$	78,896	$	50,228	$	51,221	$	8,982	$	189,327

Ending Allowance by
Evaluation Methodology:
Individually evaluated	$	3,108	$	—	$	749	$	—	$	3,857
Collectively evaluated	$	75,788	$	50,228	$	50,472	$	8,982	$	185,470

Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated	$	58,187	$	20,724	$	12,973	$	—	$	91,884
Collectively evaluated	14,572,562		4,272,792		8,258,209		464,594		27,568,157
Ending balance	$	14,630,749	$	4,293,516	$	8,271,182	$	464,594	$	27,660,041

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


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


	Nine Months Ended September 30, 2021
			Real Estate
	Real Estate		Construction
	Mortgage		and Land		Commercial		Consumer		Total
	(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period	$	138,342	$	78,356	$	126,403	$	5,080	$	348,181
Charge-offs	(663)		(775)		(3,802)		(1,080)		(6,320)
Recoveries	5,990		—		2,269		113		8,372
Net recoveries (charge-offs)	5,327		(775)		(1,533)		(967)		2,052
Provision	(47,466)		(24,922)		(77,373)		3,261		(146,500)
Balance, end of period	$	96,203	$	52,659	$	47,497	$	7,374	$	203,733

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

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

The allowance for loan and lease losses increased by $0.6 million in the third quarter of 2022 to $189.3 million due primarily to a provision for loan and lease losses of $3.0 million driven by increased reserves needed due to a less favorable economic forecast, offset partially by a lower level of growth in loans and leases and unfunded loan commitments and a decrease in COVID-related qualitative reserves.

We actively participated in both rounds of the Paycheck Protection Program ("PPP"), under the provisions of the CARES Act during 2020 and 2021, originating $1.65 billion of such loans. As of September 30, 2022, PPP loans totaled $13.3 million, net of deferred fees. The loans have two or five year terms, are fully guaranteed by the SBA, and do not carry an allowance.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

A loan is considered collateral-dependent, and is individually evaluated for reserve purposes, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent loans held for investment by collateral type as of the following dates:


	September 30, 2022						December 31, 2021
	Real		Business				Real		Business
	Property		Assets		Total		Property		Assets		Total
	(In thousands)
Real estate mortgage	$	61,167	$	—	$	61,167	$	30,817	$	—	$	30,817
Real estate construction and land	8,397		—		8,397		10,421		—		10,421
Commercial	—		1,539		1,539		—		7,586		7,586
Total	$	69,564	$	1,539	$	71,103	$	41,238	$	7,586	$	48,824

Allowance for Credit Losses

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

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


	Three Months Ended
	September 30, 2022
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	188,705	$	95,071	$	283,776
Charge-offs	(4,652)		—		(4,652)
Recoveries	2,274		—		2,274
Net charge-offs	(2,378)		—		(2,378)
Provision	3,000		—		3,000
Balance, end of period	$	189,327	$	95,071	$	284,398


	Nine Months Ended
	September 30, 2022
	Allowance for		Reserve for		Total
	Loan and		Unfunded Loan		Allowance for
	Lease Losses		Commitments		Credit Losses
	(In thousands)
Balance, beginning of period	$	200,564	$	73,071	$	273,635
Charge-offs	(10,685)		—		(10,685)
Recoveries	8,448		—		8,448
Net charge-offs	(2,237)		—		(2,237)
Provision	(9,000)		22,000		13,000
Balance, end of period	$	189,327	$	95,071	$	284,398

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


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


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

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 5. FORECLOSED ASSETS, NET

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


	September 30,		December 31,
Property Type	2022		2021
	(In thousands)
Commercial real estate	$	—	$	12,594

Single-family residence	2,967		—

Total other real estate owned, net	2,967		12,594
Other foreclosed assets	—		249
Total foreclosed assets, net	$	2,967	$	12,843

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


	Foreclosed
	Assets, Net
	(In thousands)
Balance, December 31, 2021	$	12,843

Transfers to foreclosed assets from loans	3,271


Reductions related to sales	(13,147)
Balance, September 30, 2022	$	2,967

NOTE 6. 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.

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.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(In thousands)
Gross Amount of CDI and CRI:
Balance, beginning of period	$	133,850	$	100,550	$	133,850	$	109,646
Addition from Civic acquisition	—		—		—		750
Fully amortized portion	(42,300)		—		(42,300)		(9,846)

Balance, end of period	91,550		100,550		91,550		100,550
Accumulated Amortization:
Balance, beginning of period	(96,191)		(82,127)		(88,893)		(86,005)
Amortization expense	(3,649)		(2,890)		(10,947)		(8,858)
Fully amortized portion	42,300		—		42,300		9,846

Balance, end of period	(57,540)		(85,017)		(57,540)		(85,017)
Net CDI and CRI, end of period	$	34,010	$	15,533	$	34,010	$	15,533

The following table presents the estimated aggregate future amortization expense for our current CDI and CRI as of the date indicated:


	September 30, 2022
	(In thousands)
Period ending December 31,
2022	$	2,628
2023	9,085
2024	6,404
2025	4,087
2026	3,482
Thereafter	8,324
Net CDI and CRI	$	34,010

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 7. OTHER ASSETS

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


	September 30,		December 31,
Other Assets	2022		2021
	(In thousands)
LIHTC investments	$	329,796	$	297,746
Deferred tax asset, net (1)	321,650		—
Cash surrender value of BOLI	206,650		203,836
Interest receivable	141,330		120,329
Operating lease ROU assets, net (2)	124,773		123,225
Equity investments without readily determinable fair values	62,850		62,975
SBIC investments	59,447		46,861
Prepaid expenses	30,125		27,632
Taxes receivable	27,050		36,011
Equity warrants (3)	4,215		3,555
Equity investments with readily determinable fair values	2		28,578
Other receivables/assets	124,644		133,244
Total other assets	$	1,432,532	$	1,083,992

____________________

(1) At December 31, 2021, this was a net deferred tax liability of $19.6 million. The change to a deferred tax asset in 2022 was primarily attributable to the increase in unrealized losses on the Company's investment securities portfolio.

(2) See Note 8. Leases for further details regarding the operating lease ROU assets.

(3) See Note 10. Derivatives for information regarding equity warrants.

NOTE 8. LEASES

Operating Leases as a Lessee

Our lease expense is a component of "Occupancy expense" on our condensed consolidated statements of earnings. The following table presents the components of lease expense for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(In thousands)
Operating lease expense:
Fixed costs	$	8,682	$	8,678	$	26,203	$	25,950
Variable costs	33		18		92		42
Short-term lease costs	379		357		1,122		1,042
Sublease income	(955)		(1,114)		(3,108)		(3,297)
Net lease expense	$	8,139	$	7,939	$	24,309	$	23,737

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


	Nine Months Ended
	September 30,
	2022		2021
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	26,643	$	27,386
ROU assets obtained in exchange for lease obligations:
Operating leases	$	28,420	$	29,840

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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


	September 30,			December 31,
	2022			2021
	(Dollars in thousands)
Operating leases:
Operating lease right-of-use assets, net	$	124,773		$	123,225
Operating lease liabilities	$	145,785		$	142,117

Weighted average remaining lease term (in years)	5.9			5.6
Weighted average discount rate	2.32		%	2.23		%

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


	September 30, 2022
	(In thousands)
Period ending December 31,
2022	$	9,431
2023	36,483
2024	29,455
2025	22,635
2026	17,544
Thereafter	41,136
Total operating lease liabilities	156,684
Less: Imputed interest	(10,899)
Present value of operating lease liabilities	$	145,785

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, 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. The equipment is tested periodically for impairment. No impairment was recorded on "Equipment leased to others under operating leases" during the nine months ended September 30, 2022 and 2021.

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


	September 30, 2022
	(In thousands)
Period ending December 31,
2022	$	11,023
2023	43,800
2024	39,727
2025	30,744
2026	24,490
Thereafter	53,761
Total undiscounted cash flows	$	203,545

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 9. BORROWINGS AND SUBORDINATED DEBT

Borrowings

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


	September 30, 2022				December 31, 2021
			Weighted				Weighted
			Average				Average
	Balance		Rate		Balance		Rate
	(Dollars in thousands)
FHLB secured advances	$	1,370,000	3.22	%	$	—	—	%
FHLB unsecured overnight advance	112,000		3.11	%	—		—	%
AFX short-term borrowings	250,000		3.20	%	—		—	%
Credit-linked notes	132,815		12.98	%	—		—	%

Total borrowings	$	1,864,815	3.91	%	$	—	—	%

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

FHLB Secured Line of Credit. The Bank had secured financing capacity with the FHLB as of September 30, 2022 of $5.6 billion, collateralized by a blanket lien on $6.6 billion of qualifying loans and $1.9 billion of securities. As of September 30, 2022, the balance outstanding was $1.4 billion, which consisted of a $1.4 billion overnight advance. As of December 31, 2021, there was no balance outstanding.

FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of September 30, 2022, the Bank had secured borrowing capacity of $2.5 billion collateralized by liens covering $3.1 billion of qualifying loans. As of September 30, 2022 and December 31, 2021, 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 was a $112.0 million balance outstanding at September 30, 2022 and no balance outstanding at December 31, 2021.

Federal Funds Arrangements with Commercial Banks. As of September 30, 2022, the Bank had unsecured lines of credit of $180.0 million in the aggregate with several correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and have no unused commitment fees. As of September 30, 2022 and December 31, 2021, there were no balances outstanding. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2022, the balance outstanding was $250.0 million, which consisted of $250.0 million in overnight borrowings. As of December 31, 2021, there was no balance outstanding.

Credit-Linked Notes

On September 29, 2022, the Bank completed a credit-linked notes transaction. The notes were issued and sold at par and had an aggregate principal amount of $132.8 million with net proceeds of approximately $128.7 million and are due June 27, 2052. The notes are linked to the credit risk of an approximately $2.66 billion reference pool of previously purchased single-family residential mortgage loans. The notes were issued in five classes with a blended rate on the notes of SOFR plus 11%. The transaction results in a lower risk-weighting on the reference pool of loans for regulatory capital purposes. The credit-linked notes are reported at fair value. See Note 12. Fair Value Option for additional information.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Subordinated Debt

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


	September 30, 2022				December 31, 2021				Date	Maturity	Rate Index
Series	Balance		Rate (1)		Balance		Rate (1)		Issued	Date	(Quarterly Reset) (6)
	(Dollars in thousands)
Subordinated notes, net (2)	$	395,008	3.25	%	$	394,634	3.25	%	4/30/2021	5/1/2031	Fixed rate (3)
Trust V	10,310		6.63	%	10,310		3.32	%	8/15/2003	9/17/2033	3-month LIBOR + 3.10
Trust VI	10,310		6.34	%	10,310		3.25	%	9/3/2003	9/15/2033	3-month LIBOR + 3.05
Trust CII	5,155		6.48	%	5,155		3.17	%	9/17/2003	9/17/2033	3-month LIBOR + 2.95
Trust VII	61,856		5.53	%	61,856		2.88	%	2/5/2004	4/23/2034	3-month LIBOR + 2.75
Trust CIII	20,619		4.98	%	20,619		1.89	%	8/15/2005	9/15/2035	3-month LIBOR + 1.69
Trust FCCI	16,495		4.89	%	16,495		1.80	%	1/25/2007	3/15/2037	3-month LIBOR + 1.60
Trust FCBI	10,310		4.84	%	10,310		1.75	%	9/30/2005	12/15/2035	3-month LIBOR + 1.55
Trust CS 2005-1	82,475		5.24	%	82,475		2.15	%	11/21/2005	12/15/2035	3-month LIBOR + 1.95
Trust CS 2005-2	128,866		4.73	%	128,866		2.08	%	12/14/2005	1/30/2036	3-month LIBOR + 1.95
Trust CS 2006-1	51,545		4.73	%	51,545		2.08	%	2/22/2006	4/30/2036	3-month LIBOR + 1.95
Trust CS 2006-2	51,550		4.73	%	51,550		2.08	%	9/27/2006	10/30/2036	3-month LIBOR + 1.95
Trust CS 2006-3 (4)	25,265		2.32	%	29,306		1.49	%	9/29/2006	10/30/2036	3-month EURIBOR + 2.05
Trust CS 2006-4	16,470		4.73	%	16,470		2.08	%	12/5/2006	1/30/2037	3-month LIBOR + 1.95
Trust CS 2006-5	6,650		4.73	%	6,650		2.08	%	12/19/2006	1/30/2037	3-month LIBOR + 1.95
Trust CS 2007-2	39,177		4.73	%	39,177		2.08	%	6/13/2007	7/30/2037	3-month LIBOR + 1.95
Total subordinated debt	932,061		4.19	%	935,728		2.64	%
Acquisition discount (5)	(68,682)				(72,445)
Net subordinated debt	$	863,379			$	863,283

___________________

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

(2) Net of unamortized issuance costs of $5.0 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.

