0001102112 pacw:BusinessAssetsMember pacw:RealEstateConstructionMember 2020-03-310001102112us-gaap:ConsumerPortfolioSegmentMemberpacw:TermLoansByOriginationDateMemberpacw:A5SpecialMentionMemberpacw:OriginationDate2019Member2020-06-30


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
Form 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the quarterly period ended March 31,June 30, 2020
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware33-0885320
(State of Incorporation)(I.R.S. Employer Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills,, CA90212
(Address of Principal Executive Offices, Including Zip Code)
(310) (310) 887-8500
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per sharePACWThe Nasdaq Stock Market, LLC
(Title of Each Class)(Trading Symbol)(Name of Exchange on Which Registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☐ No   ☑
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☑      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
☑Large accelerated 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 May 1,July 30, 2020, there were 116,479,832116,749,981 shares of the registrant's common stock outstanding, excluding 1,427,0241,623,568 shares of unvested restricted stock.

1

PACWEST BANCORP
MARCH 31,JUNE 30, 2020 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
Page
PART I. FINANCIAL INFORMATION
Page
PART I. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets (Unaudited)
4
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
5
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
6
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
7
Condensed Consolidated Statements of Cash Flows (Unaudited)
89
Notes to Condensed Consolidated Financial Statements (Unaudited)
1011
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
5051
Item 3.Quantitative and Qualitative Disclosures About Market Risk
8489
Item 4.Controls and Procedures
8893
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
8893
Item 1A.Risk Factors
8893
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
9095
Item 6.Index to Exhibits
9196
Signatures
9398

2

PART I
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."
AFXAmerican Financial ExchangeIPOInitial Public Offering
ALLLAllowance for Loan and Lease LossesIRRInterest Rate Risk
ALMAsset Liability ManagementLIBORLondon Inter-bank Offered Rate
ASCAccounting Standards CodificationLIHTCLow Income Housing Tax Credit
ASUAccounting Standards UpdateMBSMortgage-Backed Securities
Basel IIIA comprehensive capital framework and rules for U.S. banking organizations approved by the FRB and the FDIC in 2013MVEMarket Value of Equity
BHCABank Holding Company Act of 1956, as amendedNIINet Interest Income
BOLIBank Owned Life InsuranceNIMNet Interest Margin
CDICARES ActCoronavirus Aid, Relief, and Economic Security ActNSFNon-Sufficient Funds
CDICore Deposit Intangible AssetsNSFOREONon-Sufficient FundsOther Real Estate Owned
CECLCurrent Expected Credit LossOREOPD/LGDOther Real Estate Owned
CET1Common Equity Tier 1PD/LGDProbability of Default/Loss Given Default
CMOsCET1Common Equity Tier 1PPNRPre-Provision, Pre-Goodwill Impairment, Pre-Tax Net Revenue
CMBSCommercial Mortgage-Backed SecuritiesPPPPaycheck Protection Program
CMOsCollateralized Mortgage ObligationsPRSUsPerformance-Based Restricted Stock Units
CPICOVID-19Consumer Price IndexCoronavirus DiseasePWAMPacific Western Asset Management Inc.
CRACPIConsumer Price IndexROURight-of-use
CRACommunity Reinvestment ActROUSBARight-of-useSmall Business Administration
CRICustomer Relationship Intangible AssetsSBASECSmall Business AdministrationSecurities and Exchange Commission
DBOCalifornia Department of Business OversightSECSOFRSecurities and Exchange Commission
DTAsDeferred Tax AssetsSOFRSecured Overnight Financing Rate
Dodd-Frank ActDTAsDodd-Frank Wall Street Reform and Consumer Protection ActDeferred Tax AssetsTax Equivalent Net Interest IncomeNet interest income reflecting adjustments related to tax-exempt interest on certain loans and investment securities
Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection ActTax Equivalent NIMNIM reflecting adjustments related to tax-exempt interest on certain loans and investment securities
Efficiency RatioNoninterest expense (less intangible asset amortization, net foreclosed assets expense (income), goodwill impairment, and acquisition, integration and reorganization costs) divided by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain/loss on sale of securities and gain/loss on sales of assets other than loans and leases)Tax Equivalent NIMTCJANIM reflecting adjustments related to tax-exempt interest on certain loans and investment securities
FASBFinancial Accounting Standards BoardTCJATax Cuts and Jobs Act
FDICFASBFinancial Accounting Standards BoardTDRsTroubled Debt Restructurings
FDICFederal Deposit Insurance CorporationTDRsTRSAsTroubled Debt RestructuringsTime-Based Restricted Stock Awards
FHLBFederal Home Loan Bank of San FranciscoTRSAsU.S. GAAPTime-Based Restricted Stock AwardsU.S. Generally Accepted Accounting Principles
FRBBoard of Governors of the Federal Reserve SystemU.S. GAAPVIEU.S. Generally Accepted Accounting PrinciplesVariable Interest Entity
FRBSFFederal Reserve Bank of San FranciscoVIEVariable Interest Entity


3

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,June 30,December 31,
2020 2019 20202019
(Unaudited)(Unaudited)
(Dollars in thousands, except par value amounts) (Dollars in thousands, except par value amounts)
ASSETS:   ASSETS:
Cash and due from banks$172,570
 $172,585
Cash and due from banks$174,059  $172,585  
Interest-earning deposits in financial institutions439,690
 465,039
Interest-earning deposits in financial institutions1,747,077  465,039  
Total cash, cash equivalents, and restricted cash612,260
 637,624
Total cash, cash equivalents, and restricted cash1,921,136  637,624  
Securities available-for-sale, at fair value3,757,663
 3,797,187
Securities available-for-sale, at fair value3,851,141  3,797,187  
Federal Home Loan Bank stock, at cost54,244
 40,924
Federal Home Loan Bank stock, at cost17,250  40,924  
Total investment securities3,811,907
 3,838,111
Total investment securities3,868,391  3,838,111  
Gross loans and leases held for investment19,806,394
 18,910,740
Gross loans and leases held for investment19,780,476  18,910,740  
Deferred fees, net(61,089) (63,868)Deferred fees, net(85,845) (63,868) 
Allowance for loan and lease losses(221,292) (138,785)Allowance for loan and lease losses(301,050) (138,785) 
Total loans and leases held for investment, net19,524,013
 18,708,087
Total loans and leases held for investment, net19,393,581  18,708,087  
Equipment leased to others under operating leases306,530
 324,084
Equipment leased to others under operating leases295,191  324,084  
Premises and equipment, net39,799
 38,585
Premises and equipment, net42,299  38,585  
Foreclosed assets, net1,701
 440
Foreclosed assets, net1,449  440  
Goodwill1,078,670
 2,548,670
Goodwill1,078,670  2,548,670  
Core deposit and customer relationship intangibles, net34,446
 38,394
Core deposit and customer relationship intangibles, net30,564  38,394  
Other assets733,941
 636,811
Other assets734,457  636,811  
Total assets$26,143,267
 $26,770,806
Total assets$27,365,738  $26,770,806  
   
LIABILITIES:   LIABILITIES:  
Noninterest-bearing deposits$7,510,218
 $7,243,298
Noninterest-bearing deposits$8,629,543  $7,243,298  
Interest-bearing deposits12,065,619
 11,989,738
Interest-bearing deposits14,299,036  11,989,738  
Total deposits19,575,837
 19,233,036
Total deposits22,928,579  19,233,036  
Borrowings2,295,000
 1,759,008
Borrowings60,000  1,759,008  
Subordinated debentures458,994
 458,209
Subordinated debentures460,772  458,209  
Accrued interest payable and other liabilities423,047
 365,856
Accrued interest payable and other liabilities463,489  365,856  
Total liabilities22,752,878
 21,816,109
Total liabilities23,912,840  21,816,109  
   
Commitments and contingencies


 


Commitments and contingencies
   
STOCKHOLDERS' EQUITY:   STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)—
 —
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)—  —  
Common stock ($0.01 par value, 200,000,000 shares authorized at March 31, 2020 and   
December 31, 2019; 120,131,213 and 121,890,008 shares issued, respectively, includes
   
1,436,957 and 1,513,197 shares of unvested restricted stock, respectively)
1,201
 1,219
Common stock ($0.01 par value, 200,000,000 shares authorized at June 30, 2020 andCommon stock ($0.01 par value, 200,000,000 shares authorized at June 30, 2020 and
December 31, 2019; 120,681,951 and 121,890,008 shares issued, respectively, includesDecember 31, 2019; 120,681,951 and 121,890,008 shares issued, respectively, includes
1,624,622 and 1,513,197 shares of unvested restricted stock, respectively)1,624,622 and 1,513,197 shares of unvested restricted stock, respectively)1,207  1,219  
Additional paid-in capital3,171,312
 3,306,006
Additional paid-in capital3,148,090  3,306,006  
Retained earnings213,854
 1,652,248
Retained earnings247,058  1,652,248  
Treasury stock, at cost (2,214,424 and 2,108,403 shares at March 31, 2020 and   
Treasury stock, at cost (2,307,348 and 2,108,403 shares at June 30, 2020 and
Treasury stock, at cost (2,307,348 and 2,108,403 shares at June 30, 2020 and
December 31, 2019)(86,894) (83,434)December 31, 2019)(88,495) (83,434) 
Accumulated other comprehensive income, net90,916
 78,658
Accumulated other comprehensive income, net145,038  78,658  
Total stockholders' equity3,390,389
 4,954,697
Total stockholders' equity3,452,898  4,954,697  
Total liabilities and stockholders' equity$26,143,267
 $26,770,806
Total liabilities and stockholders' equity$27,365,738  $26,770,806  
See Notes to Condensed Consolidated Financial Statements.

4

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
Three Months EndedThree Months EndedSix Months Ended
March 31, December 31, March 31,June 30,March 31,June 30,June 30,
2020 2019 2019 20202020201920202019
(Unaudited)(Unaudited)
(Dollars in thousands, except per share amounts) (Dollars in thousands, except per share amounts)
Interest income:     Interest income:
Loans and leases$262,278
 $263,402
 $274,229
Loans and leases$247,851  $262,278  $284,236  $510,129  $558,465  
Investment securities27,446
 28,135
 29,680
Investment securities26,038  27,446  28,948  53,484  58,628  
Deposits in financial institutions1,608
 2,056
 650
Deposits in financial institutions186  1,608  1,349  1,794  1,999  
Total interest income291,332
 293,593
 304,559
Total interest income274,075  291,332  314,533  565,407  619,092  
Interest expense:     Interest expense:
Deposits28,247
 34,802
 34,235
Deposits13,075  28,247  38,720  41,322  72,955  
Borrowings6,778
 5,189
 7,710
Borrowings1,319  6,778  7,210  8,097  14,920  
Subordinated debentures6,560
 6,983
 7,738
Subordinated debentures5,402  6,560  7,705  11,962  15,443  
Total interest expense41,585
 46,974
 49,683
Total interest expense19,796  41,585  53,635  61,381  103,318  
Net interest income249,747
 246,619
 254,876
Net interest income254,279  249,747  260,898  504,026  515,774  
Provision for credit losses112,000
 3,000
 4,000
Provision for credit losses120,000  112,000  8,000  232,000  12,000  
Net interest income after provision for credit losses137,747
 243,619
 250,876
Net interest income after provision for credit losses134,279  137,747  252,898  272,026  503,774  
Noninterest income:     Noninterest income:
Other commissions and fees9,721
 10,170
 11,008
Other commissions and fees10,111  9,721  11,590  19,832  22,598  
Leased equipment income12,251
 10,648
 9,282
Leased equipment income12,037  12,251  9,182  24,288  18,464  
Service charges on deposit accounts2,658
 3,611
 3,730
Service charges on deposit accounts2,004  2,658  3,771  4,662  7,501  
Gain on sale of loans and leases87
 23
 —
Gain on sale of loans and leases346  87  326  433  326  
Gain on sale of securities182
 184
 2,161
Gain on sale of securities7,715  182  22,192  7,897  24,353  
Other income4,201
 2,540
 4,883
Other income6,645  4,201  3,832  10,846  8,715  
Total noninterest income29,100
 27,176
 31,064
Total noninterest income38,858  29,100  50,893  67,958  81,957  
Noninterest expense:     Noninterest expense:
Compensation61,282
 74,637
 70,845
Compensation61,910  61,282  68,956  123,192  139,801  
Occupancy14,207
 14,541
 14,320
Occupancy14,494  14,207  14,457  28,701  28,777  
Data processing6,454
 6,770
 6,925
Data processing7,102  6,454  6,817  13,556  13,742  
Leased equipment depreciation7,205
 6,856
 5,651
Leased equipment depreciation7,102  7,205  5,558  14,307  11,209  
Intangible asset amortization3,948
 4,153
 4,870
Intangible asset amortization3,882  3,948  4,870  7,830  9,740  
Other professional services4,258
 4,261
 4,513
Other professional services4,146  4,258  4,629  8,404  9,142  
Insurance and assessments4,249
 4,168
 4,038
Insurance and assessments9,373  4,249  4,098  13,622  8,136  
Customer related expense3,932
 3,952
 2,943
Customer related expense4,408  3,932  3,405  8,340  6,348  
Loan expense2,650
 2,967
 2,885
Loan expense3,379  2,650  3,451  6,029  6,336  
Acquisition, integration and reorganization costs—
 (269) 618
Acquisition, integration and reorganization costs—  —  —  —  618  
Foreclosed assets expense (income), net66
 (3,446) 29
Foreclosed assets (income) expense, netForeclosed assets (income) expense, net(146) 66  (146) (80) (117) 
Goodwill impairment1,470,000
 —
 —
Goodwill impairment—  1,470,000  —  1,470,000  —  
Other expense9,719
 5,138
 8,650
Other expense11,315  9,719  9,332  21,034  17,982  
Total noninterest expense1,587,970
 123,728
 126,287
Total noninterest expense126,965  1,587,970  125,427  1,714,935  251,714  
Earnings (loss) before income taxes(1,421,123) 147,067
 155,653
Earnings (loss) before income taxes46,172  (1,421,123) 178,364  (1,374,951) 334,017  
Income tax expense11,988
 29,186
 43,049
Income tax expense12,968  11,988  50,239  24,956  93,288  
Net earnings (loss)$(1,433,111) $117,881
 $112,604
Net earnings (loss)$33,204  $(1,433,111) $128,125  $(1,399,907) $240,729  
     
Earnings (loss) per share:     Earnings (loss) per share:
Basic$(12.23) $0.98
 $0.92
Basic$0.28  $(12.23) $1.07  $(11.98) $1.99  
Diluted$(12.23) $0.98
 $0.92
Diluted$0.28  $(12.23) $1.07  $(11.98) $1.99  
See Notes to Condensed Consolidated Financial Statements.

5

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months EndedSix Months Ended
June 30,March 31,June 30,June 30,
20202020201920202019
(Unaudited)
(In thousands)
Net earnings (loss)$33,204  $(1,433,111) $128,125  $(1,399,907) $240,729  
Other comprehensive income, net of tax:
Unrealized net holding gains on securities
available-for-sale arising during the period82,780  17,183  72,168  99,963  134,807  
Income tax expense related to net unrealized
holding gains arising during the period(23,095) (4,794) (20,459) (27,889) (38,217) 
Unrealized net holding gains on securities
available-for-sale, net of tax59,685  12,389  51,709  72,074  96,590  
Reclassification adjustment for net gains
included in net earnings (1)
(7,715) (182) (22,192) (7,897) (24,353) 
Income tax expense related to reclassification
adjustment2,152  51  6,291  2,203  6,904  
Reclassification adjustment for net gains
included in net earnings, net of tax(5,563) (131) (15,901) (5,694) (17,449) 
Other comprehensive income, net of tax54,122  12,258  35,808  66,380  79,141  
Comprehensive income (loss)$87,326  $(1,420,853) $163,933  $(1,333,527) $319,870  
 Three Months Ended
 March 31, December 31, March 31,
 2020 2019 2019
 (Unaudited)
 (In thousands)
Net earnings (loss)$(1,433,111) $117,881
 $112,604
Other comprehensive income (loss), net of tax:     
Unrealized net holding gains (losses) on securities     
available-for-sale arising during the period17,183
 (24,547) 62,639
Income tax (expense) benefit related to net unrealized     
holding gains (losses) arising during the period(4,794) 7,446
 (17,758)
Unrealized net holding gains (losses) on securities     
available-for-sale, net of tax12,389
 (17,101) 44,881
Reclassification adjustment for net gains     
included in net earnings (1)
(182) (184) (2,161)
Income tax expense related to reclassification     
adjustment51
 56
 613
Reclassification adjustment for net gains     
included in net earnings, net of tax(131) (128) (1,548)
Other comprehensive income (loss), net of tax12,258
 (17,229) 43,333
Comprehensive income (loss)$(1,420,853) $100,652
 $155,937
___________________________________
___________________________________(1)
(1)
Entire amounts are recognized in "Gain on sale of securities" on the Condensed Consolidated Statements of Earnings (Loss).
See Notes to Condensed Consolidated Financial Statements.


6

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2020Six Months Ended June 30, 2020
Common Stock     Accumulated  Common StockAccumulated
    Additional     Other  AdditionalOther
  Par Paid-in Retained Treasury Comprehensive  ParPaid-inRetainedTreasuryComprehensive
Shares Value Capital Earnings Stock Income (Loss) Total SharesValueCapitalEarningsStockIncomeTotal
(Unaudited)(Unaudited)
(Dollars in thousands) (Dollars in thousands)
Balance, December 31, 2019119,781,605
 $1,219
 $3,306,006
 $1,652,248
 $(83,434) $78,658
 $4,954,697
Balance, December 31, 2019119,781,605  $1,219  $3,306,006  $1,652,248  $(83,434) $78,658  $4,954,697  
Cumulative effect of change in             Cumulative effect of change in
accounting principle (1)
—
 —
 —
 (5,283) —
 —
 (5,283)
accounting principle (1)
—  —  —  (5,283) —  —  (5,283) 
Net loss—
 —
 —
 (1,433,111) —
 —
 (1,433,111)Net loss—  —  —  (1,433,111) —  —  (1,433,111) 
Other comprehensive income - net             Other comprehensive income - net
unrealized gain on securities             unrealized gain on securities
available-for-sale, net of tax—
 —
 —
 —
 —
 12,258
 12,258
available-for-sale, net of tax—  —  —  —  —  12,258  12,258  
Restricted stock awarded and             Restricted stock awarded and
earned stock compensation,             earned stock compensation,
net of shares forfeited194,916
 2
 6,492
 —
 —
 —
 6,494
net of shares forfeited194,916  2  6,492  —  —  —  6,494  
Restricted stock surrendered(106,021) —
 —
 —
 (3,460) —
 (3,460)Restricted stock surrendered(106,021) —  —  —  (3,460) —  (3,460) 
Common stock repurchased under             Common stock repurchased under
Stock Repurchase Program(1,953,711) (20) (69,980) —
 —
 —
 (70,000)Stock Repurchase Program(1,953,711) (20) (69,980) —  —  —  (70,000) 
Cash dividends paid:             Cash dividends paid:
Common stock, $0.60/share—
 —
 (71,206) —
 —
 —
 (71,206)Common stock, $0.60/share—  —  (71,206) —  —  —  (71,206) 
Balance, March 31, 2020117,916,789
 $1,201
 $3,171,312
 $213,854
 $(86,894) $90,916
 $3,390,389
Balance, March 31, 2020117,916,789  $1,201  $3,171,312  $213,854  $(86,894) $90,916  $3,390,389  
Net earningsNet earnings—  —  —  33,204  —  —  33,204  
Other comprehensive income - netOther comprehensive income - net
unrealized gain on securitiesunrealized gain on securities
available-for-sale, net of taxavailable-for-sale, net of tax—  —  —  —  —  54,122  54,122  
Restricted stock awarded andRestricted stock awarded and
earned stock compensation,earned stock compensation,
net of shares forfeitednet of shares forfeited550,738  6  6,283  —  —  —  6,289  
Restricted stock surrenderedRestricted stock surrendered(92,924) —  —  —  (1,601) —  (1,601) 
Cash dividends paid:Cash dividends paid:
Common stock, $0.25/shareCommon stock, $0.25/share—  —  (29,505) —  —  —  (29,505) 
Balance, June 30, 2020Balance, June 30, 2020118,374,603  $1,207  $3,148,090  $247,058  $(88,495) $145,038  $3,452,898  
________________________
(1)
(1) Impact due to adoption on January 1, 2020 of ASU 2016-13, "Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments," and the related amendments, commonly referred to as CECL.

Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments," and the related amendments, commonly referred to as CECL.

7

Three Months Ended March 31, 2019Six Months Ended June 30, 2019
Common Stock     Accumulated  Common StockAccumulated
    Additional     Other  AdditionalOther
  Par Paid-in Retained Treasury Comprehensive  ParPaid-inRetainedTreasuryComprehensive
Shares Value Capital Earnings Stock Income (Loss) Total SharesValueCapitalEarningsStockIncome (Loss)Total
(Unaudited)(Unaudited)
(Dollars in thousands) (Dollars in thousands)
Balance, December 31, 2018123,189,833
 $1,251
 $3,722,723
 $1,182,674
 $(74,985) $(6,075) $4,825,588
Balance, December 31, 2018123,189,833  $1,251  $3,722,723  $1,182,674  $(74,985) $(6,075) $4,825,588  
Cumulative effect of change in             Cumulative effect of change in
accounting principle (2)
—
 —
 —
 938
 —
 —
 938
accounting principle (2)
—  —  —  938  —  —  938  
Net earnings—
 —
 —
 112,604
 —
 —
 112,604
Net earnings—  —  —  112,604  —  —  112,604  
Other comprehensive income - net             Other comprehensive income - net
unrealized gain on securities             unrealized gain on securities
available-for-sale, net of tax—
 —
 —
 —
 —
 43,333
 43,333
available-for-sale, net of tax—  —  —  —  —  43,333  43,333  
Restricted stock awarded and             Restricted stock awarded and
earned stock compensation,             earned stock compensation,
net of shares forfeited195,536
 2
 5,806
 —
 —
 —
 5,808
net of shares forfeited195,536  2  5,806  —  —  —  5,808  
Restricted stock surrendered(113,544) —
 —
 —
 (4,522) —
 (4,522)Restricted stock surrendered(113,544) —  —  —  (4,522) —  (4,522) 
Common stock repurchased under             Common stock repurchased under
Stock Repurchase Program(3,070,676) (31) (119,556) —
 —
 —
 (119,587)Stock Repurchase Program(3,070,676) (31) (119,556) —  —  —  (119,587) 
Cash dividends paid:             Cash dividends paid:
Common stock, $0.60/share—
 —
 (73,180) —
 —
 —
 (73,180)Common stock, $0.60/share—  —  (73,180) —  —  —  (73,180) 
Balance, March 31, 2019120,201,149
 $1,222
 $3,535,793
 $1,296,216
 $(79,507) $37,258
 $4,790,982
Balance, March 31, 2019120,201,149  $1,222  $3,535,793  $1,296,216  $(79,507) $37,258  $4,790,982  
Net earningsNet earnings—  —  —  128,125  —  —  128,125  
Other comprehensive income - netOther comprehensive income - net
unrealized gain on securitiesunrealized gain on securities
available-for-sale, net of taxavailable-for-sale, net of tax—  —  —  —  —  35,808  35,808  
Restricted stock awarded andRestricted stock awarded and
earned stock compensation,earned stock compensation,
net of shares forfeitednet of shares forfeited619,653  6  6,715  —  —  —  6,721  
Restricted stock surrenderedRestricted stock surrendered(74,429) —  —  —  (2,788) —  (2,788) 
Common stock repurchased underCommon stock repurchased under
Stock Repurchase ProgramStock Repurchase Program(917,269) (9) (34,920) —  —  —  (34,929) 
Cash dividends paid:Cash dividends paid:
Common stock, $0.60/shareCommon stock, $0.60/share—  —  (71,909) —  —  —  (71,909) 
Balance, June 30, 2019Balance, June 30, 2019119,829,104  $1,219  $3,435,679  $1,424,341  $(82,295) $73,066  $4,852,010  
________________________
(2)
(2) Impact due to adoption on January 1, 2019 of ASU 2016-02, "Leases (Topic 842)," and the related amendments.


See Notes to Condensed Consolidated Financial Statements.

8

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months EndedSix Months Ended
March 31, June 30,
2020 2019 20202019
(Unaudited)(Unaudited)
(In thousands) (In thousands)
Cash flows from operating activities:   Cash flows from operating activities:  
Net earnings (loss)$(1,433,111) $112,604
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:   
Net (loss) earningsNet (loss) earnings$(1,399,907) $240,729  
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Goodwill impairment1,470,000
 —
Goodwill impairment1,470,000  —  
Depreciation and amortization10,914
 9,287
Depreciation and amortization22,124  18,607  
Amortization of net premiums on securities available-for-sale2,643
 4,142
Amortization of net premiums on securities available-for-sale5,591  7,933  
Amortization of intangible assets3,948
 4,870
Amortization of intangible assets7,830  9,740  
Amortization of operating lease ROU assets7,196
 7,608
Amortization of operating lease ROU assets14,662  14,723  
Provision for credit losses112,000
 4,000
Provision for credit losses232,000  12,000  
Gain on sale of foreclosed assets(52) (191)Gain on sale of foreclosed assets(112) (320) 
Provision for losses on foreclosed assets105
 —
Provision for losses on foreclosed assets110  —  
Gain on sale of loans and leases(87) —
Gain on sale of loans and leases(433) (326) 
Loss on sale of premises and equipment77
 3
Loss (gain) on sale of premises and equipmentLoss (gain) on sale of premises and equipment187  (37) 
Gain on sale of securities(182) (2,161)Gain on sale of securities(7,897) (24,353) 
Unrealized loss on derivatives and foreign currencies, net264
 16
Unrealized loss (gain) on derivatives and foreign currencies, netUnrealized loss (gain) on derivatives and foreign currencies, net564  (40) 
Earned stock compensation6,494
 5,808
Earned stock compensation12,783  12,529  
Decrease in other assets4,206
 52,148
Decrease in other assets8,393  44,349  
Decrease in accrued interest payable and other liabilities(68,841) (46,241)Decrease in accrued interest payable and other liabilities(91,873) (55,550) 
Net cash provided by operating activities115,574
 151,893
Net cash provided by operating activities274,022  279,984  
   
Cash flows from investing activities:   Cash flows from investing activities:
Net increase in loans and leases(923,353) (391,621)Net increase in loans and leases(887,247) (605,228) 
Proceeds from sales of loans and leases87
 16,937
Proceeds from sales of loans and leases3,522  80,440  
Proceeds from maturities and paydowns of securities available-for-sale80,521
 67,325
Proceeds from maturities and paydowns of securities available-for-sale170,245  150,766  
Proceeds from sales of securities available-for-sale14,948
 407,926
Proceeds from sales of securities available-for-sale144,997  1,410,510  
Purchases of securities available-for-sale(41,405) (402,030)Purchases of securities available-for-sale(274,824) (1,232,214) 
Net (purchases) redemptions of Federal Home Loan Bank stock(13,320) 2,673
Net redemptions (purchases) of Federal Home Loan Bank stockNet redemptions (purchases) of Federal Home Loan Bank stock23,674  (11,043) 
Proceeds from sales of foreclosed assets462
 2,236
Proceeds from sales of foreclosed assets769  4,184  
Purchases of premises and equipment, net(4,304) (5,625)Purchases of premises and equipment, net(9,772) (8,621) 
Proceeds from sales of premises and equipment2
 —
Proceeds from sales of premises and equipment2  54  
Proceeds from BOLI death benefit380
 —
Proceeds from BOLI death benefit761  555  
Net decrease (increase) in equipment leased to others under operating leases10,905
 (6,709)Net decrease (increase) in equipment leased to others under operating leases15,147  (18,986) 
Net cash (used in) investing activities(875,077) (308,888)
Net cash used in investing activitiesNet cash used in investing activities(812,726) (229,583) 
   
Cash flows from financing activities:   Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits266,932
 (176,506)Net increase (decrease) in noninterest-bearing deposits1,387,698  (588,417) 
Net increase in interest-bearing deposits75,881
 591,932
Net increase in interest-bearing deposits2,309,298  524,957  
Net increase in borrowings535,992
 109,973
Net (decrease) increase in borrowingsNet (decrease) increase in borrowings(1,699,008) 541,945  
Common stock repurchased and restricted stock surrendered(73,460) (124,109)Common stock repurchased and restricted stock surrendered(75,061) (161,826) 
Cash dividends paid(71,206) (73,180)Cash dividends paid(100,711) (145,089) 
Net cash provided by financing activities734,139
 328,110
Net cash provided by financing activities1,822,216  171,570  
   
Net (decrease) increase in cash, cash equivalents, and restricted cash(25,364) 171,115
Net increase in cash, cash equivalents, and restricted cashNet increase in cash, cash equivalents, and restricted cash1,283,512  221,971  
Cash, cash equivalents, and restricted cash, beginning of period637,624
 385,767
Cash, cash equivalents, and restricted cash, beginning of period637,624  385,767  
Cash, cash equivalents, and restricted cash, end of period$612,260
 $556,882
Cash, cash equivalents, and restricted cash, end of period$1,921,136  $607,738  
See Notes to Condensed Consolidated Financial Statements.

9

PACWEST BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months EndedSix Months Ended
March 31, June 30,
2020 2019 20202019
(Unaudited)(Unaudited)
(In thousands) (In thousands)
Supplemental disclosures of cash flow information:   Supplemental disclosures of cash flow information:
Cash paid for interest$43,820
 $46,197
Cash paid for interest$68,390  $97,238  
Cash paid for income taxes2,019
 2,778
Cash paid for income taxes3,850  68,305  
Loans transferred to foreclosed assets1,776
 37
Loans transferred to foreclosed assets1,776  37  
Transfers from loans held for investment to loans held for sale—
 25,124
Transfers from loans held for investment to loans held for sale—  25,124  
See Notes to Condensed Consolidated Financial Statements.


10


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


NOTE 1.  ORGANIZATION 
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
We are focused on relationship-based business banking to small, middle-market and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located in California, 1 branch located in Durham, North Carolina, 1 branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovative hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are interest paid by the Bank on deposits and borrowings, compensation, occupancy, and general operating expenses.
We have completed 29 acquisitions from May 1, 2000 through March 31, 2020 with our last acquisition in October 2017. Our acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates.
Significant Accounting Policies
Our accounting policies are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission ("Form 10-K"). Updates to our significant accounting policies described below reflect the impact of the adoption of ASU 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments” and the related amendments, commonly referred to as CECL.
Investment Securities
Prior to January 1, 2020, debt securities available-for-sale were measured at fair value and declines in the fair value were reviewed to determine whether the impairment was other-than-temporary. If the decline in fair value was considered temporary, the decline in fair value below the amortized cost basis of a security was recognized in other comprehensive income (loss). If we did not expect to recover the entire amortized cost basis of the security, then an other-than-temporary impairment was considered to have occurred. The cost basis of the security was written down to its estimated fair value and the amount of the write-down was recognized through a charge to earnings. If the amount of the amortized cost basis expected to be recovered increased in a future period, the cost basis of the security was not increased but rather recognized prospectively through interest income.
Effective January 1, 2020, upon the adoption of ASU 2016-13, debt securities available-for-sale are measured at fair value and are subject to impairment testing. A security is impaired if the fair value of the security is less than its amortized cost basis. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value decline (if any). If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.
11


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


Purchased Loans with Credit Deterioration
Prior to January 1, 2020, purchased credit impaired loans were accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” At the time of acquisition, these loans were recorded at estimated fair value based upon estimated future cash flows with no related allowance for credit losses.
Effective January 1, 2020, upon the adoption of ASU 2016-13, an entity records purchased financial assets with credit deterioration ("PCD assets") at the purchase price plus the allowance for credit losses expected at the time of acquisition. This allowance is recognized through a gross-up that increases the amortized cost basis of the asset with no effect on net income. Subsequent changes (favorable and unfavorable) in expected cash flows are recognized immediately in net income by adjusting the related allowance.
Allowance for Credit Losses on Loans and Leases Held for Investment
Effective January 1, 2020, upon the adoption of ASU 2016-13, the Company replaced the current incurred loss accounting model with the current expected credit loss ("CECL") approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.
The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The amortized cost basis of loans and leases does not include accrued interest receivable, which is included in "Other assets" on the condensed consolidated balance sheets. The "Provision for credit losses" on the condensed consolidated statements of earnings (loss) is a combination of the provision for loan and lease losses and the provision for unfunded loan commitments.
Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and considering available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. The resulting allowance for loan and lease losses is deducted from the associated amortized cost basis to reflect the net amount expected to be collected. Subsequent changes in this estimate are recorded through the provision for credit losses and the allowance. The CECL methodology could result in significant changes to both the timing and amounts of provision for credit losses and the allowance as compared to recent historical periods. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for credit losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses hasis comprised of an individually evaluated component for loans and leases that no longer share similar risk characteristics with other loans and leases and a pooled loans component for loans and leases that share similar risk characteristics.
A loan or lease with an outstanding balance greater than $250,000 is individually evaluated for expected credit loss when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. We select loans and leases for individual assessment on an ongoing basis using certain criteria such as payment performance, borrower reported and forecasted financial results, and budgets, and other external factors when appropriate. We measure the current expected credit loss of a loan or lease based upon the fair value of the underlying collateral if the loan or lease is collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease is not collateral-dependent. To the extent a loan or lease balance exceeds the estimated collectable value, a reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan is collateral-dependent.
12


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


Our CECL methodology for the pooled loans component includes both quantitative and qualitative loss factors which are applied to our population of loans and leases and assessed at a pool level. The loan portfolio is segmented into 4 loan segments, 8 loan classes and 22 loan pools based upon loan type that share similar default risk characteristics to calculate quantitative loss factors for each pool. NaN of these loan pools have insignificant current balances and/or insignificant historical losses, thus, estimated losses are calculated using historical loss rates from the first quarter of 2009 to the current period rather than econometric regression modeling. For the remaining 16 loan pools, we estimate the probability of default (“PD”) during the reasonable and supportable period using 7 econometric regression models developed to correlate macroeconomic variables to credit performance (including risk rating upgrades/downgrades and defaults). The loans and unfunded commitments are grouped into 9 loss given default (“LGD”) pools based on portfolio classes that share similar collateral risk characteristics. LGD rates are computed based on the net charge-offs recognized divided by the exposure at default (“EAD”) of defaulted loans starting with the first quarter of 2009 to the current period. The PD and LGD rates are applied to the EAD at the loan or lease level based on contractual scheduled payments, estimated prepayments, and estimated usage of unfunded commitments to compute the current expected credit loss. We are usinguse our actual historical loan prepayment experience from 2009 - 20182019 to estimate future prepayments by loan pool. Prepayment rates during the reasonable and supportableGiven that no historical period are based on historical experience from 2017-2018 as it exhibits economic conditions most similar to the single scenario baseline forecast discussed below.below, prepayment rates based on all historical prepayment experience from 2009 - 2019 are consistently applied during the reasonable and supportable, reversion, and post-reversion periods.
For the reasonable and supportable forecast period, future macroeconomic events and circumstances are estimated over a 4-quarter time horizon using a single scenario baseline forecast that is consistent with management's current expectations for the 16 loan pools. We use economic forecasts from Moody's Analytics in this process. The economic forecast is updated monthly therefore the one used for each quarter-end calculation is generally based on a one-month lag based on the timing of when the forecast becomes available. The key macroeconomic assumptions used in the PD regression models include at least three of the following economic indicators; Real GDP, Unemployment Rates,unemployment rates, CRE Price Index and the BBB spread. The quantitative CECL model, utilizing historical portfolio performance, current portfolio composition and performance, estimated prepayments, and the effects of the economic forecast, calculates the expected EAD which is multiplied by the PD and LGD rates to calculate expected losses through the end of the forecast period. We then use a 2-quarter reversion period to revert on a straight-line basis from the PD, LGD, and prepayment rates used during the reasonable and support period to the Company’s historical PD, LGD, and prepayment experience. Subsequent to the reversion period for the remaining contractual life of loans and leases, PD, LGD, and prepayment rates are based on historical experience from the first quarter of 2009 to the fourth quarter of 2018, which2019. PD regression models and prepayment rates are updated on an annual basis or more frequently if necessary, whilebasis. LGD rates are based on historical experience from the firstupdated every quarter of 2009 to thereflect current period.charge-off activity.
The PDs and LGDs calculated by the quantitative models are highly correlated to our internal risk ratings assigned to each loan and lease. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans and leases on a regular basis. The credit risk ratings assigned to every loan and lease are either “high pass,” “pass,” “special mention,” “substandard,” or “doubtful” as defined as follows:
•
•High Pass: (Risk ratings 1-2) Loans and leases rated as "high pass" exhibit a favorable credit profile and have minimal risk characteristics. Repayment in full is expected, even in adverse economic conditions.
•Pass: (Risk ratings 1-2) Loans and leases rated as "high pass" exhibit a favorable credit profile and have minimal risk characteristics. Repayment in full is expected, even in adverse economic conditions.
Pass: (Risk ratings 3-4) Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
•
•Special Mention: (Risk rating 5) Loans and leases rated as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
•Substandard: (Risk rating 6) Loans and leases rated as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
•: (Risk rating 5) Loans and leases rated as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
•
Substandard: (Risk rating 6) Loans and leases rated as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
•
Doubtful: (Risk rating 7) Loans and leases rated as "doubtful" have all the weaknesses of those rated as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
In addition, we may refer to the loans and leases with assigned credit risk ratings of "substandard" and "doubtful" together as "classified" loans and leases. For further information on classified loans and leases, see Note 4. Loans and Leases of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
13