(6) Interest rate will default to the last published or determined rate of LIBOR, and for Trust CS 2006-4, the Base Rate, defined as the greater of Prime and the federal funds rate, upon cessation of LIBOR and effectively converting these instruments to fixed rate, if not modified prior to June 30, 2023.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 10. DERIVATIVES

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


	September 30, 2022				December 31, 2021
	Notional		Fair		Notional		Fair
Derivatives Not Designated As Hedging Instruments	Amount		Value		Amount		Value
	(In thousands)
Derivative Assets:
Interest rate contracts	$	86,060	$	6,149	$	87,470	$	992
Foreign exchange contracts	28,463		—		28,463		1,517
Interest rate and economic contracts	114,523		6,149		115,933		2,509
Equity warrant assets	19,048		4,215		18,539		3,555
Total	$	133,571	$	10,364	$	134,472	$	6,064

Derivative Liabilities:
Interest rate contracts	$	86,060	$	5,924	$	87,470	$	931
Foreign exchange contracts	28,463		443		28,463		—
Total	$	114,523	$	6,367	$	115,933	$	931

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 11. COMMITMENTS AND CONTINGENCIES

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


	September 30,		December 31,
	2022		2021
	(In thousands)
Loan commitments to extend credit	$	11,227,234	$	9,006,350
Standby letters of credit	320,320		345,769
Total	$	11,547,554	$	9,352,119

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 $95.1 million at September 30, 2022 and $73.1 million at December 31, 2021.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

In addition, we invest in SBICs that call for capital contributions up to an amount specified in the partnership agreements, and in CRA-related loan pools. As of September 30, 2022 and December 31, 2021, we had commitments to contribute capital to these entities totaling $85.2 million and $85.9 million.

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


	September 30, 2022
	(In thousands)
Period ending December 31,
2022	$	40,974
2023	44,255




Total	$	85,229

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.

NOTE 12. FAIR VALUE OPTION

The Company may elect to report financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. The election is made upon the initial recognition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not otherwise be revoked once an election is made. The changes in fair value are recorded in "Noninterest income" on the condensed consolidated statements of earnings. However, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk is reported as a component of "Accumulated other comprehensive (loss) income" on the condensed consolidated balance sheets.

Fair Value Option for Certain Debt Liabilities

The Company has elected the fair value option for the credit-linked notes issued in September 2022. The Company elected the fair value option because these notes are financial instruments that contain embedded derivatives. The notes are linked to the credit risk of an approximately $2.66 billion reference pool of previously purchased single-family residential mortgage loans. The carrying value of the credit-linked notes at September 30, 2022 was $132.8 million, which represented the fair value.

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, derivatives, and certain debt liabilities. 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 15. Fair Value Measurements, to the Consolidated Financial Statements of the Company's Form 10-K.

The Company also holds SBIC investments measured at fair value using the NAV per share practical expedient that are not required to be classified in the fair value hierarchy. At September 30, 2022, the fair value of these investments was $59.4 million.

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


	Fair Value Measurements as of
	September 30, 2022
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency residential MBS	$	2,291,234	$	—	$	2,291,234	$	—
Agency commercial MBS	807,920		—		807,920		—
Agency residential CMOs	736,482		—		736,482		—
U.S. Treasury securities	663,389		663,389		—		—
Municipal securities	415,199		—		415,199		—
Collateralized loan obligations	353,762		—		353,762		—
Corporate debt securities	345,542		—		345,542		—
Private label residential CMOs	197,955		—		197,955		—
Asset-backed securities	32,022		—		32,022		—
Private label commercial MBS	29,178		—		29,178		—
SBA securities	18,645		—		18,645		—
Total securities available-for-sale	$	5,891,328	$	663,389	$	5,227,939	$	—
Equity investments with readily determinable fair values	$	2	$	2	$	—	$	—
Derivatives (1):
Equity warrants	4,215		—		—		4,215
Interest rate and economic contracts	6,149		—		6,149		—
Derivative liabilities	6,367		—		6,367		—
Credit-linked notes	132,815		—		—		132,815

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Fair Value Measurements as of
	December 31, 2021
Measured on a Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available-for-sale:
Agency residential MBS	$	2,898,210	$	—	$	2,898,210	$	—
Municipal securities	2,315,968		—		2,315,968		—
Agency commercial MBS	1,688,967		—		1,688,967		—
Agency residential CMOs	1,038,134		—		1,038,134		—
U.S. Treasury securities	966,898		966,898		—		—
Corporate debt securities	527,094		—		527,094		—
Private label commercial MBS	450,217		—		435,216		15,001
Collateralized loan obligations	385,362		—		385,362		—
Private label residential CMOs	264,417		—		264,417		—
Asset-backed securities	129,547		—		129,547		—
SBA securities	29,644		—		29,644		—
Total securities available-for-sale	$	10,694,458	$	966,898	$	9,712,559	$	15,001
Equity investments with readily determinable fair values	$	28,578	$	28,578	$	—	$	—
Derivatives (1):
Equity warrants	3,555		—		—		3,555
Interest rate and economic contracts	2,509		—		2,509		—
Derivative liabilities	931		—		931		—

____________________

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

During the nine months ended September 30, 2022, there was a $10,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily determinable fair values measured on a recurring basis. There was also a $4.6 million transfer of private label commercial MBS from Level 3 to Level 2 during the nine months ended September 30, 2022.

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


	September 30, 2022
	Equity Warrants
		Weighted
	Range	Average
Unobservable Inputs	of Inputs	Input (1)
Volatility	24.9% - 160.1%	28.1%
Risk-free interest rate	2.8% - 4.3%	4.1%
Remaining life assumption (in years)	0.08 - 5.00	3.15

____________________

(1) Unobservable inputs for equity warrants were weighted by the relative fair values of the instruments.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes activity for our Level 3 private label commercial MBS available-for-sale, and equity warrants and credit-linked notes measured at fair value on a recurring basis for the period indicated:


	Private Label		Equity		Credit-Linked
	Commercial MBS		Warrants		Notes
	(In thousands)
Balance, December 31, 2021	$	15,001	$	3,555	$	—
Total included in earnings	(8)		2,536		—
Total included in other comprehensive income (loss)	(156)		—		—

Issuances	—		604		132,815


Transfer to Level 2	(4,552)		—		—
Net settlements	(10,285)		—		—
Exercises and settlements	—		(2,470)		—
Transfers to Level 1 (equity investments with readily
determinable fair values)	—		(10)		—
Balance, September 30, 2022	$	—	$	4,215	$	132,815

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

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


	Fair Value Measurement as of
	September 30, 2022
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases	$	36,971	$	—	$	26,333	$	10,638


Total non-recurring	$	36,971	$	—	$	26,333	$	10,638


	Fair Value Measurement as of
	December 31, 2021
Measured on a Non-Recurring Basis	Total		Level 1		Level 2		Level 3
	(In thousands)
Individually evaluated loans and leases	$	30,882	$	—	$	2,915	$	27,967

Total non-recurring	$	30,882	$	—	$	2,915	$	27,967

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


	Three Months Ended				Nine Months Ended
Losses on Assets	September 30,				September 30,
Measured on a Non-Recurring Basis	2022		2021		2022		2021
	(In thousands)
Individually evaluated loans and leases	$	5,234	$	243	$	6,892	$	2,499

OREO	—		—		—		14
Total losses	$	5,234	$	243	$	6,892	$	2,513

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

September 30, 2022

Valuation

Unobservable

Input or

Weighted

Asset

Fair Value

Technique

Inputs

Range

Average

(Dollars in thousands)

Individually evaluated

loans and leases

4,719

Discounted cash flows

Discount rates

5.50% - 9.25%

7.05%

Individually evaluated

loans and leases

5,919

Third party appraisals

No discounts

Total non-recurring Level 3

10,638

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


	September 30, 2022
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	216,436	$	216,436	$	216,436	$	—	$	—
Interest-earning deposits in financial institutions	2,244,272		2,244,272		2,244,272		—		—
Securities available-for-sale	5,891,328		5,891,328		663,389		5,227,939		—
Securities held-to-maturity	2,264,601		2,060,846		170,010		1,890,836		—
Investment in FHLB stock	36,990		36,990		—		36,990		—
Loans held for sale	15,534		16,407		—		16,407		—
Loans and leases held for investment, net	27,470,714		25,527,716		—		26,333		25,501,383
Equity investments with readily determinable fair values	2		2		2		—		—
Equity warrants	4,215		4,215		—		—		4,215
Interest rate and economic contracts	6,149		6,149		—		6,149		—
Servicing rights	712		712		—		—		712

Financial Liabilities:
Core deposits	28,559,310		28,559,310		—		28,559,310		—
Wholesale non-maturity deposits	2,367,544		2,367,544		—		2,367,544		—
Time deposits	3,269,018		3,232,022		—		3,232,022		—
Borrowings	1,864,815		1,864,815		1,732,000		—		132,815
Subordinated debt	863,379		807,820		—		807,820		—
Derivative liabilities	6,367		6,367		—		6,367		—

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	December 31, 2021
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash and due from banks	$	112,548	$	112,548	$	112,548	$	—	$	—
Interest-earning deposits in financial institutions	3,944,686		3,944,686		3,944,686		—		—
Securities available-for-sale	10,694,458		10,694,458		966,898		9,712,559		15,001
Investment in FHLB stock	17,250		17,250		—		17,250		—
Loans and leases held for investment, net	22,740,984		23,461,156		—		2,915		23,458,241
Equity investments with readily determinable fair values	28,578		28,578		28,578		—		—
Equity warrants	3,555		3,555		—		—		3,555
Interest rate and economic contracts	2,509		2,509		—		2,509		—
Servicing rights	1,228		1,228		—		—		1,228

Financial Liabilities:
Core deposits	32,734,949		32,734,949		—		32,734,949		—
Wholesale non-maturity deposits	889,976		889,976		—		889,976		—
Time deposits	1,372,832		1,371,527		—		1,371,527		—
Borrowings	—		—		—		—		—
Subordinated debt	863,283		917,342		—		917,342		—
Derivative liabilities	931		931		—		931		—

Limitations

Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on what management believes to be reasonable judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of September 30, 2022, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 14. EARNINGS PER COMMON SHARE

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(Dollars in thousands, except per share data)
Basic Earnings Per Common Share:
Net earnings	$	131,616	$	139,996	$	374,104	$	470,914
Less: Preferred stock dividends	(9,392)		—		(9,392)		—
Net earnings available to common stockholders	122,224		139,996		364,712		470,914
Less: Earnings allocated to unvested restricted stock(1)	(2,331)		(2,417)		(6,721)		(7,930)
Net earnings allocated to common shares	$	119,893	$	137,579	$	357,991	$	462,984

Weighted-average basic shares and unvested restricted
stock outstanding	120,342		119,569		119,989		119,272
Less: Weighted-average unvested restricted stock
outstanding	(2,556)		(2,340)		(2,422)		(2,235)
Weighted-average basic shares outstanding	117,786		117,229		117,567		117,037

Basic earnings per common share	$	1.02	$	1.17	$	3.04	$	3.96

Diluted Earnings Per Common Share:
Net earnings allocated to common shares	$	119,893	$	137,579	$	357,991	$	462,984

Weighted-average diluted shares outstanding	117,786		117,229		117,567		117,037

Diluted earnings per common share	$	1.02	$	1.17	$	3.04	$	3.96

________________________

(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 and the related amounts which are from contracts with customers within the scope of ASC Topic 606, "Revenue from Contracts with Customers," for the periods indicated. As illustrated here, substantially all of our revenue is specifically excluded from the scope of ASC Topic 606.


	Three Months Ended September 30,
	2022				2021
	Total		Revenue from		Total		Revenue from
	Recorded		Contracts with		Recorded		Contracts with
	Revenue		Customers		Revenue		Customers
	(In thousands)
Total Interest Income	$	410,044	$	—	$	290,082	$	—
Noninterest Income:
Service charges on deposit accounts	3,608		3,608		3,407		3,407
Other commissions and fees	10,034		3,834		11,792		2,680
Leased equipment income	12,835		—		10,943		—
Gain on sale of loans	58		—		—		—
Gain on sale of securities	86		—		515		—
Dividends and gains on equity securities	3,228		—		8,387		—
Warrant income	292		—		13,578		—
Other income	8,478		359		2,723		(14)
Total noninterest income	38,619		7,801		51,345		6,073
Total Revenue	$	448,663	$	7,801	$	341,427	$	6,073

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


	Three Months Ended
	September 30,
	2022		2021
	(In thousands)
Products and services transferred at a point in time	$	3,718	$	2,754
Products and services transferred over time	4,083		3,319
Total revenue from contracts with customers	$	7,801	$	6,073

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)


	Nine Months Ended September 30,
	2022				2021
	Total		Revenue from		Total		Revenue from
	Recorded		Contracts with		Recorded		Contracts with
	Revenue		Customers		Revenue		Customers
	(In thousands)
Total Interest Income	$	1,083,466	$	—	$	843,924	$	—
Noninterest Income:
Service charges on deposit accounts	10,813		10,813		9,793		9,793
Other commissions and fees	32,427		11,608		31,654		8,140
Leased equipment income	38,264		—		33,144		—
Gain on sale of loans	130		—		1,561		—
(Loss) gain on sale of securities	(1,019)		—		616		—
Dividends and (losses) gains on equity securities	(4,050)		—		24,685		—
Warrant income	2,536		—		25,351		—
Other income	14,682		422		9,741		560
Total noninterest income	93,783		22,843		136,545		18,493
Total Revenue	$	1,177,249	$	22,843	$	980,469	$	18,493

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


	Nine Months Ended
	September 30,
	2022		2021
	(In thousands)
Products and services transferred at a point in time	$	11,415	$	8,819
Products and services transferred over time	11,428		9,674
Total revenue from contracts with customers	$	22,843	$	18,493

Contract Balances

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


	September 30, 2022		December 31, 2021
	(In thousands)
Receivables, which are included in "Other assets"	$	1,306	$	1,066

Contract liabilities, which are included in "Accrued interest payable and other liabilities"	$	131	$	229

Contract liabilities relate to advance consideration received from customers for which revenue is recognized over the life of the contract. The change in contract liabilities for the nine months ended September 30, 2022 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $98,000.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 16. STOCKHOLDERS' EQUITY

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 issue up to 6,650,000 shares. As of September 30, 2022, there were 2,032,177 shares available for grant under the Amended and Restated 2017 Plan.

Restricted Stock

Restricted stock amortization totaled $9.5 million and $8.4 million for the three months ended September 30, 2022 and 2021 and $26.1 million and $23.0 million for the nine months ended September 30, 2022 and 2021. Such amounts are included in "Compensation expense" on the condensed consolidated statements of earnings. The amount of unrecognized compensation expense related to unvested TRSAs and PRSUs as of September 30, 2022 totaled $75.7 million.

Time-Based Restricted Stock Awards

At September 30, 2022, there were 2,505,854 shares of unvested TRSAs outstanding. TRSAs generally vest ratably over a service period of three or four years from the date of the grant or immediately upon death of an employee. Compensation expense related to TRSAs is based on the fair value of the underlying award on the grant date and is recognized over the vesting period using the straight-line method.

Performance-Based Restricted Stock Units

At September 30, 2022, there were 582,287 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.

Preferred Stock Issuance

On June 6, 2022, the Company issued and sold 20,530,000 depositary shares (the “Depositary Shares”), each representing a 1/40th ownership interest in a share of the Company’s 7.75% fixed rate reset non-cumulative, non-convertible, perpetual preferred stock, Series A, par value $0.01 per share (the “Series A preferred stock”), with a liquidation preference of $1,000 per share of Series A preferred stock (equivalent to $25.00 per Depositary Share). The Series A preferred stock qualifies as Tier 1 capital for purposes of regulatory capital calculations. The gross proceeds were $513.3 million while net proceeds from the issuance of the Series A preferred stock, after deducting $14.7 million of offering costs including the underwriting discount and other expenses, were $498.5 million.

Holders of the Depositary Shares will be entitled to all proportional rights and preferences of the Series A preferred stock (including dividend, voting, redemption, and liquidation rights).

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Dividends on the Series A preferred stock are not cumulative or mandatory. If the Company’s Board of Directors does not declare a dividend on the Series A preferred stock in respect of a dividend period, then no dividend shall be deemed to be payable for such dividend period or be cumulative, and the Company will have no obligation to pay any dividend for that dividend period, whether or not the Board of Directors declares a dividend on the Series A preferred stock or any other class or series of its capital stock for any future dividend period. Additionally, so long as any share of Series A preferred stock remains outstanding, unless dividends on all outstanding shares of Series A preferred stock for the most recently completed dividend period have been paid in full or declared and a sum sufficient for the payment thereof has been set aside for payment, no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on the Company’s common stock.

The Series A preferred stock is perpetual and has no maturity date. The Series A preferred stock is not subject to any mandatory redemption, sinking fund, or other similar provisions. The Company, at its option and subject to prior regulatory approval, may redeem the Series A preferred stock (i) in whole or in part, from time to time, on any dividend payment date on or after September 1, 2027 or (ii) in whole but not in part at any time within 90 days following a regulatory capital treatment event, in each case, at a redemption price equal to $1,000 per share of Series A preferred stock (equivalent to $25 per Depositary Share), plus any declared and unpaid dividends, without regard to any undeclared dividends, to but excluding the redemption date. Neither the holders of the Series A preferred stock nor holders of the Depositary Shares will have the right to require the redemption or repurchase of the Series A preferred stock.

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 standard 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 December 31, 2021, the Company permanently ceased originating any new loans or entering into any transaction that would increase its LIBOR-based exposure. For all new variable-rate and hybrid loans, the Company primarily offers Prime and SOFR as the variable-rate index, but may consider alternate rates such as the American Interbank Offered Rate (“Ameribor”) and others based on market conditions and/or the type of loan or financial instrument.

The Company has completed its readiness efforts to identify loans and other financial instruments that are impacted by the discontinuance of LIBOR. The Company has also completed its review for fallback language contained in contracts for LIBOR-based loans and other financial instruments and has begun to execute a transition plan to amend those legacy contracts maturing after June 30, 2023 that do not have or have inadequate fallback language by adding fallback language or to convert the base rate of the contract to a SOFR-based rate or another rate or index offered by the Company.

The Company will also continue to assess impacts to its operations, financial models, data and technology as part of our transition plan. The Company is currently evaluating the impact of this Update on its consolidated financial statements but does not expect it to have a material impact.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Effective

Effect on the Financial Statements

Standard

Description

Date

or Other Significant Matters

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

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

January 1, 2023

The Company will apply the amendments prospectively to business combinations occurring on or after the effective date. This standard 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)

Effective

Effect on the Financial Statements

Standard

Description

Date

or Other Significant Matters

ASU 2022-02, Financial Instruments – Credit Losses (Topic 326)

This standard eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors, in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for restructurings involving borrowers that are experiencing financial difficulty. Additionally, the amendments in this standard eliminate inconsistency in previous guidance by requiring creditors that are public business entities to disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases, but eliminates the disclosure of gross recoveries by year of origination previously presented in Example 15 in ASC 326-20-50-79.

An entity may elect to adopt the amendments on TDRs and related disclosure enhancements separately from the amendments relating to vintage disclosures. The amendments should be applied prospectively except as provided in the next sentence. For amendments related to the recognition and measurement of TDRs, an entity has the option to apply the amendments either prospectively or through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption using the modified retrospective transition method. Additionally, early adoption is permitted.

January 1, 2023

The Company has elected to adopt the amendments on TDRs and related disclosure enhancements separately from the amendments relating to vintage disclosures, which we early adopted on January 1, 2022.

This standard is not expected to have a material impact on the Company's consolidated financial statements and related disclosures upon adoption.

Effective

Effect on the Financial Statements

Standard

Description

Date

or Other Significant Matters

ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

This standard clarifies that a contractual sale restriction is not considered in measuring an equity security at fair value. The standard also clarifies that an entity cannot recognize a contractual sale restriction as a separate unit of account, such as a contra-asset or liability. The standard requires new disclosures for all entities with equity securities subject to contractual sales restrictions. Additionally, early adoption is permitted.

January 1, 2024

The Company does not take into account contractual sale restrictions in determining the fair value of its equity securities. The Company expects that this standard will not have a material impact on its consolidated financial statements.

PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 18. RELATED PARTY TRANSACTIONS

In February 2022, the Company purchased $133.1 million in unpaid principal balances of single-family residential mortgage loans from a privately owned non-affiliated bank holding company. In addition, the Company entered into a subservicing agreement with the bank holding company pursuant to which it would service the purchased loans on an ongoing basis and the Company could outsource servicing of loans purchased from third parties to it. The Company’s Chairman of the Board of Directors is a director of the non-affiliated bank holding company.

The transactions described above were approved by the Audit Committee of the Board of Directors in accordance with our related party transactions policy.

NOTE 19. SUBSEQUENT EVENTS

Common Stock Dividends

On November 1, 2022, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.25 per common share. The cash dividend is payable on November 30, 2022 to stockholders of record at the close of business on November 15, 2022.

Preferred Stock Dividends

On November 1, 2022, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.4845 per Depositary Share. The cash dividend is payable on December 1, 2022 to stockholders of record at the close of business on November 15, 2022.

The Company has evaluated events that have occurred subsequent to September 30, 2022 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:

•weaker than expected general business and economic conditions, including a recession, could adversely affect the Company’s revenues, the values of its assets and liabilities, negatively impact loan and deposit growth, and may impact our borrowers ability to repay their loans;

•the risks and impacts of the COVID-19 pandemic appear to have largely subsided, however, new variants may continue to impact key macro-economic indicators such as unemployment and GDP and may have a material impact on our business, financial position, results of operations, liquidity and our allowance for credit losses and the related provision for credit losses;

•our ability to compete effectively against other financial service providers in our markets;

•continued deterioration in general business and economic conditions, uncertainty in U.S. fiscal monetary policy, including the interest rate policies of the Federal Reserve Board, and volatility and disruption in credit and capital markets could adversely affect the Company's revenues and the value of its assets, including goodwill, and liabilities, lead to a tightening of credit, and increase stock price volatility;

•changes in credit quality and the effect of credit quality and the current expected credit loss 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 manage our liquidity;

•the need to increase 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;

•impact of the benchmark interest rate reform in the U.S. including the transition away from the U.S. dollar London Inter-bank Offering Rate ("LIBOR") to alternative reference rates;

•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;

•the impact of climate change, public health issues, natural or man-made disasters such as wildfires, droughts and earthquakes, all of which are particularly common in California;

•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

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 2022, accounted for 91.2% of net revenue (net interest income plus noninterest income).

At September 30, 2022, the Company had total assets of $41.4 billion, including $27.7 billion of total loans and leases, net of deferred fees, $5.9 billion of securities available-for-sale, $2.3 billion of securities held-to-maturity, and $2.2 billion of interest-earning deposits in financial institutions compared to $40.4 billion of total assets at December 31, 2021, including $22.9 billion of total loans and leases, net of deferred fees, $10.7 billion of securities available-for-sale, no securities held-to-maturity, and $3.9 billion of interest-earning deposits in financial institutions. The $961.2 million increase in total assets since year-end was due primarily to a $4.7 billion increase in loans and leases, net of deferred fees, and a $2.3 billion increase in securities held-to-maturity, offset partially by a $4.8 billion decrease in securities available-for-sale and a $1.7 billion decrease in interest-earning deposits in financial institutions. The changes in securities available-for-sale and securities held-to-maturity were due mainly to a $2.3 billion transfer from available-for-sale to held-to-maturity during the second quarter of 2022. Contributing to the decrease in securities available-for-sale were sales of $1.0 billion and a net increase in net unrealized losses of $969.6 million due to the significant increase in market interest rates during 2022.

At September 30, 2022, the Company had total liabilities of $37.5 billion, including total deposits of $34.2 billion and borrowings of $1.9 billion, compared to $36.4 billion of total liabilities at December 31, 2021, including $35.0 billion of total deposits and no borrowings. The $1.1 billion increase in total liabilities since year-end was due mainly to increases of $1.4 billion in overnight FHLB borrowings, $1.5 billion in wholesale non-maturity deposits, and $1.9 billion in time deposits, offset partially by a decrease of $4.2 billion in core deposits. The decrease in core deposits was due primarily to a $3.3 billion decline in balances from our venture banking clients. At September 30, 2022, core deposits totaled $28.6 billion, or 83% of total deposits, including $12.8 billion of noninterest-bearing demand deposits, or 37% of total deposits.

At September 30, 2022, the Company had total stockholders' equity of $3.9 billion compared to $4.0 billion at December 31, 2021. The $123.7 million decrease in stockholders' equity since year-end was due mainly to a $914.2 million decrease in accumulated other comprehensive income (loss) attributable to the investment securities portfolio going from a net unrealized gain of $66.0 million to a net unrealized loss of $848.2 million, and $90.2 million of common stock cash dividends paid, offset partially by $498.5 million in net proceeds from our Series A preferred stock issuance in June 2022 and $374.1 million in net earnings. Our consolidated Tier 1 capital and Total capital ratios increased to 10.46%, and 13.43% at September 30, 2022 due primarily to net earnings, the Series A preferred stock issuance, and the credit-linked notes issuance in September 2022, while our consolidated common equity Tier 1 capital ratio decreased to 8.56% due to risk-weighted assets growing at a higher percentage than Tier 1 capital and the exclusion of Series A preferred stock from this capital calculation.

Recent Events

Credit-Linked Notes Issuance

On September 29, 2022, Pacific Western Bank completed a credit-linked notes transaction. The notes were issued and sold at par and had an aggregate principal amount of $132.8 million with net proceeds of approximately $128.7 million and are due June 27, 2052. The notes are linked to the credit risk of an approximately $2.66 billion reference pool of previously purchased single-family residential mortgage loans. The notes were issued in five classes with a blended rate on the notes of SOFR plus 11%. The transaction results in a lower risk-weighting on the reference pool of loans for regulatory capital purposes.

Preferred Stock Issuance

On June 6, 2022, the Company issued and sold 20,530,000 depositary shares (the “Depositary Shares”), each representing a 1/40th ownership interest in a share of the Company’s 7.75% fixed rate reset non-cumulative, non-convertible, perpetual preferred stock, par value $0.01 per share (the “Series A preferred stock”), with a liquidation preference of $1,000 per share (equivalent to $25.00 per Depositary Share). The Series A preferred stock qualifies as Tier 1 capital for purposes of the regulatory capital calculations. The gross proceeds were $513.3 million while net proceeds from the issuance of the Series A preferred stock, after deducting $14.7 million of offering costs including the underwriting discount and other expenses, were $498.5 million. A total of 513,250 shares of Series A preferred stock was issued. For additional information regarding the Series A preferred stock issuance, see Note 16. Stockholders' Equity.

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 strong net interest margin is our strong 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 in 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. On occasion, to augment our internal loan production, we have purchased loans such as multi-family loans from other banks, private student loans from third-party lenders, and, most recently, single-family residential mortgage loans. Prior to our acquisition of Civic, we also purchased loans from Civic. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic, interest-rate risk, credit risk, and product composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.