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


In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s loan and lease risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in increases in the provisions for credit losses and the allowance for credit losses.
The qualitative portion of the reserve on pooled loans and leases represents management’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative reserve. The qualitative loss factors consider idiosyncratic risk factors, conditions that may not be reflected in quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects our best estimate of current expected credit losses. Current and forecasted economic trends and underlying market values for collateral dependent loans are generally considered to be encompassed within our CECL quantitative methodology and component of the reserve. An incremental qualitative adjustment may be considered when economic forecasts exhibit higher levels of volatility or uncertainty.
The other qualitative criteria we consider when establishing the loss factors include the following:
legal•Legal and regulatoryRegulatory - matters that could impact our borrowers’ ability to repay our loans and leases;
•Concentrations - loan and lease portfolio composition and any loan concentrations;
•Collateral Dependency - considers changes in collateral values;
•Lending Policy - current lending policies and the effects of any new policies or policy amendments;
•Nature and Volume - loan and lease production volume and mix;
•Problem Loan Trends - loan and lease portfolio credit performance trends;trends, including a borrower's financial condition, credit rating, and ability to meet loan payment requirements;
•Loan Review - results of independent credit review; and
•Management - changes in management related to credit administration functions.
We estimate the reserve for unfunded loan commitments using the same loss factorsPD, LGD, and prepayment rates as used for the allowance for loan and lease losses. The reserve for unfunded loan commitments is computed using expected future utilization rates of the unfunded commitments during the contractual life of the commitments based on historical usage of unfunded commitments for the various loan types from the first quarter of 2015 to the secondfourth quarter of 2019. The utilization rates are updated on an annual basis.
Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements. In addition, current credit risk ratings are subject to change as we continue to monitor our loans and leases. To the extent we experience increased levels of borrower loan defaults, borrowers’ noncompliance with our loan agreements, adverse changes in collateral values, or changes in economic and business conditions that adversely affect our borrowers, our classified loans and leases may increase. Higher levels of classified loans and leases generally result in increased provisions for credit losses and an increased allowance for credit losses. In addition, economic forecasts utilized in the estimation process will change in future periods, which will result in changes to the estimates made for current expected credit losses as of a point in time. However, economic forecasts are just one of many assumptions and components that go into estimating the allowance for credit losses.
The CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Most of the steps in the methodology involve judgment and are subjective in nature including, among other things, selection of the most reliable econometric regression models, segmentation of the loan and lease portfolio, determining the amount of loss history to consider, determining the relevant macroeconomic inputs to the quantitative models, determining the methodology to forecast prepayments, selection of the most appropriate economic forecast scenario, determining the length of the reasonable and supportable forecast and reversion periods, determining expected utilization rates on unfunded loan commitments and determining relevant and appropriate qualitative factors. In addition, the CECL methodology is dependent on economic forecasts which are inherently imprecise and will change from period to period. Although we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the allowance will be sufficient to absorb future losses.
14


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


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


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


Basis of Presentation 
Our interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, certain disclosures accompanying annual consolidated financial statements are omitted. In the opinion of management, all significant intercompany accounts and transactions have been eliminated and adjustments, consisting solely of normal recurring accruals and considered necessary for the fair presentation of financial statements for the interim periods, have been included. The current period's results of operations are not necessarily indicative of the results that ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K.
Use of Estimates
We have made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these condensed consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowance for credit losses, (the 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, and the fair value estimates of assets acquired and liabilities assumed in acquisitions.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 condensed consolidated statements of earnings (loss), a new line is presented for "Customer related expense," as that category exceeded the disclosure materiality threshold in 2019, which previously had been included as part of "Other expense."None.
NOTE 2. RESTRICTED CASH BALANCES
The Company is required to maintain reserve balances with the FRBSF. SuchFRBSF establishes cash reserve requirements arethat its member banks must maintain based on a percentage of deposit liabilities and may be satisfied by cash on hand.liabilities. On March 26, 2020, the FRBSF reduced the reserve requirement ratios to zero percent. The average reserves required to be held at the FRBSF for the threesix months ended March 31,June 30, 2020 and the year ended December 31, 2019 were $166.2$83.1 million and $131.0 million. As of March 31,June 30, 2020 and December 31, 2019, we pledged cash collateral for our derivative contracts of $3.5$2.2 million and $3.2 million.
16


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


NOTE 3. INVESTMENT SECURITIES  
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and fair values of securities available-for-sale as of the dates indicated:
 March 31, 2020 December 31, 2019
   Gross Gross     Gross Gross  
 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Security TypeCost Gains Losses Value Cost Gains Losses Value
 (In thousands)
Agency commercial MBS$1,068,810
 $57,997
 $(1,375) $1,125,432
 $1,083,182
 $25,579
 $(537) $1,108,224
Agency residential CMOs1,069,657
 40,124
 (7,684) 1,102,097
 1,112,573
 24,403
 (579) 1,136,397
Municipal securities687,603
 46,310
 (29) 733,884
 691,647
 43,851
 (339) 735,159
Agency residential MBS277,213
 12,733
 (115) 289,831
 294,606
 10,593
 (1) 305,198
Asset-backed securities220,624
 41
 (9,966) 210,699
 216,133
 320
 (1,670) 214,783
Collateralized loan obligations142,144
 —
 (12,062) 130,082
 124,134
 25
 (403) 123,756
Private label residential CMOs99,021
 1,096
 (2,255) 97,862
 96,066
 3,430
 (13) 99,483
SBA securities44,508
 998
 (65) 45,441
 47,765
 506
 (13) 48,258
Corporate debt securities17,000
 —
 (43) 16,957
 17,000
 3,748
 —
 20,748
U.S. Treasury securities4,986
 392
 —
 5,378
 4,985
 196
 —
 5,181
Total$3,631,566
 $159,691
 $(33,594) $3,757,663
 $3,688,091
 $112,651
 $(3,555) $3,797,187

See Note 12. Fair Value Measurements for information on fair value measurements and methodology.
 June 30, 2020December 31, 2019
GrossGrossGrossGross
AmortizedUnrealizedUnrealizedFairAmortizedUnrealizedUnrealizedFair
Security TypeCostGainsLossesValueCostGainsLossesValue
 (In thousands)
Agency commercial MBS$1,060,551  $72,587  $(52) $1,133,086  $1,083,182  $25,579  $(537) $1,108,224  
Agency residential CMOs993,696  56,055  (9) 1,049,742  1,112,573  24,403  (579) 1,136,397  
Municipal securities825,446  62,976  (84) 888,338  691,647  43,851  (339) 735,159  
Agency residential MBS236,134  12,847  (47) 248,934  294,606  10,593  (1) 305,198  
Asset-backed securities232,081  556  (5,431) 227,206  216,133  320  (1,670) 214,783  
Collateralized loan obligations142,080  —  (5,417) 136,663  124,134  25  (403) 123,756  
Private label residential CMOs95,629  2,245  (1,099) 96,775  96,066  3,430  (13) 99,483  
SBA securities42,375  2,236  (35) 44,576  47,765  506  (13) 48,258  
Corporate debt securities17,000  3,458  —  20,458  17,000  3,748  —  20,748  
U.S. Treasury securities4,987  376  —  5,363  4,985  196  —  5,181  
Total$3,649,979  $213,336  $(12,174) $3,851,141  $3,688,091  $112,651  $(3,555) $3,797,187  
As of March 31,June 30, 2020, securities available-for-sale with a fair value of $2.5 billion$642.0 million were pledged as collateral for FHLB borrowings, public deposits and other purposes as required by various statutes and agreements.
Realized Gains and Losses on Securities Available-for-Sale
The following table presents the amortized cost of securities sold with related gross realized gains, gross realized losses, and net realized gains for the years indicated:
Three Months EndedSix Months Ended
June 30,June 30,
Sales of Securities Available-for-Sale2020201920202019
(In thousands)
Amortized cost of securities sold$122,334  $980,395  $137,100  $1,386,157  
Gross realized gains$7,747  $24,154  $7,929  $28,213  
Gross realized losses(32) (1,962) (32) (3,860) 
Net realized gains$7,715  $22,192  $7,897  $24,353  
 Three Months Ended
 March 31,
Sales of Securities Available-for-Sale2020 2019
 (In thousands)
Amortized cost of securities sold$14,766
 $405,765
    
Gross realized gains$182
 $4,059
Gross realized losses—
 (1,898)
Net realized gains$182
 $2,161



17


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


Unrealized Losses on Securities Available-for-Sale
The following tables present the gross unrealized losses and fair values of securities available-for-sale that were in unrealized loss positions as of the dates indicated:
 March 31, 2020
 Less Than 12 Months 12 Months or More Total
   Gross   Gross   Gross
 Fair Unrealized Fair Unrealized Fair Unrealized
Security TypeValue Losses Value Losses Value Losses
 (In thousands)
Agency commercial MBS$109,101
 $(1,375) $—
 $—
 $109,101
 $(1,375)
Agency residential CMOs263,858
 (6,921) 37,560
 (763) 301,418
 (7,684)
Municipal securities7,521
 (29) —
 —
 7,521
 (29)
Agency residential MBS9,523
 (115) —
 —
 9,523
 (115)
Asset-backed securities171,096
 (7,547) 36,993
 (2,419) 208,089
 (9,966)
Collateralized loan obligations130,082
 (12,062) —
 —
 130,082
 (12,062)
Private label residential CMOs86,880
 (2,247) 105
 (8) 86,985
 (2,255)
SBA securities1,958
 (65) —
 —
 1,958
 (65)
Corporate debt securities16,958
 (42) 1
 (1) 16,959
 (43)
Total$796,977
 $(30,403) $74,659
 $(3,191) $871,636
 $(33,594)

June 30, 2020
 Less Than 12 Months12 Months or MoreTotal
GrossGrossGross
FairUnrealizedFairUnrealizedFairUnrealized
Security TypeValueLossesValueLossesValueLosses
 (In thousands)
Agency commercial MBS$9,281  $(52) $—  $—  $9,281  $(52) 
Agency residential CMOs—  —  1,308  (9) 1,308  (9) 
Municipal securities20,448  (84) —  —  20,448  (84) 
Agency residential MBS2,403  (47) —  —  2,403  (47) 
Asset-backed securities116,863  (3,400) 36,800  (2,031) 153,663  (5,431) 
Collateralized loan obligations104,062  (3,352) 32,601  (2,065) 136,663  (5,417) 
Private label residential CMOs52,839  (1,096) 78  (3) 52,917  (1,099) 
SBA securities1,971  (35) —  —  1,971  (35) 
Total$307,867  $(8,066) $70,787  $(4,108) $378,654  $(12,174) 
 December 31, 2019
 Less Than 12 Months 12 Months or More Total
   Gross   Gross   Gross
 Fair Unrealized Fair Unrealized Fair Unrealized
Security TypeValue Losses Value Losses Value Losses
 (In thousands)
Agency commercial MBS$214,862
 $(537) $—
 $—
 $214,862
 $(537)
Agency residential CMOs180,071
 (572) 1,456
 (7) 181,527
 (579)
Municipal securities38,667
 (339) —
 —
 38,667
 (339)
Agency residential MBS—
 —
 186
 (1) 186
 (1)
Asset-backed securities165,575
 (1,670) —
 —
 165,575
 (1,670)
Collateralized loan obligations102,469
 (403) —
 —
 102,469
 (403)
Private label residential CMOs9,872
 (11) 114
 (2) 9,986
 (13)
SBA securities4,565
 (13) —
 —
 4,565
 (13)
Total$716,081
 $(3,545) $1,756
 $(10) $717,837
 $(3,555)

December 31, 2019
 Less Than 12 Months12 Months or MoreTotal
GrossGrossGross
FairUnrealizedFairUnrealizedFairUnrealized
Security TypeValueLossesValueLossesValueLosses
 (In thousands)
Agency commercial MBS$214,862  $(537) $—  $—  $214,862  $(537) 
Agency residential CMOs180,071  (572) 1,456  (7) 181,527  (579) 
Municipal securities38,667  (339) —  —  38,667  (339) 
Agency residential MBS—  —  186  (1) 186  (1) 
Asset-backed securities165,575  (1,670) —  —  165,575  (1,670) 
Collateralized loan obligations102,469  (403) —  —  102,469  (403) 
Private label residential CMOs9,872  (11) 114  (2) 9,986  (13) 
SBA securities4,565  (13) —  —  4,565  (13) 
Total$716,081  $(3,545) $1,756  $(10) $717,837  $(3,555) 
The securities that were in an unrealized loss position at March 31,June 30, 2020, were considered impaired and required further review to determine if the unrealized losses were credit-related. We concluded their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. We also considered the seniority of the tranches we owned and third partyU.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 therefore, we recognized such impairment in "other comprehensive income" in stockholders' equity. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.
18


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:
 March 31, 2020
 Amortized Fair
MaturitiesCost Value
 (In thousands)
Due in one year or less$9,898
 $10,026
Due after one year through five years300,638
 309,312
Due after five years through ten years975,907
 1,024,183
Due after ten years2,345,123
 2,414,142
Total securities available-for-sale$3,631,566
 $3,757,663

June 30, 2020
AmortizedFair
MaturitiesCostValue
 (In thousands)
Due in one year or less$8,979  $9,110  
Due after one year through five years328,227  344,634  
Due after five years through ten years967,544  1,032,710  
Due after ten years2,345,229  2,464,687  
Total securities available-for-sale$3,649,979  $3,851,141  
Mortgage-backed securitiesCMBS, CMOs, and MBS have contractual maturity dates, but require periodic payments based upon scheduled amortization terms. Actual principal collections on mortgage-backedthese securities usually occur more rapidly than the scheduled amortization terms because of prepayments made by obligors of the underlying loan collateral.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,
2020201920202019
(In thousands)
Taxable interest$19,836  $20,944  $41,622  $40,686  
Non-taxable interest5,612  7,547  10,841  17,140  
Dividend income590  457  1,021  802  
Total interest income on investment securities$26,038  $28,948  $53,484  $58,628  
 Three Months Ended
 March 31,
 2020 2019
 (In thousands)
Taxable interest$21,786
 $19,742
Non-taxable interest5,229
 9,593
Dividend income431
 345
Total interest income on investment securities$27,446
 $29,680
19



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


NOTE 4.  LOANS AND LEASES
Our loans are carried at the principal amount outstanding, net of deferred fees and costs, and in the case of acquired and purchased loans, net of purchase discounts and premiums. Deferred fees and costs and purchase discounts and premiums on acquired loans are recognized as an adjustment to interest income over the contractual life of the loans primarily using the effective interest method or taken into income when the related loans are paid off or included in the carrying amount of loans that are sold.
Loans and Leases Held for Investment
The following table summarizes the composition of our loans and leases held for investment as of the dates indicated:
 March 31, December 31,
 2020 2019
 (In thousands)
Real estate mortgage$8,018,704
 $7,982,383
Real estate construction and land2,913,843
 2,773,209
Commercial8,443,966
 7,714,358
Consumer429,881
 440,790
Total gross loans and leases held for investment19,806,394
 18,910,740
Deferred fees, net(61,089) (63,868)
Total loans and leases held for investment, net of deferred fees19,745,305
 18,846,872
Allowance for loan and lease losses(221,292) (138,785)
Total loans and leases held for investment, net (1)
$19,524,013
 $18,708,087

June 30,December 31,
20202019
(In thousands)
Real estate mortgage$7,963,898  $7,982,383  
Real estate construction and land3,371,672  2,773,209  
Commercial8,033,592  7,714,358  
Consumer411,314  440,790  
Total gross loans and leases held for investment19,780,476  18,910,740  
Deferred fees, net(85,845) (63,868) 
Total loans and leases held for investment, net of deferred fees19,694,631  18,846,872  
Allowance for loan and lease losses(301,050) (138,785) 
Total loans and leases held for investment, net (1)
$19,393,581  $18,708,087  
____________________
(1)Excludes accrued interest receivable of $64.4 million and $67.5 million at March 31, 2020 and December 31, 2019, respectively, that is recorded in "Other assets" on the condensed consolidated balance sheets.
(1) Excludes accrued interest receivable of $63.0 million and $67.5 million at June 30, 2020 and December 31, 2019, respectively, which is recorded in "Other assets" on the condensed consolidated balance sheets.
The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:
June 30, 2020
30 - 8990 or More
DaysDaysTotal
Past DuePast DuePast DueCurrentTotal
 (In thousands)
Real estate mortgage:
Commercial$42,784  $6,985  $49,769  $4,172,306  $4,222,075  
Income producing and other residential50  654  704  3,732,955  3,733,659  
Total real estate mortgage42,834  7,639  50,473  7,905,261  7,955,734  
Real estate construction and land:
Commercial—  —  —  1,167,609  1,167,609  
Residential1,022  —  1,022  2,171,897  2,172,919  
Total real estate construction and land1,022  —  1,022  3,339,506  3,340,528  
Commercial:
Asset-based3,697  17,725  21,422  3,391,009  3,412,431  
Venture capital3,939  —  3,939  1,810,402  1,814,341  
Other commercial7,991  1,877  9,868  2,750,410  2,760,278  
Total commercial15,627  19,602  35,229  7,951,821  7,987,050  
Consumer1,067  215  1,282  410,037  411,319  
Total$60,550  $27,456  $88,006  $19,606,625  $19,694,631  
 March 31, 2020
 30 - 89 90 or More      
 Days Days Total    
 Past Due Past Due Past Due Current Total
 (In thousands)
Real estate mortgage:         
Commercial$4,569
 $6,241
 $10,810
 $4,209,839
 $4,220,649
Income producing and other residential1,337
 682
 2,019
 3,786,276
 3,788,295
Total real estate mortgage5,906
 6,923
 12,829
 7,996,115
 8,008,944
Real estate construction and land:         
Commercial—
 —
 —
 1,087,505
 1,087,505
Residential241
 —
 241
 1,792,507
 1,792,748
Total real estate construction and land241
 —
 241
 2,880,012
 2,880,253
Commercial:         
Asset-based—
 —
 —
 3,938,402
 3,938,402
Venture capital3,272
 2,989
 6,261
 2,709,576
 2,715,837
Other commercial4,884
 2,022
 6,906
 1,765,079
 1,771,985
Total commercial8,156
 5,011
 13,167
 8,413,057
 8,426,224
Consumer518
 102
 620
 429,264
 429,884
Total$14,821
 $12,036
 $26,857
 $19,718,448
 $19,745,305
20




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


December 31, 2019
30 - 8990 or More
DaysDaysTotal
Past DuePast DuePast DueCurrentTotal
 (In thousands)
Real estate mortgage:
Commercial$2,448  $5,919  $8,367  $4,194,320  $4,202,687  
Income producing and other residential2,105  802  2,907  3,767,153  3,770,060  
Total real estate mortgage4,553  6,721  11,274  7,961,473  7,972,747  
Real estate construction and land:
Commercial—  —  —  1,082,368  1,082,368  
Residential1,429  —  1,429  1,654,005  1,655,434  
Total real estate construction and land1,429  —  1,429  2,736,373  2,737,802  
Commercial:
Asset-based19  —  19  3,748,388  3,748,407  
Venture capital—  —  —  2,179,422  2,179,422  
Other commercial2,781  4,164  6,945  1,760,722  1,767,667  
Total commercial2,800  4,164  6,964  7,688,532  7,695,496  
Consumer1,006  200  1,206  439,621  440,827  
Total$9,788  $11,085  $20,873  $18,825,999  $18,846,872  

It is our policy to discontinue accruing interest when principal or interest payments are past due 90 days or more (unless the loan is both well secured and in the process of collection) or when, in the opinion of management, there is a reasonable doubt as to the collectability of a loan or lease in the normal course of business. Interest income on nonaccrual loans is recognized only to the extent cash is received and the principal balance of the loan is deemed collectable.
The following table presents our nonaccrual and performing loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:  
 June 30, 2020December 31, 2019
NonaccrualPerformingTotalNonaccrualPerformingTotal
 (In thousands)
Real estate mortgage:
Commercial$61,771  $4,160,304  $4,222,075  $18,346  $4,184,341  $4,202,687  
Income producing and other residential2,207  3,731,452  3,733,659  2,478  3,767,582  3,770,060  
Total real estate mortgage63,978  7,891,756  7,955,734  20,824  7,951,923  7,972,747  
Real estate construction and land:
Commercial337  1,167,272  1,167,609  364  1,082,004  1,082,368  
Residential—  2,172,919  2,172,919  —  1,655,434  1,655,434  
Total real estate construction and land337  3,340,191  3,340,528  364  2,737,438  2,737,802  
Commercial:
Asset-based19,013  3,393,418  3,412,431  30,162  3,718,245  3,748,407  
Venture capital8,270  1,806,071  1,814,341  12,916  2,166,506  2,179,422  
Other commercial73,995  2,686,283  2,760,278  27,594  1,740,073  1,767,667  
Total commercial101,278  7,885,772  7,987,050  70,672  7,624,824  7,695,496  
Consumer520  410,799  411,319  493  440,334  440,827  
Total$166,113  $19,528,518  $19,694,631  $92,353  $18,754,519  $18,846,872  
 March 31, 2020 December 31, 2019
 Nonaccrual Performing Total Nonaccrual Performing Total
 (In thousands)
Real estate mortgage:           
Commercial$19,088
 $4,201,561
 $4,220,649
 $18,346
 $4,184,341
 $4,202,687
Income producing and other residential2,308
 3,785,987
 3,788,295
 2,478
 3,767,582
 3,770,060
Total real estate mortgage21,396
 7,987,548
 8,008,944
 20,824
 7,951,923
 7,972,747
Real estate construction and land:           
Commercial351
 1,087,154
 1,087,505
 364
 1,082,004
 1,082,368
Residential—
 1,792,748
 1,792,748
 —
 1,655,434
 1,655,434
Total real estate construction and land351
 2,879,902
 2,880,253
 364
 2,737,438
 2,737,802
Commercial:           
Asset-based17,104
 3,921,298
 3,938,402
 30,162
 3,718,245
 3,748,407
Venture capital18,612
 2,697,225
 2,715,837
 12,916
 2,166,506
 2,179,422
Other commercial37,726
 1,734,259
 1,771,985
 27,594
 1,740,073
 1,767,667
Total commercial73,442
 8,352,782
 8,426,224
 70,672
 7,624,824
 7,695,496
Consumer413
 429,471
 429,884
 493
 440,334
 440,827
Total$95,602
 $19,649,703
 $19,745,305
 $92,353
 $18,754,519
 $18,846,872
21



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


At March 31,June 30, 2020, nonaccrual loans and leases included $12.0$27.5 million of loans and leases 90 or more days past due, $6.6$52.6 million of loans and leases 30 to 89 days past due, and $77.0$86.0 million of loans and leases current with respect to contractual payments that were placed on nonaccrual status based on management’s judgment regarding their collectability. At December 31, 2019, nonaccrual loans and leases included $11.1 million of loans and leases 90 or more days past due, $1.2 million of loans and leases 30 to 89 days past due, and $80.0 million of current loans and leases that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of March 31,June 30, 2020, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $42.9$86.5 million and represented 45%52% of total nonaccrual loans and leases.
The following tables present the credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated. Classified loans and leases are those with a credit risk rating of either substandard or doubtful.
June 30, 2020
ClassifiedSpecial MentionPassTotal
(In thousands)
Real estate mortgage:
Commercial$71,446  $322,312  $3,828,317  $4,222,075  
Income producing and other residential6,941  6,150  3,720,568  3,733,659  
Total real estate mortgage78,387  328,462  7,548,885  7,955,734  
Real estate construction and land:
Commercial337  12,354  1,154,918  1,167,609  
Residential—  —  2,172,919  2,172,919  
Total real estate construction and land337  12,354  3,327,837  3,340,528  
Commercial:
Asset-based25,008  186,813  3,200,610  3,412,431  
Venture capital29,054  138,403  1,646,884  1,814,341  
Other commercial159,814  82,313  2,518,151  2,760,278  
Total commercial213,876  407,529  7,365,645  7,987,050  
Consumer630  18,052  392,637  411,319  
Total$293,230  $766,397  $18,635,004  $19,694,631  
 March 31, 2020
 Classified Special Mention Pass Total
 (In thousands)
Real estate mortgage:       
Commercial$33,908
 $371,668
 $3,815,073
 $4,220,649
Income producing and other residential7,083
 2,491
 3,778,721
 3,788,295
Total real estate mortgage40,991
 374,159
 7,593,794
 8,008,944
Real estate construction and land:       
Commercial351
 10,577
 1,076,577
 1,087,505
Residential—
 —
 1,792,748
 1,792,748
Total real estate construction and land351
 10,577
 2,869,325
 2,880,253
Commercial:       
Asset-based23,218
 152,136
 3,763,048
 3,938,402
Venture capital31,110
 173,947
 2,510,780
 2,715,837
Other commercial51,498
 186,368
 1,534,119
 1,771,985
Total commercial105,826
 512,451
 7,807,947
 8,426,224
Consumer537
 1,471
 427,876
 429,884
Total$147,705
 $898,658
 $18,698,942
 $19,745,305



December 31, 2019
ClassifiedSpecial MentionPassTotal
(In thousands)
Real estate mortgage:
Commercial$33,535  $30,070  $4,139,082  $4,202,687  
Income producing and other residential8,600  1,711  3,759,749  3,770,060  
Total real estate mortgage42,135  31,781  7,898,831  7,972,747  
Real estate construction and land:
Commercial364  —  1,082,004  1,082,368  
Residential—  1,429  1,654,005  1,655,434  
Total real estate construction and land364  1,429  2,736,009  2,737,802  
Commercial:
Asset-based32,223  38,936  3,677,248  3,748,407  
Venture capital35,316  74,813  2,069,293  2,179,422  
Other commercial65,261  174,785  1,527,621  1,767,667  
Total commercial132,800  288,534  7,274,162  7,695,496  
Consumer613  1,212  439,002  440,827  
Total$175,912  $322,956  $18,348,004  $18,846,872  
22


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


 December 31, 2019
 Classified Special Mention Pass Total
 (In thousands)
Real estate mortgage:       
Commercial$33,535
 $30,070
 $4,139,082
 $4,202,687
Income producing and other residential8,600
 1,711
 3,759,749
 3,770,060
Total real estate mortgage42,135
 31,781
 7,898,831
 7,972,747
Real estate construction and land:       
Commercial364
 —
 1,082,004
 1,082,368
Residential—
 1,429
 1,654,005
 1,655,434
Total real estate construction and land364
 1,429
 2,736,009
 2,737,802
Commercial:       
Asset-based32,223
 38,936
 3,677,248
 3,748,407
Venture capital35,316
 74,813
 2,069,293
 2,179,422
Other commercial65,261
 174,785
 1,527,621
 1,767,667
Total commercial132,800
 288,534
 7,274,162
 7,695,496
Consumer613
 1,212
 439,002
 440,827
Total$175,912
 $322,956
 $18,348,004
 $18,846,872





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


The following table presents our nonaccrual loans and leases by loan portfolio segment and class and by with and without an allowance recorded as of the date indicated and interest income recognized on nonaccrual loans and leases for the period indicated:
At and For the Three Months EndedAt and For the Six Months Ended
 June 30, 2020June 30, 2020
NonaccrualInterestNonaccrualInterest
RecordedIncomeRecordedIncome
InvestmentRecognizedInvestmentRecognized
 (In thousands)(In thousands)
With An Allowance Recorded:  
Real estate mortgage:
Commercial$304  $—  $304  $—  
Income producing and other residential1,445  —  1,445  —  
Commercial:
Asset based2,458  —  2,458  —  
Venture capital8,270  —  8,270  —  
Other commercial45,569  —  45,569  —  
Consumer520  —  520  —  
With No Related Allowance Recorded:
Real estate mortgage:
Commercial$61,467  $62  $61,467  $130  
Income producing and other residential762  —  762  —  
Real estate construction and land:
Commercial337  —  337  —  
Commercial:
Asset based16,555  —  16,555  —  
Other commercial28,426  1,196  28,426  1,220  
Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage$63,978  $62  $63,978  $130  
Real estate construction and land337  —  337  —  
Commercial101,278  1,196  101,278  1,220  
Consumer520  —  520  —  
Total$166,113  $1,258  $166,113  $1,350  
 At and For the Three Months Ended
 March 31, 2020
 Nonaccrual Interest
 Recorded Income
 Investment Recognized
 (In thousands)
With An Allowance Recorded: 
  
Real estate mortgage:   
Commercial$342
 $—
Income producing and other residential1,534
 —
Commercial:   
Venture capital15,524
 —
Other commercial28,782
 —
Consumer413
 —
With No Related Allowance Recorded:   
Real estate mortgage:   
Commercial$18,746
 $84
Income producing and other residential774
 —
Real estate construction and land:   
Commercial351
 —
Commercial:   
Asset based17,103
 —
Venture capital3,089
 —
Other commercial8,944
 24
Total Loans and Leases With and   
Without an Allowance Recorded:   
Real estate mortgage$21,396
 $84
Real estate construction and land351
 —
Commercial73,442
 24
Consumer413
 —
Total$95,602
 $108















23


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


The following tables present our loans held for investment by loan portfolio segment and class, by credit quality indicator (internal risk ratings), and by year of origination (vintage year) as of the date indicated:
Revolving
Converted
Amortized Cost BasisTerm Loans by Origination YearRevolvingto Term
June 30, 202020202019201820172016PriorLoansLoansTotal
(In thousands)
Real Estate Mortgage:
Commercial
Internal risk rating:
1-2 High pass$—  $—  $15,131  $15,672  $10,233  $62,921  $—  $—  $103,957  
3-4 Pass338,636  538,666  720,870  805,795  358,812  890,775  66,993  3,813  3,724,360  
5 Special mention—  55,250  92,175  2,558  77,811  94,518  —  —  322,312  
6-8 Classified—  1,367  183  21,747  2,909  45,240  —  —  71,446  
Total$338,636  $595,283  $828,359  $845,772  $449,765  $1,093,454  $66,993  $3,813  $4,222,075  
Current YTD period:
Gross charge-offs$—  $—  $—  $1,831  $—  $2,676  $—  $—  $4,507  
Gross recoveries—  —  —  —  —  (237) —  —  (237) 
Net$—  $—  $—  $1,831  $—  $2,439  $—  $—  $4,270  
Real Estate Mortgage:
Income Producing and
Other Residential
Internal risk rating:
1-2 High pass$—  $34,966  $76,744  $46,031  $54,261  $28,639  $—  $—  $240,641  
3-4 Pass148,116  843,413  1,243,035  653,956  260,740  220,111  109,783  773  3,479,927  
5 Special mention—  —  2,888  962  —  —  2,300  —  6,150  
6-8 Classified—  —  —  —  —  5,452  106  1,383  6,941  
Total$148,116  $878,379  $1,322,667  $700,949  $315,001  $254,202  $112,189  $2,156  $3,733,659  
Current YTD period:
Gross charge-offs$—  $—  $—  $—  $—  $—  $—  $175  $175  
Gross recoveries—  —  —  —  —  (13) (1) —  (14) 
Net$—  $—  $—  $—  $—  $(13) $(1) $175  $161  
Real Estate Construction
and Land: Commercial
Internal risk rating:
1-2 High pass$—  $—  $—  $—  $—  $—  $—  $—  $—  
3-4 Pass22,576  285,286  362,367  216,294  119,503  137,008  7,112  4,772  1,154,918  
5 Special mention—  —  12,354  —  —  —  —  —  12,354  
6-8 Classified—  —  —  —  —  337  —  —  337  
Total$22,576  $285,286  $374,721  $216,294  $119,503  $137,345  $7,112  $4,772  $1,167,609  
Current YTD period:
Gross charge-offs$—  $—  $—  $—  $—  $—  $—  $—  $—  
Gross recoveries—  —  —  —  —  —  —  —  —  
Net$—  $—  $—  $—  $—  $—  $—  $—  $—  
               Revolving  
               Converted  
Amortized Cost BasisTerm Loans by Origination Year Revolving to Term  
March 31, 20202020 2019 2018 2017 2016 Prior Loans Loans Total
 (In thousands)
Real Estate Mortgage:                 
Commercial                 
Internal risk rating:                 
1-2 High pass$—
 $—
 $15,151
 $10,230
 $8,439
 $54,639
 $—
 $—
 $88,459
3-4 Pass257,882
 535,541
 729,459
 824,199
 372,166
 937,158
 66,377
 3,832
 3,726,614
5 Special mention—
 56,577
 90,921
 18,806
 75,754
 129,610
 —
 —
 371,668
6-8 Classified—
 —
 183
 7,516
 4,468
 21,741
 —
 —
 33,908
Total$257,882
 $592,118
 $835,714
 $860,751
 $460,827
 $1,143,148
 $66,377
 $3,832
 $4,220,649
Current YTD period:                 
Gross charge-offs$—
 $—
 $—
 $—
 $—
 $325
 $—
 $—
 $325
Gross recoveries—
 —
 —
 —
 —
 (119) —
 —
 (119)
Net$—
 $—
 $—
 $—
 $—
 $206
 $—
 $—
 $206
                  
Real Estate Mortgage:                 
Income Producing and                 
Other Residential                 
Internal risk rating:                 
1-2 High pass$—
 $37,036
 $87,849
 $44,165
 $55,736
 $49,408
 $—
 $—
 $274,194
3-4 Pass78,326
 851,712
 1,254,556
 703,249
 276,705
 227,298
 111,585
 1,096
 3,504,527
5 Special mention—
 —
 —
 —
 —
 —
 2,300
 191
 2,491
6-8 Classified—
 —
 —
 —
 —
 5,588
 112
 1,383
 7,083
Total$78,326
 $888,748
 $1,342,405
 $747,414
 $332,441
 $282,294
 $113,997
 $2,670
 $3,788,295
Current YTD period:                 
Gross charge-offs$—
 $—
 $—
 $—
 $—
 $—
 $—
 $175
 $175
Gross recoveries—
 —
 —
 —
 —
 (4) (1) —
 (5)
Net$—
 $—
 $—
 $—
 $—
 $(4) $(1) $175
 $170
                  
Real Estate Construction                 
and Land: Commercial                 
Internal risk rating:                 
1-2 High pass$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
3-4 Pass15,749
 244,344
 331,283
 210,871
 129,186
 136,050
 5,470
 3,624
 1,076,577
5 Special mention—
 —
 10,577
 —
 —
 —
 —
 —
 10,577
6-8 Classified—
 —
 —
 —
 —
 351
 —
 —
 351
Total$15,749
 $244,344
 $341,860
 $210,871
 $129,186
 $136,401
 $5,470
 $3,624
 $1,087,505
Current YTD period:                 
Gross charge-offs$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Gross recoveries—
 —
 —
 —
 —
 —
 —
 —
 —
Net$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—




24


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

Revolving
Converted
Amortized Cost BasisTerm Loans by Origination YearRevolvingto Term
June 30, 202020202019201820172016PriorLoansLoansTotal
(In thousands)
Real Estate Construction
and Land: Residential
Internal risk rating:
1-2 High pass$—  $—  $—  $—  $—  $—  $—  $—  $—  
3-4 Pass177,247  366,209  783,534  671,665  110,532  2,051  18,714  42,967  2,172,919  
5 Special mention—  —  —  —  —  —  —  —  —  
6-8 Classified—  —  —  —  —  —  —  —  —  
Total$177,247  $366,209  $783,534  $671,665  $110,532  $2,051  $18,714  $42,967  $2,172,919  
Current YTD period:
Gross charge-offs$—  $—  $—  $—  $—  $—  $—  $—  $—  
Gross recoveries—  —  —  —  —  —  —  —  —  
Net$—  $—  $—  $—  $—  $—  $—  $—  $—  
Commercial: Asset-Based
Internal risk rating:
1-2 High pass$22,993  $178,052  $116,797  $65,756  $130,266  $95,166  $288,230  $98,416  $995,676  
3-4 Pass45,866  141,935  111,495  40,166  58,534  60,573  1,722,555  23,810  2,204,934  
5 Special mention—  66,446  52,740  22,597  18,793  1,429  19,720  5,088  186,813  
6-8 Classified—  —  —  —  —  15,854  8,836  318  25,008  
Total$68,859  $386,433  $281,032  $128,519  $207,593  $173,022  $2,039,341  $127,632  $3,412,431  
Current YTD period:
Gross charge-offs$—  $—  $—  $—  $—  $11,550  $—  $—  $11,550  
Gross recoveries(8) —  —  —  —  (323) (56) —  (387) 
Net$(8) $—  $—  $—  $—  $11,227  $(56) $—  $11,163  
Commercial: Venture
Capital
Internal risk rating:
1-2 High pass (1)
$—  $5,649  $—  $(6) $(6) $(2) $237,484  $—  $243,119  
3-4 Pass50,908  172,879  82,954  11,696  34,275  9,055  1,036,748  5,250  1,403,765  
5 Special mention9,499  28,162  27,430  4,000  610  —  66,685  2,017  138,403  
6-8 Classified—  (866) 10,871  —  —  3,632  12,574  2,843  29,054  
Total$60,407  $205,824  $121,255  $15,690  $34,879  $12,685  $1,353,491  $10,110  $1,814,341  
Current YTD period:
Gross charge-offs$—  $—  $6,532  $—  $(8) $149  $140  $—  $6,813  
Gross recoveries—  —  (41) (104) (136) (3) (15) —  (299) 
Net$—  $—  $6,491  $(104) $(144) $146  $125  $—  $6,514  
____________________
(1) Amounts with negative balances are loans with zero principal balances but have deferred loan origination fees.