The Magnitude of Credit Losses

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

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

The Level of Noninterest Expense

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

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Efficiency Ratio		2022			2021			2022			2021
		(Dollars in thousands)
Noninterest expense		$	195,618		$	159,421		$	546,689		$	461,307
Less:	Intangible asset amortization	3,649			2,890			10,947			8,858
	Foreclosed assets (income) expense, net	(248)			165			(3,629)			47
	Acquisition, integration and reorganization costs	—			200			—			3,825
	Noninterest expense used for efficiency ratio	$	192,217		$	156,166		$	539,371		$	448,577

Net interest income (tax equivalent)		$	338,558		$	279,777		$	979,010		$	814,495
Noninterest income		38,619			51,345			93,783			136,545
	Net revenues	377,177			331,122			1,072,793			951,040
Less:	Gain (loss) on sale of securities	86			515			(1,019)			616
	Net revenues used for efficiency ratio	$	377,091		$	330,607		$	1,073,812		$	950,424

Efficiency ratio		51.0		%	47.2		%	50.2		%	47.2		%

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 common equity, tangible common equity ratio, and tangible book value per common 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 common share, respectively. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Return on Average Tangible Common Equity		2022			2021			2022			2021
		(Dollars in thousands)
Net earnings		$	131,616		$	139,996		$	374,104		$	470,914
Less:	Preferred stock dividends	(9,392)			—			(9,392)			—
	Net earnings available to common stockholders	122,224			139,996			364,712			470,914
Add:	Intangible asset amortization	3,649			2,890			10,947			8,858
	Adjusted net earnings	$	125,873		$	142,886		$	375,659		$	479,772

Average stockholders' equity		$	4,011,179		$	3,916,621		$	3,837,609		$	3,758,733
Less:	Average intangible assets	1,441,689			1,221,253			1,445,332			1,212,851
Less:	Average preferred stock	498,516			—			213,698			—
	Average tangible common equity	$	2,070,974		$	2,695,368		$	2,178,579		$	2,545,882

Return on average equity (1)		13.02		%	14.18		%	13.03		%	16.75		%
Return on average tangible common equity (2)		24.11		%	21.03		%	23.05		%	25.20		%

___________________________________

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

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


Tangible Common Equity Ratio and	September 30,			December 31,
Tangible Book Value Per Common Share	2022			2021
	(Dollars in thousands, except per share data)
Stockholders’ equity	$	3,875,945		$	3,999,630
Less: Preferred stock	498,516			—
Total common equity	3,377,429			3,999,630
Less: Intangible assets	1,439,746			1,450,693
Tangible common equity	1,937,683			2,548,937
Add: Accumulated other comprehensive loss (income)	848,214			(65,968)
Adjusted tangible common equity	$	2,785,897		$	2,482,969

Total assets	$	41,404,592		$	40,443,344
Less: Intangible assets	1,439,746			1,450,693
Tangible assets	$	39,964,846		$	38,992,651

Equity to assets ratio	9.36		%	9.89		%
Tangible common equity ratio (1)	4.85		%	6.54		%
Tangible common equity ratio, excluding AOCI (2)	6.97		%	6.37		%
Book value per common share (3)	$	28.07		$	33.45
Tangible book value per common share (4)	$	16.11		$	21.31
Tangible book value per common share, excluding AOCI (5)	$	23.16		$	20.76
Common shares outstanding	120,314,023			119,584,854

_______________________________________

(1) Tangible common equity divided by tangible assets.

(2) Adjusted tangible common equity divided by tangible assets.

(3) Total common equity divided by common shares outstanding.

(4) Tangible common equity divided by common shares outstanding.

(5) Adjusted tangible common equity divided by common shares outstanding.

Results of Operations

Earnings Performance

The following table presents performance metrics for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(Dollars in thousands, except per share data)
Earnings Summary:
Interest income	$	410,044		$	290,082		$	1,083,466		$	843,924
Interest expense	(74,863)			(14,240)			(115,643)			(40,505)
Net interest income	335,181			275,842			967,823			803,419
Provision for credit losses	(3,000)			20,000			(14,500)			156,000
Noninterest income	38,619			51,345			93,783			136,545
Noninterest expense	(195,618)			(159,421)			(546,689)			(461,307)
Earnings before income taxes	175,182			187,766			500,417			634,657
Income tax expense	(43,566)			(47,770)			(126,313)			(163,743)
Net earnings	131,616			139,996			374,104			470,914
Preferred stock dividends	(9,392)			—			(9,392)			—
Net earnings available to common stockholders	$	122,224		$	139,996		$	364,712		$	470,914

Per Common Share Data:
Diluted earnings per common share	$	1.02		$	1.17		$	3.04		$	3.96
Book value per common share	$	28.07		$	32.77
Tangible book value per common share (1)	$	16.11		$	22.57

Performance Ratios:
Return on average assets	1.28		%	1.55		%	1.24		%	1.86		%
Return on average tangible common equity (1)	24.11		%	21.03		%	23.05		%	25.20		%
Net interest margin (tax equivalent)	3.57		%	3.33		%	3.52		%	3.46		%
Yield on average loans and leases (tax equivalent)	5.12		%	5.01		%	4.82		%	5.13		%
Cost of average total deposits	0.70		%	0.08		%	0.32		%	0.10		%
Efficiency ratio	51.0		%	47.2		%	50.2		%	47.2		%

Capital Ratios (consolidated):
Common equity tier 1 capital ratio	8.56		%	10.15		%
Tier 1 capital ratio	10.46		%	10.65		%
Total capital ratio	13.43		%	14.36		%
Tier 1 leverage capital ratio	8.63		%	8.05		%
Risk-weighted assets	$	33,042,173		$	26,057,583

_____________________________

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

Third Quarter of 2022 Compared to Third Quarter of 2021

Net earnings available to common stockholders for the third quarter of 2022 were $122.2 million, or $1.02 per diluted share, compared to net earnings available to common stockholders for the third quarter of 2021 of $140.0 million, or $1.17 per diluted share. The $17.8 million decrease in net earnings available to common stockholders from the third quarter of 2021 was due mainly to a higher provision for credit losses of $23.0 million, lower noninterest income of $12.7 million, higher noninterest expense of $36.2 million, and higher preferred stock dividends of $9.4 million, offset partially by higher net interest income of $59.3 million and lower income tax expense of $4.2 million. The increase in the provision for credit losses for the third quarter of 2022 from the third quarter of 2021 was due to a $3.0 million provision in the third quarter of 2022 compared to a provision benefit of $20.0 million in the third quarter of 2021. The provision in the third quarter of 2022 was due primarily to reserves needed attributable to a less favorable economic forecast, offset partially by a decrease in COVID-related qualitative reserves. The provision benefit in the third quarter of 2021 was due mainly to improvement in both macroeconomic forecast variables and loan portfolio credit quality metrics, offset partially by increased provisions for unfunded loan commitments and loan growth. Noninterest income decreased due primarily to decreases of $13.3 million in warrant income and $5.2 million in dividends and gains (losses) on equity investments, offset partially by an increase of $5.8 million in other income, with the first two items attributable mostly to a decrease in capital markets activity in 2022. Noninterest expense increased primarily due to an increase of $8.1 million in customer related expense due primarily to the acquired operations of the HOA Business in October 2021, a $7.9 million increase in compensation expense, due mostly to the incremental expense of the higher headcount in 2022 from the acquired operations of the HOA Business in October 2021, incremental additions to staff in certain business lines, and staff added to support our digital and innovation initiatives, and a $5.5 million increase in other professional expense due primarily to the issuance costs related to the credit-linked notes transaction in September 2022. Net interest income increased due mainly to higher interest income on loans and leases and investment securities attributable primarily to higher average balances, offset partially by higher interest expense on interest-bearing liabilities due to higher rates and average balances. The decrease in income tax expense was due primarily to lower pre-tax earnings in the third quarter of 2022 compared to the third quarter of 2021.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Net earnings available to common stockholders for the nine months ended September 30, 2022 were $364.7 million, or $3.04 per diluted share, compared to net earnings available to common stockholders for the nine months ended September 30, 2021 of $470.9 million, or $3.96 per diluted share. The $106.2 million decrease in net earnings available to common stockholders from the year-ago period was due mainly to a higher provision for credit losses of $170.5 million, lower noninterest income of $42.8 million, higher noninterest expense of $85.4 million, and higher preferred stock dividends of $9.4 million, offset partially by higher net interest income of $164.4 million and lower income tax expense of $37.4 million. The increase in the provision for credit losses for the nine months ended September 30, 2022 from the year-ago period was due to a $14.5 million provision in the nine months ended September 30, 2022 compared to a provision benefit of $156.0 million in the nine months ended September 30, 2021. The provision in the nine months ended September 30, 2022 was due primarily to the growth in loans and leases and unfunded loan commitments and a less favorable economic forecast. The provision benefit in the nine months ended September 30, 2021 was due mainly to improvement in both macroeconomic forecast variables and loan portfolio credit quality metrics. Noninterest income decreased due primarily to decreases of $28.7 million in dividends and gains (losses) on equity investments and $22.8 million in warrant income, attributable mostly to a decrease in capital markets activity in 2022. Noninterest expense increased primarily due to an increase of $32.0 million in compensation expense, due mostly to the incremental expense of the higher headcount in 2022 from the acquired operations of Civic and the HOA Business in 2021, incremental additions to staff in certain business lines, and staff added to support our digital and innovation initiatives. Net interest income increased due mainly to higher interest income on loans and leases and investment securities attributable primarily to higher average balances, offset partially by higher interest expense on interest-bearing liabilities due to higher rates and average balances. The decrease in income tax expense was due primarily to lower pre-tax earnings in the nine months ended September 30, 2022 compared to the year-ago period.

Net Interest Income

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


	Three Months Ended
	September 30, 2022						September 30, 2021
			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)	$	27,038,873	$	348,639	5.12	%	$	19,670,671	$	248,485	5.01	%
Investment securities (2)(4)	8,803,349		54,423		2.45	%	8,047,098		42,952		2.12	%
Deposits in financial institutions	1,809,809		10,359		2.27	%	5,657,768		2,580		0.18	%
Total interest‑earning assets (2)	37,652,031		413,421		4.36	%	33,375,537		294,017		3.50	%
Other assets	3,189,241						2,496,127
Total assets	$	40,841,272					$	35,871,664

LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking	$	6,650,477	19,475		1.16	%	$	7,372,859	2,042		0.11	%
Money market	10,914,027		31,780		1.16	%	8,662,449		2,997		0.14	%
Savings	649,574		42		0.03	%	620,079		38		0.02	%
Time	3,000,187		9,991		1.32	%	1,475,307		1,340		0.36	%
Total interest‑bearing deposits	21,214,265		61,288		1.15	%	18,130,694		6,417		0.14	%
Borrowings	505,482		3,081		2.42	%	238,335		101		0.17	%
Subordinated debt	863,719		10,494		4.82	%	862,272		7,722		3.55	%
Total interest‑bearing liabilities	22,583,466		74,863		1.32	%	19,231,301		14,240		0.29	%
Noninterest‑bearing demand deposits	13,653,177						12,198,313
Other liabilities	593,450						525,429
Total liabilities	36,830,093						31,955,043
Stockholders’ equity	4,011,179						3,916,621
Total liabilities and stockholders' equity	$	40,841,272					$	35,871,664
Net interest income (2)			$	338,558					$	279,777
Net interest rate spread (2)					3.04	%					3.21	%
Net interest margin (2)					3.57	%					3.33	%

Total deposits (5)	$	34,867,442	$	61,288	0.70	%	$	30,329,007	$	6,417	0.08	%

_____________________

(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 $3.8 million and $2.4 million for the three months ended September 30, 2022 and 2021, respectively.

(4) Includes tax-equivalent adjustments of $1.3 million and $2.2 million for the three months ended September 30, 2022 and 2021, respectively, related to tax-exempt interest on investment securities. The federal statutory rate utilized was 21%.

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


	Nine Months Ended
	September 30, 2022						September 30, 2021
			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)	$	25,320,430	$	913,314	4.82	%	$	19,221,192	$	737,478	5.13	%
Investment securities (2)(4)	9,557,397		164,927		2.31	%	6,650,744		111,392		2.24	%
Deposits in financial institutions	2,287,909		16,412		0.96	%	5,601,765		6,130		0.15	%
Total interest‑earning assets (2)	37,165,736		1,094,653		3.94	%	31,473,701		855,000		3.63	%
Other assets	3,089,929						2,413,840
Total assets	$	40,255,665					$	33,887,541

LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking	$	6,752,585	25,067		0.50	%	$	7,007,042	6,668		0.13	%
Money market	10,773,700		43,689		0.54	%	8,376,974		9,593		0.15	%
Savings	647,613		122		0.03	%	597,260		109		0.02	%
Time	2,079,177		13,980		0.90	%	1,488,848		4,816		0.43	%
Total interest‑bearing deposits	20,253,075		82,858		0.55	%	17,470,124		21,186		0.16	%
Borrowings	720,939		5,683		1.05	%	229,990		559		0.32	%
Subordinated debt	863,648		27,102		4.20	%	689,484		18,760		3.64	%
Total interest‑bearing liabilities	21,837,662		115,643		0.71	%	18,389,598		40,505		0.29	%
Noninterest‑bearing demand deposits	14,031,727						11,232,927
Other liabilities	548,667						506,283
Total liabilities	36,418,056						30,128,808
Stockholders’ equity	3,837,609						3,758,733
Total liabilities and stockholders' equity	$	40,255,665					$	33,887,541
Net interest income (2)			$	979,010					$	814,495
Net interest rate spread (2)					3.23	%					3.34	%
Net interest margin (2)					3.52	%					3.46	%

Total deposits (5)	$	34,284,802	$	82,858	0.32	%	$	28,703,051	$	21,186	0.10	%

_____________________

(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 $15.4 million and $5.0 million for the nine months ended September 30, 2022 and 2021, respectively.

(4) Includes tax-equivalent adjustments of $5.5 million and $6.4 million for the nine months ended September 30, 2022 and 2021, respectively, related to tax-exempt interest on investment securities. The federal statutory rate utilized was 21%.

Third Quarter of 2022 Compared to Third Quarter of 2021

Net interest income increased by $59.3 million to $335.2 million for the third quarter of 2022 compared to $275.8 million for the third quarter of 2021 due mainly to higher interest income on loans and leases and investment securities, offset partially by higher interest expense. The increase in interest income on loans and leases was attributable to a higher average balance and higher yield on average loans and leases. The tax equivalent yield on average loans and leases was 5.12% for the third quarter of 2022, compared to 5.01% for the same quarter of 2021. The increase in interest income on investment securities was due to a higher average balance and higher yield on average investment securities. The increase in interest expense was due to a higher cost and balance of average interest-bearing liabilities.

The tax equivalent NIM was 3.57% for the third quarter of 2022 compared to 3.33% for the comparable quarter last year. The increase in the tax equivalent NIM was due mostly to the change in the mix of average interest-earning assets and the higher yield on average loans and leases. The change in the mix of average interest-earning assets was due to the increase in the balance of average loans and leases as a percentage of average interest-earning assets from 59% to 72% and the decrease in the balance of average deposits in financial institutions as a percentage of average interest-earning assets from 17% to 5%. The balance of average loans and leases increased by $7.4 billion and the balance of average deposits in financial institutions declined by $3.8 billion.

The cost of average total deposits increased to 0.70% for the third quarter of 2022 from 0.08% for the third quarter of 2021 due mainly to higher average balances and rates on higher-cost wholesale and brokered time deposits, as well as higher market rates on our deposit products. Average wholesale and brokered time deposits increased by $2.9 billion to $4.0 billion for the third quarter of 2022 from $1.1 billion for the third quarter of 2021.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Net interest income increased by $164.4 million to $967.8 million for the nine months ended September 30, 2022 compared to $803.4 million for the nine months ended September 30, 2021 due mainly to higher interest income on loans and leases and investment securities, offset partially by higher interest expense. The increase in interest income on loans and leases was attributable to a higher average balance, offset partially by a lower yield on average loans and leases. The tax equivalent yield on average loans and leases was 4.82% for the nine months ended September 30, 2022 compared to 5.13% for the same period in 2021. The increase in interest income on investment securities was due to a higher average balance and higher yield on average investment securities. The increase in interest expense was due to a higher cost and balance of average interest-bearing liabilities.

The tax equivalent NIM was 3.52% for the nine months ended September 30, 2022 compared to 3.46% for the same period last year. The increase in the tax equivalent NIM was due mostly to the change in the mix of average interest-earning assets, offset partially by the lower yield on average loans and leases. The change in the mix of average interest-earning assets was due to the increase in the balance of average loans and leases as a percentage of average interest-earning assets from 61% to 68%, the increase in the balance of average investment securities as a percentage of average interest-earning assets from 21% to 26%, and the decrease in the balance of average deposits in financial institutions as a percentage of average interest-earning assets from 18% to 6%. The balance of average loans and leases increased by $6.1 billion, the balance of average investment securities increased by $2.9 billion, and the balance of average deposits in financial institutions declined by $3.3 billion.

The cost of average total deposits increased to 0.32% for the nine months ended September 30, 2022 from 0.10% for the same period last year due mainly to higher market rates on our deposit products and higher average balances and rates on higher-cost wholesale and brokered time deposits. Average wholesale and brokered time deposits increased by $921.6 million to $2.2 billion for the nine months ended September 30, 2022 from $1.3 billion for the nine months ended September 30, 2021.

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 held-to-maturity securities and information regarding credit quality metrics for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(Dollars in thousands)
Provision For Credit Losses:
Addition to (reduction in) allowance for loan and lease losses	$	3,000		$	(21,500)		$	(9,000)		$	(146,500)
Addition to (reduction in) reserve for unfunded
loan commitments	—			1,500			22,000			(9,500)
Total loan-related provision	$	3,000		$	(20,000)		$	13,000		$	(156,000)
Addition to allowance for held-to-maturity securities	—			—			1,500			—
Total provision for credit losses	$	3,000		$	(20,000)		$	14,500		$	(156,000)

Credit Quality Metrics:
Net charge-offs (recoveries) on loans and leases
held for investment (1)	$	2,378		$	367		$	2,237		$	(2,052)
Annualized net charge-offs (recoveries) to average
loans and leases	0.03		%	0.01		%	0.01		%	(0.01)		%
At quarter-end:
Allowance for credit losses	$	284,398		$	279,804
Allowance for credit losses to loans and leases
held for investment	1.03		%	1.36		%
Allowance for credit losses to nonaccrual loans
and leases held for investment	316.9		%	433.8		%
Nonaccrual loans and leases held for investment	$	89,742		$	64,507
Nonaccrual loans and leases held for investment to
loans and leases held for investment	0.32		%	0.31		%

______________________

(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 the allowance for loan and lease losses, the reserve for unfunded loan commitments, and the allowance for credit losses on held-to-maturity securities. 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 loan-related allowance for credit losses methodology, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.

Third Quarter of 2022 Compared to Third Quarter of 2021

The provision for credit losses increased by $23.0 million to a provision of $3.0 million for the third quarter of 2022 compared to a provision benefit of $20.0 million for the third quarter of 2021. During the third quarter of 2022, the $3.0 million loan-related provision was primarily attributable to a less favorable economic forecast offset partially by a decrease in COVID-related qualitative reserves. During the third quarter of 2021, a provision benefit was recorded as a result of improvement in both macro-economic forecast variables and loan portfolio credit quality metrics, offset partially by increased provisions for unfunded loan commitments and loan growth.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

The provision for credit losses increased by $170.5 million to a provision of $14.5 million for the nine months ended September 30, 2022 compared to a provision benefit of $156.0 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, the $13.0 million loan-related provision was due primarily to the growth in loans and leases and unfunded loan commitments and a less favorable economic forecast offset partially by a decrease in qualitative reserves. We also recorded a $1.5 million provision on held-to-maturity securities related to the $2.3 billion transfer from available-for-sale securities during the second quarter of 2022 and the estimated current expected credit loss on those held-to-maturity securities. During the nine months ended September 30, 2021, a provision benefit was recorded as a result of improvement in both macro-economic forecast variables and loan portfolio credit quality metrics offset partially by increased provisions for unfunded loan commitments and loan growth.

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

Noninterest Income

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Noninterest Income	2022		2021		2022		2021
	(In thousands)
Leased equipment income	$	12,835	$	10,943	$	38,264	$	33,144
Other commissions and fees	10,034		11,792		32,427		31,654
Service charges on deposit accounts	3,608		3,407		10,813		9,793
Gain on sale of loans and leases	58		—		130		1,561
Gain (loss) on sale of securities	86		515		(1,019)		616
Dividends and gains (losses) on equity investments	3,228		8,387		(4,050)		24,685
Warrant income	292		13,578		2,536		25,351
Other	8,478		2,723		14,682		9,741
Total noninterest income	$	38,619	$	51,345	$	93,783	$	136,545

Third Quarter of 2022 Compared to Third Quarter of 2021

Noninterest income decreased by $12.7 million to $38.6 million for the third quarter of 2022 compared to $51.3 million for the third quarter of 2021 due mainly to decreases of $13.3 million in warrant income and $5.2 million in dividends and gains (losses) on equity investments, offset partially by a $5.8 million increase in other income. The first two items decreased due to decreased capital market activity in 2022 and volatility in equity markets resulting from geopolitical tensions and inflationary pressures. Warrant income decreased due principally to fewer gains from exercised warrants, driven by the less capital market activity in 2022. The decrease in dividends and gains (losses) on equity investments was due mainly to lower gains on sales of equity investments and lower income distributions on SBIC investments, offset partially by higher fair value gains on equity investments still held. The increase in other income was due primarily to the receipt of a $5.5 million legal settlement, net of current year legal fees.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Noninterest income decreased by $42.8 million to $93.8 million for the nine months ended September 30, 2022 compared to $136.5 million for the nine months ended September 30, 2021 due mainly to decreases of $28.7 million in dividends and gains (losses) on equity investments and $22.8 million in warrant income. These two items declined due to decreased capital market activity in 2022 and volatility in equity markets resulting from geopolitical tensions and inflationary pressures. The decrease in dividends and gains (losses) on equity investments was due primarily to lower gains on sales of equity investments, offset partially by higher fair value gains on equity investments still held. Warrant income decreased due principally to fewer gains from exercised warrants, driven by the less capital market activity in 2022.

Noninterest Expense

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Noninterest Expense	2022		2021		2022		2021
	(In thousands)
Compensation	$	105,933	$	98,061	$	300,715	$	268,750
Occupancy	15,574		14,928		46,042		43,766
Customer related expense	12,673		4,538		37,076		14,329
Other professional services	10,674		5,164		23,354		15,546
Data processing	9,568		7,391		28,455		22,106
Leased equipment depreciation	8,908		8,603		27,031		26,186
Insurance and assessments	7,159		3,685		18,281		12,333
Loan expense	6,228		4,180		18,422		11,404
Intangible asset amortization	3,649		2,890		10,947		8,858
Acquisition, integration and reorganization costs	—		200		—		3,825
Foreclosed assets (income) expense, net	(248)		165		(3,629)		47
Other	15,500		9,616		39,995		34,157
Total noninterest expense	$	195,618	$	159,421	$	546,689	$	461,307

Third Quarter of 2022 Compared to Third Quarter of 2021

Noninterest expense increased by $36.2 million to $195.6 million for the third quarter of 2022 compared to $159.4 million for the third quarter of 2021 due primarily to increases of $8.1 million in customer related expense, $7.9 million in compensation expense, $5.9 million in other expense, $5.5 million in other professional services, and $3.5 million in insurance and assessments expense. The increases in customer related expense, compensation expense, and other expense were attributable mostly to the incremental expense related to the increased headcount and operations in 2022 due to the HOA Business that was acquired in October 2021 and increased levels of loan production in 2022. The increase in other professional services was due mainly to issuance costs of the credit-linked notes transaction in September 2022. The increase in insurance and assessments expense was due to higher FDIC assessment expense attributable to downward trends in core deposits and capital levels in the first half of 2022 resulting in a higher assessment rate.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Noninterest expense increased by $85.4 million to $546.7 million for the nine months ended September 30, 2022 compared to $461.3 million for the nine months ended September 30, 2021 due mainly to increases of $32.0 million in compensation expense, $22.7 million customer related expense, $7.8 million in other professional services, $7.0 million in loan expense, and $6.3 million in data processing expense. The increases in these items, except other professional services, were attributable mostly to the incremental expense related to the increased headcount and operations in 2022 due to the February 2021 Civic acquisition and October 2021 HOA Business acquisition, incremental additions to staff in certain business lines, and staff added to support our digital and innovation initiatives. The increase in other professional services was due mainly to issuance costs of the credit-linked notes transaction in September 2022.

Income Taxes

The effective tax rate for the third quarter of 2022 was 24.9% compared to 25.4% for the third quarter of 2021. The effective tax rate for the nine months ended September 30, 2022 was 25.2% compared to 25.8% for the nine months ended September 30, 2021. The lower effective tax rates in 2022 were due primarily to the adjustment to the liability for uncertain tax positions made in the third quarter of 2022. The Company’s blended statutory tax rate for federal and state is 27.5% and the effective tax rate for the full year 2022 is estimated to be in the range of 25-27%.