25
               Revolving  
               Converted  
Amortized Cost BasisTerm Loans by Origination Year Revolving to Term  
March 31, 20202020 2019 2018 2017 2016 Prior Loans Loans Total
 (In thousands)
Real Estate Construction                 
and Land: Residential                 
Internal risk rating:                 
1-2 High pass$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
3-4 Pass23,686
 253,764
 711,007
 634,325
 127,324
 2,075
 8,909
 31,658
 1,792,748
5 Special mention—
 —
 —
 —
 —
 —
 —
 —
 —
6-8 Classified—
 —
 —
 —
 —
 —
 —
 —
 —
Total$23,686
 $253,764
 $711,007
 $634,325
 $127,324
 $2,075
 $8,909
 $31,658
 $1,792,748
Current YTD period:                 
Gross charge-offs$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Gross recoveries—
 —
 —
 —
 —
 —
 —
 —
 —
Net$—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
                  
Commercial: Asset-Based                 
Internal risk rating:                 
1-2 High pass$10,832
 $164,402
 $188,677
 $74,590
 $150,284
 $97,445
 $701,522
 $—
 $1,387,752
3-4 Pass44,396
 202,867
 123,136
 39,665
 69,392
 66,816
 1,806,634
 22,390
 2,375,296
5 Special mention—
 35,967
 48,345
 19,652
 15,461
 1,568
 31,143
 —
 152,136
6-8 Classified—
 —
 —
 —
 —
 15,872
 7,346
 —
 23,218
Total$55,228
 $403,236
 $360,158
 $133,907
 $235,137
 $181,701
 $2,546,645
 $22,390
 $3,938,402
Current YTD period:                 
Gross charge-offs$—
 $—
 $—
 $—
 $—
 $11,550
 $—
 $—
 $11,550
Gross recoveries—
 —
 —
 —
 —
 (323) (42) —
 (365)
Net$—
 $—
 $—
 $—
 $—
 $11,227
 $(42) $—
 $11,185
                  
Commercial: Venture                 
Capital                 
Internal risk rating:                 
1-2 High pass$—
 $4,798
 $—
 $(8) $(2) $996
 $389,952
 $—
 $395,736
3-4 Pass84,493
 162,533
 104,081
 14,226
 37,176
 10,833
 1,694,848
 6,854
 2,115,044
5 Special mention1,000
 39,663
 36,436
 —
 —
 —
 96,848
 —
 173,947
6-8 Classified—
 (822) 11,167
 6,868
 —
 5,967
 7,930
 —
 31,110
Total$85,493
 $206,172
 $151,684
 $21,086
 $37,174
 $17,796
 $2,189,578
 $6,854
 $2,715,837
Current YTD period:                 
Gross charge-offs$—
 $—
 $83
 $—
 $(7) $182
 $85
 $—
 $343
Gross recoveries—
 —
 —
 (46) (119) (3) (17) —
 (185)
Net$—
 $—
 $83
 $(46) $(126) $179
 $68
 $—
 $158






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


Revolving
Converted
Amortized Cost BasisTerm Loans by Origination YearRevolvingto Term
June 30, 202020202019201820172016PriorLoansLoansTotal
(In thousands)
Commercial: Other
Commercial
Internal risk rating:
1-2 High pass$1,209,264  $432  $8  $16,894  $1  $3,076  $97,116  $136  $1,326,927  
3-4 Pass19,833  102,743  112,650  97,807  33,596  108,841  698,428  17,326  1,191,224  
5 Special mention—  109  —  818  1,995  4,892  73,339  1,160  82,313  
6-8 Classified1  3  35  70  4,126  46,522  105,085  3,972  159,814  
Total$1,229,098  $103,287  $112,693  $115,589  $39,718  $163,331  $973,968  $22,594  $2,760,278  
Current YTD period:
Gross charge-offs$—  $—  $—  $52  $—  $996  $10,031  $1,229  $12,308  
Gross recoveries—  —  (8) (19) (73) (2,459) (100) (2) (2,661) 
Net$—  $—  $(8) $33  $(73) $(1,463) $9,931  $1,227  $9,647  
Consumer
Internal risk rating:
1-2 High pass$23  $—  $10  $18  $—  $—  $752  $—  $803  
3-4 Pass51,068  138,584  71,591  50,523  53,886  15,445  10,735  2  391,834  
5 Special mention—  637  9,971  2,097  3,592  1,755  —  —  18,052  
6-8 Classified—  57  116  —  62  355  1  39  630  
Total$51,091  $139,278  $81,688  $52,638  $57,540  $17,555  $11,488  $41  $411,319  
Current YTD period:
Gross charge-offs$—  $97  $86  $135  $295  $—  $21  $4  $638  
Gross recoveries—  —  (1) (5) (14) (21) —  —  (41) 
Net$—  $97  $85  $130  $281  $(21) $21  $4  $597  
Total Loans and Leases
Internal risk rating:
1-2 High pass$1,232,280  $219,099  $208,690  $144,365  $194,755  $189,800  $623,582  $98,552  $2,911,123  
3-4 Pass854,250  2,589,715  3,488,496  2,547,902  1,029,878  1,443,859  3,671,068  98,713  15,723,881  
5 Special mention9,499  150,604  197,558  33,032  102,801  102,594  162,044  8,265  766,397  
6-8 Classified1  561  11,205  21,817  7,097  117,392  126,602  8,555  293,230  
Total$2,096,030  $2,959,979  $3,905,949  $2,747,116  $1,334,531  $1,853,645  $4,583,296  $214,085  $19,694,631  
Current YTD period:
Gross charge-offs$—  $97  $6,618  $2,018  $287  $15,371  $10,192  $1,408  $35,991  
Gross recoveries(8) —  (50) (128) (223) (3,056) (172) (2) (3,639) 
Net$(8) $97  $6,568  $1,890  $64  $12,315  $10,020  $1,406  $32,352  
               Revolving  
               Converted  
Amortized Cost BasisTerm Loans by Origination Year Revolving to Term  
March 31, 20202020 2019 2018 2017 2016 Prior Loans Loans Total
 (In thousands)
Commercial: Other                 
Commercial                 
Internal risk rating:                 
1-2 High pass$13
 $462
 $8
 $16,915
 $2
 $3,204
 $127,406
 $160
 $148,170
3-4 Pass11,586
 101,273
 118,985
 102,457
 35,130
 114,158
 884,472
 17,888
 1,385,949
5 Special mention—
 89
 —
 694
 2,134
 42,241
 141,173
 37
 186,368
6-8 Classified2
 4
 35
 90
 4,325
 10,324
 32,565
 4,153
 51,498
Total$11,601
 $101,828
 $119,028
 $120,156
 $41,591
 $169,927
 $1,185,616
 $22,238
 $1,771,985
Current YTD period:                 
Gross charge-offs$—
 $—
 $—
 $52
 $—
 $190
 $6,375
 $722
 $7,339
Gross recoveries—
 —
 (8) (12) (55) (230) (100) —
 (405)
Net$—
 $—
 $(8) $40
 $(55) $(40) $6,275
 $722
 $6,934
                  
Consumer                 
Internal risk rating:                 
1-2 High pass$16
 $—
 $10
 $27
 $—
 $—
 $651
 $—
 $704
3-4 Pass27,755
 150,949
 90,399
 59,058
 65,145
 19,383
 14,476
 7
 427,172
5 Special mention—
 276
 564
 175
 186
 270
 —
 —
 1,471
6-8 Classified—
 39
 19
 —
 62
 364
 11
 42
 537
Total$27,771
 $151,264
 $90,992
 $59,260
 $65,393
 $20,017
 $15,138
 $49
 $429,884
Current YTD period:                 
Gross charge-offs$—
 $—
 $85
 $114
 $263
 $—
 $11
 $—
 $473
Gross recoveries—
 —
 —
 (2) (1) (13) —
 —
 (16)
Net$—
 $—
 $85
 $112
 $262
 $(13) $11
 $—
 $457
                  
Total Loans and Leases                 
Internal risk rating:                 
1-2 High pass$10,861
 $206,698
 $291,695
 $145,919
 $214,459
 $205,692
 $1,219,531
 $160
 $2,295,015
3-4 Pass543,873
 2,502,983
 3,462,906
 2,588,050
 1,112,224
 1,513,771
 4,592,771
 87,349
 16,403,927
5 Special mention1,000
 132,572
 186,843
 39,327
 93,535
 173,689
 271,464
 228
 898,658
6-8 Classified2
 (779) 11,404
 14,474
 8,855
 60,207
 47,964
 5,578
 147,705
Total$555,736
 $2,841,474
 $3,952,848
 $2,787,770
 $1,429,073
 $1,953,359
 $6,131,730
 $93,315
 $19,745,305
Current YTD period:                 
Gross charge-offs$—
 $—
 $168
 $166
 $256
 $12,247
 $6,471
 $897
 $20,205
Gross recoveries—
 —
 (8) (60) (175) (692) (160) —
 (1,095)
Net$—
 $—
 $160
 $106
 $81
 $11,555
 $6,311
 $897
 $19,110



26


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


TDRs are a result of rate reductions, term extensions, fee concessions, and debt forgiveness, or a combination thereof. The Company has granted various consumer and commercial loan modifications to provide borrowers relief from the economic impacts of COVID-19. In accordance with the CARES Act, the Company has elected to not apply TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act. The following table presents our troubled debt restructurings of loans held for investment by loan portfolio segment and class for the periods indicated:
Three Months Ended June 30,
 20202019
Pre-Post-Pre-Post-
ModificationModificationModificationModification
NumberOutstandingOutstandingNumberOutstandingOutstanding
ofRecordedRecordedofRecordedRecorded
Troubled Debt RestructuringsLoansInvestmentInvestmentLoansInvestmentInvestment
 (Dollars in thousands)
Real estate mortgage:
Commercial7  $3,745  $3,745  —  $—  $—  
Income producing and other residential5  787  787  3  456  456  
Commercial:
Asset-based6  1,234  1,234  1  620  620  
Venture capital—  —  —  4  13,971  14,972  
Other commercial19  18,840  15,726  3  107  107  
Consumer3  212  212  —  —  —  
Total40  $24,818  $21,704  11  $15,154  $16,155  
 Three Months Ended March 31,
 2020 2019
   Pre- Post-   Pre- Post-
   Modification Modification   Modification Modification
 Number Outstanding Outstanding Number Outstanding Outstanding
 of Recorded Recorded of Recorded Recorded
Troubled Debt RestructuringsLoans Investment Investment Loans Investment Investment
 (Dollars in thousands)
Real estate mortgage:           
Commercial—
 $—
 $—
 1
 $37
 $—
Income producing and other residential—
 —
 —
 3
 789
 789
Commercial:           
Asset-based4
 1,741
 1,741
 —
 —
 —
Venture capital2
 2,047
 2,047
 6
 2,105
 1,242
Other commercial15
 22,165
 20,389
 8
 585
 585
Total21
 $25,953
 $24,177
 18
 $3,516
 $2,616

Six Months Ended June 30,
 20202019
Pre-Post-Pre-Post-
ModificationModificationModificationModification
NumberOutstandingOutstandingNumberOutstandingOutstanding
ofRecordedRecordedofRecordedRecorded
Troubled Debt RestructuringsLoansInvestmentInvestmentLoansInvestmentInvestment
 (Dollars in thousands)
Real estate mortgage:
Commercial8  $3,745  $3,745  1  $37  $—  
Income producing and other residential5  787  787  6  1,245  1,245  
Commercial:
Asset-based7  1,741  1,741  1  620  620  
Venture capital2  2,047  2,047  10  16,076  16,214  
Other commercial30  23,219  21,444  11  692  692  
Consumer3  212  212  —  —  —  
Total55  $31,751  $29,976  29  $18,670  $18,771  
During the three and six months ended June 30, 2020, there was 1 $2.0 million venture capital loan restructured in the preceding 12-month period that subsequently defaulted.
During the three months ended March 31, 2020,June 30, 2019, there was 1were 2 venture capital loanloans totaling $2.3 million$447,000 and 1 other commercial loan totaling $9,000,of $81,000, restructured in the preceding 12-month period that subsequently defaulted. During the threesix months ended March 31,June 30, 2019, there were 2 venture capital loans totaling $447,000 and 3 other commercial loans totaling $64,000$140,000, restructured in the preceding 12-month period that subsequently defaulted.

27


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


Leases Receivable
We provide equipment financing to our customers primarily with operating and direct financing leases. For direct financing leases, lease receivables are recorded on the balance sheet but the leased equipment is not, although we generally retain legal title to the leased equipment until the end of each lease. Direct financing leases are stated at the net amount of minimum lease payments receivable, plus any unguaranteed residual value, less the amount of unearned income and net acquisition discount at the reporting date. Direct lease origination costs are amortized using the effective interest method over the life of the leases. Direct financing leases are subject to our accounting for allowance for loan and lease losses. See Note 8. Leases for information regarding operating leases where we are the lessor.
The following table provides the components of leases receivable income for the periods indicated:
Three Months EndedThree Months EndedSix Months Ended
March 31,June 30,June 30,
2020 20192020201920202019
(In thousands)(In thousands)
Component of leases receivable income:   Component of leases receivable income:
Interest income on net investments in leases$2,252
 $3,140
Interest income on net investments in leases$2,103  $2,886  $4,355  $6,026  

The following table presents the components of leases receivable as of the dates indicated:
 March 31, 2020 December 31, 2019
 (In thousands)
Net investment in direct financing leases:   
Lease payments receivable$149,740
 $147,729
Unguaranteed residual assets20,459
 20,806
Deferred costs and other581
 655
Aggregate net investment in leases$170,780
 $169,190

June 30, 2020December 31, 2019
(In thousands)
Net investment in direct financing leases:
Lease payments receivable$137,984  $147,729  
Unguaranteed residual assets18,653  20,806  
Deferred costs and other577  655  
Aggregate net investment in leases$157,214  $169,190  
The following table presents maturities of leases receivable as of the date indicated:
June 30, 2020
(In thousands)
Period ending December 31,
2020$35,218  
202161,182  
202224,981  
202314,366  
202410,469  
2025 and thereafter2,766  
Total undiscounted cash flows148,982  
Less: Unearned income(10,998) 
Present value of lease payments$137,984  

 March 31, 2020
 (In thousands)
Period ending December 31, 
2020$53,576
202159,334
202223,920
202313,324
20249,691
2025 and thereafter2,352
Total undiscounted cash flows162,197
Less: Unearned income(12,457)
Present value of lease payments$149,740




28


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


Allowance for Loan and Lease Losses
The following tables present a summary of the activity in the allowance for loan and lease losses on loans and leases held for investment by loan portfolio segment for the periods indicated:
Three Months Ended June 30, 2020
Real Estate
Real EstateConstruction
Mortgageand LandCommercialConsumerTotal
(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period$91,372  $40,173  $87,570  $2,177  $221,292  
Charge-offs(4,182) —  (11,439) (165) (15,786) 
Recoveries127  —  2,392  25  2,544  
Net charge-offs(4,055) —  (9,047) (140) (13,242) 
Provision43,407  29,940  19,424  229  93,000  
Balance, end of period$130,724  $70,113  $97,947  $2,266  $301,050  
 Three Months Ended March 31, 2020
   Real Estate      
 Real Estate Construction      
 Mortgage and Land Commercial Consumer Total
 (In thousands)
Allowance for Loan and Lease Losses:         
Balance, beginning of period$44,575
 $30,544
 $61,528
 $2,138
 $138,785
Charge-offs(500) —
 (19,232) (473) (20,205)
Recoveries124
 —
 955
 16
 1,095
Net charge-offs(376) —
 (18,277) (457) (19,110)
Provision41,865
 18,221
 37,459
 455
 98,000
Cumulative effect of change in accounting         
principle - CECL5,308
 (8,592) 6,860
 41
 3,617
Balance, end of period$91,372
 $40,173
 $87,570
 $2,177
 $221,292
          
Ending Allowance by         
Evaluation Methodology:         
Individually evaluated$230
 $—
 $6,462
 $—
 $6,692
Collectively evaluated$91,142
 $40,173
 $81,108
 $2,177
 $214,600
          
Ending Loans and Leases by         
Evaluation Methodology:         
Individually evaluated$25,901
 $1,816
 $72,280
 $—
 $99,997
Collectively evaluated7,983,043
 2,878,437
 8,353,944
 429,884
 19,645,308
Ending balance$8,008,944
 $2,880,253
 $8,426,224
 $429,884
 $19,745,305

Six Months Ended June 30, 2020
Real Estate
Real EstateConstruction
Mortgageand LandCommercialConsumerTotal
(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period$44,575  $30,544  $61,528  $2,138  $138,785  
Charge-offs(4,682) —  (30,671) (638) (35,991) 
Recoveries251  —  3,347  41  3,639  
Net charge-offs(4,431) —  (27,324) (597) (32,352) 
Provision85,272  48,161  56,883  684  191,000  
Cumulative effect of change in accounting
principle - CECL5,308  (8,592) 6,860  41  3,617  
Balance, end of period$130,724  $70,113  $97,947  $2,266  $301,050  
Ending Allowance by
Evaluation Methodology:
Individually evaluated$211  $—  $8,282  $—  $8,493  
Collectively evaluated$130,513  $70,113  $89,665  $2,266  $292,557  
Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated$68,240  $1,799  $105,661  $—  $175,700  
Collectively evaluated7,887,494  3,338,729  7,881,389  411,319  19,518,931  
Ending balance$7,955,734  $3,340,528  $7,987,050  $411,319  $19,694,631  

29


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


Three Months Ended June 30, 2019
Real Estate
Real EstateConstruction
Mortgageand LandCommercialConsumerTotal
(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period$45,754  $27,208  $61,496  $1,823  $136,281  
Charge-offs(534) —  (16,927) (176) (17,637) 
Recoveries240  —  6,080  73  6,393  
Net charge-offs(294) —  (10,847) (103) (11,244) 
Provision (negative provision)1,366  (830) 8,752  712  10,000  
Balance, end of period$46,826  $26,378  $59,401  $2,432  $135,037  
 Three Months Ended March 31, 2019
   Real Estate      
 Real Estate Construction      
 Mortgage and Land Commercial Consumer Total
 (In thousands)
Allowance for Loan and Lease Losses:         
Balance, beginning of period$46,021
 $28,209
 $56,360
 $1,882
 $132,472
Charge-offs(196) —
 (3,003) (266) (3,465)
Recoveries143
 —
 3,106
 25
 3,274
Net (charge-offs) recoveries(53) —
 103
 (241) (191)
Provision (negative provision)(214) (1,001) 5,033
 182
 4,000
Balance, end of period$45,754
 $27,208
 $61,496
 $1,823
 $136,281
          
Ending Allowance by         
Evaluation Methodology:         
Individually evaluated$270
 $—
 $5,931
 $—
 $6,201
Collectively evaluated$45,484
 $27,208
 $55,565
 $1,823
 $130,080
          
Ending Loans and Leases by         
Evaluation Methodology:         
Individually evaluated$23,908
 $5,432
 $71,660
 $—
 $101,000
Collectively evaluated8,135,550
 2,346,292
 7,352,694
 372,161
 18,206,697
Ending balance$8,159,458
 $2,351,724
 $7,424,354
 $372,161
 $18,307,697

Six Months Ended June 30, 2019
Real Estate
Real EstateConstruction
Mortgageand LandCommercialConsumerTotal
(In thousands)
Allowance for Loan and Lease Losses:
Balance, beginning of period$46,021  $28,209  $56,360  $1,882  $132,472  
Charge-offs(730) —  (19,930) (442) (21,102) 
Recoveries383  —  9,186  98  9,667  
Net charge-offs(347) —  (10,744) (344) (11,435) 
Provision (negative provision)1,152  (1,831) 13,785  894  14,000  
Balance, end of period$46,826  $26,378  $59,401  $2,432  $135,037  
Ending Allowance by
Evaluation Methodology:
Individually evaluated$260  $—  $4,482  $—  $4,742  
Collectively evaluated$46,566  $26,378  $54,919  $2,432  $130,295  
Ending Loans and Leases by
Evaluation Methodology:
Individually evaluated$27,594  $5,376  $60,380  $—  $93,350  
Collectively evaluated8,048,432  2,370,754  7,513,934  446,382  18,379,502  
Ending balance$8,076,026  $2,376,130  $7,574,314  $446,382  $18,472,852  
The allowance for loan and lease losses increased by $83$79.8 million in the firstsecond quarter of 2020 to $301.1 million due primarily to a provision for loan and lease losses of $98 million. The higher provision for loan and lease losses in$93.0 million driven by the first quarter of 2020 was a result ofimpact from the current economic forecast, which reflected a significant deterioration and continued uncertainty in the key macro-economic forecast variables such as unemployment and Real GDP as a result of COVID-19.
We actively participated in the COVID-19 pandemic, significant loan downgrades into special mention,Paycheck Protection Program ("PPP"), under the provisions of the Coronavirus Aid, Relief, and higher provisions on individually evaluated loans.Economic Security ("CARES") Act during the second quarter of 2020. As of June 30, 2020, we processed approximately $1.2 billion in loans through the PPP. The loans have two-year terms, are fully guaranteed by the SBA, and do not carry an allowance.
30


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


A loan is considered collateral-dependent, and is individually evaluated for reserve purposes, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent loans held for investment by collateral type as of the following date:
 March 31, 2020
 Real Business  
 Property Assets Total
 (In thousands)
Real estate mortgage$19,310
 $—
 $19,310
Real estate construction and land1,816
 —
 1,816
Commercial—
 22,530
 22,530
     Total$21,126
 $22,530
 $43,656




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


June 30, 2020
RealBusiness
PropertyAssetsTotal
(In thousands)
Real estate mortgage$62,021  $—  $62,021  
Real estate construction and land1,799  —  1,799  
Commercial—  32,135  32,135  
     Total$63,820  $32,135  $95,955  
Allowance for Credit Losses
The allowance for credit losses is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets.
The following tables present a summary of the activity in the allowance for loan and lease losses and reserve for unfunded loan commitments for the periods indicated:
Three Months EndedThree Months Ended
March 31, 2020June 30, 2020
Allowance for Reserve for TotalAllowance forReserve forTotal
Loan and Unfunded Loan Allowance forLoan andUnfunded LoanAllowance for
Lease Losses Commitments Credit LossesLease LossesCommitmentsCredit Losses
(In thousands)(In thousands)
Balance, beginning of period$138,785
 $35,861
 $174,646
Balance, beginning of period$221,292  $53,571  $274,863  
Charge-offs(20,205) —
 (20,205)Charge-offs(15,786) —  (15,786) 
Recoveries1,095
 —
 1,095
Recoveries2,544  —  2,544  
Net charge-offs(19,110) —
 (19,110)Net charge-offs(13,242) —  (13,242) 
Provision98,000
 14,000
 112,000
Provision93,000  27,000  120,000  
Cumulative effect of change in accounting     
principle - CECL3,617
 3,710
 7,327
Balance, end of period$221,292
 $53,571
 $274,863
Balance, end of period$301,050  $80,571  $381,621  

 Three Months Ended
 March 31, 2019
 Allowance for Reserve for Total
 Loan and Unfunded Loan Allowance for
 Lease Losses Commitments Credit Losses
 (In thousands)
Balance, beginning of period$132,472
 $36,861
 $169,333
Charge-offs(3,465) —
 (3,465)
Recoveries3,274
 —
 3,274
Net charge-offs(191) —
 (191)
Provision4,000
 —
 4,000
Balance, end of period$136,281
 $36,861
 $173,142

Six Months Ended
June 30, 2020
Allowance forReserve forTotal
Loan andUnfunded LoanAllowance for
Lease LossesCommitmentsCredit Losses
(In thousands)
Balance, beginning of period$138,785  $35,861  $174,646  
Charge-offs(35,991) —  (35,991) 
Recoveries3,639  —  3,639  
Net charge-offs(32,352) —  (32,352) 
Provision191,000  41,000  232,000  
Cumulative effect of change in accounting
principle - CECL3,617  3,710  7,327  
Balance, end of period$301,050  $80,571  $381,621  
31


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

Three Months Ended
June 30, 2019
Allowance forReserve forTotal
Loan andUnfunded LoanAllowance for
Lease LossesCommitmentsCredit Losses
(In thousands)
Balance, beginning of period$136,281  $36,861  $173,142  
Charge-offs(17,637) —  (17,637) 
Recoveries6,393  —  6,393  
Net charge-offs(11,244) —  (11,244) 
Provision (negative provision)10,000  (2,000) 8,000  
Balance, end of period$135,037  $34,861  $169,898  

Six Months Ended
June 30, 2019
Allowance forReserve forTotal
Loan andUnfunded LoanAllowance for
Lease LossesCommitmentsCredit Losses
(In thousands)
Balance, beginning of period$132,472  $36,861  $169,333  
Charge-offs(21,102) —  (21,102) 
Recoveries9,667  —  9,667  
Net charge-offs(11,435) —  (11,435) 
Provision (negative provision)14,000  (2,000) 12,000  
Balance, end of period$135,037  $34,861  $169,898  
32


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

NOTE 5.  FORECLOSED ASSETS
The following table summarizes foreclosed assets as of the dates indicated:
 March 31, December 31,
Property Type2020 2019
 (In thousands)
Commercial real estate$33
 $221
Construction and land development219
 219
Total other real estate owned, net252
 440
Other foreclosed assets1,449
 —
Total foreclosed assets, net$1,701
 $440

June 30,December 31,
Property Type20202019
(In thousands)
Commercial real estate$28  $221  
Construction and land development219  219  
Total other real estate owned, net247  440  
Other foreclosed assets1,202  —  
Total foreclosed assets, net$1,449  $440  
The following table presents the changes in foreclosed assets, net of the valuation allowance, for the period indicated:
 Foreclosed
 Assets
 (In thousands)
Balance, December 31, 2019$440
Transfers to foreclosed assets from loans1,776
Provision for losses(105)
Reductions related to sales(410)
Balance, March 31, 2020$1,701

Foreclosed
Assets
(In thousands)
Balance, December 31, 2019$440 
Transfers to foreclosed assets from loans1,776 
Provision for losses(110)
Reductions related to sales(657)
Balance, June 30, 2020$1,449 
NOTE 6.  GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment annually unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings (loss).
The unprecedented decline in economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations in March 2020, including our stock price. These events indicated that goodwill may be impaired and resulted in us performing a goodwill impairment assessment. As a result, we recorded a goodwill impairment charge of $1.47 billion in the first quarter of 2020 as ourthe estimated fair value of equity was less than our book value. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, or liquidity position.
The following table presents the changes in the carrying amount of goodwill for the period indicated:
Goodwill
(In thousands)
Balance, December 31, 2019$2,548,670 
Impairment - March 2020(1,470,000)
Balance, June 30, 2020$1,078,670 
 Goodwill
 (In thousands)
Balance, December 31, 2019$2,548,670
Impairment(1,470,000)
Balance, March 31, 2020$1,078,670
33



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


Our other intangible assets with definite lives include CDI and CRI. CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or customer relationships acquired. The aggregate amortization expense is expected to be $14.8 million for 2020. The estimated aggregate amortization expense related to our current intangible assets for each of the next four years is $10.8 million for 2021, $7.4 million for 2022, $3.8 million for 2023, and $1.7 million for 2024. Our current intangible assets are estimated to be fully amortized by the end of 2024.
The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:
 Three Months Ended
 March 31,
 2020 2019
 (In thousands)
Gross Amount of CDI and CRI:   
Balance, beginning of period$117,573
 $119,497
Balance, end of period$117,573
 $119,497
Accumulated Amortization:   
Balance, beginning of period(79,179) (62,377)
Amortization(3,948) (4,870)
Balance, end of period(83,127) (67,247)
Net CDI and CRI, end of period$34,446
 $52,250

 Three Months EndedSix Months Ended
June 30,June 30,
 2020201920202019
 (In thousands)
Gross Amount of CDI and CRI:    
Balance, beginning of period$117,573  $119,497  $117,573  $119,497  
Fully amortized portion(7,927) —  (7,927) —  
Balance, end of period109,646  119,497  109,646  119,497  
Accumulated Amortization:
Balance, beginning of period(83,127) (67,247) (79,179) (62,377) 
Amortization(3,882) (4,870) (7,830) (9,740) 
Fully amortized portion7,927  —  7,927  —  
Balance, end of period(79,082) (72,117) (79,082) (72,117) 
Net CDI and CRI, end of period$30,564  $47,380  $30,564  $47,380  
NOTE 7.  OTHER ASSETS
The following table presents the detail of our other assets as of the dates indicated:
March 31, December 31,June 30,December 31,
Other Assets2020 2019Other Assets20202019
(In thousands)(In thousands)
Cash surrender value of BOLI$199,962
 $199,029
Cash surrender value of BOLI$200,733  $199,029  
LIHTC investments (1)
181,077
 75,149
LIHTC investments (1)
192,963  75,149  
Operating lease ROU assets, net124,897
 129,301
Operating lease ROU assets, net (2)
Operating lease ROU assets, net (2)
125,325  129,301  
Interest receivable78,253
 81,479
Interest receivable76,150  81,479  
CRA investments (2)
66,713
 65,152
CRA investments (3)
CRA investments (3)
74,644  65,152  
Prepaid expenses20,602
 17,099
Prepaid expenses24,971  17,099  
Equity investments without readily determinable fair valuesEquity investments without readily determinable fair values14,967  14,890  
Equity warrants (4)
Equity warrants (4)
4,781  3,434  
Equity investments with readily determinable fair valuesEquity investments with readily determinable fair values2,688  2,998  
Taxes receivable17,656
 31,591
Taxes receivable—  31,591  
Equity investments without readily determinable fair values14,914
 14,890
Equity warrants (3)
4,290
 3,434
Equity investments with readily determinable fair values2,471
 2,998
Other receivables/assets23,106
 16,689
Other receivables/assets17,235  16,689  
Total other assets$733,941
 $636,811
Total other assets$734,457  $636,811  
____________________
(1)
(1) During the first quarter of 2020, the Company increased the amount of its investment in low income housing project partnerships by $101 million representing the amount of related unfunded commitments, with an offset to a liability included in "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets.
(2)Includes equity investments without readily determinable fair values of $19.2 million and $17.8 million at March 31, 2020 and December 31, 2019.
(3)
For information regarding equity warrants, see Note 10. Derivatives.
(2) See Note 8.Leases for further details regarding the operating lease ROU assets.

(3) Includes equity investments without readily determinable fair values of $21.0 million and $17.8 million at June 30, 2020 and December 31, 2019.
(4) For information regarding equity warrants, see Note 10. Derivatives.



34


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



Regarding our equity investments without readily determinable fair values, there were 0 impairments and 0 upward or downward adjustments during the three months ended March 31, 2020. On a cumulative basis, from January 1, 2018 through March 31, 2020, we recorded impairments of $1.0 million and upward adjustments of $286,000.
NOTE 8. LEASES
Operating Leases as a Lessee
Our lease expense is a component of "Occupancy expense" on our condensed consolidated statements of earnings (loss). The following table presents the components of lease expense for the periods indicated:
 Three Months Ended
 March 31,
 2020 2019
 (In thousands)
Operating lease expense:   
Fixed costs$8,245
 $8,302
Variable costs13
 24
Short-term lease costs92
 520
Sublease income(1,016) (1,126)
Net lease expense$7,334
 $7,720

Three Months EndedSix Months Ended
June 30,June 30,
2020201920202019
(In thousands)
Operating lease expense:
Fixed costs$8,832  $8,534  $17,077  $16,836  
Variable costs12  46  25  70  
Short-term lease costs102  203  194  723  
Sublease income(1,003) (1,054) (2,019) (2,180) 
Net lease expense$7,943  $7,729  $15,277  $15,449  
The following table presents supplemental cash flow information related to leases for the periods indicated:
 Three Months Ended
 March 31,
 2020 2019
 (In thousands)
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases$8,236
 $8,242
ROU assets obtained in exchange for lease obligations:   
Operating leases$4,560
 $147,972

Six Months Ended
June 30,
20202019
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$16,519  $16,408  
ROU assets obtained in exchange for lease obligations:
Operating leases$14,542  $149,621  
The following table presents supplemental balance sheet and other information related to operating leases as of the dates indicated:
June 30,December 31,
20202019
(Dollars in thousands)
Operating leases:
Operating lease right-of-use assets, net$125,325  $129,301  
Operating lease liabilities$145,261  $145,354  
Weighted average remaining lease term (in years)6.06.1
Weighted average discount rate2.67 %2.82 %
 March 31, 2020 December 31, 2019
 (Dollars in thousands)
Operating leases:   
Operating lease right-of-use assets, net$124,897
 $129,301
Operating lease liabilities$142,654
 $145,354
    
Weighted average remaining lease term (in years)5.9
 6.1
Weighted average discount rate2.77% 2.82%
35



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


The following table presents the maturities of operating lease liabilities as of the date indicated:
 March 31, 2020
 (In thousands)
Period ending December 31, 
2020$25,163
202131,675
202225,859
202322,992
202415,729
2025 and thereafter34,522
Total operating lease liabilities155,940
Less: Imputed interest(13,286)
Present value of operating lease liabilities$142,654

June 30, 2020
(In thousands)
Period ending December 31,
2020$17,487  
202133,171  
202227,289  
202324,265  
202417,032  
2025 and thereafter38,940  
Total operating lease liabilities158,184  
Less: Imputed interest(12,923) 
Present value of operating lease liabilities$145,261  
Operating Leases as a Lessor
We provide equipment financing to our customers through operating leases where we facilitate the purchase of equipment leased to our customers. The equipment is shown on the condensed consolidated balance sheets as "Equipment leased to others under operating leases" and is depreciated to its estimated residual value at the end of the lease term, shown as "Leased equipment depreciation" in the condensed consolidated statements of earnings (loss), according to our fixed asset accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Noninterest Income" in the condensed consolidated statements of earnings (loss).
The following table presents the rental payments to be received on operating leases as of the date indicated:
March 31, 2020June 30, 2020
(In thousands)(In thousands)
Period ending December 31, Period ending December 31,
2020$31,434
2020$20,056  
202139,086
202137,745  
202233,046
202231,705  
202325,554
202324,213  
202420,903
202419,562  
2025 and thereafter37,283
2025 and thereafter34,266  
Total undiscounted cash flows$187,306
Total undiscounted cash flows$167,547  
36



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


NOTE 9.  BORROWINGS AND SUBORDINATED DEBENTURES
Borrowings
The following table summarizes our borrowings as of the dates indicated:
 March 31, 2020 December 31, 2019
   Weighted   Weighted
   Average   Average
 Balance Rate Balance Rate
 (Dollars in thousands)
FHLB secured advances$1,904,000
 0.51% $1,318,000
 1.66%
FHLB unsecured overnight advance141,000
 0.11% 141,000
 1.56%
AFX short-term borrowings250,000
 0.18% 300,000
 1.61%
Non‑recourse debt—
 —% 8
 7.50%
Total borrowings$2,295,000
 0.45% $1,759,008
 1.64%

June 30, 2020December 31, 2019
WeightedWeighted
AverageAverage
BalanceRateBalanceRate
(Dollars in thousands)
FHLB secured advances$10,000  — %$1,318,000  1.66 %
FHLB unsecured overnight advance—  — %141,000  1.56 %
AFX short-term borrowings50,000  0.05 %300,000  1.61 %
Non-recourse debt—  — %8  7.50 %
Total borrowings$60,000  0.04 %$1,759,008  1.64 %
The Bank has established secured and unsecured lines of credit under which it may borrow funds from time to time on a term or overnight basis from the FHLB, the FRBSF, and other financial institutions.
FHLB Secured Line of Credit. The Bank had secured financing capacity with the FHLB as of March 31,June 30, 2020 of $6.0$4.2 billion, collateralized by a blanket lien on $6.3$6.4 billion of qualifying loansloans. During the second quarter of 2020, the Company prepaid $750.0 million of FHLB term advances and $2.0 billionincurred $6.6 million of securities.prepayment penalties, which is included in "Other expense" on the condensed consolidated statements of earnings (loss). The FHLB term advances had a weighted average interest rate of 0.96% and the prepayment decision was made after the significant drop in market interest rates in March 2020 and the expectation of continued low interest rates for an extended time.
The following table presents the interest rates and maturity dates of FHLB secured advances as of the dates indicated:
 March 31, 2020 December 31, 2019
     Maturity     Maturity
 Balance Rate Date Balance Rate Date
 (Dollars in thousands)
Overnight advance$1,154,000
 0.21% 4/1/2020 $1,318,000
 1.66% 1/2/2020
Term advance250,000
 0.98% 3/2/2021 —
 —% —
Term advance250,000
 0.96% 9/2/2021 —
 —% —
Term advance250,000
 0.94% 3/2/2022 —
 —% —
Total FHLB secured advances$1,904,000
 0.51%   $1,318,000
 1.66%  

June 30, 2020December 31, 2019
MaturityMaturity
BalanceRateDateBalanceRateDate
(Dollars in thousands)
Overnight advance$—  — %—$1,318,000  1.66 %1/2/2020
Term advance5,000  — %11/6/2020—  — %—
Term advance5,000  — %5/6/2021—  — %—
Total FHLB secured advances$10,000  — %$1,318,000  1.66 %
FRBSF Secured Line of Credit. The Bank has a secured line of credit with the FRBSF. As of March 31,June 30, 2020, the Bank had secured borrowing capacity of $1.9$1.6 billion collateralized by liens covering $2.6$2.2 billion of qualifying loans. As of March 31,June 30, 2020 and December 31, 2019, there were 0 balances outstanding.
FHLB Unsecured Line of Credit. The Bank has a $141.0$112.0 million unsecured line of credit with the FHLB for the purchase of overnight funds, of which $141.0 million wasthere were 0 balances outstanding at March 31,June 30, 2020. At December 31, 2019, the balance outstanding was $141.0 million.$141.0 million.
Federal Funds Arrangements with Commercial Banks. As of March 31,June 30, 2020, the Bank had unsecured lines of credit of $180.0 million in the aggregate with several correspondent banks for the purchase of overnight funds, subject to availability of funds. These lines are renewable annually and have 0 unused commitment fees. As of March 31,June 30, 2020 and December 31, 2019, there were 0 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 March 31,June 30, 2020, thethere was a $50.0 million balance outstanding was $250.0 million, which consisted of $250.0 million in overnight borrowings.outstanding. As of December 31, 2019, there were $300.0 million in overnight borrowings outstanding.
37