Balance Sheet Analysis

Securities Available-for-Sale

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


	September 30, 2022					December 31, 2021
	Fair		% of		Duration	Fair		% of		Duration
Security Type	Value		Total		(in years)	Value		Total		(in years)
	(Dollars in thousands)
Agency residential MBS	$	2,291,234	39	%	7.4	$	2,898,210	27	%	2.9
Agency commercial MBS	807,920		14	%	4.0	1,688,967		16	%	5.2
Agency residential CMOs	736,482		13	%	3.5	1,038,134		10	%	3.2
U.S. Treasury securities	663,389		11	%	5.2	966,898		9	%	6.6
Municipal securities	415,199		7	%	5.9	2,315,968		22	%	7.7
Collateralized loan obligations	353,762		6	%	—	385,362		4	%	0.1
Corporate debt securities	345,542		6	%	2.9	527,094		5	%	4.2
Private label residential CMOs	197,955		3	%	5.3	264,417		2	%	3.9
Asset-backed securities	32,022		1	%	—	129,547		1	%	0.1
Private label commercial MBS	29,178		—	%	2.3	450,217		4	%	7.5
SBA securities	18,645		—	%	2.4	29,644		—	%	3.7
Total securities available-for-sale	$	5,891,328	100	%	5.2	$	10,694,458	100	%	4.8

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


	September 30, 2022
	Fair		% of
Municipal Securities by State	Value		Total
	(Dollars in thousands)
Texas	$	126,755	31	%
California	103,711		25	%
Washington	40,117		10	%
Oregon	32,503		8	%
Minnesota	20,245		5	%
Delaware	18,851		4	%
Florida	17,179		4	%
Wisconsin	11,954		3	%
Rhode Island	10,443		2	%
Iowa	6,764		2	%
Total of ten largest states	388,522		94	%
All other states	26,677		6	%
Total municipal securities available-for-sale	$	415,199	100	%

Securities Held-to-Maturity

The following table presents the composition and durations of our securities held-to-maturity as of the date indicated:


	September 30, 2022
	Amortized		% of		Duration
Security Type	Cost		Total		(in years)
	(Dollars in thousands)

Municipal securities	$	1,242,427	55	%	9.2
Agency commercial MBS	425,831		19	%	7.7
Private label commercial MBS	344,673		15	%	7.3
U.S. Treasury securities	183,457		8	%	7.8
Corporate debt securities	69,713		3	%	6.1




Total securities held-to-maturity	$	2,266,101	100	%	8.4

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


	September 30, 2022
	Amortized		% of
Municipal Securities by State	Cost		Total
	(Dollars in thousands)
California	$	307,013	25	%
Texas	275,048		22	%
Washington	190,499		15	%
Oregon	77,670		6	%
Maryland	65,030		5	%
Georgia	55,407		4	%
Colorado	49,299		4	%
Minnesota	35,306		3	%
Tennessee	30,810		3	%
Florida	21,981		2	%
Total of ten largest states	1,108,063		89	%
All other states	134,364		11	%
Total municipal securities held-to-maturity	$	1,242,427	100	%

Loans and Leases Held for Investment

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


	September 30, 2022				December 31, 2021
			% of				% of
Loan and Lease Portfolio	Balance		Total		Balance		Total
	(Dollars in thousands)
Real Estate Mortgage:
Commercial real estate	$	2,522,921	9	%	$	2,545,517	11	%
SBA program	620,992		2	%	623,579		3	%
Hotel	626,793		3	%	593,203		3	%
Total commercial real estate mortgage	3,770,706		14	%	3,762,299		17	%
Multi-family	5,510,876		20	%	3,916,317		17	%
Residential mortgage	2,941,711		10	%	2,449,693		11	%
Investor-owned residential	2,407,456		9	%	1,050,411		4	%
Total residential real estate mortgage	10,860,043		39	%	7,416,421		32	%
Total real estate mortgage	14,630,749		53	%	11,178,720		49	%
Real Estate Construction and Land:
Commercial real estate construction and land	843,086		3	%	832,591		4	%
Residential construction	2,916,415		10	%	2,182,091		9	%
Construction - renovation	534,015		2	%	422,445		2	%
Total residential real estate construction and land	3,450,430		12	%	2,604,536		11	%
Total real estate construction and land (1)	4,293,516		15	%	3,437,127		15	%
Total real estate	18,924,265		68	%	14,615,847		64	%
Commercial:
Lender finance	3,200,866		12	%	2,617,712		11	%
Equipment finance	923,650		3	%	681,266		3	%
Premium finance	815,651		3	%	586,267		3	%
Other asset-based	214,487		1	%	190,232		1	%
Total asset-based	5,154,654		19	%	4,075,477		18	%
Equity fund loans	1,398,318		5	%	1,707,143		7	%
Venture lending	602,768		2	%	613,450		3	%
Total venture capital	2,001,086		7	%	2,320,593		10	%
Secured business loans	383,702		1	%	486,088		2	%
Paycheck Protection Program	13,314		—	%	156,699		1	%
Other lending	718,426		3	%	829,194		3	%
Total other commercial	1,115,442		4	%	1,471,981		6	%
Total commercial	8,271,182		30	%	7,868,051		34	%
Consumer	464,594		2	%	457,650		2	%
Total loans and leases held for investment,
net of deferred fees	$	27,660,041	100	%	$	22,941,548	100	%

Total unfunded loan commitments	$	11,227,234			$	9,006,350

________________________________

(1) Includes land and acquisition and development loans of $151.2 million at September 30, 2022 and $151.8 million at December 31, 2021.

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


	September 30, 2022				December 31, 2021
			% of				% of
Real Estate Loans by State	Balance		Total		Balance		Total
	(Dollars in thousands)
California	$	10,559,838	56	%	$	8,916,633	61	%
Florida	1,237,639		7	%	556,057		4	%
Colorado	932,535		5	%	721,343		5	%
Texas	831,331		4	%	392,836		3	%
New York	697,428		4	%	675,948		5	%
Washington	658,324		3	%	500,836		3	%
Arizona	497,673		3	%	253,289		2	%
Nevada	486,010		2	%	346,838		2	%
Oregon	426,718		2	%	375,223		3	%
Georgia	316,554		2	%	203,360		1	%
Total of 10 largest states	16,644,050		88	%	12,942,363		89	%
All other states	2,280,215		12	%	1,673,484		11	%
Total real estate loans held for investment, net of deferred fees	$	18,924,265	100	%	$	14,615,847	100	%

The following table presents a roll forward of loans and leases held for investment, net of deferred fees, for the periods indicated:


	Nine Months Ended
Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees (1)	September 30, 2022
	(In thousands)
Balance, beginning of period	$	22,941,548
Additions:
Production	7,148,148
Disbursements	5,138,574
Total production and disbursements	12,286,722
Reductions:
Payoffs	(3,773,781)
Paydowns	(3,704,306)
Total payoffs and paydowns	(7,478,087)
Sales	(60,652)
Transfers to foreclosed assets	(3,271)
Charge-offs	(10,685)
Transfers to loans held for sale	(15,534)
Total reductions	(7,568,229)

Net increase	4,718,493
Balance, end of period	$	27,660,041

Weighted average rate on production (2)	4.82		%

_______________________________________

(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 22 basis points to loan yields for the nine months ended September 30, 2022.

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 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 higher inflation rates, rising interest rates, the risk of a recession, technical or otherwise, and the Russia-Ukraine war as well as any trailing impact of the COVID-19 pandemic in our process for estimating 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 resulting from such events. 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.

For the third quarter of 2022, we switched from using the Moody’s Consensus Forecast scenario to using a multiple scenario approach. In the third quarter, we used the Moody’s September 2022 Baseline, S1 Upside 10th Percentile, and S3 Downside 90th Percentile forecast scenarios for the calculation of our quantitative component. The weightings of the scenarios were based on management’s current expectations for the economic forecast, acknowledging the risk of a near-term recession and inherent uncertainty, with a smaller weighting assigned to the S1 Upside and equal weighting to the Baseline and S3 Downside scenarios. For the second quarter of 2022, we used the June 2022 Moody's Consensus Forecast for the calculation of our quantitative component and Moody’s S2 Downside 75th Percentile scenario for a qualitative adjustment to consider forecast uncertainty. The economic forecasts were generally less favorable compared to the prior quarter resulting in an increase to the allowance for credit losses partially offset by reductions in pandemic-specific qualitative adjustments.

As part of our allowance for credit losses methodology, we consistently incorporate the use of qualitative factors in determining the overall allowance for credit losses to capture risks that may not be adequately reflected in our quantitative models. 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 were more directly affected by the COVID-19 pandemic and 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. Throughout 2021, these qualitative adjustments were updated based on evolving forecasts of property values and the pace of recovery for small businesses. During the third quarter of 2022, forecasted property values for hotels, retail, and office properties improved, the outlook for small businesses improved and, therefore, our pandemic-specific qualitative adjustments were decreased.

The increases in the quantitative reserve for net growth in loans and leases and deterioration of the economic forecast were offset partially by decreases in pandemic-specific qualitative adjustments and, as a result, a $3.0 million loan-related provision for credit losses was recognized during the third quarter of 2022. The loan-related allowance for credit losses as a percentage of loans and leases held for investment decreased slightly due to loan growth in lending areas with lower credit risk and is consistent with stable credit quality and minimal charge-offs.

The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of allowance for credit losses. As part of our allowance for credit losses process, sensitivity analyses are performed to assess the impact of how changing certain assumptions could impact the estimated allowance for credit losses. At times, these analyses can provide information to further assist management in making decisions on certain assumptions. We calculated alternative values for our September 30, 2022 ACL using various alternative forecast scenarios provided by Moody’s including the Moody's Consensus Forecast, and Moody’s S2 Downside 75th Percentile and the calculated amounts for the quantitative component differed from the probability-weighted multiple scenario forecast ranging from lower by 4.74% to higher by 4.23%. However, changing one assumption and not reassessing other assumptions used in the quantitative or qualitative process could yield results that are not reasonable or appropriate, hence all assumptions and information must be considered. From a sensitivity analysis perspective, changing key assumptions such as the macro-economic variable inputs from the economic forecasts, the reasonable and supportable forecast period, prepayment rates, loan segmentation, historical loss factors and/or periods, among others, would all change the outcome of the quantitative components of the allowance for credit losses. Those results would then need to be assessed from a qualitative perspective potentially requiring further adjustments to the qualitative component to arrive at a reasonable and appropriate allowance for credit losses.

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 on loans and leases held for investment 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 loan commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements.

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


	September 30,			December 31,
Allowance for Credit Losses Data	2022			2021
	(Dollars in thousands)
Allowance for loan and lease losses	$	189,327		$	200,564
Reserve for unfunded loan commitments	95,071			73,071
Total allowance for credit losses	$	284,398		$	273,635

Allowance for loan and lease losses to loans and leases held for investment	0.68		%	0.87		%


Allowance for credit losses to loans and leases held for investment	1.03		%	1.19		%

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Allowance for Credit Losses Roll Forward	2022			2021			2022			2021
	(Dollars in thousands)
Balance, beginning of period	$	283,776		$	300,171		$	273,635		$	433,752





Provision for credit losses:
Reduction in allowance for loan and lease losses	3,000			(21,500)			(9,000)			(146,500)
Addition to reserve for unfunded loan commitments	—			1,500			22,000			(9,500)
Total provision for credit losses	3,000			(20,000)			13,000			(156,000)
Loans and leases charged off:
Real estate mortgage	(1,604)			(29)			(3,310)			(663)
Real estate construction and land	(1,006)			—			(1,013)			(775)
Commercial	(1,522)			(951)			(5,266)			(3,802)
Consumer	(520)			(536)			(1,096)			(1,080)
Total loans and leases charged off	(4,652)			(1,516)			(10,685)			(6,320)
Recoveries on loans charged off:
Real estate mortgage	231			563			1,699			5,990
Real estate construction and land	29			—			178			—
Commercial	1,996			543			6,521			2,269
Consumer	18			43			50			113
Total recoveries on loans charged off	2,274			1,149			8,448			8,372
Net (charge-offs) recoveries	(2,378)			(367)			(2,237)			2,052
Balance, end of period	$	284,398		$	279,804		$	284,398		$	279,804

Annualized net (charge-offs) recoveries to
average loans and leases	0.03		%	0.01		%	0.01		%	(0.01)		%

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Allowance for Credit Losses Charge-offs	2022		2021		2022		2021
	(In thousands)
Real Estate Mortgage:
Commercial real estate	$	770	$	—	$	2,258	$	—
SBA program	108		—		236		236
Hotel	—		—		55		343
Total commercial real estate mortgage	878		—		2,549		579
Multi-family	—		1		—		56
Residential mortgage	—		—		—		—
Investor-owned residential	726		28		761		28
Total residential real estate mortgage	726		29		761		84
Total real estate mortgage	1,604		29		3,310		663
Real Estate Construction and Land:
Commercial real estate construction and land	—		—		—		775
Residential construction	—		—		—		—
Construction - renovation	1,006		—		1,013		—
Total residential real estate construction and land	1,006		—		1,013		—
Total real estate construction and land	1,006		—		1,013		775
Commercial:
Lender finance	—		232		—		232
Equipment finance	—		—		—		—
Premium finance	—		—		—		—
Other asset-based	750		—		750		—
Total asset-based	750		232		750		232
Equity fund loans	—		—		—		—
Venture lending	—		—		—		620
Total venture capital	—		—		—		620
Secured business loans	182		73		426		120
Paycheck Protection Program	—		—		—		—
Other lending	590		646		4,090		2,830
Total other commercial	772		719		4,516		2,950
Total commercial	1,522		951		5,266		3,802
Consumer	520		536		1,096		1,080
Total charge-offs	$	4,652	$	1,516	$	10,685	$	6,320

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Allowance for Credit Losses Recoveries	2022		2021		2022		2021
	(In thousands)
Real Estate Mortgage:
Commercial real estate	$	4	$	—	$	1,204	$	5,384
SBA program	226		513		259		550
Hotel	—		—		—		—
Total commercial real estate mortgage	230		513		1,463		5,934
Multi-family	—		—		4		—
Residential mortgage	1		50		232		56
Investor-owned residential	—		—		—		—
Total residential real estate mortgage	1		50		236		56
Total real estate mortgage	231		563		1,699		5,990
Real Estate Construction and Land:
Commercial real estate construction and land	29		—		178		—
Residential construction	—		—		—		—
Construction - renovation	—		—		—		—
Total residential real estate construction and land	—		—		—		—
Total real estate construction and land	29		—		178		—
Commercial:
Lender finance	—		—		—		—
Equipment finance	—		—		163		114
Premium finance	—		—		—		—
Other asset-based	—		101		105		360
Total asset-based	—		101		268		474
Equity fund loans	—		—		—		—
Venture lending	169		32		341		133
Total venture capital	169		32		341		133
Secured business loans	60		125		156		324
Paycheck Protection Program	—		—		—		—
Other lending	1,767		285		5,756		1,338
Total other commercial	1,827		410		5,912		1,662
Total commercial	1,996		543		6,521		2,269
Consumer	18		43		50		113
Total recoveries	$	2,274	$	1,149	$	8,448	$	8,372

Deposits

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


	September 30, 2022				December 31, 2021
			% of				% of
Deposit Composition	Balance		Total		Balance		Total
	(Dollars in thousands)
Noninterest-bearing demand	$	12,775,756	37	%	$	14,543,133	41	%
Interest checking	6,780,900		20	%	7,319,898		21	%
Money market	8,361,779		24	%	10,241,265		29	%
Savings	640,875		2	%	630,653		2	%
Total core deposits	28,559,310		83	%	32,734,949		93	%
Wholesale non-maturity deposits	2,367,544		7	%	889,976		3	%
Total non-maturity deposits	30,926,854		90	%	33,624,925		96	%
Retail time deposits	1,778,325		5	%	1,177,147		3	%
Brokered time deposits	1,490,693		5	%	195,685		1	%
Total time deposits	3,269,018		10	%	1,372,832		4	%
Total deposits	$	34,195,872	100	%	$	34,997,757	100	%

The following table presents time deposits based on the $250,000 FDIC insured limit as of the dates indicated:


	September 30, 2022		December 31, 2021
Time Deposits	Balance		Balance
	(In thousands)
Time deposits $250,000 and under	$	2,238,472	$	885,938
Time deposits over $250,000	1,030,546		486,894
Total time deposits	$	3,269,018	$	1,372,832

During the nine months ended September 30, 2022, total deposits decreased by $801.9 million to $34.2 billion due primarily to a decline of $4.2 billion in core deposits, offset partially by increases of $1.9 billion in time deposits and $1.5 billion in wholesale non-maturity deposits. The decrease in core deposits for the nine months ended September 30, 2022 was driven primarily by a $3.3 billion decrease in balances from our venture banking clients. The decline in venture banking deposits was primarily attributable to the lack of capital market activity, which has significantly decreased cash inflows while the underlying clients continue to use cash to fund normal ongoing business operations, commonly referred to as “cash burn” within the venture banking community. At September 30, 2022, our venture banking deposits were $12.2 billion. At September 30, 2022, core deposits totaled $28.6 billion, or 83% of total deposits, including $12.8 billion of noninterest-bearing demand deposits, or 37% of total deposits.