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


Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
June 30, 2020December 31, 2019DateMaturityRate Index
SeriesBalanceRateBalanceRateIssuedDate(Quarterly Reset)
(Dollars in thousands)
Trust V$10,310  3.40 %$10,310  5.00 %8/15/20039/17/20333-month LIBOR + 3.10
Trust VI10,310  3.36 %10,310  4.94 %9/3/20039/15/20333-month LIBOR + 3.05
Trust CII5,155  3.25 %5,155  4.85 %9/17/20039/17/20333-month LIBOR + 2.95
Trust VII61,856  3.51 %61,856  4.69 %2/5/20044/23/20343-month LIBOR + 2.75
Trust CIII20,619  2.00 %20,619  3.58 %8/15/20059/15/20353-month LIBOR + 1.69
Trust FCCI16,495  1.91 %16,495  3.49 %1/25/20073/15/20373-month LIBOR + 1.60
Trust FCBI10,310  1.86 %10,310  3.44 %9/30/200512/15/20353-month LIBOR + 1.55
Trust CS 2005-182,475  2.26 %82,475  3.85 %11/21/200512/15/20353-month LIBOR + 1.95
Trust CS 2005-2128,866  2.71 %128,866  3.89 %12/14/20051/30/20363-month LIBOR + 1.95
Trust CS 2006-151,545  2.71 %51,545  3.89 %2/22/20064/30/20363-month LIBOR + 1.95
Trust CS 2006-251,550  2.71 %51,550  3.89 %9/27/200610/30/20363-month LIBOR + 1.95
Trust CS 2006-3 (1)
28,956  1.82 %28,902  1.64 %9/29/200610/30/20363-month EURIBOR + 2.05
Trust CS 2006-416,470  2.71 %16,470  3.89 %12/5/20061/30/20373-month LIBOR + 1.95
Trust CS 2006-56,650  2.71 %6,650  3.89 %12/19/20061/30/20373-month LIBOR + 1.95
Trust CS 2007-239,177  2.71 %39,177  3.89 %6/13/20077/30/20373-month LIBOR + 1.95
Gross subordinated debentures540,744  2.65 %540,690  3.87 %
Unamortized discount (2)
(79,972) (82,481) 
Net subordinated debentures$460,772  $458,209  
 March 31, 2020 December 31, 2019 Date Maturity Rate Index
SeriesBalance Rate Balance Rate Issued Date (Quarterly Reset)
 (Dollars in thousands)      
Trust V$10,310
 3.94% $10,310
 5.00% 8/15/2003 9/17/2033 3-month LIBOR + 3.10
Trust VI10,310
 3.79% 10,310
 4.94% 9/3/2003 9/15/2033 3-month LIBOR + 3.05
Trust CII5,155
 3.79% 5,155
 4.85% 9/17/2003 9/17/2033 3-month LIBOR + 2.95
Trust VII61,856
 4.52% 61,856
 4.69% 2/5/2004 4/23/2034 3-month LIBOR + 2.75
Trust CIII20,619
 2.43% 20,619
 3.58% 8/15/2005 9/15/2035 3-month LIBOR + 1.69
Trust FCCI16,495
 2.34% 16,495
 3.49% 1/25/2007 3/15/2037 3-month LIBOR + 1.60
Trust FCBI10,310
 2.29% 10,310
 3.44% 9/30/2005 12/15/2035 3-month LIBOR + 1.55
Trust CS 2005-182,475
 2.69% 82,475
 3.85% 11/21/2005 12/15/2035 3-month LIBOR + 1.95
Trust CS 2005-2128,866
 3.72% 128,866
 3.89% 12/14/2005 1/30/2036 3-month LIBOR + 1.95
Trust CS 2006-151,545
 3.72% 51,545
 3.89% 2/22/2006 4/30/2036 3-month LIBOR + 1.95
Trust CS 2006-251,550
 3.72% 51,550
 3.89% 9/27/2006 10/30/2036 3-month LIBOR + 1.95
Trust CS 2006-3 (1)
28,432
 1.65% 28,902
 1.64% 9/29/2006 10/30/2036 3-month EURIBOR + 2.05
Trust CS 2006-416,470
 3.72% 16,470
 3.89% 12/5/2006 1/30/2037 3-month LIBOR + 1.95
Trust CS 2006-56,650
 3.72% 6,650
 3.89% 12/19/2006 1/30/2037 3-month LIBOR + 1.95
Trust CS 2007-239,177
 3.72% 39,177
 3.89% 6/13/2007 7/30/2037 3-month LIBOR + 1.95
Gross subordinated debentures540,220
 3.43% 540,690
 3.87%      
Unamortized discount (2)
(81,226)   (82,481)        
Net subordinated debentures$458,994
   $458,209
        
___________________
___________________
(1) Denomination is in Euros with a value of €25.8 million.
(1)Denomination is in Euros with a value of €25.8 million.
(2)Amount represents the fair value adjustment on trust preferred securities assumed in acquisitions.
(2) Amount represents the fair value adjustment on trust preferred securities assumed in acquisitions.
NOTE 10.  DERIVATIVES
The Company uses derivatives to manage exposure to market risk, primarily foreign currency risk and interest rate risk, and to assist customers with their risk management objectives. The Company uses foreign exchange contracts to manage the foreign exchange rate risk associated with certain foreign currency-denominated assets and liabilities. As of March 31,June 30, 2020, all of our derivatives were held for risk management purposes and NaNnone were designated as accounting hedges. The objective is to manage the uncertainty of future foreign exchange rate fluctuations. These derivatives provide for a fixed exchange rate which has the effect of reducing or eliminating changes to anticipated cash flows to be received on assets and liabilities denominated in foreign currencies as the result of changes to exchange rates. Our derivatives are carried at fair value and recorded in other assets or other liabilities, as appropriate. The changes in fair value of our derivatives and the related interest are recognized in "Noninterest income - other" in the condensed consolidated statements of earnings (loss). For the threesix months ended March 31,June 30, 2020, changes in fair value recorded through noninterest income in the condensed consolidated statements of earnings (loss) were immaterial.
In connection with negotiated credit facilities and certain other services, we may obtain equity warrant assets giving us the right to acquire stock in primarily private, venture-backed companies. We hold these assets for prospective investment gains. We do not use them to hedge any economic risks nor do we use other derivative instruments to hedge economic risks stemming from equity warrant assets. We account for equity warrant assets as derivatives when they contain net settlement terms and other qualifying criteria under ASC 815. These equity warrant assets are recorded at estimated fair value and are classified as "Other assets" on our condensed consolidated balance sheets at the time they are obtained. See Note 7. Other Assets.
38


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


Derivative instruments expose us to credit risk in the event of nonperformance by counterparties. This risk exposure consists primarily of the termination value of agreements where we are in a favorable position. We manage the credit risk associated with various derivative agreements through bilateral collateral posting requirements, counterparty credit review, and monitoring procedures.
The following table presents the U.S. dollar notional amounts and fair values of our derivative instruments included in the condensed consolidated balance sheets as of the dates indicated:
 March 31, 2020 December 31, 2019
 Notional Fair Notional Fair
Derivatives Not Designated As Hedging InstrumentsAmount Value Amount Value
 (In thousands)
Derivative Assets:       
Interest rate contracts$10,932
 $120
 $15,159
 $71
Foreign exchange contracts90,122
 4,826
 91,144
 1,163
Other derivative assets101,054
 4,946
 106,303
 1,234
Equity warrant assets26,469
 4,290
 26,079
 3,434
Total$127,523
 $9,236
 $132,382
 $4,668
        
Derivative Liabilities:       
Interest rate contracts$10,932
 $120
 $15,159
 $71
Foreign exchange contracts90,122
 1,032
 91,144
 684
Total$101,054
 $1,152
 $106,303
 $755

June 30, 2020December 31, 2019
NotionalFairNotionalFair
Derivatives Not Designated As Hedging InstrumentsAmountValueAmountValue
(In thousands)
Derivative Assets:
Interest rate contracts$10,649  $107  $15,159  $71  
Foreign exchange contracts80,240  3,078  91,144  1,163  
Other derivative assets90,889  3,185  106,303  1,234  
Equity warrant assets26,391  4,781  26,079  3,434  
Total$117,280  $7,966  $132,382  $4,668  
Derivative Liabilities:
Interest rate contracts$10,649  $107  $15,159  $71  
Foreign exchange contracts80,240  22  91,144  684  
Total$90,889  $129  $106,303  $755  
NOTE 11.  COMMITMENTS AND CONTINGENCIES
The following table presents a summary of commitments described below as of the dates indicated:
 March 31, December 31,
 2020 2019
 (In thousands)
Loan commitments to extend credit$7,697,724
 $8,183,158
Standby letters of credit368,979
 355,503
Commitments to contribute capital to small business   
investment companies and CRA-related loan pools50,518
 40,698
Commitments to contribute capital to low income housing   
project partnerships (1)
—
 88,515
Commitments to contribute capital to private equity funds50
 50
Total$8,117,271
 $8,667,924

June 30,December 31,
20202019
(In thousands)
Loan commitments to extend credit$7,745,921  $8,183,158  
Standby letters of credit365,792  355,503  
Commitments to contribute capital to small business
investment companies and CRA-related loan pools49,993  40,698  
Commitments to contribute capital to low income housing
project partnerships (1)
—  88,515  
Commitments to contribute capital to private equity funds50  50  
Total$8,161,756  $8,667,924  
____________________
(1)During the first quarter of 2020, the Company increased the amount of its investment in low income housing project partnerships by $101 million representing the amount of related unfunded commitments, with an offset to a liability included in "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets.
(1) During the first quarter of 2020, the Company increased the amount of its investment in low income housing project partnerships by $101 million representing the amount of related unfunded commitments, with an offset to a liability included in "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets.
The Company is a party to financial instruments with off‑balanceoff-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement that the Company has in particular classes of financial instruments.
39


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


Commitments to extend credit are contractual agreements to lend to our customers when customers are in compliance with their contractual credit agreements and when customers have contractual availability to borrow under such agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. We provide standby letters of credit in conjunction with several of our lending arrangements and property lease obligations. Most guarantees expire within one year from the date of issuance. If a borrower defaults on its commitments subject to any letter of credit issued under these arrangements, we would be required to meet the borrower's financial obligation but would seek repayment of that financial obligation from the borrower. In some cases, borrowers have pledged cash and investment securities as collateral with us under these arrangements.
In addition, we invest in small business investment companies that call for capital contributions up to an amount specified in the partnership agreements, and in CRA-related loan pools. As of March 31,June 30, 2020 and December 31, 2019, we had commitments to contribute capital to these entities totaling $50.5$50.0 million and $40.7 million. We also had commitments to contribute up to an additional $50,000 to private equity funds at March 31,June 30, 2020 and December 31, 2019.
The following table presents the years in which commitments are expected to be paid for our commitments to contribute capital to small business investment companies and CRA-related loan pools as of the date indicated:
 March 31, 2020
 (In thousands)
Period ending December 31, 
2020$31,698
202118,820
Total$50,518

June 30, 2020
(In thousands)
Period ending December 31,
2020$25,876  
202124,117  
Total$49,993  
Legal Matters
In the ordinary course of our business, the Company is party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon currently available information, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations. The range of any reasonably possible liabilities is also not significant.
40


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


NOTE 12.  FAIR VALUE MEASUREMENTS
ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three‑level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument. This category generally includes agency residential CMOs, agency commercial and residential MBS, municipal securities, collateralized loan obligations, registered publicly rated private label CMOs, corporate debt securities, SBA securities, and asset-backed securitizations.
Level 3: Inputs to a valuation methodology that are unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category also includes observable inputs from a pricing service not corroborated by observable market data, and includes our non-rated private label CMOs, non-rated private label asset-backed securities, and equity warrants.
The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily securities available‑for‑saleavailable-for-sale and derivatives. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for individually evaluated loans and leases and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long‑livedlong-lived assets.
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
 March 31, 2020
Measured on a Recurring BasisTotal Level 1 Level 2 Level 3
 (In thousands)
Securities available‑for‑sale:       
Agency commercial MBS$1,125,432
 $—
 $1,125,432
 $—
Agency residential CMOs1,102,097
 —
 1,102,097
 —
Municipal securities733,884
 —
 733,884
 —
Agency residential MBS289,831
 —
 289,831
 —
Asset-backed securities210,699
 —
 196,080
 14,619
Collateralized loan obligations130,082
 —
 130,082
 —
Private label residential CMOs97,862
 —
 92,920
 4,942
SBA securities45,441
 —
 45,441
 —
Corporate debt securities16,957
 —
 16,957
 —
U.S. Treasury securities5,378
 5,378
 —
 —
Total securities available-for-sale$3,757,663
 $5,378
 $3,732,724
 $19,561
Equity investments with readily determinable fair values$2,471
 $2,471
 $—
 $—
Derivatives (1):
       
Equity warrants4,290
 —
 —
 4,290
Other derivative assets4,946
 —
 4,946
 —
Derivative liabilities1,152
 —
 1,152
 —


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


 Fair Value Measurements as of
 December 31, 2019
Measured on a Recurring BasisTotal Level 1 Level 2 Level 3
 (In thousands)
Securities available‑for‑sale:       
Agency commercial MBS$1,108,224
 $—
 $1,108,224
 $—
Agency residential CMOs1,136,397
 —
 1,136,397
 —
Municipal securities735,159
 —
 735,159
 —
Agency residential MBS305,198
 —
 305,198
 —
Asset-backed securities214,783
 —
 198,348
 16,435
Collateralized loan obligations123,756
 —
 123,756
 —
Private label residential CMOs99,483
 —
 93,219
 6,264
SBA securities48,258
 —
 48,258
 —
Corporate debt securities20,748
 —
 20,748
 —
U.S. Treasury securities5,181
 5,181
 —
 —
Total securities available-for-sale$3,797,187
 $5,181
 $3,769,307
 $22,699
Equity investments with readily determinable fair values$2,998
 $2,998
 $—
 $—
Derivatives (1):
       
Equity warrants3,434
 —
 —
 3,434
Other derivative assets1,234
 —
 1,234
 —
Derivative liabilities755
 —
 755
 —

____________________
(1)
For information regarding derivative instruments, see Note 10. Derivatives.
During the three months ended March 31, 2020, there were 0 transfers from or to Level 3 assets measured on a recurring basis.
The following table presents information about quantitative inputs and assumptions used to determine the fair values provided by our third party pricing service for our Level 3 private label residential CMOs and asset-backed securities available-for-sale measured at fair value on a recurring basis as of the date indicated:
 March 31, 2020
 Private Label Residential CMOs Asset-Backed Securities
   Weighted Input or Weighted
 Range Average Range Average
Unobservable Inputsof Inputs 
Input (1)
 of Inputs 
Input (2)
Voluntary annual prepayment speeds (3)
2.1% - 19.1% 11.8% 15.0% 15.0%
Annual default rates (3)
0.3% - 35.7% 1.6% 2.0% 2.0%
Loss severity rates (3)
1.6% - 183.7% 57.0% 60.0% 60.0%
Discount rates2.3% - 14.6% 8.1% 5.5% - 5.6% 5.5%

____________________
(1)Unobservable inputs for private label residential CMOs were weighted by the relative fair values of the instruments.
(2)Discount rates for asset-backed securities were weighted by the relative fair values of the instruments.
(3)The voluntary annual prepayment speeds, annual default rates, and loss severity rates were the same for all of the asset-backed securities.


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


The following table presents information about quantitative inputs and assumptions used in the modified Black-Scholes option pricing model to determine the fair value for our Level 3 equity warrants measured at fair value on a recurring basis as of the date indicated:
March 31, 2020
Equity Warrants
Weighted
RangeAverage
Unobservable Inputsof Inputs
Input (1)
Volatility21.2% - 251.5%24.9%
Risk-free interest rate0.1% - 0.4%0.3%
Remaining life assumption (in years)0.08 - 4.993.06

____________________
(1)Unobservable inputs for equity warrants were weighted by the relative fair values of the instruments.
The following table summarizes activity for our Level 3 private label residential CMOs available-for-sale, asset-backed securities available-for-sale, and equity warrants measured at fair value on a recurring basis for the period indicated:
 Private Label Asset-Backed Equity
 Residential CMOs Securities Warrants
 (In thousands)
Balance, December 31, 2019$6,264
 $16,435
 $3,434
Total included in earnings118
 (11) 837
Total included in other comprehensive income(959) (687) —
Issuances—
 —
 120
Sales 
—
 —
 (101)
Net settlements(481) (1,118) —
Balance, March 31, 2020$4,942
 $14,619
 $4,290
      
Unrealized net gains (losses) for the period included in other     
comprehensive income for securities held at quarter-end$726
 $(490)  

The following tables present assets measured at fair value on a non‑recurring basis as of the dates indicated:
 Fair Value Measurement as of
 March 31, 2020
Measured on a Non‑Recurring BasisTotal Level 1 Level 2 Level 3
 (In thousands)
Individually evaluated loans and leases (1)
$59,440
 $—
 $4,456
 $54,984
Total non-recurring$59,440
 $—
 $4,456
 $54,984
______________________
(1)Includes nonaccrual loans and leases and performing TDRs with balances greater than $250,000.




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


 Fair Value Measurement as of
 December 31, 2019
Measured on a Non‑Recurring BasisTotal Level 1 Level 2 Level 3
 (In thousands)
Impaired loans and leases (1)
$28,706
 $—
 $1,083
 $27,623
OREO105
 —
 —
 105
Total non-recurring$28,811
 $—
 $1,083
 $27,728
_____________________
(1)    Includes all nonaccrual loans and leases and performing TDRs.
The following table presents losses recognized on assets measured on a nonrecurring basis for the periods indicated:
 Three Months Ended
Losses on AssetsMarch 31,
Measured on a Non‑Recurring Basis2020 2019
 (In thousands)
Individually evaluated loans and leases (1)
$18,907
 $3,756
Loans held for sale—
 1,707
OREO105
 —
Total losses$19,012
 $5,463

_____________________
(1)    For 2019, losses are based on impaired loans and leases.
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of the date indicated:
  March 31, 2020
    Valuation Unobservable Input or Weighted
Asset Fair Value Technique Inputs Range Average
  (In thousands)        
Individually evaluated          
loans and leases $39,262
 Discounted cash flows Discount rates 3.50% - 10.46% 8.03%
Individually evaluated     Discount from    
loans and leases 15,267
 Third party appraisal 
appraisal (1)
 54.06% 54.06%
Individually evaluated          
loans and leases 455
 Third party appraisals No discounts    
Total non-recurring Level 3 $54,984
        

____________________
(1)    Relates to one loan at March 31, 2020.



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


The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
 March 31, 2020
 Carrying Estimated Fair Value
 Amount Total Level 1 Level 2 Level 3
 
(In thousands)
Financial Assets:         
Cash and due from banks$172,570
 $172,570
 $172,570
 $—
 $—
Interest‑earning deposits in financial institutions439,690
 439,690
 439,690
 —
 —
Securities available‑for‑sale3,757,663
 3,757,663
 5,378
 3,732,724
 19,561
Investment in FHLB stock54,244
 54,244
 —
 54,244
 —
Loans and leases held for investment, net19,524,013
 19,072,790
 —
 4,456
 19,068,334
Equity warrants4,290
 4,290
 —
 —
 4,290
Other derivative assets4,946
 4,946
 —
 4,946
 —
Equity investments with readily determinable fair values2,471
 2,471
 2,471
 —
 —
          
Financial Liabilities:         
Core deposits16,050,522
 16,050,522
 —
 16,050,522
 —
Non-core non-maturity deposits836,157
 836,157
 —
 836,157
 —
Time deposits2,689,158
 2,701,350
 —
 2,701,350
 —
Borrowings2,295,000
 2,299,563
 1,545,000
 754,563
 —
Subordinated debentures458,994
 442,418
 —
 442,418
 —
Derivative liabilities1,152
 1,152
 —
 1,152
 —

 December 31, 2019
 Carrying Estimated Fair Value
 Amount Total Level 1 Level 2 Level 3
 
(In thousands)
Financial Assets:         
Cash and due from banks$172,585
 $172,585
 $172,585
 $—
 $—
Interest‑earning deposits in financial institutions465,039
 465,039
 465,039
 —
 —
Securities available‑for‑sale3,797,187
 3,797,187
 5,181
 3,769,307
 22,699
Investment in FHLB stock40,924
 40,924
 —
 40,924
 —
Loans and leases held for investment, net18,708,087
 19,055,004
 —
 1,083
 19,053,921
Equity warrants3,434
 3,434
 —
 —
 3,434
Other derivative assets1,234
 1,234
 —
 1,234
 —
Equity investments with readily determinable fair values2,998
 2,998
 2,998
 —
 —
          
Financial Liabilities:         
Core deposits16,187,287
 16,187,287
 —
 16,187,287
 —
Non-core non-maturity deposits496,407
 496,407
 —
 496,407
 —
Time deposits2,549,342
 2,549,260
 —
 2,549,260
 —
Borrowings1,759,008
 1,759,008
 1,759,000
 8
 —
Subordinated debentures458,209
 441,617
 —
 441,617
 —
Derivative liabilities755
 755
 —
 755
 —



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


For information regarding the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820), and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03), see Note 1. Nature of Operations and Summary of Significant Accounting Policies, and Note 14. Fair Value Measurements, to the Consolidated Financial Statements of the Company's 2019 Annual Report on Form 10-K.
The following tables present information on the assets and liabilities measured and recorded at fair value on a recurring basis as of the dates indicated:
Fair Value Measurements as of
June 30, 2020
Measured on a Recurring BasisTotalLevel 1Level 2Level 3
(In thousands)
Securities available-for-sale:
Agency commercial MBS$1,133,086  $—  $1,133,086  $—  
Agency residential CMOs1,049,742  —  1,049,742  —  
Municipal securities888,338  —  888,338  —  
Agency residential MBS248,934  —  248,934  —  
Asset-backed securities227,206  —  193,513  33,693  
Collateralized loan obligations136,663  —  136,663  —  
Private label residential CMOs96,775  —  91,639  5,136  
SBA securities44,576  —  44,576  —  
Corporate debt securities20,458  —  20,458  —  
U.S. Treasury securities5,363  5,363  —  —  
Total securities available-for-sale$3,851,141  $5,363  $3,806,949  $38,829  
Equity investments with readily determinable fair values$2,688  $2,688  $—  $—  
Derivatives (1):
Equity warrants4,781  —  —  4,781  
Other derivative assets3,185  —  3,185  —  
Derivative liabilities129  —  129  —  
41


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

Fair Value Measurements as of
December 31, 2019
Measured on a Recurring BasisTotalLevel 1Level 2Level 3
(In thousands)
Securities available-for-sale:
Agency commercial MBS$1,108,224  $—  $1,108,224  $—  
Agency residential CMOs1,136,397  —  1,136,397  —  
Municipal securities735,159  —  735,159  —  
Agency residential MBS305,198  —  305,198  —  
Asset-backed securities214,783  —  198,348  16,435  
Collateralized loan obligations123,756  —  123,756  —  
Private label residential CMOs99,483  —  93,219  6,264  
SBA securities48,258  —  48,258  —  
Corporate debt securities20,748  —  20,748  —  
U.S. Treasury securities5,181  5,181  —  —  
Total securities available-for-sale$3,797,187  $5,181  $3,769,307  $22,699  
Equity investments with readily determinable fair values$2,998  $2,998  $—  $—  
Derivatives (1):
Equity warrants3,434  —  —  3,434  
Other derivative assets1,234  —  1,234  —  
Derivative liabilities755  —  755  —  
____________________
(1) For information regarding derivative instruments, see Note 10. Derivatives.
During the six months ended June 30, 2020, there was a $5,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily determinable fair values measured on a recurring basis.
The following table presents information about quantitative inputs and assumptions used to determine the fair values provided by our third party pricing service for our Level 3 private label residential CMOs and asset-backed securities available-for-sale measured at fair value on a recurring basis as of the date indicated:
June 30, 2020
Private Label Residential CMOsAsset-Backed Securities
WeightedInput orWeighted
RangeAverageRangeAverage
Unobservable Inputsof Inputs
Input (1)
of Inputs
Input (2)
Voluntary annual prepayment speeds6.1% - 17.7%11.7%10.0% - 15.0%12.0%
Annual default rates (3)
0.3% - 35.5%2.2%2.0%2.0%
Loss severity rates (3)
2.3% - 242.7%53.8%60.0%60.0%
Discount rates2.1% - 9.9%6.8%3.0% - 5.1%3.7%
____________________
(1) Unobservable inputs for private label residential CMOs were weighted by the relative fair values of the instruments.
(2) Voluntary annual prepayment speeds and discount rates for asset-backed securities were weighted by the relative fair values of the instruments.
(3) Annual default rates and loss severity rates were the same for all of the asset-backed securities.
42


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

The following table presents information about quantitative inputs and assumptions used in the modified Black-Scholes option pricing model to determine the fair value for our Level 3 equity warrants measured at fair value on a recurring basis as of the date indicated:
June 30, 2020
Equity Warrants
Weighted
RangeAverage
Unobservable Inputsof Inputs
Input (1)
Volatility23.4% - 147.4%28.4%
Risk-free interest rate0.1% - 0.3%0.2%
Remaining life assumption (in years)0.10 - 4.972.98
____________________
(1) Unobservable inputs for equity warrants were weighted by the relative fair values of the instruments.
The following table summarizes activity for our Level 3 private label residential CMOs available-for-sale, asset-backed securities available-for-sale, and equity warrants measured at fair value on a recurring basis for the period indicated:
Private LabelAsset-BackedEquity
Residential CMOsSecuritiesWarrants
(In thousands)
Balance, December 31, 2019$6,264  $16,435  $3,434  
Total included in earnings244  78  2,810  
Total included in other comprehensive income(574) (473) —  
Purchases—  20,100  —  
Issuances—  —  201  
Sales
—  —  (1,659) 
Net settlements(798) (2,447) —  
Transfers to Level 1 (equity investments with readily
determinable fair values)—  —  (5) 
Balance, June 30, 2020$5,136  $33,693  $4,781  
Unrealized net gains (losses) for the period included in other
comprehensive income for securities held at quarter-end$1,112  $(276) 
The following tables present assets measured at fair value on a non-recurring basis as of the dates indicated:
Fair Value Measurement as of
June 30, 2020
Measured on a Non-Recurring BasisTotalLevel 1Level 2Level 3
(In thousands)
Individually evaluated loans and leases (1)
$134,012  $—  $3,346  $130,666  
OREO28  —  —  28  
Total non-recurring$134,040  $—  $3,346  $130,694  
______________________
(1) Includes nonaccrual loans and leases and performing TDRs with balances greater than $250,000.

43


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

Fair Value Measurement as of
December 31, 2019
Measured on a Non-Recurring BasisTotalLevel 1Level 2Level 3
(In thousands)
Impaired loans and leases (1)
$28,706  $—  $1,083  $27,623  
OREO105  —  —  105  
Total non-recurring$28,811  $—  $1,083  $27,728  
_____________________
(1) Includes all nonaccrual loans and leases and performing TDRs.
The following table presents losses recognized on assets measured on a nonrecurring basis for the periods indicated:
Three Months EndedSix Months Ended
Losses on AssetsJune 30,June 30,
Measured on a Non-Recurring Basis2020201920202019
(In thousands)
Individually evaluated loans and leases (1)
$9,483  $1,842  $29,317  $3,038  
OREO5  —  110  —  
Total losses$9,488  $1,842  $29,427  $3,038  
_____________________
(1) For 2019, losses are based on impaired loans and leases.
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of the date indicated:
June 30, 2020
ValuationUnobservableInput orWeighted
AssetFair ValueTechniqueInputsRangeAverage
(In thousands)
Individually evaluated
loans and leases$72,972  Discounted cash flowsDiscount rates2.25% - 10.46%7.57%
Individually evaluatedDiscount from
loans and leases57,252  Third party appraisalappraisal23.00% - 54.06%36.07%
Individually evaluated
loans and leases442  Third party appraisalsNo discounts
Discount from
OREO (1)
28  Third party appraisalappraisal20.00%20.00%
Total non-recurring Level 3$130,694  
____________________
(1) Relates to one OREO at June 30, 2020.







44


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

The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
June 30, 2020
CarryingEstimated Fair Value
AmountTotalLevel 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and due from banks$174,059  $174,059  $174,059  $—  $—  
Interest-earning deposits in financial institutions1,747,077  1,747,077  1,747,077  —  —  
Securities available-for-sale3,851,141  3,851,141  5,363  3,806,949  38,829  
Investment in FHLB stock17,250  17,250  —  17,250  —  
Loans and leases held for investment, net19,393,581  19,603,897  —  3,346  19,600,551  
Equity warrants4,781  4,781  —  —  4,781  
Other derivative assets3,185  3,185  —  3,185  —  
Equity investments with readily determinable fair values2,688  2,688  2,688  —  —  
Financial Liabilities:
Core deposits19,535,814  19,535,814  —  19,535,814  —  
Non-core non-maturity deposits1,217,266  1,217,266  —  1,217,266  —  
Time deposits2,175,499  2,184,874  —  2,184,874  —  
Borrowings60,000  59,976  50,000  9,976  —  
Subordinated debentures460,772  443,945  —  443,945  —  
Derivative liabilities129  129  —  129  —  

December 31, 2019
CarryingEstimated Fair Value
AmountTotalLevel 1Level 2Level 3
(In thousands)
Financial Assets:
Cash and due from banks$172,585  $172,585  $172,585  $—  $—  
Interest-earning deposits in financial institutions465,039  465,039  465,039  —  —  
Securities available-for-sale3,797,187  3,797,187  5,181  3,769,307  22,699  
Investment in FHLB stock40,924  40,924  —  40,924  —  
Loans and leases held for investment, net18,708,087  19,055,004  —  1,083  19,053,921  
Equity warrants3,434  3,434  —  —  3,434  
Other derivative assets1,234  1,234  —  1,234  —  
Equity investments with readily determinable fair values2,998  2,998  2,998  —  —  
Financial Liabilities:
Core deposits16,187,287  16,187,287  —  16,187,287  —  
Non-core non-maturity deposits496,407  496,407  —  496,407  —  
Time deposits2,549,342  2,549,260  —  2,549,260  —  
Borrowings1,759,008  1,759,008  1,759,000  8  —  
Subordinated debentures458,209  441,617  —  441,617  —  
Derivative liabilities755  755  —  755  —  
45


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

Limitations
Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on what management believes to be reasonable judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of March 31,June 30, 2020, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
NOTE 13.  EARNINGS (LOSS) PER SHARE
The following table presents the computations of basic and diluted net earnings (loss) per share for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,
2020201920202019
(Dollars in thousands, except per share data)
Basic Earnings (Loss) Per Share:
Net earnings (loss)$33,204  $128,125  $(1,399,907) $240,729  
Less: Earnings allocated to unvested restricted stock(1)
(362) (1,190) (1,251) (2,343) 
Net earnings (loss) allocated to common shares$32,842  $126,935  $(1,401,158) $238,386  
Weighted-average basic shares and unvested restricted
stock outstanding118,192  120,042  118,484  121,128  
Less: Weighted-average unvested restricted stock
outstanding(1,606) (1,462) (1,551) (1,407) 
Weighted-average basic shares outstanding116,586  118,580  116,933  119,721  
Basic earnings (loss) per share$0.28  $1.07  $(11.98) $1.99  
Diluted Earnings (Loss) Per Share:
Net earnings (loss) allocated to common shares$32,842  $126,935  $(1,401,158) $238,386  
Weighted-average diluted shares outstanding116,586  118,580  116,933  119,721  
Diluted earnings (loss) per share$0.28  $1.07  $(11.98) $1.99  
 Three Months Ended
 March 31, December 31, March 31,
 2020 2019 2019
 (Dollars in thousands, except per share data)
Basic Earnings (Loss) Per Share:     
Net earnings (loss)$(1,433,111) $117,881
 $112,604
Less: Earnings allocated to unvested restricted stock(1)
(939) (1,458) (1,163)
Net earnings (loss) allocated to common shares$(1,434,050) $116,423
 $111,441
      
Weighted-average basic shares and unvested restricted     
stock outstanding118,775
 119,804
 122,227
Less: Weighted-average unvested restricted stock     
outstanding(1,495) (1,566) (1,352)
Weighted-average basic shares outstanding117,280
 118,238
 120,875
      
Basic earnings (loss) per share$(12.23) $0.98
 $0.92
      
Diluted Earnings (Loss) Per Share:     
Net earnings (loss) allocated to common shares$(1,434,050) $116,423
 $111,441
      
Weighted-average diluted shares outstanding117,280
 118,238
 120,875
      
Diluted earnings (loss) per share$(12.23) $0.98
 $0.92
________________________
(1) Represents cash dividends paid to holders of unvested restricted stock, net of forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.
46

________________________
(1)Represents cash dividends paid to holders of unvested restricted stock, net of forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.


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


NOTE 14. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table presents interest income and noninterest income, the components of total revenue, as disclosed in the condensed consolidated statements of earnings (loss) and the related amounts which are from contracts with customers within the scope of ASC Topic 606, "Revenue from Contracts with Customers," for the periods indicated. As illustrated here, substantially all of our revenue is specifically excluded from the scope of ASC Topic 606.
 Three Months Ended March 31,
 2020 2019
 Total Revenue from Total Revenue from
 Recorded Contracts with Recorded Contracts with
 Revenue Customers Revenue Customers
 (In thousands)
Total interest income$291,332
 $—
 $304,559
 $—
Noninterest income:       
   Service charges on deposit accounts2,658
 2,658
 3,730
 3,730
   Other commissions and fees9,721
 4,154
 11,008
 4,538
   Leased equipment income12,251
 —
 9,282
 —
   Gain on sale of loans87
 —
 —
 —
   Gain on sale of securities182
 —
 2,161
 —
   Other income4,201
 336
 4,883
 371
      Total noninterest income29,100
 7,148
 31,064
 8,639
Total revenue$320,432
 $7,148
 $335,623
 $8,639

Three Months Ended June 30,
20202019
TotalRevenue fromTotalRevenue from
RecordedContracts withRecordedContracts with
RevenueCustomersRevenueCustomers
(In thousands)
Total interest income$274,075  $—  $314,533  $—  
Noninterest income:
   Service charges on deposit accounts2,004  2,004  3,771  3,771  
   Other commissions and fees10,111  3,006  11,590  5,158  
   Leased equipment income12,037  —  9,182  —  
   Gain on sale of loans346  —  326  —  
   Gain on sale of securities7,715  —  22,192  —  
   Other income6,645  336  3,832  454  
      Total noninterest income38,858  5,346  50,893  9,383  
Total revenue$312,933  $5,346  $365,426  $9,383  
The following table presents revenue from contracts with customers based on the timing of revenue recognition for the periods indicated:
Three Months Ended
June 30,
20202019
(In thousands)
Products and services transferred at a point in time$2,727  $4,987  
Products and services transferred over time2,619  4,396  
Total revenue from contracts with customers$5,346  $9,383  
 Three Months Ended
 March 31,
 2020 2019
 (In thousands)
Products and services transferred at a point in time$4,236
 $4,546
Products and services transferred over time2,912
 4,093
Total revenue from contracts with customers$7,148
 $8,639

47


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

Six Months Ended June 30,
20202019
TotalRevenue fromTotalRevenue from
RecordedContracts withRecordedContracts with
RevenueCustomersRevenueCustomers
(In thousands)
Total interest income$565,407  $—  $619,092  $—  
Noninterest income:
   Service charges on deposit accounts4,662  4,662  7,501  7,501  
   Other commissions and fees19,832  7,160  22,598  9,696  
   Leased equipment income24,288  —  18,464  —  
   Gain on sale of loans433  —  326  —  
   Gain on sale of securities7,897  —  24,353  —  
   Other income10,846  672  8,715  825  
      Total noninterest income67,958  12,494  81,957  18,022  
Total revenue$633,365  $12,494  $701,049  $18,022  
The following table presents revenue from contracts with customers based on the timing of revenue recognition for the periods indicated:
Six Months Ended
June 30,
20202019
(In thousands)
Products and services transferred at a point in time$6,963  $9,533  
Products and services transferred over time5,531  8,489  
Total revenue from contracts with customers$12,494  $18,022  
Contract Balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers as of the dates indicated:
 March 31, 2020 December 31, 2019
 (In thousands)
Receivables, which are included in "Other assets"$447
 $1,094
Contract assets, which are included in "Other assets"$—
 $—
Contract liabilities, which are included in "Accrued interest payable and other liabilities"$457
 $490

June 30, 2020December 31, 2019
(In thousands)
Receivables, which are included in "Other assets"$936  $1,094  
Contract assets, which are included in "Other assets"$—  $—  
Contract liabilities, which are included in "Accrued interest payable and other liabilities"$425  $490  
Contract liabilities relate to advance consideration received from customers for which revenue is recognized over the life of the contract. The change in contract liabilities for the threesix months ended March 31,June 30, 2020 due to revenue recognized that was included in the contract liability balance at the beginning of the period was $33,000.
$65,000.

48


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


NOTE 15.  STOCK-BASED COMPENSATION
The Company’s 2017 Stock Incentive Plan, or the 2017 Plan, permits stock-based compensation awards to officers, directors, employees, and consultants. The 2017 Plan authorized grants of stock‑basedstock-based compensation instruments to purchase or issue up to 4,000,000 shares of Company common stock. As of March 31,June 30, 2020, there were 2,343,2551,790,129 shares available for grant under the 2017 Plan. Though frozen for new issuances, certain awards issued under the 2003 Stock Incentive Plan remain outstanding, but are due to vest no later than February 2021.
Restricted Stock
Restricted stock amortization totaled $6.5$5.7 million and $5.8$6.2 million for the three months ended March 31,June 30, 2020 and 2019, and $12.2 million and $12.0 million for the six months ended June 30, 2020 and 2019. Such amounts are included in "Compensation expense" on the condensed consolidated statements of earnings (loss). The amount of unrecognized compensation expense related to unvested TRSAs and PRSUs as of March 31,June 30, 2020 totaled $54.3 million.$55.3 million.
Time-Based Restricted Stock Awards
At March 31,June 30, 2020, there were 1,436,9571,624,622 shares of unvested TRSAs outstanding pursuant to the Company's 2003 and 2017 Stock Incentive Plans. The TRSAs generally vest ratably over a service period of three to four years from the date of the grant or immediately upon death of an employee. Compensation expense related to TRSAs is based on the fair value of the underlying stockaward on the awardgrant date and is recognized over the vesting period using the straight‑linestraight-line method.
Performance-Based Restricted Stock Units
At March 31,June 30, 2020, there were 338,836315,008 units of unvested PRSUs that have been granted. The PRSUs will vest only if performance goals with respect to certain financial metrics are met over a three-year performance period. The shares underlying the PRSUs are not considered issued and outstanding until they vest. PRSUs are granted and initially expensed based on a target number. The number of shares that will ultimately vest based on actual performance will range from 0 to a maximum of either 150% or 200% of target.
Compensation expense related to PRSUs is based on the fair value of the underlying stockaward on the awardgrant date and is amortized over the vesting period using the straight-line method unless it is determined that: (1) attainment of the financial metrics is less than probable, in which case a portion or all of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion or all of the previously recognized amortization is reversed and also suspended. If it is determined that attainment of a financial measure higher than target is probable, the amortization will increase to up to 150% or 200% of the target amortization amount. Annual PRSU expense may vary during the three-year performance period based upon changes in management's estimate of the number of shares that may ultimately vest. In the case where the performance target for the PRSU is based on a market condition (such as total shareholder return), the amortization is neither reversed nor suspended if it is subsequently determined that the attainment of the performance target is less than probable or improbable and the employee continues to meet the service requirement of the award.
49


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


NOTE 16.  RECENTLY ISSUED ACCOUNTING STANDARDS
EffectiveEffect on the Financial Statements
StandardDescriptionDateor Other Significant Matters
ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)"

This Update clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.

January 1, 2021
The adoption of this guidance is not expected to have a material impact on the Company's condensed consolidated financial statements.


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

March 12, 2020 through December 31, 2022The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.





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


NOTE 17.  SUBSEQUENT EVENTS
Common Stock Dividends
On May 1, 2020, 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 May 29, 2020 to stockholders of record at the close of business on May 20, 2020.
The Company has evaluated events that have occurred subsequent to March 31,June 30, 2020 and have concluded there are no other subsequent events that would require recognition in the accompanying condensed consolidated financial statements.


50

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This Form 10-Q contains certain “forward-looking statements” about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our operating expenses, profitability, allowance for loan and lease losses, net interest margin, net interest income, deposit growth, loan and lease portfolio growth and production, acquisitions, maintaining capital adequacy, liquidity, goodwill, and interest rate risk management. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words “anticipate,” “assume,” “intend,” “believe,” “forecast,” “expect,” “estimate,” “plan,” “continue,” “will,” “should,” “look forward” and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation:
•the COVID-19 pandemic is adversely affecting the Company, its employees, customers and third-party service providers, and the ultimate extent of the impacts of the pandemic and related government stimulus programs on its business, financial position, results of operations, liquidity and prospects is uncertain. Continued deterioration in general business and economic conditions could adversely affect the Company’s revenues and the values of its assets and liabilities, lead to a tightening of credit and increase stock price volatility;
•our ability to complete future acquisitions, and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;
•our ability to compete effectively against other financial service providers in our markets;
•the impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolios;
•deterioration, weaker than expected improvement, or other changes in the state of the economy or the markets in which we conduct business (including the levels of IPOs and mergers and acquisitions), which may affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans;
•changes in credit quality and the effect of credit quality and the CECL accounting standard on our provision for credit losses and allowance for loan and lease losses;
•our ability to attract deposits and other sources of funding or liquidity;
•the need to retain capital for strategic or regulatory reasons;
•compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases, changes in our asset or liability mix, and/or changes to the cost of deposits and borrowings;
•uncertainty regarding the future of LIBOR and the potential transition away from LIBOR toward new reference rates;rates by the end of 2021;
•reduced demand for our services due to strategic or regulatory reasons or reduced demand for our products due to legislative changes such as new rent control laws;
•our ability to successfully execute on initiatives relating to enhancements of our technology infrastructure, including client-facing systems and applications;
•legislative or regulatory requirements or changes, including an increase of capital requirements, and increased political and regulatory uncertainty;
•the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
•higher than anticipated increases in operating expenses;
•lower than expected dividends paid from the Bank to the holding company;
•the amount and exact timing of any common stock repurchases will depend upon market conditions and other factors;

51

•a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge;
•the effectiveness of our risk management framework and quantitative models;
•the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews;
•the impact of changes made to tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and
•our success at managing risks involved in the foregoing items and all other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and other documents filed or furnished by PacWest with the SEC.
All forward-looking statements included in this Form 10-Q are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.
Overview
PacWest Bancorp, a Delaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located in Beverly Hills, California. Our principal business is to serve as the holding company for our wholly-owned subsidiary, Pacific Western Bank. References to "Pacific Western" or the "Bank" refer to Pacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer to PacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring to PacWest Bancorp, the parent company, on a stand-alone basis.
The Bank is focused on relationship-based business banking to small, middle-market, and venture-backed businesses nationwide. The Bank offers a broad range of loan and lease and deposit products and services through 74 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovative hubs across the United States. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.
In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin. Net interest income, on a year-to-date basis in 2020, accounted for 89.6%88.1% of net revenue (net interest income plus noninterest income).
At March 31,June 30, 2020, the Company had total assets of $26.1$27.4 billion, including $19.7$19.7 billion of total loans and leases, net of deferred fees, and $3.8$3.9 billion of securities available-for-sale, compared to $26.8 billion of total assets, including $18.8 billion of total loans and leases, net of deferred fees, and $3.8 billion of securities available-for-sale at December 31, 2019. The $627.5$594.9 million decreaseincrease in total assets since year-end was due primarily to a $1.47$1.3 billion increase in interest-earning deposits in financial institutions and an $847.8 million increase in loans and leases, net of deferred fees, offset partially by a $1.5 billion write-down of goodwill, offset partially by an increase of $898.4 million in loans and leases.goodwill. The increase in loans and leases was driven mostly by $1.2 billion of loans funded under the Paycheck Protection Program and increased balances on existing loans resulting primarily from disbursements on construction loans and equity fund loans.

52

At March 31,June 30, 2020, the Company had total liabilities of $22.8$23.9 billion, including total deposits of $19.6$22.9 billion and borrowings of $2.3 billion,$60.0 million, compared to $21.8 billion of total liabilities, including $19.2 billion of total deposits and $1.8 billion of borrowings at December 31, 2019. The $936.8 million$2.1 billion increase in total liabilities since year-end was due mainly to increases of $536.0$3.3 billion in core deposits and $720.9 million in non-core non-maturity deposits, offset partially by decreases of $1.7 billion in borrowings, primarily FHLB advances, $339.8 million in non-core non-maturity deposits, and $139.8$373.8 million in time deposits, offset partially by a decrease of $136.8 million in core deposits. The decreaseincrease in core deposits was due primarily to PPP loan proceeds being deposited into customers' accounts and venture banking, which saw deposits increase by $1.6 billion to a $420.8 million decrease in interest checking deposits, offset partially by a $266.9 million increase in noninterest-bearing demand deposits.record $8.7 billion at June 30, 2020. At March 31,June 30, 2020, core deposits totaled $16.1$19.5 billion, or 82%85% of total deposits, including $7.5$8.6 billion of noninterest-bearing demand deposits, or 38% of total deposits.
At March 31,June 30, 2020, the Company had total stockholders' equity of $3.4$3.5 billion compared to $5.0 billion at December 31, 2019. The $1.6$1.5 billion decrease in stockholders' equity since year-end was due mainly to a $1.43$1.4 billion net loss, attributable primarily to a $1.47 billion goodwill impairment charge, $71.2$100.7 million of cash dividends paid, and $70.0 million of common stock repurchased under the Stock Repurchase Program, offset partially by a $12.3$66.4 million increase in accumulated other comprehensive income. Consolidated capital ratios remained strong with Tier 1 capital and total capital ratios of 9.22%9.97% and 12.07%13.18% at March 31,June 30, 2020.
Recent Events
COVID-19 Pandemic
The outbreak of the Coronavirus Disease ("COVID-19") pandemic has impacted our business and operations in several ways as outlined below. Our first and continuing priority wasremains the safety and health of our employees and customers as we navigatednavigate our way through the quickly unfolding events that began in March. Wepandemic. In the first quarter, we activated our Business Continuity Team and Pandemic Plan under the direction of a special task force comprised of executive level management from various departments to work closely with the Business Continuity Team to help lead our people and our business through this period of uncertainty.
Our Employees
We took several actions in March to move everyone possible to a remote working environment;environment, which has continued to this day; however, as an essential business service, some of our employees are required to work at one of our critical offices or at one of our branch locations where we have appliedare practicing social distancing and other safety measures to the best of our ability. We have applied social distancing, wearing of face masks, remote working, additional cleaning, reminders of frequent handwashing, installation of plexi-glass barriers among other steps to ensure the health and safety of employees and customers. We suspended all employee business travel and canceled all hosted client events. We requiredrequire anyone who has traveled personally to a foreign country or on a cruise, or to/from the New York, New Jersey or Connecticut area, to self-quarantine for 14 days. Despite these restrictions, we have remained fully operational and able to meet the needs of our clients and the communities we serve. To recognize our employees who must work in our branches or critical locations, we have implementedpaid a special bonus program of up to $1,000 payable in April and Maythe second quarter of 2020.
Our Clients and Branch Operations
Our primary branch operations are within California, which has been undercontinues to work its way through the State's Resilience Roadmap from the initial "Stay-at-home" order issued on March 13, 2020 to the subsequent executive orders and phased-in guidance issued for re-openings. As a "Stay-at-home" executive orderlarge state, the stages of re-opening vary by county and thus the state governor since March 13. In an effortimpact to do our part, despite being an essential business service,operations varies by county. At the outset of the pandemic, we have taken steps to promote social distancing in our branch locations. We have closed 19 branches along with the lobbies of 27 additional branches where drive-up tellers are available,available. On June 1st, we re-opened 17 of the 19 branches and decided to permanently close two branches. We continue to monitor the pandemic's impact on our branch operations and have alternative plans in place in the event we need to reduce branch hours, temporarily closed 19 branch locations that were withinclose branches in close proximity to each other, branches, established rotating branch teams whereby one team is in the branch one week and then another team the following week, reducedor stagger the hours in our open branches and, starting in early April, began havingof our employees, wear face masks when interacting with clientsall in an effort to keep our employees and colleagues. We have also encouraged customers to utilizesafe while meeting the needs of our mobile banking services or our drive-up locations.customers.






53

Impact to Our Business
To date, from a business perspective, the impacts from the COVID-19 pandemic have been primarily related to our loan portfolio. We have experienced an increase in customers seeking loan modifications through payment deferrals and extension of terms. As of May 6,June 30, 2020, loan modifications and/payment or extensionsdeferral modifications were made on approximately 4.7%9% of the loan portfolio, however we expectmost of which occurred in May and June. Most of the modifications were either for payment deferrals for three months or maturity extensions up to receive additionalthree months, while some deferrals were up to six months and some extensions were up to one year. As of July 30, 2020, loan modification requests going forward. Atmodifications were 9% of the same time, we saw requests for SBA loansJune 30, 2020 loan and lease portfolio as shown in the table below:
July 30, 2020June 30, 2020% of
Total DeferralLoan and LeaseJune 30, 2020
Loan and Lease Portfolioand ExtensionsPortfolioLoan and Lease
Segment and ClassCountBalanceBalancePortfolio
(Dollars in millions)
Real estate mortgage:
Commercial123$932  $4,222  22 %
Income producing and other residential49225  3,734  6 %
Real estate construction and land:
Commercial13284  1,168  24 %
Residential9192  2,173  9 %
Commercial:
Asset-based43115  3,413  3 %
Venture capital1918  1,814  1 %
Other commercial15146  2,760  2 %
Consumer49934  411  8 %
Total906$1,846  $19,695  9 %
We actively participated in the Paycheck Protection Program ("PPP"), under the provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, such as the Paycheck Protection Program ("PPP"), and are actively working with customers on these requests and modifications to help them through these challenging times.Act. As of May 6,June 30, 2020, we assisted approximatelyprocessed over 4,100 of our customers in obtaining SBA approvalloans for approximately $1.34$1.2 billion in loans through the PPP.The loans had two-year terms with a 1% loan coupon rate and origination fees that varied from 1% to 5% depending on the size of the loan. These fees, which amounted to approximately $36.4 million, are recognized over the two-year life of the loan with the fee recognition accelerated upon forgiveness or repayment of the loan. The PPP loans are fully guaranteed by the SBA and do not carry an allowance. Our participation in the PPP resulted in a corresponding increase in core deposits in the second quarter of 2020 due to PPP loan proceeds being deposited into customers' accounts.
As events unfolded in March, we immediately increased the enhanced monitoring of our loan and lease portfolio with particular emphasis on certain loan and lease portfolios that we expected to be most impacted by the COVID-19 pandemic, such as hotel, retail, commercial aviation, restaurant, and oil services loan and lease portfolios. The economic impacts caused by the COVID-19 pandemic have resulted inprecipitated loan and lease risk rating downgrades across these loan and lease portfolios, as we experienced an increaseresulting in increases of $443.4 million in special mention loans of $576 million.and $117.3 million in classified loans during the six months ended June 30, 2020. Our exposure to these loan and lease portfolios, which includes equipment leased to others under operating leases, is as follows:
June 30, 2020
% of
SpecialTotal Loans
Loan and Lease PortfolioClassifiedMentionPassTotaland Leases
(Dollars in millions)
Hotel$2  $305  $836  $1,143  6 %
Retail43  2  580  625  3 %
Commercial aviation—  150  147  297  2 %
Restaurant12  4  145  161  1 %
Oil services28  4  93  125  1 %
Total$85  $465  $1,801  $2,351  12 %
54
 March 31, 2020
   Special     % of Total
Loan and Lease PortfolioClassified Mention Pass Total Loans
 (Dollars in millions)
Hotel$2
 $304
 $779
 $1,085
 5.5%
Retail5
 48
 590
 643
 3.3%
Aviation—
 119
 227
 346
 1.8%
Restaurant10
 5
 147
 162
 0.8%
Oil services15
 1
 121
 137
 0.7%
Total$32
 $477
 $1,864
 $2,373
 12.1%

The deterioration in economic conditions caused by the COVID-19 pandemic has significantly impacted the economic forecasts and assumptions used in our estimation process for the allowance for credit losses under the current expected credit loss (“CECL”) methodology, which we adopted on January 1, 2020.CECL. Our provision for credit losses for the firstsecond quarter of 2020 increased by $109$8.0 million from the first quarter of 2020 to $120.0 million, while during the first quarter of 2020, the provision for credit losses increased by $109.0 million to $112.0 million when compared to the fourth quarter of 2019 to $112 million. The combination of2019. Deterioration in the deteriorationmacro-economic variables used in the economic forecasts used in the allowance for credit losses process combined with the loan downgrades mentioned above, and an increase in the provision for individually evaluated loans, allhas contributed to a substantially higher provision for credit losses for the quarter.first half of the year. For further details on CECL and the impacts to our process in the firstsecond quarter, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein. .
TheDuring the first quarter of 2020, the economic impact of the COVID-19 pandemic also resulted in market volatility and a significant decline in stock market valuations, including our stock price. As a result, we performed an updated goodwill impairment assessment and recorded goodwill impairment of $1.47 billion in the first quarter, as the estimated fair value of equity was less than book value as of March 31, 2020. This is a non-cash charge and had no impact on our regulatory capital ratios, cash flows, or liquidity position. The goodwill impairment charge resulted in a net loss of $1.4 billion in the first quarter and although our net earnings excluding the goodwill impairment charge were $36.9 million, or $0.31 per diluted share, the results contributed to our decision to reduce our quarterly dividend from $0.60 per share to $0.25 per share during the second quarter.
On March 23, 2020, we announced the temporary suspension of share repurchases under our stock repurchase program until June 30, 2020 and, assubsequently announced on April 21, 2020, indefinitely suspendedthe indefinite suspension of any repurchases in light of the recent COVID-19 pandemic-related developments. We have not repurchased any shares since February 28, 2020.
Looking ahead, we expect the operating environment to remain challenging as the severity and duration of the pandemic continue to unfold. We expect to see some requests for further loan modifications as the initial modifications expire during the second half of the year while the stay-at-home orders and national emergency remain in effect and then beyond as those orders are lifted and as businesses re-open and the economy begins the path to recovery. We expect continued requestslevel of provisions for loan modifications andcredit losses will continue to be actively engaged in programs offered viaimpacted by the CARES Act or other economic stimulus plans.







Resignation of Executive Officer
On January 10, 2020, Laird Boulden announced his resignation from his position as EVP, Presidentforecasts and overall credit performance of the National Lending Group of the Company and the Bank to be effective on March 1, 2020. Effective March 1, 2020, Laird Boulden now serves as EVP, Executive Chairman of the Bank.loan portfolio.
Key Performance Indicators
Among other factors, our operating results generally depend on the following key performance indicators:
The Level of Net Interest Income
Net interest income is the excess of interest earned on our interest‑earninginterest-earning assets over the interest paid on our interest‑bearinginterest-bearing liabilities. Net interest margin is net interest income (annualized if related to a quarterly period) expressed as a percentage of average interest‑earninginterest-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‑earninginterest-earning assets and interest‑bearinginterest-bearing liabilities. Our primary interest‑earninginterest-earning assets are loans and investment securities, and our primary interest‑bearinginterest-bearing liabilities are deposits and borrowings. Contributing to our high net interest margin is our high yield on loans and leases and competitive cost of deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we seek to minimize the impact of these variances by attracting a high percentage of noninterest‑bearingnoninterest-bearing deposits.
55

Loan and Lease Growth
We actively seek new lending opportunities under an array of lending products. Our lending activities include real estate mortgage loans, real estate construction and land loans, commercial loans and leases, and a small amount of consumer lending. Our commercial real estate loans and real estate construction loans are secured by a range of property types. Our commercial loans and leases portfolio is diverse and generally includes various asset-secured loans, equipment-secured loans and leases, venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial and venture-backed companies during the various phases of their early life cycles, and secured business loans.
Our loan origination process emphasizes credit quality. To augment our internal loan production, we have historically purchased multi-family loans from other banks and private student loans from third-party lenders. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic, interest-rate risk, credit risk, and product composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified loans and leases, nonaccrual loans and leases, and net charge‑offs.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‑balanceoff-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‑deterioratedcredit-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).
56

The following table presents the calculation of our efficiency ratio for the periods indicated:
Three Months EndedSix Months Ended
June 30,March 31,June 30,June 30,
Efficiency Ratio20202020201920202019
(Dollars in thousands)
Noninterest expense$126,965  $1,587,970  $125,427  $1,714,935  $251,714  
Less:Intangible asset amortization3,882  3,948  4,870  7,830  9,740  
Foreclosed assets (income) expense, net(146) 66  (146) (80) (117) 
Goodwill impairment—  1,470,000  —  1,470,000  —  
Acquisition, integration and reorganization costs—  —  —  —  618  
      Noninterest expense used for efficiency ratio$123,229  $113,956  $120,703  $237,185  $241,473  
Net interest income (tax equivalent)$256,294  $251,428  $261,689  $507,722  $517,742  
Noninterest income38,858  29,100  50,893  67,958  81,957  
Net revenues295,152  280,528  312,582  575,680  599,699  
Less:Gain on sale of securities7,715  182  22,192  7,897  24,353  
Net revenues used for efficiency ratio$287,437  $280,346  $290,390  $567,783  $575,346  
Efficiency ratio42.9 %40.6 %41.6 %41.8 %42.0 %
  Three Months Ended
  March 31, December 31, March 31,
Efficiency Ratio2020 2019 2019
  (Dollars in thousands)
Noninterest expense$1,587,970
 $123,728
 $126,287
Less:Intangible asset amortization3,948
 4,153
 4,870
 Foreclosed assets expense (income), net66
 (3,446) 29
 Goodwill impairment1,470,000
 —
 —
 Acquisition, integration and reorganization costs—
 (269) 618
      Noninterest expense used for efficiency ratio$113,956
 $123,290
 $120,770
       
Net interest income (tax equivalent)$251,428
 $248,374
 $256,052
Noninterest income29,100
 27,176
 31,064
Net revenues280,528
 275,550
 287,116
Less:Gain on sale of securities182
 184
 2,161
Net revenues used for efficiency ratio$280,346
 $275,366
 $284,955
       
Efficiency ratio40.6% 44.8% 42.4%

Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates relate to the allowance for credit losses on loans and leases held for investment, the carrying value of goodwill and other intangible assets, and the realization of deferred income tax assets and liabilities.
Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC. Updates to our critical accounting policies and estimates are described below.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment annually unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the condensed consolidated statements of earnings (loss).
Allowance for Credit Losses on Loans and Leases Held for Investment
For information regarding the calculation of the allowance for credit losses on loans and leases held for investment using the CECL methodology effective January 1, 2020, see " - Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" and "Note 1. Organization - Significant Accounting Policies and Accounting Standards Adopted in 2020," of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)." For further information regarding our critical accounting policies and estimates, refer to our Annual Report on Form 10‑K10-K for the year ended December 31, 2019.

57

Non-GAAP Measurements
We use certain non‑GAAPnon-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-Q:
•
•Return on average tangible equity, tangible common equity ratio, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP measures of return on average equity, equity to assets ratio, and book value per share, respectively. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.
 Three Months EndedThree Months EndedSix Months Ended
 March 31, December 31, March 31,June 30,March 31,June 30,June 30,
Return on Average Tangible EquityReturn on Average Tangible Equity2020 2019 2019Return on Average Tangible Equity20202020201920202019
 (Dollars in thousands)(Dollars in thousands)
Net earnings (loss)Net earnings (loss) $(1,433,111) $117,881
 $112,604
Net earnings (loss)$33,204  $(1,433,111) $128,125  $(1,399,907) $240,729  
Add:Intangible asset amortization 3,948
 —
 —
Add:Intangible asset amortization3,882  3,948  4,870  7,830  9,740  
Goodwill impairment 1,470,000
 —
 —
Goodwill impairment—  1,470,000  —  1,470,000  —  
Adjusted net earnings used for return on average tangible equity$40,837
 $117,881
 $112,604
Adjusted net earnings used for return
         on average tangible equity$37,086  $40,837  $132,995  $77,923  $250,469  
Average stockholders' equityAverage stockholders' equity $4,956,778
 $4,930,182
 $4,815,965
Average stockholders' equity$3,446,850  $4,956,778  $4,818,889  $4,201,814  $4,817,435  
Less:Average intangible assets 2,569,189
 2,589,217
 2,603,842
Less:Average intangible assets1,111,302  2,569,189  2,598,762  1,840,246  2,601,288  
Average tangible common equityAverage tangible common equity $2,387,589
 $2,340,965
 $2,212,123
Average tangible common equity$2,335,548  $2,387,589  $2,220,127  $2,361,568  $2,216,147  
      
Return on average equity (1)
Return on average equity (1)
 (116.28)% 9.49% 9.48%
Return on average equity (1)
3.87 %(116.28)%10.66 %(67.00)%10.08 %
Return on average tangible equity (2)
Return on average tangible equity (2)
 6.88 % 19.98% 20.64%
Return on average tangible equity (2)
6.39 %6.88 %24.03 %6.64 %22.79 %

(1)
(1)  Annualized net earnings (loss) divided by average stockholders' equity.
(2)Annualized adjusted net earnings divided by average tangible common equity.

(2)  Annualized adjusted net earnings divided by average tangible common equity.
Tangible Common Equity Ratio/March 31, December 31,Tangible Common Equity Ratio/June 30,December 31,
Tangible Book Value Per Share2020 2019Tangible Book Value Per Share20202019
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Stockholders’ equity$3,390,389
 $4,954,697
Stockholders’ equity$3,452,898  $4,954,697  
Less: Intangible assets1,113,116
 2,587,064
Less: Intangible assets1,109,234  2,587,064  
Tangible common equity$2,277,273
 $2,367,633
Tangible common equity$2,343,664  $2,367,633  
   
Total assets$26,143,267
 $26,770,806
Total assets$27,365,738  $26,770,806  
Less: Intangible assets1,113,116
 2,587,064
Less: Intangible assets1,109,234  2,587,064  
Tangible assets$25,030,151
 $24,183,742
Tangible assets$26,256,504  $24,183,742  
   
Equity to assets ratio12.97% 18.51%Equity to assets ratio12.62 %18.51 %
Tangible common equity ratio (1)
9.10% 9.79%
Tangible common equity ratio (1)
8.93 %9.79 %
Book value per share$28.75
 $41.36
Book value per share$29.17  $41.36  
Tangible book value per share (2)
$19.31
 $19.77
Tangible book value per share (2)
$19.80  $19.77  
Shares outstanding117,916,789
 119,781,605
Shares outstanding118,374,603  119,781,605  
_______________________________________ 
(1)
(1) Tangible common equity divided by tangible assets.
(2)Tangible common equity divided by shares outstanding.


(2) Tangible common equity divided by shares outstanding.

•
Adjusted net earnings and adjusted earnings per share: These non-GAAP measurements are presented in the following tables for the periods presented. See Note 13. Earnings (Loss) Per Share for the GAAP calculation of earnings per share.
58

   Three Months Ended
Adjusted Net Earnings and March 31, December 31, March 31,
Adjusted Earnings Per Share 2020 2019 2019
   (Dollars in thousands)
Adjusted Net Earnings:      
Net earnings (loss) $(1,433,111) $117,881
 $112,604
Add:Goodwill impairment 1,470,000
 —
 —
 Adjusted net earnings $36,889
 $117,881
 $112,604
        
Adjusted Basic Earnings Per Share:     
Adjusted net earnings$36,889
 $117,881
 $112,604
Less:Earnings allocated to unvested restricted     
 stock (939) (1,458) (1,163)
Adjusted net earnings allocated to common shares$35,950
 $116,423
 $111,441
        
Weighted-average basic shares and unvested restricted     
 stock outstanding 118,775
 119,804
 122,227
Less:Weighted-average unvested restricted     
 stock outstanding (1,495) (1,566) (1,352)
Weighted-average basic shares outstanding117,280
 118,238
 120,875
        
Adjusted basic earnings per share$0.31
 $0.98
 $0.92
        
Adjusted Diluted Earnings Per Share:     
Adjusted net earnings allocated to common shares$35,950
 $116,423
 $111,441
        
Weighted-average diluted shares outstanding117,280
 118,238
 120,875
        
Adjusted diluted earnings per share$0.31
 $0.98
 $0.92
•Adjusted net earnings and adjusted earnings per share: These non-GAAP measurements are presented in the following tables for the periods presented. See Note 13. Earnings (Loss) Per Share for the GAAP calculation of earnings per share.

Three Months EndedSix Months Ended
Adjusted Net Earnings andJune 30,March 31,June 30,June 30,
Adjusted Earnings Per Share20202020201920202019
(Dollars in thousands)
Adjusted Net Earnings:
Net earnings (loss)$33,204  $(1,433,111) $128,125  $(1,399,907) $240,729  
Add:Goodwill impairment—  1,470,000  —  1,470,000  —  
Adjusted net earnings$33,204  $36,889  $128,125  $70,093  $240,729  
Adjusted Basic Earnings Per Share:
Adjusted net earnings$33,204  $36,889  $128,125  $70,093  $240,729  
Less:Earnings allocated to unvested restricted
stock(362) (939) (1,190) (1,251) (2,343) 
Adjusted net earnings allocated to common shares$32,842  $35,950  $126,935  $68,842  $238,386  
Weighted-average basic shares and unvested restricted
stock outstanding118,192  118,775  120,042  118,484  121,128  
Less:Weighted-average unvested restricted
stock outstanding(1,606) (1,495) (1,462) (1,551) (1,407) 
Weighted-average basic shares outstanding116,586  117,280  118,580  116,933  119,721  
Adjusted basic earnings per share$0.28  $0.31  $1.07  $0.59  $1.99  
Adjusted Diluted Earnings Per Share:
Adjusted net earnings allocated to common shares$32,842  $35,950  $126,935  $68,842  $238,386  
Weighted-average diluted shares outstanding116,586  117,280  118,580  116,933  119,721  
Adjusted diluted earnings per share$0.28  $0.31  $1.07  $0.59  $1.99  

























59

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

Three Months EndedSix Months Ended
PPNR and PPNR ReturnJune 30,March 31,June 30,June 30,
on Average Assets20202020201920202019
(Dollars in thousands)
Net earnings (loss)$33,204  $(1,433,111) $128,125  $(1,399,907) $240,729  
Add:Provision for credit losses120,000  112,000  8,000  232,000  12,000  
Goodwill impairment—  1,470,000  —  1,470,000  —  
Income tax expense12,968  11,988  50,239  24,956  93,288  
Pre-provision, pre-goodwill impairment
pre-tax net revenue ("PPNR")$166,172  $160,877  $186,364  $327,049  $346,017  
Average assets$26,621,227  $27,099,040  $25,849,189  $26,860,133  $25,812,771  
Return on average assets (1)
0.50 %(21.27)%1.99 %(10.48)%1.88 %
PPNR return on average assets (2)
2.51 %2.39 %2.89 %2.45 %2.70 %

(1)  Annualized net earnings (loss) divided by average assets.
(2)  Annualized PPNR divided by average assets.
60

Results of Operations
Earnings Performance
The following table presents performance metrics for the periods indicated:
Three Months EndedThree Months EndedSix Months Ended
March 31, December 31, March 31,June 30,March 31,June 30,June 30,
2020 2019 201920202020201920202019
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
Earnings Summary:     Earnings Summary:
Net interest income$249,747
 $246,619
 $254,876
Net interest income$254,279  $249,747  $260,898  $504,026  $515,774  
Provision for credit losses(112,000) (3,000) (4,000)Provision for credit losses(120,000) (112,000) (8,000) (232,000) (12,000) 
Noninterest income29,100
 27,176
 31,064
Noninterest income38,858  29,100  50,893  67,958  81,957  
Noninterest expense(1,587,970) (123,728) (126,287)
Operating expenseOperating expense(126,965) (117,970) (125,427) (244,935) (251,714) 
Goodwill impairmentGoodwill impairment—  (1,470,000) —  (1,470,000) —  
Earnings (loss) before income taxes(1,421,123) 147,067
 155,653
Earnings (loss) before income taxes46,172  (1,421,123) 178,364  (1,374,951) 334,017  
Income tax expense(11,988) (29,186) (43,049)Income tax expense(12,968) (11,988) (50,239) (24,956) (93,288) 
Net earnings (loss)$(1,433,111) $117,881
 $112,604
Net earnings (loss)$33,204  $(1,433,111) $128,125  $(1,399,907) $240,729  
     
Pre-provision, pre-goodwill impairment,Pre-provision, pre-goodwill impairment,
pre-tax net revenue ("PPNR") (2)
pre-tax net revenue ("PPNR") (2)
$166,172  $160,877  $186,364  $327,049  $346,017  
Performance Measures:     Performance Measures:
Diluted earnings (loss) per share$(12.23) $0.98
 $0.92
Diluted earnings (loss) per share$0.28  $(12.23) $1.07  $(11.98) $1.99  
Annualized return on:     
Average assets(21.27)% 1.77% 1.77%
Average tangible equity (1)(2)
6.88 % 19.98% 20.64%
Return on average assetsReturn on average assets0.50 %(21.27)%1.99 %(10.48)%1.88 %
PPNR return on average assets (2)
PPNR return on average assets (2)
2.51 %2.39 %2.89 %2.45 %2.70 %
Return on average tangible equity (1)(2)
Return on average tangible equity (1)(2)
6.39 %6.88 %24.03 %6.64 %22.79 %
Net interest margin (tax equivalent)4.31 % 4.33% 4.69%Net interest margin (tax equivalent)4.20 %4.31 %4.72 %4.26 %4.70 %
Yield on average loans and leases (tax equivalent)5.54 % 5.67% 6.16%Yield on average loans and leases (tax equivalent)5.01 %5.54 %6.26 %5.27 %6.21 %
Cost of average total deposits0.59 % 0.71% 0.73%Cost of average total deposits0.25 %0.59 %0.81 %0.41 %0.77 %
Efficiency ratio40.6 % 44.8% 42.4%Efficiency ratio42.9 %40.6 %41.6 %41.8 %42.0 %
_____________________________
(1)Calculation reduces average stockholder's equity by average intangible assets.
(2)See "- Non-GAAP Measurements."
First(1) Calculation reduces average stockholder's equity by average intangible assets.
(2) See "- Non-GAAP Measurements."
Second Quarter of 2020 Compared to FourthFirst Quarter of 20192020
Net earnings for the second quarter of 2020 was $33.2 million, or $0.28 per diluted share, compared to a net loss for the first quarter of 2020 wasof $1.43 billion, or a loss of $12.23 per diluted share, compared to net earnings for the fourth quarter of 2019 of $117.9 million, or $0.98 per diluted share. The $1.55$1.47 billion decreaseincrease in net earnings from the prior quarter was due primarily to a $1.47 billion goodwill impairment charge in the first quarter, higher noninterest income of $9.8 million, and higher net interest income of $4.5 million, offset partially by higher noninterest expense (excluding the goodwill impairment charge) of $9.0 million, and a higher provision for credit losses of $109.0$8.0 million. Noninterest income increased due primarily to a $7.5 million increase in gain on sale of securities and a $2.9 million increase in dividends and gains on equity investments, offset partially by a $1.6 million decrease in other income. Net interest income increased due mainly to a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases, offset partially by a lower yield on average loans and leases and securities. The increase in noninterest expense (excluding the goodwill impairment charge) was due mainly to increases of $5.1 million in insurance and assessments expense and $6.6 million in prepayment penalties incurred from the early payoff of $750 million of FHLB term advances, offset partially by the reversal of a $1.5 million accrual for operational loss contingencies. The increase in the provision for credit losses in the firstsecond quarter of 2020 was the result ofdriven by the impact offrom the current economic forecast which reflected a significant deterioration and continued uncertainty in the key macro-economic forecast variables such as unemployment and Real GDP significant loan downgrades into special mention, and higher provisions on individually evaluated loans.as a result of the impact of COVID-19. Excluding the goodwill impairment charge, adjusted net earnings for the first quarter of 2020 were $36.9 million, or $0.31 per diluted share, with the decrease from the fourth quarter of 2019 primarily attributable to the higher provision for credit losses.share. See "Non-GAAP Measurements" for the calculations of these amounts.
61
First
Second Quarter of 2020 Compared to FirstSecond Quarter of 2019
Net lossearnings for the firstsecond quarter of 2020 was $1.43 billion,were $33.2 million, or a loss of $12.23$0.28 per diluted share, compared to net earnings for the firstsecond quarter of 2019 of $112.6$128.1 million, or $0.92$1.07 per diluted share. The $1.55 billion$94.9 million decrease in net earnings from the year-ago quarter was due primarily to a $1.47 billion goodwill impairment charge and a higher provision for credit losses of $108.0$112.0 million, lower noninterest income of $12.0 million, and lower net interest income of $6.6 million, offset partially by lower income tax expense of $37.3 million. The increase in the provision for credit losses infor the firstsecond quarter of 2020 was the result of the impact of the current economic forecast used in our CECL process, which reflected a significant deterioration in key macro-economic forecast variables such as unemployment and Real GDP as a result of COVID-19. The decrease in noninterest income in the second quarter of 2020 compared to the year-ago quarter was primarily due to a $14.5 million decrease in the gain on sale of securities. Net interest income decreased due primarily to lower yields on average loans and leases and securities as a result of lower market rates, offset partially by a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases. The decrease in income tax expense is mostly due to lower pre-tax net earnings in the second quarter of 2020 compared to the year-ago quarter.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net loss for the six months ended June 30, 2020 was $1.40 billion, or a loss of $11.98 per diluted share, compared to net earnings for the six months ended June 30, 2019 of $240.7 million, or $1.99 per diluted share. The $1.64 billion decrease in net earnings from the year-ago period was due primarily to a $1.47 billion goodwill impairment charge, a higher provision for credit losses of $220.0 million, lower noninterest income of $14.0 million, and lower net interest income of $11.7 million, offset partially by lower noninterest expense of $6.8 million, excluding the goodwill impairment charge, and lower income tax expense of $68.3 million. The increase in the provision for credit losses for the six months ended June 30, 2020 was the result of the impact of the current economic forecast used in our CECL process, which reflected a significant loan downgrades into special mention,deterioration in key macro-economic forecast variables such as unemployment and GDP as a result of COVID-19. The decrease in noninterest income for the first six months of 2020 compared to the same period a year ago was due primarily to a $16.5 million decrease in the gain on sale of securities. Net interest income decreased due mainly to lower yields on average loans and leases and securities as a result of lower market rates, offset partially by a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases. The decrease in noninterest expense, excluding the goodwill impairment charge was due mostly to lower compensation expense of $16.6 million, offset partially by higher insurance and assessments expense of $5.5 million and higher provisions on individually evaluated loans.leased equipment depreciation of $3.1 million.
62

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‑earninginterest-earning assets and interest expense and rates paid on average interest‑bearinginterest-bearing liabilities, presented on a tax equivalent basis, for the periods indicated:
Three Months Ended
June 30, 2020March 31, 2020June 30, 2019
InterestYieldsInterestYieldsInterestYields
AverageIncome/andAverageIncome/andAverageIncome/and
BalanceExpenseRatesBalanceExpenseRatesBalanceExpenseRates
(Dollars in thousands)
ASSETS:
Loans and leases (1)(2)(3)
$19,951,603  $248,474  5.01 %$19,065,035  $262,764  5.54 %$18,239,690  $284,513  6.26 %
Investment securities (2)(4)
3,846,459  27,430  2.87 %3,853,217  28,641  2.99 %3,790,436  29,462  3.12 %
Deposits in financial institutions733,142  186  0.10 %537,384  1,608  1.20 %228,702  1,349  2.37 %
Total interest‑earning assets (2)
24,531,204  276,090  4.53 %23,455,636  293,013  5.02 %22,258,828  315,324  5.68 %
Other assets2,090,023  3,643,404  3,590,361  
Total assets$26,621,227  $27,099,040  $25,775,949  
LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking$4,001,750  1,573  0.16 %$3,466,812  7,135  0.83 %$3,242,960  10,644  1.32 %
Money market6,114,354  2,856  0.19 %5,247,866  10,016  0.77 %5,046,021  14,604  1.16 %
Savings524,335  33  0.03 %497,959  160  0.13 %525,648  227  0.17 %
Time2,475,858  8,613  1.40 %2,684,143  10,936  1.64 %2,731,156  13,245  1.95 %
Total interest‑bearing deposits13,116,297  13,075  0.40 %11,896,780  28,247  0.95 %11,545,785  38,720  1.35 %
Borrowings871,110  1,319  0.61 %2,026,749  6,778  1.35 %1,142,223  7,210  2.53 %
Subordinated debentures459,466  5,402  4.73 %458,399  6,560  5.76 %454,901  7,705  6.79 %
Total interest‑bearing liabilities14,446,873  19,796  0.55 %14,381,928  41,585  1.16 %13,142,909  53,635  1.64 %
Noninterest‑bearing demand deposits8,292,151  7,357,717  7,544,027  
Other liabilities435,353  402,617  343,364  
Total liabilities23,174,377  22,142,262  21,030,300  
Stockholders’ equity3,446,850  4,956,778  4,818,889  
Total liabilities and
stockholders' equity$26,621,227  $27,099,040  $25,849,189  
Net interest income (2)
$256,294  $251,428  $261,689  
Net interest rate spread (2)
3.98 %3.86 %4.04 %
Net interest margin (2)
4.20 %4.31 %4.72 %
Total deposits (5)
$21,408,448  $13,075  0.25 %$19,254,497  $28,247  0.59 %$19,089,812  $38,720  0.81 %
 Three Months Ended
 March 31, 2020 December 31, 2019 March 31, 2019
  InterestYields  InterestYields  InterestYields
 AverageIncome/and AverageIncome/and AverageIncome/and
 BalanceExpenseRates BalanceExpenseRates BalanceExpenseRates
 (Dollars in thousands)
ASSETS:           
Loans and leases (1)(2)(3)
$19,065,035
$262,764
5.54% $18,470,583
$263,783
5.67% $18,064,230
$274,513
6.16%
Investment securities (2)(4)
3,853,217
28,641
2.99% 3,811,216
29,509
3.07% 3,968,531
30,572
3.12%
Deposits in financial institutions537,384
1,608
1.20% 498,068
2,056
1.64% 111,950
650
2.35%
Total interest‑earning assets (2)
23,455,636
293,013
5.02% 22,779,867
295,348
5.14% 22,144,711
305,735
5.60%
Other assets3,643,404
   3,600,872
   3,631,238
  
Total assets$27,099,040
   $26,380,739
   $25,775,949
  
            
LIABILITIES AND           
STOCKHOLDERS’ EQUITY:           
Interest checking$3,466,812
7,135
0.83% $3,731,696
10,031
1.07% $3,041,822
9,321
1.24%
Money market5,247,866
10,016
0.77% 5,117,553
12,063
0.94% 5,274,987
14,908
1.15%
Savings497,959
160
0.13% 509,497
204
0.16% 553,032
242
0.18%
Time2,684,143
10,936
1.64% 2,744,156
12,504
1.81% 2,286,932
9,764
1.73%
Total interest‑bearing deposits11,896,780
28,247
0.95% 12,102,902
34,802
1.14% 11,156,773
34,235
1.24%
Borrowings2,026,749
6,778
1.35% 1,179,220
5,189
1.75% 1,218,319
7,710
2.57%
Subordinated debentures458,399
6,560
5.76% 456,997
6,983
6.06% 454,203
7,738
6.91%
Total interest‑bearing liabilities14,381,928
41,585
1.16% 13,739,119
46,974
1.36% 12,829,295
49,683
1.57%
Noninterest‑bearing demand deposits7,357,717
   7,338,888
   7,783,652
  
Other liabilities402,617
   372,550
   347,037
  
Total liabilities22,142,262
   21,450,557
   20,959,984
  
Stockholders’ equity4,956,778
   4,930,182
   4,815,965
  
Total liabilities and           
stockholders' equity$27,099,040
   $26,380,739
   $25,775,949
  
Net interest income (2)
 $251,428
   $248,374
   $256,052
 
Net interest rate spread (2)
  3.86%   3.78%   4.03%
Net interest margin (2)
  4.31%   4.33%   4.69%
            
Total deposits (5)
$19,254,497
$28,247
0.59% $19,441,790
$34,802
0.71% $18,940,425
$34,235
0.73%
_____________________
_____________________
(1) Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans.
(1)Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2)
(2) Tax equivalent.
(3)Includes discount accretion on acquired loans of $4.8 million, $3.0 million, and $3.0 million for the three months ended March 31, 2020, December 31, 2019, and March 31, 2019, respectively.
(4)Includes tax-equivalent adjustments of $1.2 million, $1.4 million, and $0.9 million for the three months ended March 31, 2020, December 31, 2019, and March 31, 2019, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.
(5)Total deposits is the sum of total interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits.