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


	Time Deposits
	$250,000		Over
September 30, 2022	and Under		$250,000		Total
	(In thousands)
Maturities:
Due in three months or less	$	634,290	$	596,381	$	1,230,671
Due in over three months through six months	557,579		109,871		667,450
Due in over six months through twelve months	685,031		257,866		942,897
Total due within twelve months	1,876,900		964,118		2,841,018
Due in over 12 months through 24 months	298,769		61,017		359,786
Due in over 24 months	62,803		5,411		68,214
Total due over twelve months	361,572		66,428		428,000
Total	$	2,238,472	$	1,030,546	$	3,269,018

Client Investment Funds

In addition to deposit products, we also offer select clients non-depository cash investment options through PWAM, our registered investment adviser subsidiary, and third-party money market sweep products. PWAM provides customized investment advisory and asset management solutions. At September 30, 2022, total off-balance sheet client investment funds were $1.8 billion, of which $1.1 billion was managed by PWAM. At December 31, 2021, total off-balance sheet client investment funds were $1.4 billion, of which $0.9 billion was managed by PWAM.

Credit Quality

Nonperforming Assets, Performing TDRs, and Classified Loans and Leases

The following table presents information on our nonperforming assets, performing TDRs, and classified loans and leases as of the dates indicated:


	September 30,			December 31,
	2022			2021
	(Dollars in thousands)
Nonaccrual loans and leases held for investment	$	89,742		$	61,174

Foreclosed assets, net	2,967			12,843
Total nonperforming assets	$	92,709		$	74,017

Performing TDRs held for investment	$	8,106		$	24,430
Classified loans and leases held for investment	$	96,685		$	116,104
Special mention loans and leases held for investment	$	463,994		$	391,611
Nonaccrual loans and leases held for investment to loans and leases held for investment	0.32		%	0.27		%
Nonperforming assets to loans and leases held for investment and foreclosed assets, net	0.34		%	0.32		%
Allowance for credit losses to nonaccrual loans and leases held for investment	316.9		%	447.3		%
Classified loans and leases held for investment to loans and leases held for investment	0.35		%	0.51		%
Special mention loans and leases held for investment to loans and leases held for investment	1.68		%	1.71		%

Nonaccrual Loans and Leases Held for Investment

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


	September 30, 2022				December 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
	(In thousands)
Real estate mortgage:
Commercial	$	42,772	$	14	$	27,540	$	2,165	$	15,232	$	(2,151)
Residential	25,950		21,700		12,292		39,929		13,658		(18,229)
Total real estate mortgage	68,722		21,714		39,832		42,094		28,890		(20,380)
Real estate construction and land:
Commercial	—		—		—		—		—		—
Residential	7,101		3,051		4,715		5,031		2,386		(1,980)
Total real estate construction and land	7,101		3,051		4,715		5,031		2,386		(1,980)
Commercial:
Asset-based	2,127		—		1,464		—		663		—
Venture capital	3,809		—		2,799		—		1,010		—
Other commercial	7,616		265		11,950		630		(4,334)		(365)
Total commercial	13,552		265		16,213		630		(2,661)		(365)
Consumer	367		1,996		414		1,004		(47)		992
Total held for investment	$	89,742	$	27,026	$	61,174	$	48,759	$	28,568	$	(21,733)

During the nine months ended September 30, 2022, nonaccrual loan and leases held for investment increased by $28.6 million to $89.7 million at September 30, 2022 due mainly to additions of $102.6 million, offset partially by returns to accrual status of $7.3 million, charge-offs of $6.7 million, and principal and other reductions of $60.1 million. As of September 30, 2022, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $30.8 million and represented 34% of total nonaccrual loans and leases.

Foreclosed Assets

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


	September 30,		December 31,
Property Type	2022		2021
	(In thousands)
Commercial real estate	$	—	$	12,594
Single-family residence	2,967		—


Total OREO, net	2,967		12,594
Other foreclosed assets	—		249
Total foreclosed assets, net	$	2,967	$	12,843

During the nine months ended September 30, 2022, foreclosed assets decreased by $9.9 million to $3.0 million at September 30, 2022 due mainly to sales of $13.1 million, offset partially by additions of $3.3 million. In the first quarter of 2022, we sold our largest foreclosed asset with a book value of $12.6 million, which resulted in a gain on sale of $3.2 million.

Performing TDRs Held for Investment

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


	September 30, 2022			December 31, 2021
			Number			Number
			of			of
Performing TDRs	Balance		Loans	Balance		Loans
	(Dollars in thousands)
Real estate mortgage	$	5,805	17	$	6,204	18
Real estate construction and land	1,408		1	1,428		1
Commercial	870		21	16,773		24
Consumer	23		1	25		1
Total performing TDRs held for investment	$	8,106	40	$	24,430	44

During the nine months ended September 30, 2022, performing TDRs held for investment decreased by $16.3 million to $8.1 million at September 30, 2022 attributable primarily to payments and other reductions of $16.4 million.

Classified and Special Mention Loans and Leases Held for Investment

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


	September 30,		December 31,
Loan and Lease Credit Risk Ratings	2022		2021
	(In thousands)
Pass	$	27,099,362	$	22,433,833
Special mention	463,994		391,611
Classified	96,685		116,104
Total loans and leases held for investment, net of deferred fees	$	27,660,041	$	22,941,548

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 nine months ended September 30, 2022, classified loans and leases decreased by $19.4 million to $96.7 million at September 30, 2022 due mostly to decreases of $18.2 million in commercial real estate mortgage loans and $14.8 million in other commercial loans, offset partially by an increase of $14.2 million in residential real estate mortgage loans.

During the nine months ended September 30, 2022, special mention loans and leases increased by $72.4 million to $464.0 million at September 30, 2022 due mainly to increases of $66.9 million in residential real estate construction and land loans, $42.1 million in venture capital loans, $23.2 million in commercial real estate mortgage loans and $8.8 million in residential real estate mortgage loans, offset partially by a decrease of $67.7 million in commercial real estate construction and land loans.

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


	September 30, 2022				December 31, 2021				Increase (Decrease)
			Special				Special				Special
	Classified		Mention		Classified		Mention		Classified		Mention
	(In thousands)
Real estate mortgage:
Commercial	$	44,014	$	215,057	$	62,206	$	191,809	$	(18,192)	$	23,248
Residential	31,892		28,660		17,700		19,848		14,192		8,812
Total real estate mortgage	75,906		243,717		79,906		211,657		(4,000)		32,060
Real estate construction and land:
Commercial	—		—		—		67,727		—		(67,727)
Residential	7,543		68,586		4,715		1,720		2,828		66,866
Total real estate construction and land	7,543		68,586		4,715		69,447		2,828		(861)
Commercial:
Asset-based	2,127		79,991		4,591		78,305		(2,464)		1,686
Venture capital	3,803		56,974		4,794		14,833		(991)		42,141
Other commercial	6,864		8,235		21,659		15,528		(14,795)		(7,293)
Total commercial	12,794		145,200		31,044		108,666		(18,250)		36,534
Consumer	442		6,491		439		1,841		3		4,650
Total	$	96,685	$	463,994	$	116,104	$	391,611	$	(19,419)	$	72,383

Regulatory Matters

Capital

Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines that compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. At September 30, 2022, banks considered to be “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5.00%, a minimum common equity Tier 1 risk-based capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, and a minimum Total risk-based capital ratio of 10.00%.

Basel III currently requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. Effective January 1, 2019, the common equity Tier 1,Tier 1, and Total capital ratio minimums inclusive of the capital conservation buffer were 7.00%, 8.50%, and 10.50%. At September 30, 2022, the Company and the Bank were in compliance with the capital conservation buffer requirement.

The Company and the Bank elected the CECL 5-year regulatory transition guidance for calculating regulatory capital ratios and the September 30, 2022 ratios include this election. This regulatory guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through December 31, 2022. This cumulative amount will then be phased out of regulatory capital over the next three years from 2023 to 2025. The add-back as of September 30, 2022 ranged from 0 basis points to 6 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
September 30, 2022	Actual	Purposes	Buffer	Classification
PacWest Bancorp Consolidated:
Tier 1 leverage capital ratio	8.63%	4.00%	N/A	N/A
CET1 capital ratio	8.56%	4.50%	7.00%	N/A
Tier 1 capital ratio	10.46%	6.00%	8.50%	N/A
Total capital ratio	13.43%	8.00%	10.50%	N/A

Pacific Western Bank:
Tier 1 leverage capital ratio	8.39%	4.00%	N/A	5.00%
CET1 capital ratio	10.17%	4.50%	7.00%	6.50%
Tier 1 capital ratio	10.17%	6.00%	8.50%	8.00%
Total capital ratio	12.16%	8.00%	10.50%	10.00%


		Minimum Required
		For Capital	For Capital	For Well
		Adequacy	Conservation	Capitalized
December 31, 2021	Actual	Purposes	Buffer	Classification
PacWest Bancorp Consolidated:
Tier 1 leverage capital ratio	6.84%	4.00%	N/A	N/A
CET1 capital ratio	8.86%	4.50%	7.00%	N/A
Tier 1 capital ratio	9.32%	6.00%	8.50%	N/A
Total capital ratio	12.69%	8.00%	10.50%	N/A

Pacific Western Bank:
Tier 1 leverage capital ratio	7.00%	4.00%	N/A	5.00%
CET1 capital ratio	9.56%	4.50%	7.00%	6.50%
Tier 1 capital ratio	9.56%	6.00%	8.50%	8.00%
Total capital ratio	11.80%	8.00%	10.50%	10.00%

The Company's consolidated Tier 1 leverage, Tier 1, and Total capital ratios increased during the nine months ended September 30, 2022 due mainly to net earnings, the $513.3 million Series A preferred stock issuance in June 2022, and the credit-linked notes issuance in September 2022, while the consolidated common equity Tier 1 capital ratio decreased due to risk-weighted assets growing at a higher percentage than Tier 1 capital and the exclusion of Series A preferred stock from this capital calculation. The net Series A preferred stock proceeds of $498.5 million and year-to-date net earnings of $374.1 million increased regulatory capital, offset partially by an increase in risk-weighted assets of $4.5 billion from $28.5 billion as of December 31, 2021 to $33.0 billion as of September 30, 2022, primarily as a result of the growth in loans and leases and unfunded loan commitments.

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. As of September 30, 2022, the carrying value of subordinated debt totaled $863.4 million. At September 30, 2022, $131.0 million of the trust preferred securities were included in the Company's Tier I capital and $718.3 million were included in Tier II capital.

Dividends on Common and Preferred 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. The Company currently is not required to receive FRB approval to declare or pay a dividend to stockholders. Further, if the Company defaults or elects to defer the interest payments on its subordinated debt, it is restricted from paying dividends on its Series A preferred and common stock.

Dividends on Preferred Stock

The Company's ability to pay dividends on the Series A preferred stock depends on the ability of the Bank to pay dividends to the holding company. The ability of the Company and the Bank to pay dividends in the future is subject to bank regulatory requirements, including capital regulations and policies established by the FRB, the FDIC and the DFPI, as applicable. Dividends on the Series A preferred stock will not be declared, paid, or set aside for payment to the extent such act would cause us to fail to comply with applicable laws and regulations, including applicable FRB capital adequacy regulations and policies.

Stock Repurchase Program

On February 15, 2022, PacWest's Board of Directors authorized a new Stock Repurchase Program, effective March 1, 2022, to repurchase shares of its common stock for an aggregate purchase price not to exceed $100 million with a program maturity date of February 28, 2023.

Liquidity

Liquidity Management

Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in the Company’s business operations or unanticipated events.