First(3) Includes discount accretion on acquired loans of $2.5 million, $4.8 million, and $3.5 million for the three months ended June 30, 2020, March 31, 2020, and June 30, 2019, respectively.
(4) Includes tax-equivalent adjustments of $1.4 million, $1.2 million, and $0.5 million for the three months ended June 30, 2020, March 31, 2020, and June 30, 2019, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.
(5) Total deposits is the sum of total interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits.

63

Six Months Ended
June 30, 2020June 30, 2019
InterestYieldsInterestYields
AverageIncome/andAverageIncome/and
BalanceExpenseRatesBalanceExpenseRates
(Dollars in thousands)
ASSETS:
Loans and leases (1)(2)(3)
$19,508,319  $511,238  5.27 %$18,152,444  $559,026  6.21 %
Investment securities (2)(4)
3,849,838  56,071  2.93 %3,878,991  60,035  3.12 %
Deposits in financial institutions635,263  1,794  0.57 %170,649  1,999  2.36 %
Total interest-earning assets (2)
23,993,420  569,103  4.77 %22,202,084  621,060  5.64 %
Other assets2,866,713  3,610,687  
Total assets$26,860,133  $25,812,771  
LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking$3,734,281  8,708  0.47 %$3,142,946  19,965  1.28 %
Money market5,681,110  12,872  0.46 %5,159,871  29,512  1.15 %
Savings511,147  193  0.08 %539,264  469  0.18 %
Time2,580,001  19,549  1.52 %2,510,271  23,009  1.85 %
Total interest-bearing deposits12,506,539  41,322  0.66 %11,352,352  72,955  1.30 %
Borrowings1,448,929  8,097  1.12 %1,180,060  14,920  2.55 %
Subordinated debentures458,932  11,962  5.24 %454,554  15,443  6.85 %
Total interest-bearing liabilities14,414,400  61,381  0.86 %12,986,966  103,318  1.60 %
Noninterest-bearing demand deposits7,824,934  7,663,177  
Other liabilities418,985  345,193  
Total liabilities22,658,319  20,995,336  
Stockholders’ equity4,201,814  4,817,435  
Total liabilities and
stockholders' equity$26,860,133  $25,812,771  
Net interest income (2)
$507,722  $517,742  
Net interest rate spread (2)
3.91 %4.04 %
Net interest margin (2)
4.26 %4.70 %
Total deposits (5)
$20,331,473  $41,322  0.41 %$19,015,529  $72,955  0.77 %
_____________________
(1) Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2) Tax equivalent.
(3) Includes discount accretion on acquired loans of $7.3 million and $6.5 million for the six months ended June 30, 2020 and 2019, respectively.
(4) Includes tax-equivalent adjustments of $2.6 million and $1.4 million for the six months ended June 30, 2020 and 2019, respectively, related to tax-exempt income on investment securities. The federal statutory tax rate utilized was 21%.
(5) Total deposits is the sum of total interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits.












64

Second Quarter of 2020 Compared to FourthFirst Quarter of 20192020
Net interest income increased by $3.1$4.5 million to $254.3 million for the second quarter of 2020 compared to $249.7 million for the first quarter of 2020 compared to $246.6 million for the fourth quarter of 2019 due mainly to a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases, offset partially by a lower yield on average loanloans and lease balances and one less day in the first quarter.leases. The tax-equivalent yield on average loans and leases was 5.01% for the second quarter of 2020 compared to 5.54% for the first quarter of 2020 compared to 5.67% for the fourth quarter of 2019.2020. The decrease in the yield on average loans and leases was due principally to lower market rates, a lower rate on loan production from the repricingimpact of variable-ratethe PPP loans, causingand lower loan discount accretion. Excluding the PPP loans, which have a coupon interest.rate of 1%, the tax equivalent yield on average loans and leases was 5.10%.
The tax equivalent NIM was 4.20% for the second quarter of 2020 compared to 4.31% for the first quarter of 2020 compared to 4.33% for the fourth quarter of 2019.2020. The decrease in the tax equivalent NIM was due mainly to lower market rates resulting in a lower loan and lease yield, a lower rate on loan production from the repricingimpact of variable-ratethe PPP loans, causingand lower coupon interest, offset partially byloan discount accretion. Excluding the lower costPPP loans, the tax equivalent NIM was 4.25% for the second quarter of average interest-bearing liabilities.2020. Despite the above, the NIM proved to be resilient in part due to interest rate floors on variable-rate loans.
The cost of average total deposits decreased to 0.25% for the second quarter of 2020 from 0.59% for the first quarter of 2020 from 0.71% for the fourth quarter of 2019.2020. The lower cost of average interest-bearing deposits reflected actions taken to reduce deposit rates in light of the two emergency interest rate cuts by the Federal Reserve in March of 2020. The cost of average interest-bearing deposits declined by 19 basis points and the cost of average total deposits declined by 12 basis points in the first quarter. The spot rate of our cost of deposits was 33 basis points0.19% on March 31,June 30, 2020.
FirstSecond Quarter of 2020 Compared to FirstSecond Quarter of 2019
Net interest income decreased by $5.1$6.6 million to $249.7$254.3 million for the firstsecond quarter of 2020 compared to $254.9$260.9 million for the firstsecond quarter of 2019 due to the decline in interest income exceeding the decline in interest expense. Interest income decreased by $13.2 million due mainly to a lower yield on average loans and leases, offset partially by a lower cost of average interest-bearing liabilities and a higher balance of average loans and leases. Interest expense decreased by $8.1 million due primarily to a lower cost of average interest-bearing liabilities in conjunction with decreased market rates, offset partially by a shift in our deposit mix resulting from an increase in average interest-bearing deposits and a decrease in average noninterest-bearing deposits. The tax equivalent yield on average loans and leases was 5.54%5.01% for the firstsecond quarter of 2020 compared to 6.16%6.26% for the same quarter of 2019. The decrease in the yield on average loans and leases was due in partmainly to lower loan coupon interest from the repricing of variable-rate loans in conjunction with decreased market rates. The decrease inrates and a lower rate on loan production from the yield on average loans and leases was also influenced byimpact of the credit de-risking initiatives taken over the last couple of years which has seen the replacement of higher yielding loans, such as cash flow, with lower yielding multi-family and equity fundPPP loans.
The tax equivalent NIM was 4.31%4.20% for the firstsecond quarter of 2020 compared to 4.69%4.72% for the same quarter last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the yield on average loans and leases as described above, offset partially by lower deposit and borrowing costs. Total discount accretion on acquired loans contributed eightfive basis points to the NIM for the firstsecond quarter of 2020 compared to sixseven basis points for the firstsecond quarter of 2019.
The cost of average total deposits decreased to 0.59%0.25% for the firstsecond quarter of 2020 from 0.73%0.81% for the firstsecond quarter of 2019 due mainly to lower rates paid on deposits in conjunction with decreased market rates,rates.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net interest income decreased by $11.7 million to $504.0 million for the six months ended June 30, 2020 compared to $515.8 million for the six months ended June 30, 2019 due mainly to a lower yield on average loans and leases and higher balances of average interest-bearing deposits and borrowings, offset partially by a shiftlower cost of average interest-bearing liabilities and a higher balance of average loans and leases. The tax equivalent yield on average loans and leases was 5.27% for the six months ended June 30, 2020 compared to 6.21% for the same period in our2019. The decrease in the yield on average loans and leases was due mainly to lower loan coupon interest from the repricing of variable-rate loans in conjunction with decreased market rates and a lower rate on loan production from the impact of the PPP loans. Excluding the PPP loans, which have a coupon rate of 1%, the tax equivalent yield on average loans and leases was 5.32%.
The tax equivalent NIM was 4.26% for the six months ended June 30, 2020 compared to 4.70% for the same period last year. The decrease in the tax equivalent NIM was due mostly to the decrease in the yield on average loans and leases as described above, offset partially by lower deposit mixand borrowing costs. Excluding the PPP loans, the tax equivalent NIM was 4.28% for the six months ended June 30, 2020.
The cost of average total deposits decreased to 0.41% for the six months ended June 30, 2020 from 0.77% for the six months ended June 30, 2019 due mainly to lower rates paid on deposits resulting from an increase in average interest-bearing deposits and a decrease in average noninterest-bearing demand deposits.decreased market rates.
65

Provision for Credit Losses
The following table sets forth the details of the provision for credit losses on loans and leases held for investment and information regarding credit quality metrics for the periods indicated:
Three Months EndedThree Months EndedSix Months Ended
March 31, December 31, March 31,June 30,March 31,June 30,June 30,
2020 2019 201920202020201920202019
(Dollars in thousands)(Dollars in thousands)
Provision For Credit Losses:     Provision For Credit Losses:
Addition to allowance for loan and lease losses$98,000
 $1,000
 $4,000
Addition to allowance for loan and lease losses$93,000  $98,000  $10,000  $191,000  $14,000  
Addition to reserve for unfunded     
Addition to (reduction in) reserve for unfundedAddition to (reduction in) reserve for unfunded
loan commitments14,000
 2,000
 —
loan commitments27,000  14,000  (2,000) 41,000  (2,000) 
Total provision for credit losses$112,000
 $3,000
 $4,000
Total provision for credit losses$120,000  $112,000  $8,000  $232,000  $12,000  
     
Credit Quality Metrics:     Credit Quality Metrics:
Net charge‑offs on loans and leases held for     
Net charge-offs on loans and leases held forNet charge-offs on loans and leases held for
investment (1)
$19,110
 $767
 $191
investment (1)
$13,242  $19,110  $11,244  $32,352  $11,435  
Annualized net charge‑offs to average loans and leases0.40% 0.02% —%
Annualized net charge-offs to average loans and leasesAnnualized net charge-offs to average loans and leases0.27 %0.40 %0.25 %0.33 %0.13 %
At quarter-end:     At quarter-end:
Allowance for credit losses$274,863
 $174,646
 $173,142
Allowance for credit losses$381,621  $274,863  $169,898  
Allowance for credit losses to loans and leases     Allowance for credit losses to loans and leases
held for investment1.39% 0.93% 0.95%held for investment1.94 %1.39 %0.92 %
Allowance for credit losses to nonaccrual     Allowance for credit losses to nonaccrual
loans and leases held for investment287.5% 189.1% 195.6%loans and leases held for investment229.7 %287.5 %209.1 %
     
Nonaccrual loans and leases held for investment$95,602
 $92,353
 $88,527
Nonaccrual loans and leases held for investment$166,113  $95,602  $81,265  
Performing TDRs held for investment$8,978
 $12,257
 $17,027
Performing TDRs held for investment$15,037  $8,978  $16,464  
Classified loans and leases held for investment
$147,705
 $175,912
 $190,305
Classified loans and leases held for investment
$293,230  $147,705  $190,979  
______________________
(1)
(1) See "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" for detail of charge-offs and recoveries by loan portfolio segment, class, and subclass for the periods presented.
Provisions for credit losses are charged to earnings for both onthe allowance for loan and off‑balance sheet credit exposures.lease losses and the reserve for unfunded loan commitments. The provision for credit losses on our loans and leases held for investment is based on our allowance methodology and is an expense that, in our judgment, is required to maintain an adequate allowance for credit losses. For further details on our allowance for credit losses methodology, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.
The provision for credit losses increased by $109.0$8.0 million to $120.0 million for the second quarter of 2020 compared to $112.0 million for the first quarter of 2020 comparedas a result of reserve builds that reflected significant deterioration and continued uncertainty in the key macro-economic forecast variables such as unemployment and GDP as a result of COVID-19.
The provision for credit losses increased by $112.0 million to $3.0$120.0 million for the fourthsecond quarter of 2020 compared to $8.0 million for the second quarter of 2019 as a result of the impact of the current economic forecast used in our CECL process, which reflected a significant deterioration in key macro-economic forecast variables such as unemployment and Real GDP significant loan downgrades into special mention, and higher provisions on individually evaluated loans.as a result of COVID-19.
The provision for credit losses increased by $108.0$220.0 million to $112.0$232.0 million for the first quarter ofsix months ended June 30, 2020 compared to $4.0$12.0 million for the first quarter ofsix months ended June 30, 2019 as a result of the impact of the current economic forecast used in our CECL process, which reflected a significant deterioration in key macro-economic forecast variables such as unemployment and Real GDP significant loan downgrades into special mention, and higher provisions on individually evaluated loans.as a result of COVID-19.
66


Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances areinclude an increased amount of classified and/or criticized loans and leases, net loan and lease and unfunded commitment growth, and changes in economic conditions and forecasts. Changes in economic conditions and forecasts include the rate of economic growth, the unemployment rate, the rate of inflation, changes in the general level of interest rates, changes in real estate values, and adverse conditions in borrowers’ businesses. See further discussion in “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.
Noninterest Income
The following table summarizes noninterest income by category for the periods indicated:
Three Months EndedSix Months Ended
June 30,March 31,June 30,June 30,
Noninterest Income20202020201920202019
(In thousands)
Leased equipment income$12,037  $12,251  $9,182  $24,288  $18,464  
Other commissions and fees10,111  9,721  11,590  $19,832  $22,598  
Service charges on deposit accounts2,004  2,658  3,771  4,662  7,501  
Gain on sale of loans and leases346  87  326  433  326  
Gain on sale of securities7,715  182  22,192  7,897  24,353  
Other income:
Dividends and gains (losses) on equity investments2,947  28  (83) 2,975  213  
Warrant income1,973  837  1,214  2,810  3,493  
Other1,725  3,336  2,701  5,061  5,009  
Total noninterest income$38,858  $29,100  $50,893  $67,958  $81,957  
 Three Months Ended
 March 31, December 31, March 31,
Noninterest Income2020 2019 2019
 (In thousands)
Leased equipment income$12,251
 $10,648
 $9,282
Other commissions and fees9,721
 10,170
 11,008
Service charges on deposit accounts2,658
 3,611
 3,730
Gain on sale of loans and leases87
 23
 —
Gain on sale of securities182
 184
 2,161
Other income:     
Dividends and gains (losses) on equity investments28
 (794) 296
Warrant income837
 1,240
 2,279
Other3,336
 2,094
 2,308
Total noninterest income$29,100
 $27,176
 $31,064
FirstSecond Quarter of 2020 Compared to FourthFirst Quarter of 20192020
Noninterest income increased by $1.9$9.8 million to $38.9 million for the second quarter of 2020 compared to $29.1 million for the first quarter of 2020 compareddue mainly to $27.2a $7.5 million increase in gain on sale of securities and a $2.9 million increase in dividends and gains on equity investments, offset partially by a $1.6 million decrease in other income. The increase in gain on sale of securities resulted from the sale of $122.3 million of securities in the second quarter. The increase in dividends and gains on equity investments resulted from increases in the fair value of equity investments still held and a $1.5 million gain on sale of an equity investment. The decrease in other income was primarily due to $1.1 million of bankruptcy proceeds received on a former credit in the first quarter.
Second Quarter of 2020 Compared to Second Quarter of 2019
Noninterest income decreased by $12.0 million to $38.9 million for the fourthsecond quarter of 2020 compared to $50.9 million for the second quarter of 2019 due mainly to a $1.6 million increase in leased equipment income and a $1.2 million increase in other income, offset partially by a $1.0 million decrease in service charges on deposit accounts. The increase in leased equipment income was due to early lease terminations, which resulted in higher termination gains and accretion of deferred fees. The increase in other income was due mainly to $1.1 million of bankruptcy proceeds received related to a former borrower. The decrease in service charges on deposit accounts was due mainly to waivers of various fees (service charges, wire fees, overdraft fees, NSF fees) to offer assistance to our customers during the COVID-19 pandemic.
First Quarter of 2020 Compared to First Quarter of 2019
Noninterest income decreased by $2.0 million to $29.1 million for the first quarter of 2020 compared to $31.1 million for the first quarter of 2019 due mainly to a $2.0$14.5 million decrease in gain on sale of securities, a $1.4$1.8 million decrease in warrant income,service charges on deposit accounts, and a $1.3$1.5 million decrease in other commissions and fees, offset partially by a $3.0 million increase in dividends and gains on equity investments and a $2.9 million increase in leased equipment income. Gain on sale of securities decreased primarily due to lower sales activity in the firstsecond quarter of 2020 as compared to the firstsecond quarter of 2019. Warrant incomeService charges on deposit accounts decreased due primarily due to fewer warrant exitslower analysis fees and NSF fees in the firstsecond quarter of 2020 as compared to the firstsecond quarter of 2019. Other commissions and fees decreased primarily due to lower credit card fee income and lower foreign exchange fees, loweroffset partially by higher customer success fees. The increase in dividends and gains on equity investments resulted primarily from increases in the fair value of equity investments still held and gains on sales of equity investments sold. Leased equipment income increased due to early lease terminations resulting in higher termination gains in the second quarter of 2020 as compared to the second quarter of 2019 and a higher average balance of leases in 2020 resulting in higher lease income as compared to the 2019 period.
67

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Noninterest income decreased by $14.0 million to $68.0 million for the six months ended June 30, 2020 compared to $82.0 million for the six months ended June 30, 2019 due mainly to a $16.5 million decrease in gain on sale of securities, a $2.8 million decrease in service charges on deposit accounts, and a $2.8 million decrease in other commissions and fees, offset partially by a $5.8 million increase in leased equipment income and a $2.8 million increase in dividends and gains on equity investments. Gain on sale of securities decreased primarily due to lower sales activity in the 2020 period as compared to the prior year period. Service charges on deposit accounts decreased due primarily to lower analysis fees and NSF fees for the six months ended June 30, 2020 as compared to the same period last year as we waived certain fees as part of our response to the COVID-19 pandemic. Other commissions and fees decreased primarily due to lower foreign exchange fees and lower loan-relatedcredit card fee income, offset partially by higher customer success fees. Leased equipment income increased due to early lease terminations resulting in higher termination gains and accretion of deferred fees in the first quarter ofsix months ended June 30, 2020 as compared to the first quarter ofsix months ended June 30, 2019 and a higher average balance of leases in 2020 resulting in higher interestlease income as compared to the 2019 period. The increase in dividends and gains on equity investments resulted primarily from increases in the fair value of equity investments still held.

Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
Three Months EndedSix Months Ended
June 30,March 31,June 30,June 30,
Noninterest Expense20202020201920202019
(In thousands)
Compensation$61,910  $61,282  $68,956  $123,192  $139,801  
Occupancy14,494  14,207  14,457  28,701  28,777  
Leased equipment depreciation7,102  7,205  5,558  14,307  11,209  
Data processing7,102  6,454  6,817  13,556  13,742  
Other professional services4,146  4,258  4,629  8,404  9,142  
Insurance and assessments9,373  4,249  4,098  13,622  8,136  
Intangible asset amortization3,882  3,948  4,870  7,830  9,740  
Customer related expense4,408  3,932  3,405  8,340  6,348  
Loan expense3,379  2,650  3,451  6,029  6,336  
Foreclosed assets (income) expense, net(146) 66  (146) (80) (117) 
Acquisition, integration and reorganization costs—  —  —  —  618  
Other11,315  9,719  9,332  21,034  17,982  
Total operating expense126,965  117,970  125,427  244,935  251,714  
Goodwill impairment—  1,470,000  —  1,470,000  —  
Total noninterest expense$126,965  $1,587,970  $125,427  $1,714,935  $251,714  
68

 Three Months Ended
 March 31, December 31, March 31,
Noninterest Expense2020 2019 2019
 (In thousands)
Compensation$61,282
 $74,637
 $70,845
Occupancy14,207
 14,541
 14,320
Leased equipment depreciation7,205
 6,856
 5,651
Data processing6,454
 6,770
 6,925
Other professional services4,258
 4,261
 4,513
Insurance and assessments4,249
 4,168
 4,038
Intangible asset amortization3,948
 4,153
 4,870
Customer related expense3,932
 3,952
 2,943
Loan expense2,650
 2,967
 2,885
Foreclosed assets expense (income), net66
 (3,446) 29
Acquisition, integration and reorganization costs—
 (269) 618
Other9,719
 5,138
 8,650
Total operating expense117,970
 123,728
 126,287
Goodwill impairment1,470,000
 —
 —
Total noninterest expense$1,587,970
 $123,728
 $126,287
FirstSecond Quarter of 2020 Compared to FourthFirst Quarter of 2020
Noninterest expense decreased by $1.46 billion to $127.0 million for the second quarter of 2020 compared to $1.59 billion for the first quarter of 2020 attributable primarily to a $1.47 billion goodwill impairment charge in the first quarter. Excluding the goodwill impairment charge, noninterest expense increased by $9.0 million to $127.0 million. This increase was due mainly to a $5.1 million increase in insurance and assessments expense, a $1.6 million increase in other expense, a $0.7 million increase in loan expense, and a $0.6 million increase in data processing expense. The increase in insurance and assessments expense was due to an increase in FDIC assessment expense resulting from an increase in our assessment rate due primarily to the first quarter loss from the goodwill impairment charge. The higher assessment rate will continue for one year. The increase in other expense was due to $6.6 million in prepayment penalties incurred from the early payoff of $750 million of FHLB term advances, offset partially by the reversal of a $1.5 million accrual for operational loss contingencies and decreases in various business expenses due to less activity as a result of COVID-19. The FHLB term advances had a weighted average interest rate of 0.96% and the prepayment decision was made after the significant drop in market rates in March and the expectation of continued low rates for extended time. The increase in loan expense was due primarily to higher loan-related legal and workout expenses. The increase in data processing expense was due to a one-time expense to purchase systems for the origination and loan documentation submissions necessary for the Paycheck Protection Program.
Second Quarter of 2020 Compared to Second Quarter of 2019
Noninterest expense increased by $1.5 million to $127.0 million for the second quarter of 2020 compared to $125.4 million for the second quarter of 2019 due mainly to a $5.3 million increase in insurance and assessments, a $2.0 million increase in other expense and a $1.5 million increase in leased equipment depreciation, offset partially by a $7.0 million decrease in compensation expense. Insurance and assessments expense increased due primarily to an increase in our FDIC assessment rate as a result of the first quarter 2020 loss from the goodwill impairment charge. The increase in other expense was due mainly to $6.6 million in prepayment penalties incurred from the early payoff of $750 million of FHLB term advances, offset partially by decreases in various business expenses due to less activity as a result of COVID-19. The increase in leased equipment depreciation is due mainly to a higher average balance in the 2020 quarter as compared to the 2019 quarter. The decrease in compensation expense was due mainly to lower bonus expense in the 2020 quarter compared to the 2019 quarter.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Noninterest expense increased by $1.46 billion to $1.59$1.71 billion for the first quarter ofsix months ended June 30, 2020 compared to $123.7$251.7 million for the fourth quarter of 2019 attributable primarily to a $1.47 billion goodwill impairment charge. Excluding the goodwill impairment charge, noninterest expense decreased to $118.0 million, or a decrease of $5.8 million. This decrease was due mainly to a $13.4 million decrease in compensation expense, offset partially by a $4.6 million increase in other expense and a $3.5 million increase in foreclosed assets expense. Compensation expense decreased due mainly to lower bonus accruals, offset partially by higher payroll tax expense. Other expense increased due primarily to the prior quarter including $2.8 million of credits related to the reversal of accrued merger costs and franchise tax refunds, while the first quarter includes a $1.5 accrual for operational loss contingencies related to a system outage at a service provider. Foreclosed assets expense increased as the prior quarter included a $3.3 million gain on the sale of a repossessed asset.
First Quarter of 2020 Compared to First Quarter of 2019
Noninterest expense increased by $1.46 billion to $1.59 billion for the first quarter of 2020 compared to $126.3 million for the first quarter ofsix months ended June 30, 2019 due mainly to a $1.47 billion goodwill impairment charge. Excluding the goodwill impairment charge, noninterest expense decreased by $6.8 million to $118.0 million, or a decrease of $8.3$244.9 million. This decrease was due mainly to a $9.6$16.6 million decrease in compensation expense, offset partially by a $1.1$5.5 million increase in other expense. Compensation expense decreasedinsurance and assessments due primarily to an increase in our FDIC assessment rate as a result of the first quarter 2020 loss from the goodwill impairment charge, and a $3.1 million increase in leased equipment depreciation due to a higher average balance of leased equipment. The decrease in compensation expense was due mainly to lower bonus accruals, offset partially by higher stock compensation expense and higher severance expense. Other expense increased due mostlyin the 2020 period compared to a $1.5 million accrual for operational loss contingencies related to a system outage at a service provider.the prior year.

Income Taxes
The effective tax rate for the second quarter of 2020 was 28.1% compared to (0.8)% for the first quarter of 2020 was (0.8)% compared to 19.8%and 28.2% for the fourth quarter of 2019 and 27.7% for the firstsecond quarter of 2019. Excluding non-deductible goodwill impairment, the effective income tax rate was 24.5% for the first quarter of 2020. The fourth quarter of 2019higher effective tax rate in the second quarter was lower thanmainly due to tax expense related to restricted stock vestings combined with benefits recorded in the first quarter related to the filing of amended state returns. The effective tax rate for the six months ended June 30, 2020 effective rate of 24.5%, adjustedwas (1.8)% compared to 27.9% for non–deductiblethe six months ended June 30, 2019. Excluding non-deductible goodwill impairment, due primarily to $9.1 million of benefits related to changes in state apportionment, net of the federaleffective income tax effect.rate was 26.3% for the six months ended June 30, 2020. The Company’s blended statutory tax rate for federal and state is 27.9% and the effective tax rate for the full year 2020, excluding non-deductible goodwill impairment, is estimated to be in the range of 26-28%.
69

Balance Sheet Analysis
Securities Available-for-Sale
The following table presents the composition and durations of our securities available-for-sale as of the dates indicated:
March 31, 2020 December 31, 2019 June 30, 2020March 31, 2020December 31, 2019
Fair % of Duration Fair % of DurationFair% ofDurationFair% ofDurationFair% ofDuration
Security TypeValue Total (in years) Value Total (in years)Security TypeValueTotal(in years)ValueTotal(in years)ValueTotal(in years)
(Dollars in thousands) (Dollars in thousands)
Agency commercial MBS$1,125,432
 30% 3.1
 $1,108,224
 29% 4.4
Agency commercial MBS$1,133,086  29 %2.8  $1,125,432  30 %3.1  $1,108,224  29 %4.4  
Agency residential CMOs1,102,097
 29% 2.8
 1,136,397
 30% 3.7
Agency residential CMOs1,049,742  27 %2.9  1,102,097  29 %2.8  1,136,397  30 %3.7  
Municipal securities733,884
 20% 6.7
 735,159
 19% 7.6
Municipal securities888,338  23 %7.2  733,884  20 %6.7  735,159  19 %7.6  
Agency residential MBS289,831
 8% 2.6
 305,198
 8% 3.3
Agency residential MBS248,934  6 %2.5  289,831  8 %2.6  305,198  8 %3.3  
Asset-backed securities210,699
 6% 0.8
 214,783
 6% 1.1
Asset-backed securities227,206  6 %0.6  210,699  6 %0.8  214,783  6 %1.1  
Collateralized loan obligations130,082
 3% (0.2) 123,756
 3% 0.2
Collateralized loan obligations136,663  4 %(0.1) 130,082  3 %(0.2) 123,756  3 %0.2  
Private label residential CMOs97,862
 3% 2.4
 99,483
 3% 3.2
Private label residential CMOs96,775  3 %2.3  97,862  3 %2.4  99,483  3 %3.2  
SBA securities45,441
 1% 3.1
 48,258
 1% 4.0
SBA securities44,576  1 %3.0  45,441  1 %3.1  48,258  1 %4.0  
Corporate debt securities16,957
 —% 9.4
 20,748
 1% 11.3
Corporate debt securities20,458  1 %9.9  16,957  — %9.4  20,748  1 %11.3  
U.S. Treasury securities5,378
 —% 1.9
 5,181
 —% 3.2
U.S. Treasury securities5,363  — %1.6  5,378  — %1.9  5,181  — %3.2  
Total securities available-for-sale$3,757,663
 100% 3.5
 $3,797,187
 100% 4.4
Total securities available-Total securities available-
for-sale for-sale$3,851,141  100 %3.6  $3,757,663  100 %3.5  $3,797,187  100 %4.4  
The following table shows the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
June 30, 2020
Fair% of
Municipal Securities by StateValueTotal
(Dollars in thousands)
California$309,659  35 %
Washington126,840  14 %
Texas92,695  10 %
New York52,236  6 %
Utah42,620  5 %
Oregon31,530  4 %
Florida24,456  3 %
Illinois23,556  3 %
Ohio20,738  2 %
Nebraska19,642  2 %
Total of ten largest states743,972  84 %
 All other states144,366  16 %
Total municipal securities$888,338  100 %
70
 March 31, 2020
 Fair % of
Municipal Securities by StateValue Total
 (Dollars in thousands)
 California$233,708
 32%
 Washington114,871
 16%
 New York51,737
 7%
 Texas40,508
 6%
 Utah37,131
 5%
Oregon30,864
 4%
 Florida27,757
 4%
 Illinois24,872
 3%
 District of Columbia17,552
 2%
 Ohio17,417
 2%
Total of ten largest states596,417
 81%
 All other states137,467
 19%
Total municipal securities$733,884
 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:
 March 31, 2020 December 31, 2019
   % of   % of
Loan and Lease Portfolio 
Balance Total Balance Total
 (Dollars in thousands)
Real estate mortgage:       
Healthcare real estate$290,636
 1% $334,070
 2%
Hotel621,375
 3% 625,798
 3%
SBA program560,384
 3% 556,889
 3%
Other commercial real estate2,748,254
 14% 2,685,930
 14%
Total commercial real estate mortgage4,220,649
 21% 4,202,687
 22%
Income producing and other residential3,688,642
 19% 3,665,790
 19%
Other residential real estate99,653
 —% 104,270
 1%
Total income producing and other       
residential real estate mortgage3,788,295
 19% 3,770,060
 20%
Total real estate mortgage8,008,944
 40% 7,972,747
 42%
Real estate construction and land:       
Commercial1,087,505
 6% 1,082,368
 6%
Residential1,792,748
 9% 1,655,434
 9%
Total real estate construction and land (1)
2,880,253
 15% 2,737,802
 15%
Total real estate10,889,197
 55% 10,710,549
 57%
Commercial:       
Lender finance & timeshare2,293,613
 12% 2,118,767
 11%
Equipment finance822,491
 4% 852,278
 5%
Premium finance490,439
 2% 467,469
 2%
Other asset-based331,859
 2% 309,893
 2%
Total asset-based3,938,402
 20% 3,748,407
 20%
Equity fund loans1,402,464
 7% 1,199,268
 6%
Early stage242,106
 1% 212,509
 1%
Expansion stage934,420
 5% 693,459
 4%
Late stage136,847
 1% 74,186
 1%
Total venture capital2,715,837
 14% 2,179,422
 12%
Secured business loans667,439
 3% 583,300
 3%
Security monitoring539,038
 3% 619,260
 3%
Other lending527,281
 3% 527,049
 3%
Cash flow38,227
 —% 38,058
 —%
Total other commercial1,771,985
 9% 1,767,667
 9%
Total commercial8,426,224
 43% 7,695,496
 41%
Consumer429,884
 2% 440,827
 2%
Total loans and leases held for investment,       
net of deferred fees$19,745,305
 100% $18,846,872
 100%

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


June 30, 2020March 31, 2020December 31, 2019
% of% of% of
Loan and Lease Portfolio
BalanceTotalBalanceTotalBalanceTotal
(Dollars in thousands)
Real estate mortgage:
Healthcare real estate$237,287  1 %$290,636  1 %$334,070  2 %
Hotel648,081  4 %621,375  3 %625,798  3 %
SBA program573,149  3 %560,384  3 %556,889  3 %
Other commercial real estate2,763,558  14 %2,748,254  14 %2,685,930  14 %
Total commercial real estate mortgage4,222,075  22 %4,220,649  21 %4,202,687  22 %
Income producing and other residential3,638,835  19 %3,688,642  19 %3,665,790  19 %
Other residential real estate94,824  — %99,653  — %104,270  1 %
Total income producing and other
residential real estate mortgage3,733,659  19 %3,788,295  19 %3,770,060  20 %
Total real estate mortgage7,955,734  41 %8,008,944  40 %7,972,747  42 %
Real estate construction and land:
Commercial1,167,609  6 %1,087,505  6 %1,082,368  6 %
Residential2,172,919  11 %1,792,748  9 %1,655,434  9 %
Total real estate construction and land (1)
3,340,528  17 %2,880,253  15 %2,737,802  15 %
Total real estate11,296,262  58 %10,889,197  55 %10,710,549  57 %
Commercial:
Lender finance & timeshare1,979,392  10 %2,293,613  12 %2,118,767  11 %
Equipment finance786,388  4 %822,491  4 %852,278  5 %
Premium finance420,479  2 %490,439  2 %467,469  2 %
Other asset-based226,172  1 %331,859  2 %309,893  2 %
Total asset-based3,412,431  17 %3,938,402  20 %3,748,407  20 %
Equity fund loans739,761  4 %1,402,464  7 %1,199,268  6 %
Early stage211,703  1 %242,106  1 %212,509  1 %
Expansion stage738,427  4 %934,420  5 %693,459  4 %
Late stage124,450  — %136,847  1 %74,186  1 %
Total venture capital1,814,341  9 %2,715,837  14 %2,179,422  12 %
Paycheck Protection Program1,211,163  6 %—  — %—  — %
Secured business loans501,680  3 %667,439  3 %583,300  3 %
Security monitoring498,895  2 %539,038  3 %619,260  3 %
Other lending511,655  3 %527,281  3 %527,049  3 %
Cash flow36,885  — %38,227  — %38,058  — %
Total other commercial2,760,278  14 %1,771,985  9 %1,767,667  9 %
Total commercial7,987,050  40 %8,426,224  43 %7,695,496  41 %
Consumer411,319  2 %429,884  2 %440,827  2 %
Total loans and leases held for investment,
net of deferred fees$19,694,631  100 %$19,745,305  100 %$18,846,872  100 %
 


(1) Includes $145.5 million, $169.4 million, and $173.4 million at June 30, 2020, March 31, 2020 and December 31, 2019 of land, acquisition and development loans.
71

The following table presents the geographic composition of our real estate loans held for investment, net of deferred fees, by the top 10 states and all other states combined (in the order presented for the current quarter-end) as of the dates indicated:
March 31, 2020 December 31, 2019June 30, 2020December 31, 2019
  % of   % of% of% of
Real Estate Loans by StateBalance Total Balance TotalReal Estate Loans by StateBalanceTotalBalanceTotal
(Dollars in thousands)(Dollars in thousands)
California$6,649,654
 61% $6,510,094
 61%California$6,811,720  60 %$6,510,094  61 %
New York712,140
 7% 711,301
 7%New York731,872  7 %711,301  7 %
Florida575,755
 5% 598,561
 6%Florida632,517  6 %598,561  6 %
Washington336,800
 3% 324,588
 3%Washington357,491  3 %324,588  3 %
ColoradoColorado314,122  3 %126,370  1 %
Oregon295,337
 3% 288,764
 3%Oregon302,588  3 %288,764  3 %
Colorado274,918
 3% 126,370
 1%
Texas243,890
 2% 260,513
 2%Texas267,000  2 %260,513  2 %
ArizonaArizona174,731  2 %162,317  2 %
District of Columbia167,599
 2% 166,641
 2%District of Columbia154,119  1 %166,641  1 %
Arizona161,053
 1% 162,317
 1%
Pennsylvania143,411
 1% 142,684
 1%
North CarolinaNorth Carolina152,053  1 %124,738  1 %
Total of 10 largest states9,560,557
 88% 9,291,833
 87%Total of 10 largest states9,898,213  88 %9,273,887  87 %
All other states1,328,640
 12% 1,418,716
 13%All other states1,398,049  12 %1,436,662  13 %
Total real estate loans held for investment, net of deferred fees$10,889,197
 100% $10,710,549
 100%Total real estate loans held for investment, net of deferred fees$11,296,262  100 %$10,710,549  100 %
The following table presents a roll forward of loans and leases held for investment, net of deferred fees, for the periods indicated:
Three Months EndedSix Months Ended
Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees (1)
June 30, 2020June 30, 2020
(Dollars in thousands)
Balance, beginning of period$19,745,305  $18,846,872  
Additions:
Production1,802,956  2,592,702  
Disbursements800,458  2,797,538  
Total production and disbursements2,603,414  5,390,240  
Reductions:
Payoffs(612,837) (1,425,544) 
Paydowns(2,022,376) (3,076,081) 
Total payoffs and paydowns(2,635,213) (4,501,625) 
Sales(3,089) (3,089) 
Transfers to foreclosed assets—  (1,776) 
Charge-offs(15,786) (35,991) 
Total reductions(2,654,088) (4,542,481) 
Net (decrease) increase(50,674) 847,759  
Balance, end of period$19,694,631  $19,694,631  
Weighted average rate on production (2)
2.33 %2.93 %
 Three Months Ended
Roll Forward of Loans and Leases Held for Investment, Net of Deferred Fees (1)
March 31, 2020
 (Dollars in thousands)
Balance, beginning of period$18,846,872
Additions: 
Production789,746
Disbursements1,997,080
Total production and disbursements2,786,826
Reductions: 
Payoffs(812,707)
Paydowns(1,053,705)
Total payoffs and paydowns(1,866,412)
Transfers to foreclosed assets(1,776)
Charge-offs(20,205)
Total reductions(1,888,393)
Net increase898,433
Balance, end of period$19,745,305
  
Weighted average rate on production (2)
4.31%
_______________________________________ 
(1)
(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 20 basis points to loan yields for the three months ended March 31, 2020.


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



72

Allowance for Credit Losses on Loans and Leases Held for Investment
The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the condensed consolidated balance sheets. The amortized cost basis of loans and leases does not include interest receivable, which is included in "Other assets" on the condensed consolidated balance sheets. The "Provision for credit losses" on the condensed consolidated statement of earnings (loss) is a combination of the provision for loan and lease losses and the provision for unfunded loan commitments.
Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and considering available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. The resulting allowance for loan and lease losses is deducted from the associated amortized cost basis to reflect the net amount expected to be collected. Subsequent changes in this estimate are recorded through the provision for credit losses and the allowance. The CECL methodology could result in significant changes to both the timing and amounts of provision for credit losses and the allowance as compared to recent historical periods. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for credit losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses hasis comprised of an individually evaluated component for loans and leases that no longer share similar risk characteristics with other loans and leases and a pooled loans component for loans and leases that share similar risk characteristics.
A loan or lease with an outstanding balance greater than $250,000 is individually evaluated for expected credit loss when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. We select loans and leases for individual assessment on an ongoing basis using certain criteria such as payment performance, borrower reported and forecasted financial results, and budgets, and other external factors when appropriate. We measure the current expected credit loss of a loan or lease based upon the fair value of the underlying collateral if the loan or lease is collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease is not collateral-dependent. To the extent a loan or lease balance exceeds the estimated collectable value, a reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan is collateral-dependent.
Our CECL methodology for the pooled loans component includes both quantitative and qualitative loss factors which are applied to our population of loans and leases and assessed at a pool level. The loan portfolio is segmented into four loan segments, eight loan classes and 22 loan pools based upon loan type that share similar default risk characteristics to calculate quantitative loss factors for each pool. Six of these loan pools have insignificant current balances and/or insignificant historical losses, thus, estimated losses are calculated using historical loss rates from the first quarter of 2009 to the current period rather than econometric regression modeling. For the remaining 16 loan pools, we estimate the probability of default (“PD”) during the reasonable and supportable period using seven econometric regression models developed to correlate macroeconomic variables to credit performance (including risk rating upgrades/downgrades and defaults). The loans and unfunded commitments are grouped into nine loss given default (“LGD”) pools based on portfolio classes that share similar collateral risk characteristics. LGD rates are computed based on the net charge-offs recognized divided by the exposure at default (“EAD”) of defaulted loans starting with the first quarter of 2009 to the current period. The PD and LGD rates are applied to the EAD at the loan or lease level based on contractual scheduled payments, estimated prepayments, and estimated usage of unfunded commitments to compute the current expected credit loss. We are usinguse our actual historical loan prepayment experience from 2009 - 20182019 to estimate future prepayments by loan pool. Prepayment rates during the reasonable and supportableGiven that no historical period are based on historical experience from 2017-2018 as it exhibits economic conditions most similar to the single scenario baseline forecast discussed below.below, prepayment rates based on all historical prepayment experience from 2009 - 2019 are consistently applied during the reasonable and supportable, reversion, and post-reversion periods.

73

For the reasonable and supportable forecast period, future macroeconomic events and circumstances are estimated over a 4-quarter time horizon using a single scenario baseline forecast that is consistent with management's current expectations for the 16 loan pools. We use economic forecasts from Moody's Analytics in this process. The economic forecast is updated monthly therefore the one used for each quarter-end calculation is generally based on a one-month lag based on the timing of when the forecast becomes available. The key macroeconomic assumptions used in the PD regression models include at least three of the following economic indicators; Real GDP, Unemployment Rates,unemployment rates, CRE Price Index and the BBB spread. The quantitative CECL model, utilizing historical portfolio performance, current portfolio composition and performance, estimated prepayments, and the effects of the economic forecast, calculates the expected EAD which is multiplied by the PD and LGD rates to calculate expected losses through the end of the forecast period. We then use a 2-quarter reversion period to revert on a straight-line basis from the PD, LGD, and prepayment rates used during the reasonable and support period to the Company’s historical PD, LGD, and prepayment experience. Subsequent to the reversion period for the remaining contractual life of loans and leases, PD, LGD, and prepayment rates are based on historical experience from the first quarter of 2009 to the fourth quarter of 2018, which2019. PD regression models and prepayment rates are updated on an annual basis or more frequently if necessary, whilebasis. LGD rates are based on historical experience from the firstupdated every quarter of 2009 to thereflect current period.charge-off activity.
The PDs and LGDs calculated by the quantitative models are highly correlated to our internal risk ratings assigned to each loan and lease. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans and leases on a regular basis. The credit risk ratings assigned to every loan and lease are either “high pass,” “pass,” “special mention,” “substandard,” or “doubtful” as defined as follows:
•
•High Pass: (Risk ratings 1-2) Loans and leases rated as "high pass" exhibit a favorable credit profile and have minimal risk characteristics. Repayment in full is expected, even in adverse economic conditions.
•Pass: (Risk ratings 3-4) Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
•Special Mention: (Risk rating 5) Loans and leases rated as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
•Substandard: (Risk rating 6) Loans and leases rated as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
•: (Risk ratings 1-2) Loans and leases rated as "high pass" exhibit a favorable credit profile and have minimal risk characteristics. Repayment in full is expected, even in adverse economic conditions.
•
Pass: (Risk ratings 3-4) Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
•
Special Mention: (Risk rating 5) Loans and leases rated as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
•
Substandard: (Risk rating 6) Loans and leases rated as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
•
Doubtful: (Risk rating 7) Loans and leases rated as "doubtful" have all the weaknesses of those rated as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
In addition, we may refer to the loans and leases with assigned credit risk ratings of "substandard" and "doubtful" together as "classified" loans and leases. For further information on classified loans and leases, see Note 4. Loans and Leases of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s loan and lease risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in increases in the provisions for credit losses and the allowance for credit losses.
The qualitative portion of the reserve on pooled loans and leases represents management’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative reserve. The qualitative loss factors consider idiosyncratic risk factors, conditions that may not be reflected in quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects our best estimate of current expected credit losses. Current and forecasted economic trends and underlying market values for collateral dependent loans are generally considered to be encompassed within our CECL quantitative methodology and component of the reserve. An incremental qualitative adjustment may be considered when economic forecasts exhibit higher levels of volatility or uncertainty.

74

In calculating our allowance for credit losses in the firstsecond quarter of 2020, we consideredcontinued to consider the impacts of the COVID-19 pandemic on our processes outlined above given the changes in economic forecasts and assumptions along with the uncertainty as to the severity and duration of the economic consequences of the COVID-19 pandemic. Our methodology and framework remained unchanged fromis consistent with the description above and consistent with what is described above andwe did in the first quarter as we did not change any of the macro-economicmacroeconomic variables themselves, such as GDP, unemployment, BBB spreads and the CRE index, used in our models ormodels; nor did we change our loan segmentation, our reasonable and supportable forecast period of 4four quarters or our reversion period of 2two quarters. WeOther assumptions which are assessed and updated on an annual basis in the second quarter were updated including our estimated prepayment rates and our expected future utilization rates for the reserve for unfunded commitments. In the second quarter, we used the Moody’s Consensus BaselineScenario Forecast dated June 11, 2020 for our quantitative component, however sinceunlike the most recent consensus forecast was stale, as it had not been updated since early March, it did not reflect the significant changes in economic forecasts in late March due to the COVID-19 pandemic. As a result,first quarter when we had to make additional adjustments in determining our allowance for credit losses. We performed sensitivity analyses using other updated economic forecasted scenarios provided by Moody’s to calculate an additional increase to the allowance for credit losses. After assessing these various scenarios, we selectedused the Moody’s Baseline Forecast dated March 27, 2020, as the basis for our economic qualitative factorConsensus Scenario Forecast at that time was considered stale due to the fact it was dated March 12, 2020 and was not updated to reflect the updatedpandemic and rapidly changing environment. Similar to the first quarter, we made additional adjustments to the quantitative calculation due to regression model limitations caused by the sudden and unprecedented changes in macroeconomic variables and for imprecision inherent in the economic conditions, which resulted in a significant increase inforecasts. Consistent with our allowance for credit losses.losses methodology, we also incorporated the qualitative factors as prescribed in U.S. GAAP and existing regulatory guidance.
The other qualitative criteria we consider when establishing the loss factors include the following:
legal•Legal and regulatoryRegulatory - matters that could impact our borrowers’ ability to repay our loans and leases;
•Concentrations - loan and lease portfolio composition and any loan concentrations;
•Collateral Dependency - considers changes in collateral values;
•Lending Policy - current lending policies and the effects of any new policies or policy amendments;
•Nature and Volume - loan and lease production volume and mix;
•Problem Loan Trends - loan and lease portfolio credit performance trends;trends, including a borrower's financial condition, credit rating, and ability to meet loan payment requirements;
•Loan Review - results of independent credit review; and
•Management - changes in management related to credit administration functions.
We estimate the reserve for unfunded loan commitments using the same loss factorsPD, LGD, and prepayment rates as used for the allowance for loan and lease losses. The reserve for unfunded loan commitments is computed using expected future utilization rates of the unfunded commitments during the contractual life of the commitments based on historical usage of unfunded commitments for the various loan types from the first quarter of 2015 to the secondfourth quarter of 2019. The utilization rates are updated on an annual basis.basis during the second quarter.
Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements. In addition, current credit risk ratings are subject to change as we continue to monitor our loans and leases. To the extent we experience increased levels of borrower loan defaults, borrowers’ noncompliance with our loan agreements, adverse changes in collateral values, or changes in economic and business conditions that adversely affect our borrowers, our classified loans and leases may increase. Higher levels of classified loans and leases generally result in increased provisions for credit losses and an increased allowance for credit losses. In addition, economic forecasts utilized in the estimation process will change in future periods, which will result in changes to the estimates made for current expected credit losses as of a point in time. However, as noted above, economic forecasts are just one of many assumptions and components that go into estimating the allowance for credit losses.
75

The CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Most of the steps in the methodology involve judgment and are subjective in nature including, among other things, selection of the most reliable econometric regression models, segmentation of the loan and lease portfolio, determining the amount of loss history to consider, determining the relevant macroeconomic inputs to the quantitative models, determining the methodology to forecast prepayments, selection of the most appropriate economic forecast scenario, determining the length of the reasonable and supportable forecast and reversion periods, determining expected utilization rates on unfunded loan commitments and determining relevant and appropriate qualitative factors. In addition, the CECL methodology is dependent on economic forecasts which are inherently imprecise and will change from period to period. Although we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the allowance will be sufficient to absorb future losses.


As noted above, the use of different economic forecasts, whether based on different scenarios or updated economic forecasts and scenarios, will change the outcome of the calculations. However, there are numerous components and assumptions that are integral to the overall allowance for credit losses calculation process. ChangingAs part of our allowance for credit losses process, sensitivity analyses are performed to assess the impact of how changing certain assumptions could impact the loan portfolio and allowance for credit losses calculations. At times these analyses can provide information to further assist management in making decisions on certain assumptions. However, changing one assumption such as unemployment, and not reassessing other assumptions used in the quantitative or qualitative process could yield results that are not reasonable or appropriate. In addition, changes in certainappropriate, hence all assumptions do not result in linear impacts. For example, a 1% increase in the unemployment rate does not result in a 1% increase in the allowance for credit losses, because there are numerous models and assumptions used in the process. Although there mayinformation must be a correlation such that an increase in unemployment would increase the allowance for credit losses, those relationships are not linear.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 orof the quantitative components of the allowance for credit losses. Those results would, however, then need to be assessed from a qualitative perspective that could lead topotentially requiring further adjustments to the qualitative component to arrive at a reasonable and appropriate allowance for credit losses. The determination of the allowance for credit losses is complex and highly dependent on numerous models, assumptions and judgments made by management. Management's current expectation for credit losses as quantified in the allowance for credit losses considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, by management, current loan and lease composition, and relative credit risks known as of the balance sheet date.
The following table presents information regarding the allowance for credit losses on loans and leases held for investment as of the dates indicated:
June 30,March 31,December 31,June 30,
Allowance for Credit Losses Data
2020202020192019
(Dollars in thousands)
Allowance for loan and lease losses$301,050  $221,292  $138,785  $135,037  
Reserve for unfunded loan commitments80,571  53,571  35,861  34,861  
Total allowance for credit losses$381,621  $274,863  $174,646  $169,898  
Allowance for loan and lease losses to loans and leases held for investment1.53 %1.12 %0.74 %0.73 %
Allowance for credit losses to loans and leases held for investment1.94 %1.39 %0.93 %0.92 %
Allowance for credit losses to nonaccrual loans and leases held for investment229.7 %287.5 %189.1 %209.1 %





76
 March 31, December 31, March 31,
Allowance for Credit Losses Data 
2020 2019 2019
 (Dollars in thousands)
Allowance for loan and lease losses$221,292
 $138,785
 $136,281
Reserve for unfunded loan commitments53,571
 35,861
 36,142
Total allowance for credit losses$274,863
 $174,646
 $172,423
      
Allowance for credit losses to loans and leases held for investment1.39% 0.93% 0.95%
Allowance for credit losses to nonaccrual loans and leases held for investment287.5% 189.1% 195.6%







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 EndedSix Months Ended
June 30,March 31,June 30,June 30,
Allowance for Credit Losses Roll Forward
20202020201920202019
(Dollars in thousands)
Balance, beginning of period$274,863  $174,646  $173,142  $174,646  $169,333  
Provision for credit losses:
Addition to allowance for loan and lease losses93,000  98,000  10,000  191,000  14,000  
Addition to (reduction in) reserve for unfunded
loan commitments27,000  14,000  (2,000) 41,000  (2,000) 
Total provision for credit losses120,000  112,000  8,000  232,000  12,000  
Loans and leases charged off:
Real estate mortgage(4,182) (500) (534) (4,682) (730) 
Real estate construction and land—  —  —  —  —  
Commercial(11,439) (19,232) (16,927) (30,671) (19,930) 
Consumer(165) (473) (176) (638) (442) 
Total loans and leases charged off(15,786) (20,205) (17,637) (35,991) (21,102) 
Recoveries on loans charged off:
Real estate mortgage127  124  240  251  383  
Real estate construction and land—  —  —  —  —  
Commercial2,392  955  6,080  3,347  9,186  
Consumer25  16  73  41  98  
Total recoveries on loans charged off2,544  1,095  6,393  3,639  9,667  
Net charge-offs(13,242) (19,110) (11,244) (32,352) (11,435) 
Cumulative effect of change in accounting
principle - CECL:
Allowance for loan and lease losses—  3,617  —  3,617  —  
Reserve for unfunded loan commitments—  3,710  —  3,710  —  
Total cumulative effect—  7,327  —  7,327  —  
Balance, end of period$381,621  $274,863  $169,898  $381,621  $169,898  
Annualized net charge-offs to average loans and leases0.27 %0.40 %0.25 %0.33 %0.13 %



77
 Three Months Ended
 March 31, December 31, March 31,
Allowance for Credit Losses Roll Forward 
2020 2019 2019
 (Dollars in thousands)
Balance, beginning of period$174,646
 $172,413
 $169,333
Provision for credit losses:     
Addition to allowance for loan and lease losses98,000
 1,000
 4,000
Addition to reserve for unfunded     
loan commitments14,000
 2,000
 —
Total provision for credit losses112,000
 3,000
 4,000
Loans and leases charged off:     
Real estate mortgage(500) (147) (196)
Real estate construction and land—
 —
 —
Commercial(19,232) (4,475) (3,003)
Consumer(473) (37) (266)
Total loans and leases charged off(20,205) (4,659) (3,465)
Recoveries on loans charged off:     
Real estate mortgage124
 505
 143
Real estate construction and land—
 —
 —
Commercial955
 3,313
 3,106
Consumer16
 74
 25
Total recoveries on loans charged off1,095
 3,892
 3,274
Net charge-offs(19,110) (767) (191)
Cumulative effect of change in accounting     
principle - CECL:     
Allowance for loan and lease losses3,617
 —
 —
Reserve for unfunded loan commitments3,710
 —
 —
Total cumulative effect7,327
 —
 —
Balance, end of period$274,863
 $174,646
 $173,142
      
Annualized net charge-offs to average loans and leases0.40% 0.02% —%






The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:
Three Months EndedSix Months Ended
June 30,March 31,June 30,June 30,
Allowance for Credit Losses Charge-offs
20202020201920202019
(In thousands)
Real estate mortgage:
Healthcare real estate$—  $—  $—  $—  $—  
Hotel—  —  —  —  —  
SBA program76  198  534  274  630  
Other commercial real estate4,106  127  —  4,233  9  
Total commercial real estate mortgage4,182  325  534  4,507  639  
Income producing and other residential—  —  —  —  —  
Other residential real estate—  175  —  175  91  
Total income producing and other residential
real estate mortgage—  175  —  175  91  
Total real estate mortgage4,182  500  534  4,682  730  
Real estate construction and land:
Commercial—  —  —  —  —  
Residential—  —  —  —  —  
Total real estate construction and land—  —  —  —  —  
Commercial:
Lender finance & timeshare—  —  —  —  —  
Equipment finance—  11,550  —  11,550  —  
Premium finance—  —  —  —  —  
Other asset-based—  —  11,800  —  11,800  
Total asset-based—  11,550  11,800  11,550  11,800  
Expansion stage21  270  1,463  291  1,667  
Early stage6,449  73  —  6,522  96  
Equity fund loans—  —  —  —  —  
Late stage—  —  —  —  —  
Total venture capital6,470  343  1,463  6,813  1,763  
Paycheck Protection Program—  —  —  —  —  
Security monitoring4,180  6,056  —  10,236  1,707  
Secured business loans—  —  100  —  109  
Other lending789  1,283  1,182  2,072  1,696  
Cash flow—  —  2,382  —  2,855  
Total other commercial4,969  7,339  3,664  12,308  6,367  
Total commercial11,439  19,232  16,927  30,671  19,930  
Consumer165  473  176  638  442  
Total charge-offs$15,786  $20,205  $17,637  $35,991  $21,102  


78
 Three Months Ended
 March 31, December 31, March 31,
Allowance for Credit Losses Charge-offs 
2020 2019 2019
 (In thousands)
Real estate mortgage:     
Healthcare real estate$—
 $—
 $—
Hotel—
 —
 —
SBA program198
 147
 96
Other commercial real estate127
 —
 9
Total commercial real estate mortgage325
 147
 105
Income producing and other residential—
 —
 —
Other residential real estate175
 —
 91
Total income producing and other residential     
real estate mortgage175
 —
 91
Total real estate mortgage500
 147
 196
Real estate construction and land:     
Commercial—
 —
 —
Residential—
 —
 —
Total real estate construction and land—
 —
 —
Commercial:     
Lender finance & timeshare—
 —
 —
Equipment finance11,550
 —
 —
Premium finance—
 31
 —
Other asset-based—
 150
 —
Total asset-based11,550
 181
 —
Expansion stage270
 2,622
 204
Early stage73
 617
 96
Equity fund loans—
 —
 —
Late stage—
 —
 —
Total venture capital343
 3,239
 300
Security monitoring6,056
 —
 1,707
Secured business loans—
 206
 9
Other lending1,283
 651
 514
Cash flow—
 198
 473
Total other commercial7,339
 1,055
 2,703
Total commercial19,232
 4,475
 3,003
Consumer473
 37
 266
Total charge-offs$20,205
 $4,659
 $3,465





The following table presents recoveries by portfolio segment, class, and subclass for the periods indicated:
Three Months EndedSix Months Ended
June 30,March 31,June 30,June 30,
Allowance for Credit Losses Recoveries20202020201920202019
(In thousands)
Real estate mortgage:
Healthcare real estate$—  $—  $—  $—  $—  
Hotel—  —  —  —  —  
SBA program15  107  88  122  121  
Other commercial real estate103  12  59  115  131  
Total commercial real estate mortgage118  119  147  237  252  
Income producing and other residential—  —  —  —  —  
Other residential real estate9  5  93  14  131  
Total income producing and other
residential real estate mortgage9  5  93  14  131  
Total real estate mortgage127  124  240  251  383  
Real estate construction and land:
Commercial—  —  —  —  —  
Residential—  —  —  —  —  
Total real estate construction and land—  —  —  —  —  
Commercial:
Lender finance & timeshare—  —  1  —  2  
Equipment finance8  230  —  238  11  
Premium finance—  —  —  —  —  
Other asset-based14  135  239  149  318  
Total asset-based22  365  240  387  331  
Expansion stage52  46  1,961  98  2,058  
Early stage62  139  2,862  201  5,017  
Equity fund loans—  —  —  —  —  
Late stage—  —  —  —  —  
Total venture capital114  185  4,823  299  7,075  
Paycheck Protection Program—  —  —  —  —  
Security monitoring—  —  —  —  —  
Secured business loans139  78  818  217  1,445  
Other lending117  265  190  382  315  
Cash flow2,000  62  9  2,062  20  
Total other commercial2,256  405  1,017  2,661  1,780  
Total commercial2,392  955  6,080  3,347  9,186  
Consumer25  16  73  41  98  
Total recoveries$2,544  $1,095  $6,393  $3,639  $9,667  
79
 Three Months Ended
 March 31, December 31, March 31,
Allowance for Credit Losses Recoveries2020 2019 2019
 (In thousands)
Real estate mortgage:     
Healthcare real estate$—
 $—
 $—
Hotel—
 —
 —
SBA program107
 184
 33
Other commercial real estate12
 19
 72
Total commercial real estate mortgage119
 203
 105
Income producing and other residential—
 276
 —
Other residential real estate5
 26
 38
Total income producing and other residential     
real estate mortgage5
 302
 38
Total real estate mortgage124
 505
 143
Real estate construction and land:     
Commercial—
 —
 —
Residential—
 —
 —
Total real estate construction and land—
 —
 —
Commercial:     
Lender finance & timeshare—
 1
 1
Equipment finance230
 —
 11
Premium finance—
 —
 —
Other asset-based135
 871
 79
Total asset-based365
 872
 91
Expansion stage46
 207
 97
Early stage139
 441
 2,155
Equity fund loans—
 —
 —
Late stage—
 —
 —
Total venture capital185
 648
 2,252
Security monitoring—
 —
 —
Secured business loans78
 701
 627
Other lending265
 148
 125
Cash flow62
 944
 11
Total other commercial405
 1,793
 763
Total commercial955
 3,313
 3,106
Consumer16
 74
 25
Total recoveries$1,095
 $3,892
 $3,274


Deposits
The following table presents the balance of each major category of deposits as of the dates indicated:
June 30, 2020March 31, 2020December 31, 2019
% of% of% of
Deposit CompositionBalanceTotalBalanceTotalBalanceTotal
(Dollars in thousands)
Noninterest-bearing demand$8,629,543  38 %$7,510,218  38 %$7,243,298  38 %
Interest checking4,858,168  21 %3,333,147  17 %3,753,978  19 %
Money market5,498,150  24 %4,712,118  24 %4,690,420  24 %
Savings549,953  2 %495,039  3 %499,591  3 %
Total core deposits19,535,814  85 %16,050,522  82 %16,187,287  84 %
Non-core non-maturity deposits1,217,266  5 %836,157  4 %496,407  3 %
Total non-maturity deposits20,753,080  90 %16,886,679  86 %16,683,694  87 %
Time deposits $250,000 and under1,522,928  7 %2,086,188  11 %2,065,733  11 %
Time deposits over $250,000652,571  3 %602,970  3 %483,609  2 %
Total time deposits2,175,499  10 %2,689,158  14 %2,549,342  13 %
Total deposits$22,928,579  100 %$19,575,837  100 %$19,233,036  100 %
 March 31, 2020 December 31, 2019
   % of   % of
Deposit CompositionBalance Total Balance Total
 (Dollars in thousands)
Noninterest-bearing demand$7,510,218
 38% $7,243,298
 38%
Interest checking3,333,147
 17% 3,753,978
 19%
Money market4,712,118
 24% 4,690,420
 24%
Savings495,039
 3% 499,591
 3%
Total core deposits16,050,522
 82% 16,187,287
 84%
Non-core non-maturity deposits836,157
 4% 496,407
 3%
Total non-maturity deposits16,886,679
 86% 16,683,694
 87%
Time deposits $250,000 and under2,086,188
 11% 2,065,733
 11%
Time deposits over $250,000602,970
 3% 483,609
 2%
Total time deposits2,689,158
 14% 2,549,342
 13%
Total deposits$19,575,837
 100% $19,233,036
 100%
During the firstsecond quarter of 2020, total deposits increased by $342.8 million$3.4 billion to $19.6$22.9 billion, due mainly to increases of $339.8$3.5 billion in core deposits and $381.1 million in non-core non-maturity deposits, and $139.8 million in time deposits,offset partially offset by a decrease of $136.8$513.7 million in time deposits. The $3.5 billion increase in core deposits.deposits in the second quarter was driven by PPP loan proceeds being deposited into customers' accounts and venture banking which saw deposits increase by $2.0 billion to a record $8.7 billion at June 30, 2020. At March 31,June 30, 2020, core deposits totaled $16.1$19.5 billion, or 82%85% of total deposits, including $7.5$8.6 billion of noninterest-bearing demand deposits, or 38% of total deposits.
The following table summarizes the maturities of time deposits as of the date indicated:
Time Deposits
Time Deposits$250,000Over
$250,000 Over  
March 31, 2020and Under $250,000 Total
June 30, 2020June 30, 2020and Under$250,000Total
(In thousands)(In thousands)
Maturities:     Maturities:
Due in three months or less$1,009,678
 $154,055
 $1,163,733
Due in three months or less$809,617  $258,067  $1,067,684  
Due in over three months through six months690,215
 158,287
 848,502
Due in over three months through six months248,787  108,896  357,683  
Due in over six months through twelve months315,027
 277,969
 592,996
Due in over six months through twelve months281,924  273,111  555,035  
Total due within twelve months2,014,920
 590,311
 2,605,231
Total due within twelve months1,340,328  640,074  1,980,402  
Due in over 12 months through 24 months56,637
 11,056
 67,693
Due in over 12 months through 24 months75,883  10,080  85,963  
Due in over 24 months14,631
 1,603
 16,234
Due in over 24 months106,717  2,417  109,134  
Total$2,086,188
 $602,970
 $2,689,158
Total$1,522,928  $652,571  $2,175,499  
Client Investment Funds
In addition to deposit products, we also offer select clients non-depository cash investment options through PWAM, our registered investment adviser subsidiary, and third-party money market sweep products. PWAM provides customized investment advisory and asset management solutions. At March 31,June 30, 2020, total off-balance sheet client investment funds were $1.4$1.4 billion, of which $1.1$1.1 billion was managed by PWAM. At December 31, 2019, total off-balance sheet client investment funds were $1.5 billion, of which $1.2 billion was managed by PWAM.

80

Credit Quality
Nonperforming Assets, Performing TDRs, and Classified Loans and Leases
The following table presents information on our nonperforming assets, performing TDRs, and classified loans and leases as of the dates indicated:
June 30,March 31,December 31,June 30,
2020202020192019
(Dollars in thousands)
Nonaccrual loans and leases held for investment$166,113  $95,602  $92,353  $81,265  
Foreclosed assets, net1,449  1,701  440  1,472  
Total nonperforming assets$167,562  $97,303  $92,793  $82,737  
Performing TDRs held for investment$15,037  $8,978  $12,257  $16,464  
Classified loans and leases held for investment$293,230  $147,705  $175,912  $190,979  
Nonaccrual loans and leases held for investment to
loans and leases held for investment0.84 %0.48 %0.49 %0.44 %
Nonperforming assets to loans and leases held for investment
and foreclosed assets, net0.85 %0.49 %0.49 %0.45 %
Classified loans and leases held for investment
to loans and leases held for investment1.49 %0.75 %0.93 %1.03 %
 March 31, December 31, March 31,
 2020 2019 2019
 (Dollars in thousands)
Nonaccrual loans and leases held for investment$95,602
 $92,353
 $88,527
Accruing loans contractually past due 90 days or more—
 —
 —
Foreclosed assets, net1,701
 440
 3,291
Total nonperforming assets$97,303
 $92,793
 $91,818
      
Performing TDRs held for investment$8,978
 $12,257
 $17,027
Classified loans and leases held for investment$147,705
 $175,912
 $190,305
Nonaccrual loans and leases held for investment to     
loans and leases held for investment0.48% 0.49% 0.48%
Nonperforming assets to loans and leases held for investment     
and foreclosed assets, net0.49% 0.49% 0.50%
Classified loans and leases held for investment     
to loans and leases held for investment0.75% 0.93% 1.04%
Nonaccrual Loans and Leases Held for Investment
The following table presents our nonaccrual loans and leases held for investment and accruing loans and leases past due between 30 and 89 days by loan portfolio segment and class as of the dates indicated:
June 30, 2020March 31, 2020Increase (Decrease)
AccruingAccruingAccruing
and 30-89and 30-89and 30-89
Days PastDays PastDays Past
NonaccrualDueNonaccrualDueNonaccrualDue
(Dollars in thousands)
Real estate mortgage:
Commercial$61,771  $—  $19,088  $1,807  $42,683  $(1,807) 
Income producing and other residential2,207  —  2,308  1,064  (101) (1,064) 
Total real estate mortgage63,978  —  21,396  2,871  42,582  (2,871) 
Real estate construction and land:
Commercial337  —  351  —  (14) —  
Residential—  1,021  —  241  —  780  
Total real estate construction and land337  1,021  351  241  (14) 780  
Commercial:
Asset-based19,013  3,697  17,104  —  1,909  3,697  
Venture capital8,270  1,924  18,612  183  (10,342) 1,741  
Other commercial73,995  191  37,726  4,393  36,269  (4,202) 
Total commercial101,278  5,812  73,442  4,576  27,836  1,236  
Consumer520  1,067  413  518  107  549  
Total held for investment$166,113  $7,900  $95,602  $8,206  $70,511  $(306) 
81
 Nonaccrual Loans and Leases Accruing and
 March 31, 2020 December 31, 2019 30 - 89 Days Past Due
   % of   % of March 31, December 31,
   Loan   Loan 2020 2019
 Balance Category Balance Category Balance Balance
 (Dollars in thousands)
Real estate mortgage:           
Commercial$19,088
 0.5% $18,346
 0.4% $1,807
 $1,735
Income producing and other residential2,308
 0.1% 2,478
 0.1% 1,064
 2,094
Total real estate mortgage21,396
 0.3% 20,824
 0.3% 2,871
 3,829
Real estate construction and land:           
Commercial351
 —% 364
 —% —
 —
Residential—
 —% —
 —% 241
 1,429
Total real estate construction and land351
 —% 364
 —% 241
 1,429
Commercial:           
Asset-based17,104
 0.4% 30,162
 0.8% —
 19
Venture capital18,612
 0.7% 12,916
 0.6% 183
 —
Other commercial37,726
 2.1% 27,594
 1.6% 4,393
 2,258
Total commercial73,442
 0.9% 70,672
 0.9% 4,576
 2,277
Consumer413
 0.1% 493
 0.1% 518
 1,006
Total held for investment$95,602
 0.5% $92,353
 0.5% $8,206
 $8,541



During the firstsecond quarter of 2020, nonaccrual loan and leases held for investment increased by $3.2$70.5 million to $95.6$166.1 million at March 31,June 30, 2020 due mainly to $38.8 million in nonaccrual additions, the largestaddition of which was an $18.0 milliontwo retail real estate loans and one security monitoring loan, offset partially by $19.8 million in charge-offs, the largest of which was an $11.5 million charge-off of an asset-based oil industry loan, and $15.8 million in principal payments and other reductions.loan. As of March 31,June 30, 2020, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $42.9$86.5 million and represented 45%52% of total nonaccrual loans and leases.
Foreclosed Assets
The following table presents foreclosed assets (primarily OREO) by property type as of the dates indicated:
June 30,March 31,December 31,June 30,
Property Type2020201920192019
(In thousands)
Commercial real estate$28  $33  $221  $253  
Single-family residence—  —  —  953  
Construction and land development219  219  219  219  
Total OREO, net247  252  440  1,425  
Other foreclosed assets1,202  1,449  —  47  
Total foreclosed assets$1,449  $1,701  $440  $1,472  
 March 31, December 31, March 31,
Property Type2020 2019 2019
 (In thousands)
Commercial real estate$33
 $221
 $2,041
Single-family residence—
 —
 953
Construction and land development219
 219
 219
Total OREO, net252
 440
 3,213
Other foreclosed assets1,449
 —
 78
Total foreclosed assets$1,701
 $440
 $3,291
During the firstsecond quarter of 2020, foreclosed assets increaseddecreased by $1.3$0.3 million to $1.7$1.4 million at March 31,June 30, 2020, due mainly to additions of $1.8 million, offset partially by sales of $0.4 million.$0.2 million.
Performing TDRs Held for Investment
The following table presents our performing TDRs held for investment by loan portfolio segment as of the dates indicated:
June 30, 2020March 31, 2020December 31, 2019
NumberNumberNumber
ofofof
Performing TDRs
BalanceLoansBalanceLoansBalanceLoans
(Dollars in thousands)
Real estate mortgage$6,900  21  $7,095  21  $10,165  22  
Real estate construction and land1,462  1  1,466  1  1,470  1  
Commercial6,612  12  350  10  550  12  
Consumer63  2  67  2  72  2  
Total performing TDRs held for investment$15,037  36  $8,978  34  $12,257  37  
 March 31, 2020 December 31, 2019
   Number   Number
   of   of
Performing TDRs 
Balance Loans Balance Loans
 (Dollars in thousands)
Real estate mortgage$7,095
 21
 $10,165
 22
Real estate construction and land1,466
 1
 1,470
 1
Commercial350
 10
 550
 12
Consumer67
 2
 72
 2
Total performing TDRs held for investment$8,978
 34
 $12,257
 37
During the firstsecond quarter of 2020, performing TDRs held for investment decreasedincreased by $3.3$6.1 million to $9.0$15.0 million at March 31,June 30, 2020 attributable to $3.3$6.1 million in payoffs and other reductions.of TDRs transferred from nonaccrual status. The majority of the number of performing TDRs were on accrual status prior to the restructurings and have remained on accrual status after the restructurings due to the borrowers making payments before and after the restructurings.