The ability to have readily available funds sufficient to repay fully maturing liabilities is primary importance to depositors, creditors, and regulators. The Company’s liquidity, represented by cash and due from banks; interest-earning deposits in financial institutions, net of restricted cash collateral accounts; unpledged available-for-sale securities; and unpledged held-to-maturity securities, is a result of the Company’s operating, investing, and financing activities and related cash flows. In order to ensure that funds are available when necessary, the Company regularly projects the amount of funds that will be required over a twelve-month period and it also strives to maintain relationships with a diversified customer base. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets.

The Company has a formal liquidity policy and, in the opinion of management, its liquid assets are considered adequate to meet cash flow needs for loan funding and deposit cash withdrawals for the next 90 to 120 days. At September 30, 2022, there was $7.7 billion in liquid assets, comprised of $216.4 million in cash and due from banks; $2.1 billion in interest-earning deposits in financial institutions, net of restricted cash collateral accounts; $4.2 billion in unpledged available-for-sale securities; and $1.2 billion in unpledged held-to-maturity securities. At December 31, 2021, the Company maintained $14.2 billion in liquid assets, comprised of $112.5 million in cash and due from banks; $3.9 billion in interest-earning deposits in financial institutions, net of restricted cash collateral accounts; and $10.2 billion in unpledged available-for-sale securities.

The Company’s liquidity decreased by $6.5 billion during the nine months ended September 30, 2022, primarily due to the following two factors: (i) our liquidity at December 31, 2021 was higher than usual due to the $4.1 billion of liquidity acquired from the HOA Business acquisition in October 2021, and (ii) during 2022, liquid assets decreased due to the deployment of liquidity to fund loan growth of $4.7 billion.

We also maintain available borrowing capacity under secured credit lines with the FHLB and the FRBSF. As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB of $5.6 billion at September 30, 2022, of which all but $1.4 billion was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $6.6 billion of certain qualifying loans and $1.9 billion of securities. The Bank also had secured borrowing capacity with the FRBSF of $2.5 billion at September 30, 2022, all of which was available on that date. The FRBSF secured credit line was collateralized by liens on $3.1 billion of qualifying loans.

In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit for the purpose of borrowing overnight funds, subject to availability, of $112.0 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of September 30, 2022, there was a $112.0 million balance outstanding related to the FHLB unsecured line of credit. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of September 30, 2022, the Bank had borrowed $250.0 million through the AFX.

Additionally, we generate liquidity from cash flows from our loan and securities portfolios and from our large base of core deposits, defined as noninterest-bearing demand, interest checking, savings, and non-brokered money market accounts. At September 30, 2022, core deposits totaled $28.6 billion and represented 83% of the Company's total deposits. Core deposits are normally less volatile, often with customer relationships tied to other products offered by the Bank promoting long-standing relationships and stable funding sources. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our core deposits.

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

We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At September 30, 2022, brokered deposits totaled $3.9 billion, consisting of $2.4 billion of non-maturity brokered accounts and $1.5 billion of brokered time deposits. At December 31, 2021, brokered deposits totaled $1.1 billion, consisting of $890.0 million of non-maturity brokered accounts and $195.7 million of brokered time deposits.

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. The Company is currently not required to receive FRB approval to declare or pay a dividend to stockholders. 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.

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 $155.3 million during the three fiscal years of 2021, 2020, and 2019, compared to dividends of $776.0 million paid by the Bank during that same period. During the three and nine months ended September 30, 2022, PacWest received $18.0 million and $86.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $1.2 billion at September 30, 2022, for the foreseeable future any dividends from the Bank to PacWest will continue to require DFPI and FDIC approval consistent with what has been required since 2008 when Bank first had an accumulated deficit triggered by goodwill impairment write-downs during the financial crisis of 2007-2008.

At September 30, 2022, PacWest had $350.1 million in cash and cash equivalents, of which substantially all was on deposit at the Bank. We believe this amount of cash, along with anticipated future dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months.

Off-Balance Sheet Arrangements

Our obligations also include off-balance sheet arrangements consisting of loan commitments, of which only a portion is expected to be funded, and standby letters of credit. At September 30, 2022, our loan commitments and standby letters of credit were $11.2 billion and $320.3 million. The loan commitments, a portion of which will eventually result in funded loans, increase our profitability through net interest income when drawn and unused commitment fees prior to being drawn. We manage our overall liquidity taking into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources, as described in "- Liquidity - Liquidity Management," have been and are expected to be sufficient to meet the cash requirements of our lending activities. For further information on loan commitments, see Note 11. Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Market Risk - Foreign Currency Exposure

We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps to hedge exposures to debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar, and the derivatives that hedge those exposures. As of September 30, 2022, the U.S. Dollar notional amounts of subordinated debt payable denominated in foreign currencies was $25.3 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 $2.1 million for the nine months ended September 30, 2022 and a foreign currency translation net gain of $129,000 for the nine months ended September 30, 2021.

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 Finance Committee of the Company's Board of Directors review the results of these analyses quarterly. If hypothetical changes to interest rates cause changes to our simulated net present value of equity and/or net interest income outside our pre-established limits, we may adjust our asset and liability mix in an effort to bring our interest rate risk exposure within our established limits.

We evaluated the results of our NII simulation model and MVE model prepared as of September 30, 2022, the results of which are presented below. Our NII simulation and MVE model indicate that our balance sheet is asset-sensitive. An asset-sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated NII and MVE, while a liability-sensitive profile would suggest that these amounts would decrease.

Net Interest Income Simulation

We used a NII simulation model to measure the estimated changes in NII that would result over the next 12 months from immediate and sustained changes in interest rates as of September 30, 2022. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. We have assumed no growth or changes in the product mix of either our total interest-sensitive assets or liabilities over the next 12 months, therefore the results reflect an interest rate shock to a static balance sheet.

This analysis calculates the difference between NII forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at September 30, 2022. In order to arrive at the base case, we extend our balance sheet at September 30, 2022 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products’ pricing as of September 30, 2022. 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, almost half of our loans are variable rate (excluding hybrid loans), which are assumed to reprice in accordance with their contractual terms. Some loans and investment securities include the opportunity of prepayment (embedded options) and the simulation model uses prepayment assumptions to estimate these accelerated cash flows and reinvest these proceeds at current simulated yields. Our interest-bearing deposits reprice at our discretion and are assumed to reprice at a rate less than the change in market rates. The 12-month NII simulation model as of September 30, 2022 assumes interest-bearing deposits reprice at 51% and total deposits reprice at 32% of the change in market rates in a rising interest rate scenario, depending on the amount of the rate change (this is commonly referred to as the "deposit beta"). The effects of certain balance sheet attributes, such as fixed-rate loans, variable-rate loans that have reached their floors, and the volume of noninterest-bearing deposits as a percentage of earning assets, impact our assumptions and consequently the results of our NII simulation model. Additionally, we assume that all market interest rates have an interest rate floor of 0%. Changes that could vary significantly from our assumptions include loan and deposit growth or contraction, loan and deposit pricing, changes in the mix of earning assets or funding sources, and future asset/liability management decisions, all of which may have significant effects on our net interest income.

The following table presents forecasted net interest income and net interest margin for the next 12 months using the static balance sheet and forward yield curve as the base scenario, with immediate and sustained parallel upward and downward movements in interest rates of 100, 200, and 300 basis points as of the date indicated:


	Forecasted			Forecasted	Forecasted
	Net Interest		Percentage	Net Interest	Net Interest
	Income		Change	Margin	Margin Change
September 30, 2022	(Tax Equivalent)		From Base	(Tax Equivalent)	From Base
	(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points	$	1,505.8	6.4%	3.92%	0.23%
Up 200 basis points	$	1,475.3	4.3%	3.84%	0.15%
Up 100 basis points	$	1,443.9	2.0%	3.76%	0.07%
BASE CASE	$	1,415.0	—	3.69%


Down 100 basis points	$	1,388.8	(1.9)%	3.62%	(0.07)%
Down 200 basis points	$	1,371.4	(3.1)%	3.58%	(0.11)%
Down 300 basis points	$	1,353.2	(4.4)%	3.53%	(0.16)%

During the nine months ended September 30, 2022, total base case year 1 tax equivalent NII increased by $231.6 million or 20% to $1.4 billion at September 30, 2022 compared to December 31, 2021, and the base case tax equivalent NIM increased to 3.69% at September 30, 2022 from 3.17% at December 31, 2021. The increase in year 1 NII and tax equivalent NIM compared to the December 31, 2021 forecasted NII and NIM was attributable to the shift in the mix of interest-earning assets resulting from the increase in loans and leases and the decrease in interest-earning deposits in financial institutions, the impact of actual rate hikes, and the impact of the increase in the implied forward yield curve. The implied forward yield curve for December 31, 2021 included three 25 basis points rate hikes over a 12-month horizon to a Fed target rate of 1.00%, while the implied forward yield curve for September 30, 2022 included five 25 basis points rate hikes over a 12-month horizon to a Fed target rate of 4.50%.

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 “Sharp Increase” scenario, which applies a parallel ramped increase to the yield curve over an 18 month horizon. In the “Sharp Increase” scenario, Year 1 tax equivalent NII increases by 2.1%. The most unfavorable alternate rate vector that we model is the “Bull Steepener” scenario, in which rates decrease over an 18 month ramped horizon, with short term rates falling more than longer term rates. In the “Bull Steepener” scenario, Year 1 tax equivalent NII decreases by 2.8%.

At September 30, 2022, we had $27.8 billion of total loans that included $11.6 billion or 42% with variable interest rate terms (excluding hybrid loans discussed below). Of the variable interest rate loans, $10.5 billion, or 90%, contained interest rate floor provisions, which included $48 million of loans below their floors and $10.4 billion of loans that are at or above their floors and will reprice with future rate changes.

At September 30, 2022, we also had $5.8 billion of variable-rate hybrid loans, representing 21% of total loans, which do not reprice immediately 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 $79.9 million, $268.6 million, and $632.8 million in the next one, two, and three years.

LIBOR is expected to be phased out in 2023, as such the Company stopped originations of LIBOR-indexed loans effective December 31, 2021. 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 7A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2021.

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 and decrease in market interest rates of 100, 200, and 300 basis points. This analysis assigns significant value to our noninterest-bearing deposit balances. The projections include various assumptions regarding cash flows and interest rates and are by their nature forward-looking and inherently uncertain.

The MVE model is an interest rate risk management tool and the results are not necessarily an indication of our actual future results. Actual results may vary significantly from the results suggested by the market value of equity table. Loan prepayments and deposit attrition, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions. The base case is determined by applying various current market discount rates to the estimated cash flows from the different types of assets, liabilities, and off-balance sheet items existing at September 30, 2022.

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


									Ratio of
	Projected		Dollar		Percentage		Percentage		Projected
	Market Value		Change		Change		of Total		Market Value
September 30, 2022	of Equity		From Base		From Base		Assets		to Book Value
	(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points	$	9,317.4	$	286.8	3.2	%	22.5	%	240.4	%
Up 200 basis points	$	9,300.2	$	269.6	3.0	%	22.5	%	239.9	%
Up 100 basis points	$	9,206.7	$	176.1	2.0	%	22.2	%	237.5	%
BASE CASE	$	9,030.6	$	—	—	%	21.8	%	233.0	%
Down 100 basis points	$	8,793.2	$	(237.4)	(2.6)	%	21.2	%	226.9	%
Down 200 basis points	$	8,484.5	$	(546.1)	(6.0)	%	20.5	%	218.9	%
Down 300 basis points	$	7,978.3	$	(1,052.3)	(11.7)	%	19.3	%	205.8	%

During the nine months ended September 30, 2022, total base case projected market value of equity increased from December 31, 2021 by $358.8 million to $9.0 billion at September 30, 2022. This increase in base case projected MVE was due mostly to: (1) a $3.3 billion decrease in the mark-to-market adjustment for total deposits, borrowings, and subordinated debt, offset partially by (2) a $2.7 billion decrease in the mark-to-market adjustment for loans and leases; (3) a $202.3 million decrease in the mark-to-market adjustment for investment securities held-to-maturity; and (4) a $123.7 million decrease in the book value of stockholders' equity. The decrease in the book value of stockholders' equity was due mainly to a $914.2 million decline in accumulated other comprehensive income and $90.2 million of common stock cash dividends paid, offset partially by the $498.5 million net proceeds from issuance of Series A preferred stock and $374.1 million of net earnings.

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 11. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements (Unaudited) is incorporated herein by reference.

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

ITEM 1A. RISK FACTORS

For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2021. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this quarterly report on Form 10-Q.

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

The following table presents stock purchases made during the third quarter of 2022:


				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)
	(Dollars in thousands, except per share amounts)
July 1 - July 31, 2022	9	$	27.26	—	$	100,000
August 1 - August 31, 2022	24,930	$	26.33	—	$	100,000
September 1 - September 30, 2022	156	$	22.60	—	$	100,000
Total	25,095	$	26.31	—

__________________________

(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 15, 2022, PacWest's Board authorized a new Stock Repurchase Program, effective March 1, 2022, to repurchase shares of its common stock for an aggregate purchase price not to exceed $100 million with a program maturity date of February 28, 2023. No shares have been repurchased under the new Stock Repurchase Program since its March 1, 2022 start date.

ITEM 6. INDEX TO EXHIBITS


Exhibit Number			Description
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).


101			Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets as of Septembe r 30, 2022 and December 31, 2021, (ii) the Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2022 and 2021, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021, (iv) the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, 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.

* Instruments defining the rights of long-term debt holders have been omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Company will furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.

Signatures

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


		PACWEST BANCORP

Date:	November 7, 2022	/s/ Bart R. Olson
		Bart R. Olson
		Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)