82

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:
March 31, December 31, March 31,June 30,March 31,December 31,June 30,
Loan and Lease Credit Risk Ratings
2020 2019 2019
Loan and Lease Credit Risk Ratings
2020202020192019
(Dollars in thousands)(Dollars in thousands)
Pass$18,698,942
 $18,348,004
 $17,824,612
Pass$18,635,004  $18,698,942  $18,348,004  $18,042,569  
Special mention898,658
 322,956
 292,780
Special mention766,397  898,658  322,956  239,304  
Classified147,705
 175,912
 190,305
Classified293,230  147,705  175,912  190,979  
Total loans and leases held for investment, net of deferred fees$19,745,305
 $18,846,872
 $18,307,697
Total loans and leases held for investment, net of deferred fees$19,694,631  $19,745,305  $18,846,872  $18,472,852  
Classified and special mention loans and leases fluctuate from period to period as a result of loan repayments and downgrades or upgrades from our ongoing active portfolio management.
During the firstsecond quarter of 2020, classified loans and leases decreasedincreased by $28.2$145.5 million to $147.7$293.2 million at March 31,June 30, 2020. This declineincrease was due mostly to charge-offs totaling approximately $18 million, which included an $11.5 million charge-off on a previously classified asset-based oil industry loan and charge-offs totaling $6.1 million on twothree security monitoring loans.loans totaling $119.2 million and two retail real estate loans totaling $42.0 million migrating out of special mention and into the classified category.
During the firstsecond quarter of 2020, special mention loans and leases increaseddecreased by $575.7$132.3 million to $898.7$766.4 million at March 31,June 30, 2020. This increasedecrease was due primarily to loan downgrades ininto the categories most acutely impacted by the COVID-19 pandemic, including loans to hotels ($293 million), aviation ($119 million), and retail ($47 million). There were also $75 million in downgrades in the venture capital expansion stage portfolio.classified category discussed above.
The following table presents the classified and special mention credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class and the related net changes as of the dates indicated:
June 30, 2020March 31, 2020Increase (Decrease)
SpecialSpecialSpecial
ClassifiedMentionClassifiedMentionClassifiedMention
(In thousands)
Real estate mortgage:
Commercial$71,446  $322,312  $33,908  $371,668  $37,538  $(49,356) 
Income producing and other residential6,941  6,150  7,083  2,491  (142) 3,659  
Total real estate mortgage78,387  328,462  40,991  374,159  37,396  (45,697) 
Real estate construction and land:
Commercial337  12,354  351  10,577  (14) 1,777  
Residential—  —  —  —  —  —  
Total real estate construction and land337  12,354  351  10,577  (14) 1,777  
Commercial:
Asset-based25,008  186,813  23,218  152,136  1,790  34,677  
Venture capital29,054  138,403  31,110  173,947  (2,056) (35,544) 
Other commercial159,814  82,313  51,498  186,368  108,316  (104,055) 
Total commercial213,876  407,529  105,826  512,451  108,050  (104,922) 
Consumer630  18,052  537  1,471  93  16,581  
Total$293,230  $766,397  $147,705  $898,658  $145,525  $(132,261) 
83
 March 31, 2020December 31, 2019 Increase (Decrease)
   Special   Special   Special
 Classified Mention Classified Mention Classified Mention
 (In thousands)
Real estate mortgage:           
Commercial$33,908
 $371,668
 $33,535
 $30,070
 $373
 $341,598
Income producing and other residential7,083
 2,491
 8,600
 1,711
 (1,517) 780
Total real estate mortgage40,991
 374,159
 42,135
 31,781
 (1,144) 342,378
Real estate construction and land:           
Commercial351
 10,577
 364
 —
 (13) 10,577
Residential—
 —
 —
 1,429
 —
 (1,429)
Total real estate construction and land351
 10,577
 364
 1,429
 (13) 9,148
Commercial:           
Asset-based23,218
 152,136
 32,223
 38,936
 (9,005) 113,200
Venture capital31,110
 173,947
 35,316
 74,813
 (4,206) 99,134
Other commercial51,498
 186,368
 65,261
 174,785
 (13,763) 11,583
Total commercial105,826
 512,451
 132,800
 288,534
 (26,974) 223,917
Consumer537
 1,471
 613
 1,212
 (76) 259
Total$147,705
 $898,658
 $175,912
 $322,956
 $(28,207) $575,702


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 March 31,June 30, 2020, banks considered to be “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5.00%, a minimum common equity Tier 1 risk-based capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, and a minimum total risk-based capital ratio of 10.00%.
Basel III currently requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. Effective January 1, 2019, the common equity tier 1, tier 1, and total capital ratio minimums inclusive of the capital conservation buffer were 7.00%, 8.50%, and 10.50%. At March 31,June 30, 2020, the Company and Bank were in compliance with the capital conservation buffer requirement. The Company and Bank elected the CECL 5-year transition guidance for calculating regulatory capital ratios and the March 31,June 30, 2020 ratios include this election. This guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through December 31, 2022. This cumulative amount will then be phased out of regulatory capital over the next three years. The add-back as of June 30, 2020 added approximately 20 basis points to the capital ratios below.
The following tables present a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:
   Minimum Required
   For Capital For Capital For Well
   Adequacy Conservation Capitalized
 Actual Purposes Buffer Classification
March 31, 2020       
PacWest Bancorp Consolidated       
Tier 1 capital (to average assets)8.63% 4.00% 4.00% N/A
CET1 capital (to risk weighted assets)9.22% 4.50% 7.00% N/A
Tier 1 capital (to risk weighted assets)9.22% 6.00% 8.50% N/A
Total capital (to risk weighted assets)12.07% 8.00% 10.50% N/A
        
Pacific Western Bank       
Tier 1 capital (to average assets)9.71% 4.00% 4.00% 5.00%
CET1 capital (to risk weighted assets)10.38% 4.50% 7.00% 6.50%
Tier 1 capital (to risk weighted assets)10.38% 6.00% 8.50% 8.00%
Total capital (to risk weighted assets)11.39% 8.00% 10.50% 10.00%


Minimum Required
For CapitalFor CapitalFor Well
AdequacyConservationCapitalized
ActualPurposesBufferClassification
June 30, 2020
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)8.93%4.00%4.00%N/A
CET1 capital (to risk weighted assets)9.97%4.50%7.00%N/A
Tier 1 capital (to risk weighted assets)9.97%6.00%8.50%N/A
Total capital (to risk weighted assets)13.18%8.00%10.50%N/A
Pacific Western Bank
Tier 1 capital (to average assets)10.03%4.00%4.00%5.00%
CET1 capital (to risk weighted assets)11.18%4.50%7.00%6.50%
Tier 1 capital (to risk weighted assets)11.18%6.00%8.50%8.00%
Total capital (to risk weighted assets)12.44%8.00%10.50%10.00%
84

Minimum Required
For CapitalFor CapitalFor Well
AdequacyConservationCapitalized
ActualPurposesBufferClassification
December 31, 2019
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)9.74%4.00%4.00%N/A
CET1 capital (to risk weighted assets)9.78%4.50%7.00%N/A
Tier 1 capital (to risk weighted assets)9.78%6.00%8.50%N/A
Total capital (to risk weighted assets)12.41%8.00%10.50%N/A
Pacific Western Bank
Tier 1 capital (to average assets)10.95%4.00%4.00%5.00%
CET1 capital (to risk weighted assets)11.00%4.50%7.00%6.50%
Tier 1 capital (to risk weighted assets)11.00%6.00%8.50%8.00%
Total capital (to risk weighted assets)11.74%8.00%10.50%10.00%
Subordinated Debentures
We issued or assumed through mergers subordinated debentures to trusts that were established by us or entities we acquired, which, in turn, issued trust preferred securities. The carrying value of subordinated debentures totaled $459.0$460.8 million at March 31,June 30, 2020. At March 31,June 30, 2020, none of the trust preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $445.2$446.9 million were included in Tier II capital.
Dividends on Common Stock and Interest on Subordinated Debentures
As a bank holding company, PacWest is required to notify and receive approval from the FRB prior to declaring and paying a dividend to stockholders during any period in which quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. Interest payments made by us on subordinated debentures are considered dividend payments under FRB regulations. We may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. Due to the impact of the goodwill impairment charge on net incomeearnings in the first quarter of 2020, we are now required to receive such approval from the FRB prior to declaring a dividend. We received the FRB approval for our second quarter dividend and are currently awaiting their approval for our third quarter dividend. We expect to make an announcement on our dividends in August and anticipate similar timing, such as the second month following quarter-end, in future periods as long as this approval is required.
Liquidity
Liquidity Management
The goals of our liquidity management are to ensure the ability of the Company to meet its financial commitments when contractually due and to respond to other demands for funds such as the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers who have unfunded commitments. We have an Executive Management Asset/Liability Management Committee ("Executive ALM Committee") that is comprised of members of senior management and is responsible for managing commitments to meet the needs of customers while achieving our financial objectives. Our Executive ALM Committee meets regularly to review funding capacities, current and forecasted loan demand, and investment opportunities.
We manage our liquidity by maintaining pools of liquid assets on-balance sheet, consisting of cash and due from banks, interest-earning deposits in other financial institutions, and unpledged securities available-for-sale, which we refer to as our primary liquidity. We also maintain available borrowing capacity under secured borrowing lines with the FHLB and the FRBSF, which we refer to as our secondary liquidity.

85

As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB of $6.0$4.20 billion at March 31,June 30, 2020, of which $4.1$4.19 billion was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $6.3$6.4 billion of certain qualifying loans and $2.0 billion of securities.loans. The Bank also had secured borrowing capacity with the FRBSF of $1.9$1.6 billion at March 31,June 30, 2020, all of which was available on that date. The FRBSF secured credit line was collateralized by liens on $2.6$2.2 billion of qualifying loans.
In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit for the purpose of borrowing overnight funds, subject to availability, of $141.0$112.0 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of March 31,June 30, 2020, there was a $141.0 millionno 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 March 31,June 30, 2020, the Bank had $250.0$50.0 million of borrowings outstanding through the AFX.
The following tables provide a summary of the Bank’s primary and secondary liquidity levels at the dates indicated:
March 31, December 31,June 30,March 31,December 31,
Primary Liquidity - On-Balance Sheet2020 2019Primary Liquidity - On-Balance Sheet202020202019
(Dollars in thousands)(Dollars in thousands)
Cash and due from banks$172,570
 $172,585
Cash and due from banks$174,059  $172,570  $172,585  
Interest-earning deposits in financial institutions439,690
 465,039
Interest-earning deposits in financial institutions1,747,077  439,690  465,039  
Securities available-for-sale3,757,663
 3,797,187
Securities available-for-sale3,851,141  3,757,663  3,797,187  
Less: pledged securities(2,522,520) (486,200)Less: pledged securities(642,029) (2,522,520) (486,200) 
Total primary liquidity$1,847,403
 $3,948,611
Total primary liquidity$5,130,248  $1,847,403  $3,948,611  
   
Ratio of primary liquidity to total deposits9.4% 20.5%Ratio of primary liquidity to total deposits22.4 %9.4 %20.5 %

Secondary Liquidity - Off-Balance SheetMarch 31, December 31,Secondary Liquidity - Off-Balance SheetJune 30,March 31,December 31,
Available Secured Borrowing Capacity2020 2019Available Secured Borrowing Capacity202020202019
(In thousands)(In thousands)
Secured borrowing capacity with the FHLB$5,975,220
 $4,229,788
Secured borrowing capacity with the FHLB$4,201,095  $5,975,220  $4,229,788  
Less: secured advances outstanding(1,904,000) (1,318,000)Less: secured advances outstanding(10,000) (1,904,000) (1,318,000) 
Available secured borrowing capacity with the FHLB4,071,220
 2,911,788
Available secured borrowing capacity with the FHLB4,191,095  4,071,220  2,911,788  
Available secured borrowing capacity with the FRBSF1,898,666
 1,988,028
Available secured borrowing capacity with the FRBSF1,552,204  1,898,666  1,988,028  
Total secondary liquidity$5,969,886
 $4,899,816
Total secondary liquidity$5,743,299  $5,969,886  $4,899,816  
During the three months ended March 31,June 30, 2020, the Company's primary liquidity decreasedincreased by $2.1$3.3 billion to $1.8$5.1 billion at March 31,June 30, 2020 due mainly to the pledge of $2.0a $1.9 billion of securities to the FHLB to increase immediately available borrowing capacity in response to the heightened market volatility from the COVID-19 pandemic. Also contributing to the decrease in primary liquidity were decreases of $39.5 million inpledged securities, available-for-sale and $25.3 milliona $1.3 billion increase in interest-earning deposits in financial institutions.institutions, and a $93.5 million increase in securities available-for-sale. During the firstsecond quarter of 2020, the Company's secondary liquidity increaseddecreased by $1.1 billion$226.6 million to $6.0$5.7 billion at March 31,June 30, 2020 due to a $1.2 billion increase in available secured borrowing capacity with the FHLB, offset partially by an $89.4$346.5 million decrease in available borrowing capacity on the secured credit line with the FRBSF. The $1.2 billionFRBSF, offset partially by a $119.9 million increase in available secured borrowing capacity with the FHLB. The increase in the available secured borrowing capacity with the FHLB resulted primarily from the $1.8a $1.9 billion of borrowing capacity related to the $2.0 billion of securities pledged, offset partially by a $586.0 million increasedecrease in the amount borrowed from the secured borrowing line with the FHLB, andoffset partially by a $76 million$1.8 billion decrease in the FHLB borrowing capacity relateddue to the decrease in pledged loans.


securities.
In addition to our primary liquidity, we generate liquidity from cash flows from our loan and securities portfolios and from our large base of core deposits, defined as noninterest-bearing demand, interest checking, savings, and non-brokered money market accounts. At March 31,June 30, 2020, core deposits totaled $16.1$19.5 billion and represented 82%85% of the Company's total deposits. Core deposits are normally less volatile, often with customer relationships tied to other products offered by the Bank promoting long-standing relationships and stable funding sources. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our core deposits.
86

Our deposit balances may decrease if interest rates increase significantly or if customers withdraw funds from the Bank. In order to address the Bank’s liquidity risk asfrom fluctuating deposit balances, may fluctuate, 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 March 31,June 30, 2020, brokered deposits totaled $2.1$1.9 billion, consisting primarily of $1.2 billion$718.3 million of brokered time deposits and $836.2 million$1.2 billion of non-maturity brokered accounts. At December 31, 2019, brokered deposits totaled $1.7 billion, consisting mainly of $1.2 billion of brokered time deposits and $496.4 million of non-maturity brokered accounts.
Our liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Liquidity Buffer Coverage Ratio (the ratio of cash and unpledged securities to the estimated 30 day cash outflow in a defined stress scenario), Liquidity Stress Test Survival Horizon (the number of days that the Bank’s liquidity buffer plus available secured borrowing capacity is sufficient to offset cumulative cash outflow in a defined stress scenario), Loan to Funding Ratio (measurement of gross loans net of fees divided by deposits plus borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. As of March 31,At June 30, 2020, the Bank’s reported On-Balance Sheet Liquidity Ratio fell below the established liquidity policy guideline because of the exclusion of the securities that had been pledged to the FHLB but not borrowed against; however, when the available borrowing capacity attributed to those pledged securities is added back to on-balance sheet liquidity, the On-Balance Sheet Liquidity requirement was met. The Bank was in compliance with all of our other established liquidity guidelines.
As a participant in the PPP loan program, we intend to utilize the Federal Reserve Paycheck Protection Program Liquidity Facility ("PPPLF") beginning in the second quarter of 2020 as another source of liquidity. The PPPLF extends term credit collateralized by the face value of pledged PPP loans at a borrowing rate of 35 basis points.
Holding Company Liquidity
PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and PacWest's ability to raise capital, issue subordinated debt, and secure outside borrowings. Our ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common stock, and other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company through intercompany loans, advances, or cash dividends. Our ability to pay dividends is also subject to the restrictions set forth in Delaware law, by the FRB, and by certain covenants contained in our subordinated debentures. Approval by the FRB is also required prior to our declaring and paying a cash dividend during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. We may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, now or in the future, from paying dividends to our stockholders. Due to the impact of the goodwill impairment charge on net income in the first quarter of 2020, we are now required to receive approval from the FRB, as described above, prior to declaring a dividend.


Dividends paid by California state-chartered banks are regulated by the FDIC and the DBO under their general supervisory authority as it relates to a bank’s capital requirements. The Bank may declare a dividend without the approval of the DBO and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for the three previous fiscal years less any dividends paid during such period. The Bank's net earnings during the three fiscal years of 2019, 2018, and 2017 exceeded dividends paid by the Bank during that same period by $34.8 million. During the three and six months ended March 31,June 30, 2020, PacWest received $157.0$35.0 million and $192.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $2.1 billion at March 31,June 30, 2020, for the foreseeable future any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.approval consistent with what has been required since 2008 when Bank first had an accumulated deficit triggered by goodwill impairment write-downs during the last financial crisis in 2008.
At March 31,June 30, 2020, PacWest had $115.1$113.4 million in cash and cash equivalents, of which substantially all is on deposit at the Bank. We believe this amount of cash, along with anticipated future dividends from the Bank, will be sufficient to fund the holding company’s cash flow needs over the next 12 months.
87

Stock Repurchase Programs
In February 2020, we repurchased 1,953,711 shares of common stock for a total amount of $70.0 million at an average price of $35.83 under the former Stock Repurchase Program. All shares repurchased under the former Stock Repurchase Program were retired upon settlement.
On February 12, 2020, PacWest's Board of Directors authorized a new Stock Repurchase Program to purchase shares of its common stock for an aggregate purchase price not to exceed $200 million until February 28, 2021, effective upon the maturity of the currentformer Stock Repurchase Program on February 29, 2020.
During the three months ended March 31, 2020, we repurchased 1,953,711 No shares of common stock for a total amount of $70.0 million at an average price of $35.83. All shareshave been repurchased under the new Stock Repurchase Program were retired upon settlement. At March 31, 2020,and the entire $200 million is remaining amount that could be used to repurchase shares under the Stock Repurchase Program was $200.0 million.at June 30, 2020. On April 21, 2020, stock repurchasesrepurchases under the currentnew Stock Repurchase Program were suspended indefinitely.
Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
Due AfterDue After
  Due After Due After    DueOne YearThree YearsDue
Due One Year Three Years Due  WithinThroughThroughAfter
Within Through Through After  
March 31, 2020One Year Three Years Five Years Five Years Total
June 30, 2020June 30, 2020One YearThree YearsFive YearsFive YearsTotal
(In thousands)(In thousands)
Time deposits$2,605,231
 $80,072
 $3,819
 $36
 $2,689,158
Time deposits$1,980,402  $131,560  $63,537  $—  $2,175,499  
Short-term borrowings1,795,000
 —
 —
 —
 1,795,000
Short-term borrowings60,000  —  —  —  60,000  
Long-term debt obligations (1)
—
 500,000
 —
 540,220
 1,040,220
Long-term debt obligations (1)
—  —  —  540,744  540,744  
Contractual interest (2)
21,581
 4,136
 139
 1
 25,857
Contractual interest (2)
7,823  2,022  3,165  —  13,010  
Operating lease obligations33,574
 54,895
 35,199
 31,211
 154,879
Operating lease obligations34,790  55,348  34,376  32,567  157,081  
Other contractual obligations91,583
 67,874
 12,122
 24,784
 196,363
Other contractual obligations80,249  82,045  9,059  25,861  197,214  
Total$4,546,969
 $706,977
 $51,279
 $596,252
 $5,901,477
Total$2,163,264  $270,975  $110,137  $599,172  $3,143,548  
_______________________________________ 
(1)Excludes purchase accounting fair value adjustments.
(2)
(1) Excludes purchase accounting fair value adjustments.
(2) Excludes interest on subordinated debentures as these instruments are variable rate.









Long-term debt obligations include subordinated debentures. Debt obligations are also discussed in Note 9. Borrowings and Subordinated Debentures, in the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in “Item 1. Condensed Consolidated Financial Statements (Unaudited).” Operating lease obligations are discussed in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. The other contractual obligations relate to our minimum liability associated with our data and item processing contract with a third-party provider, commitments to contribute capital to investments in low income housing project partnerships and private equity funds, and commitments under deferred compensation arrangements.
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan and lease payoffs, securities repayments and maturities, and continued deposit gathering activities. We also have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Off-Balance Sheet Arrangements
Our obligations also include off-balance sheet arrangements consisting of loan commitments, of which only a portion is expected to be funded, and standby letters of credit. At March 31,June 30, 2020, our loan commitments and standby letters of credit were $7.7 billion and $369.0$365.8 million. The loan commitments, a portion of which will eventually result in funded loans, increase our profitability through net interest income when drawn and unused commitment fees prior to being drawn. We manage our overall liquidity taking into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources, as described in "- Liquidity - Liquidity Management," have been and are expected to be sufficient to meet the cash requirements of our lending activities. For further information on loan commitments, see Note 11. Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements (Unaudited) contained in "Item 1. Condensed Consolidated Financial Statements (Unaudited)."
88

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This analysis should be read in conjunction with text under the caption "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2019, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.
Market Risk - Foreign Currency Exchange
We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps and foreign exchange forward contracts to hedge exposures to loans and debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar, and the derivatives that hedge those exposures. As of March 31,June 30, 2020, the U.S. Dollar notional amounts of loans receivable and subordinated debentures payable denominated in foreign currencies were $56.0$48.0 million and $28.4$29.0 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures were $60.9$51.8 million and $29.2$28.5 million. We recognized a foreign currency translation net loss of $230,000$614,000 for the threesix months ended March 31,June 30, 2020 and a foreign currency translation net gain of $36,000$57,000 for the threesix months ended March 31,June 30, 2019.


Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk
We measure our IRR position on a monthly basis using two methods: (i) NII simulation analysis; and (ii) MVE modeling. The Executive ALM Committee and the Board Asset/Liability Management Committee review the results of these analyses quarterly. If hypothetical changes to interest rates cause changes to our simulated net present value of equity and/or net interest income outside our pre‑establishedpre-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 March 31,June 30, 2020, the results of which are presented below. Our NII simulation and MVE model indicate that our balance sheet is asset-sensitive. An asset-sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated NII and MVE, while a liability-sensitive profile would suggest that these amounts would decrease.
Net Interest Income Simulation
We used a NII simulation model to measure the estimated changes in NII that would result over the next 12 months from immediate and sustained changes in interest rates as of March 31,June 30, 2020. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. We have assumed no growth or changes in the product mix of either our total interest‑sensitiveinterest-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 March 31,June 30, 2020. In order to arrive at the base case, we extend our balance sheet at March 31,June 30, 2020 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products’ pricing as of March 31,June 30, 2020. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.
89

The NII simulation model is dependent upon numerous assumptions. For example, the majority of our loans are variable rate, which are assumed to reprice in accordance with their contractual terms. Some loans and investment securities include the opportunity of prepayment (embedded options) and the simulation model uses prepayment assumptions to estimate these prepayments and reinvest these proceeds at current simulated yields. Our interest-bearing deposits reprice at our discretion and are assumed to reprice at a rate less than the change in market rates. The 12-month NII simulation model as of March 31,June 30, 2020 assumes interest-bearing deposits reprice at 22% to 35%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‑ratefixed-rate loans, variable‑ratevariable-rate loans that have reached their floors, and the volume of noninterest‑bearingnoninterest-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%, and cannot have negative interest rates.. Changes that could vary significantly from our assumptions include loan and deposit growth or contraction, loan and deposit pricing, changes in the mix of earning assets or funding sources, and future asset/liability management decisions, all of which may have significant effects on our net interest income.


The following table presents forecasted net interest income and net interest margin for the next 12 months using the static balance sheet and forward yield curve as the base scenario, with immediate and sustained parallel upward movements in interest rates of 100, 200, and 300 basis points and sustained parallel downward movements in interest rates of 25, 50, and 100 basis points as of the date indicated:
ForecastedForecastedForecasted
Net InterestPercentageNet InterestNet Interest
IncomeChangeMarginMargin Change
June 30, 2020(Tax Equivalent)From Base(Tax Equivalent)From Base
(Dollars in millions)
Interest Rate Scenario:
Up 300 basis points$1,168.5  16.3%4.74%0.66%
Up 200 basis points$1,092.7  8.7%4.44%0.36%
Up 100 basis points$1,034.0  2.9%4.20%0.12%
BASE CASE$1,005.1  —4.08%—
Down 25 basis points$1,005.5  —%4.08%—%
Down 50 basis points$1,003.0  (0.2)%4.07%(0.01)%
Down 100 basis points$1,002.8  (0.2)%4.07%(0.01)%
 Forecasted   Forecasted Forecasted
 Net Interest Percentage Net Interest Net Interest
 Income Change Margin Margin Change
March 31, 2020(Tax Equivalent) From Base (Tax Equivalent) From Base
 (Dollars in millions)      
Interest Rate Scenario:       
Up 300 basis points$1,158.0
 14.8% 4.82% 0.62%
Up 200 basis points$1,087.5
 7.8% 4.53% 0.33%
Up 100 basis points$1,026.7
 1.8% 4.27% 0.07%
BASE CASE$1,008.7
 — 4.20% —
Down 25 basis points$1,004.9
 (0.4)% 4.18% (0.02)%
Down 50 basis points$1,000.4
 (0.8)% 4.16% (0.04)%
Down 100 basis points$995.6
 (1.3)% 4.14% (0.06)%

During the firstsecond quarter of 2020, total base case year 1 tax equivalent NII increaseddecreased by $46.9$3.6 million to $1.0 billion at March 31,June 30, 2020, and the base case tax equivalent NIM decreased to 4.08% from $961.8 million at December 31, 2019. This increase4.20%. The decrease in NII was attributable primarily to alower loan income due to unfavorable rate and volume changes, offset partially by lower cost of funds and adue to the shift in depositthe funding mix from interest-bearingborrowings to noninterest-bearing deposit accounts.core deposits. The decrease in NIM was due almost entirely to the quarter-over-quarter shift in the earning assets mix in the static balance sheet, as the balance of low yielding interest-earning deposits in financial institutions increased by $1.3 billion from the large increase in core deposits during the second quarter. A portion of the core deposits increase relates to activity of a large Venture Banking customer and to deposits from PPP loan originations which are not expected to remain over the long term.
In addition to parallel interest rate shock scenarios, we also model various alternative rate vectors that are viewed as more likely to occur in a typical monetary policy tightening cycle.vectors. The most favorable alternate rate vector that we model is the “Bear Flattener” scenario, when short-term rates increase faster than long-term rates, and the least favorable alternate rate vector that we model is the “Ramped Sharp Decrease,” a 200 basis point decrease over a 24 month period with semiannual rate adjustments.rates. In the “Bear Flattener” scenario, Year 1 tax equivalent NII increases by 5.7%,6.6%. Because of the low level of market interest rates and in the “Ramped Sharp Decrease” scenario, Year 1 tax equivalent NII decreases by 0.5%.assumption that market rates contain a 0% floor, the ad hoc scenarios that assume decreasing interest rates do not differ materially from the base case scenario.
90

At March 31,June 30, 2020, we had $19.8 billion of total loans that included $12.6$11.0 billion with variable interest rate terms (excluding hybrid loans discussed below). Of the variable interest rate loans, $8.9$9.0 billion, or 71%81%, contained interest rate floor provisions, which included $7.6$8.8 billion of loans with "in-the-money" floors, meaning the loan coupon will not adjust down if there are future decreases to the index interest rate. The cumulative amountfollowing table summarizes the estimated balance of loans with "in-the-money" floors for assumed additional market rate decreases are as follows:
the indicated increases in interest rates:
June 30, 2020
March 31, 2020
Total Amount of
Loans With
Basis Points of"In-the-Money"
Rate DecreasesIncreasesLoan Floors
(Dollars in millions)
50 bps$8,4286,715
100 bps$8,8554,872
150 bps$8,8942,912
200 bps$8,9131,028
250 bps$8,948154
At March 31,June 30, 2020, we also had $3.7 billion of variable-rate hybrid loans that do not immediately reprice because the loans contain an initial fixed-rate period before they become variable. The cumulative amounts of hybrid loans that would switch from being fixed-rate to variable-rate because the initial fixed-rate term would expire were approximately $141$299 million, $513$749 million, and $1.1$1.3 billion in the next one, two, and three years.


LIBOR is expected to be phased out after 2021, as such the Company is assessing the impacts of this transition and exploring alternatives to use in place of LIBOR.  The business processes impacted relate primarily to our variable-rate loans and our subordinated debentures, both of which are indexed to LIBOR. For further information, see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2019.
Market Value of Equity
We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities, and off‑balanceoff-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‑sensitiveinterest-sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest rates of 100, 200, and 300 basis points and sustained decrease in market interest rates of 50 and 100 basis points. This analysis assigns significant value to our noninterest-bearing deposit balances. The projections include various assumptions regarding cash flows and interest rates and are by their nature forward‑lookingforward-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‑balanceoff-balance sheet items existing at March 31,June 30, 2020.








91

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
        Ratio ofProjectedDollarPercentagePercentageProjected
Projected Dollar Percentage Percentage ProjectedMarket ValueChangeChangeof TotalMarket Value
Market Value Change Change of Total Market Value
March 31, 2020of Equity From Base From Base Assets to Book Value
June 30, 2020June 30, 2020of EquityFrom BaseFrom BaseAssetsto Book Value
(Dollars in millions)      (Dollars in millions)
Interest Rate Scenario:         Interest Rate Scenario:
Up 300 basis points$5,523.9
 $814.9
 17.3 % 21.1% 162.9%Up 300 basis points$6,031.4  $881.6  17.1 %22.0 %174.7 %
Up 200 basis points$5,329.7
 $620.7
 13.2 % 20.4% 157.2%Up 200 basis points$5,760.9  $611.1  11.9 %21.1 %166.8 %
Up 100 basis points$5,061.5
 $352.6
 7.5 % 19.4% 149.3%Up 100 basis points$5,479.6  $329.8  6.4 %20.0 %158.7 %
BASE CASE$4,709.0
 $—
 — % 18.0% 138.9%BASE CASE$5,149.8  $—  — %18.8 %149.1 %
Down 50 basis pointsDown 50 basis points$4,881.0  $(268.8) (5.2)%17.8 %141.4 %
Down 100 basis points$4,143.9
 $(565.1) (12.0)% 15.9% 122.2%Down 100 basis points$4,567.2  $(582.6) (11.3)%16.7 %132.3 %
Down 200 basis points$3,572.7
 $(1,136.2) (24.1)% 13.7% 105.4%
Down 300 basis points$3,216.1
 $(1,492.9) (31.7)% 12.3% 94.9%
During the firstsecond quarter of 2020, total base case projected market value of equity decreasedincreased by $2.7 billion$441 million to $4.7$5.1 billion. The overall MVE sensitivity reflects a more asset-sensitive profile. TheThis increase in asset sensitivity of MVE is due to the $2.7 billion lower relevant base used for the sensitivity calculation, as well as the shift in the mix of deposit accounts from interest-bearing to noninterest-bearing accounts, offset partially by the impact of the increased volume of loans with in-the-money floors. The $2.7 billion decrease in base case projected MVE was due primarily to: (1) a $1.56 billion decrease$662 million increase in the mark-to-market adjustment for loans and leases due to the impact of lower credit spreads used for calculating the valuation; and (2) a $63 million increase in the book value of stockholders' equity due mainly to a $1.47 billion goodwill impairment charge, offset partially by the $37$33 million of after-taxnet earnings from operations before the goodwill impairment, $71 million of cash dividends paid, and $70 million of stock repurchases under the Stock Repurchase Program, offset partially by a $12$54 million increase in accumulated other comprehensive income; (2) a $798income, offset partially by $30 million decrease in the mark-to-market adjustment for loans and leases due to the impact of wider credit spreads used for calculating the fair value of the loan portfolio; andcash dividends paid; offset partially by (3) a $288 million increase in the mark-to-market adjustment for total deposits due tofrom the lower discount ratemarket interest rates used for the deposit valuation, reflecting the lower prevailing market interest rates that existed at March 31, 2020 compared to the previous quarter ended December 31, 2019.
valuation.

92

ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.
There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 11. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements (Unaudited) is incorporated herein by reference.
In addition, in the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon information currently available to us, any resulting liability, in addition to amounts already accrued, and taking into consideration insurance which may be applicable, would not have a material adverse effect on the Company’s financial statements or operations.
ITEM 1A. RISK FACTORS
For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2019. See also "Forward-Looking Information" disclosed in Part I, Item 2 of this quarterly report on Form 10-Q and the updated Risk Factors below.

Since March 13, 2020, the United States has been operating under a state of emergency declared by President Trump in response to the spread of COVID-19. COVID-19 and related governmental responses have affected economic and financial market conditions as well as the operations, results, and prospects of companies across many industries. In connection with the impact of COVID-19 on the economy and the Company, the Company has supplemented the risk factors previously disclosed in the Company's most recent Annual Report on Form 10-K as follows:
General Economic and Market Conditions Risk
The recent outbreak of the novel coronavirus (COVID-19) pandemic and resulting economic conditions have adversely impacted our business operations, asset valuations and financial results, and the ultimate impact on our business and financial results is uncertain.
The novel coronavirus (COVID-19) pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business operations, asset valuations and financial results. The pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels at an unprecedented pace. In addition, the pandemic has resulted in temporary closures of many businesses and the practice of social distancing and stay-at-home requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans. The escalation of the pandemic may also negatively impact economic conditions for a period of time, resulting in declines in loan demand, liquidity of loan guarantors, loan collateral values (particularly in real estate), and deposit outflows.

93

Furthermore, the pandemic has influenced and could further influence the recognition of credit losses in our loan portfolios and has increased and could further increase our allowance for credit losses, particularly as businesses remain closed and as more customers may draw on their lines of credit or seek additional loans to help finance their businesses.
Similarly, because of changing economic and market conditions affecting issuers, the securities we hold may lose value. The volatility in the equity markets has already impacted our asset valuations, as evidenced by our goodwill impairment charge in the first quarter, and asset valuations of goodwill or other assets could be further impacted depending on future developments caused by COVID-19.
Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. To protect the health and safety of our employees and communities, we have temporarily closed certain of our branches and offices and many of our employees are working remotely. We may experience operational difficulties, including increased cybersecurity risk, due to the remote working environments of our employees. We may also experience additional operational risk due to difficulties experienced by our third-party service providers.
Because there have been no comparable recent global pandemics that resulted in a similar impact on the U.S. economy, the full extent to which the COVID-19 pandemic will impact our business operations, asset valuations and financial results will depend on future developments which are highly uncertain and cannot be predicted. These include the scope and duration of the pandemic, the continued effectiveness of our business continuity plan, the direct and indirect impact of the pandemic on our employees, customers and third-party service providers, as well as other market participants, and the effectiveness of actions taken by governmental authorities and other third parties in response to the pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the pandemic continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations, cash flows, and ability to pay dividends, as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in our 2019 Form 10-K will be heightened.
Regulatory, Compliance and Legal Risk
Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.
The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

94

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents stock purchases made during the firstsecond quarter of 2020:
Total Number ofMaximum Dollar
Shares PurchasedValue of Shares
Totalas Part ofThat May Yet
Number ofAveragePubliclyBe Purchased
SharesPrice PaidAnnouncedUnder the
Purchase Dates
Purchased (1)
Per Share
Program (2)
Program (2)
(In thousands)
April 1 – April 30, 2020—  $—  —  $200,000  
May 1 – May 31, 202089,369  $17.12  —  $200,000  
June 1 – June 30, 20203,555  $19.71  —  $200,000  
Total92,924  $17.22  —  
     Total Number of Maximum Dollar
     Shares Purchased Value of Shares
 Total   as Part of That May Yet
 Number of Average Publicly Be Purchased
 Shares Price Paid Announced Under the
Purchase Dates
Purchased (1)
 Per Share 
Program (2)
 
Program (2)
       (In thousands)
January 1 – January 31, 2020—
 $—
 —
 $124,707
February 1 – February 29, 20202,059,732
 $35.66
 1,953,711
 $54,708
March 1 – March 31, 2020—
 $—
 —
 $200,000
Total2,059,732
 $—
 1,953,711
  
__________________________
__________________________
(1)
(1) Includes shares repurchased pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of Company stock awards, and shares repurchased pursuant to the Company's publicly announced Stock Repurchase Program, described in (2) below.
(2) below.
(2)On February 12, 2020, PacWest's Board of Directors authorized a new Stock Repurchase Program to purchase shares of its common stock for an aggregate purchase price not to exceed $200 million until February 28, 2021. On April 21, 2020, stock repurchases under the current Stock Repurchase Program were suspended indefinitely. All shares repurchased under the various Stock Repurchase Programs were retired upon settlement.

95

ITEM 6. INDEX TO EXHIBITS
Exhibit NumberDescription
2.43.1
3.1
Certificate of Incorporation, as amended, of PacWest Bancorp, a Delaware corporation, dated April 22, 2008 (Exhibit 3.1 to Form 8-K filed on May 14, 2008 and incorporated herein by this reference).
3.2
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
31.1
31.2
32.1
32.2


96

Exhibit NumberDescription
101
Interactive data files pursuant to Rule 405 of Regulation S‑T:S-T: (i) the Condensed Consolidated Balance Sheets as of March 31,June 30, 2020 and December 31, 2019, (ii) the Condensed Consolidated Statements of Earnings (Loss) for the three months ended June 30, 2020, March 31, 2020 December 31,and June 30, 2019 and March 31,six months ended June 30, 2020 and 2019, (iii)  the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2020, March 31, 2020. December 31,2020 and June 30, 2019 and March 31,six months ended June 30, 2020 and 2019, (iv)  the Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended June 30, 2020, March 31, 2020, December 31,and June 30, 2019 and March 31,the six months ended June 30, 2020 and 2019, (v)  the Condensed Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2020 December 31,and 2019 and March 31, 2019, and (vi)  the Notes to Condensed Consolidated Financial Statements. (Pursuant to Rule 406T of Regulation S‑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).
104The cover page of PacWest Bancorp’s Quarterly Report on Form 10-Q for the quarterly period ended March 31,June 30, 2020, formatted in Inline XBRL (contained in Exhibit 101).


97

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:PACWEST BANCORP
Date:May 8,August 7, 2020/s/ Bart R. Olson
Bart R. Olson
Executive Vice President and Chief Accounting Officer

9398