Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL 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 fiscal year ended December 31, 2019
Commission File No. 001-36408
PACWEST BANCORP
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
33-0885320
(I.R.S. Employer Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of Principal Executive Offices, Including Zip Code)
(310) 887-8500
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
PACW
The Nasdaq Stock Market, LLC
(Title of Each Class)
(Trading Symbol)
(Name of Exchange on Which Registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
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. þ Yes o 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). þ Yes o 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):
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Large accelerated filer
Smaller reporting company
☐ Accelerated filer
☐ Emerging growth company
☐ Non-accelerated filer
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 Act). ☐ Yes þ No
As of June 30, 2019, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the average high and low
sales prices on The Nasdaq Global Select Market as of the close of business on June 28, 2019, was approximately $4.5 billion. Registrant does not have any nonvoting common
equities.
As of February 14, 2020, there were 116,859,317 shares of registrant's common stock outstanding, excluding 1,574,793 shares of unvested restricted stock.
The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive proxy statement for its 2020
Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and such information is incorporated herein by
this reference.
DOCUMENTS INCORPORATED BY REFERENCE
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PACWEST BANCORP
2019 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Forward-Looking Information
Available Information
Glossary of Acronyms, Abbreviations, and Terms
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
ITEM 15.
ITEM 16.
SIGNATURES
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
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Forward-Looking Information
PART I
This Form 10-K 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-K
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. You should not place undue
reliance on these statements as they involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results,
performance, or achievements to differ materially from those expressed in them. Actual results could differ materially from those anticipated in such forward-
looking statements as a result of risks and uncertainties more fully described under "Item 1A. Risk Factors." Factors that might cause such differences include,
but are not limited to:
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our ability to compete effectively against other financial service providers in our markets including attracting and retaining qualified employees;
the effect of the current interest rate environment or impact of changes in interest rates or levels of market activity, especially on the fair value of
our loan and investment portfolios;
economic deterioration or a recession that may affect the ability of borrowers to make contractual payments on loans and may affect 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 new CECL accounting standard on our provision for credit losses and allowance
for loan and lease losses;
our ability to attract and retain 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, and/or changes in our asset or liability mix;
failure to adequately manage the transition from LIBOR as a reference rate;
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;
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;
legislative or regulatory requirements or changes, including an increase to capital requirements, and increased political and regulatory
uncertainty;
Severe weather, natural disasters, acts of war or terrorism, public health issues, or other adverse external events could harm our business;
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;
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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 failure, interruption or breach of security of our systems or the systems of our contracted vendors;
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;
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-K and other documents filed or furnished by PacWest with the SEC.
All forward-looking statements included in this Form 10-K 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.
Available Information
We maintain a website for the Bank at http:www.pacwest.com. Via the “Investor Relations” link at the Bank’s website, our Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or
furnished to, the SEC. The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. You may obtain copies of the Company’s filings on the SEC website. These documents may
also be obtained in print upon request by our stockholders to our Investor Relations Department.
We have adopted a written Code of Business Conduct and Ethics that applies to all directors, officers and employees, including our principal executive
officer and senior financial officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder and it is
available via the "Investor Relations" link at the Bank's website in the section titled “Corporate Governance.” Any changes in, or waivers from, the provisions
of this code of ethics that the SEC requires us to disclose are posted on our website in such section. In the Corporate Governance section of our website, we
have also posted the charters for our Audit Committee, Compensation, Nominating and Governance Committee, Asset/Liability Management Committee, and
Risk Committee, as well as our Corporate Governance Guidelines. In addition, information concerning purchases and sales of our equity securities by our
executive officers and directors is posted on our website.
Documents available on the website are available in print to any stockholder who requests them in writing to our Investor Relations Department at
PacWest Bancorp, 9701 Wilshire Blvd., Suite 700, Beverly Hills, CA 90212, Attention: Investor Relations, or via e-mail to
investor-relations@pacwestbancorp.com.
All website addresses given in this document are for information only and are not intended to be an active link or to incorporate any website information
into this document.
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Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-K, including "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data."
AFX
ALLL
ALM
ASC
ASU
ATM
Basel III
BHCA
BOLI
Brexit
CDI
CECL
CET1
CFPB
American Financial Exchange
Allowance for Loan and Lease Losses
Asset Liability Management
Accounting Standards Codification
Accounting Standards Update
Automated Teller Machine
A comprehensive capital framework and rules for U.S. banking
organizations approved by the FRB and the FDIC in 2013
Bank Holding Company Act of 1956, as amended
Bank Owned Life Insurance
Britain Exit (from the European Union)
Core Deposit Intangible Assets
Current Expected Credit Loss
Common Equity Tier 1
Consumer Financial Protection Bureau
CMOs
Collateralized Mortgage Obligations
CPI
CRA
CRI
CUB
Consumer Price Index
Community Reinvestment Act
Customer Relationship Intangible Assets
CU Bancorp (a company acquired on October 20, 2017)
CU Bank
California United Bank (a wholly-owned subsidiary of CUB)
DBO
DGCL
California Department of Business Oversight
Delaware General Corporation Law
Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act
DTAs
Deferred Tax Assets
Noninterest expense (less intangible asset amortization, net
foreclosed assets income/expense, 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)
Efficiency Ratio
FASB
FDIA
FDIC
Financial Accounting Standards Board
Federal Deposit Insurance Act
Federal Deposit Insurance Corporation
FDICIA
Federal Deposit Insurance Corporation Improvement Act
FHLB
FRB
FRBSF
Federal Home Loan Bank of San Francisco
Board of Governors of the Federal Reserve System
Federal Reserve Bank of San Francisco
FSOC
IPO
IRR
LIBOR
LIHTC
MBS
MVE
NII
NIM
NSF
Non-PCI
OCC
OFAC
OREO
PATRIOT Act
PCI
PD/LGD
PRSUs
PWAM
ROU
SBA
SEC
SNCs
SOFR
Tax Equivalent
Net Interest
Income
Tax Equivalent
NIM
TCJA
TDRs
TRSAs
TruPS
U.S. GAAP
VIE
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Financial Stability Oversight Council
Initial Public Offering
Interest Rate Risk
London Inter-bank Offering Rate
Low Income Housing Tax Credit
Mortgage-Backed Securities
Market Value of Equity
Net Interest Income
Net Interest Margin
Non-Sufficient Funds
Non-Purchased Credit Impaired
Office of the Comptroller of the Currency
U.S Treasury Department of Office of Foreign Assets Control
Other Real Estate Owned
Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001
Purchased Credit Impaired
Probability of Default/Loss Given Default
Performance-Based Restricted Stock Units
Pacific Western Asset Management Inc.
Right-of-use
Small Business Administration
Securities and Exchange Commission
Shared National Credits
Secured Overnight Financing Rate
Net interest income reflecting adjustments related to tax-exempt
interest on certain loans and investment securities
NIM reflecting adjustments related to tax-exempt interest on certain
loans and investment securities
Tax Cuts and Jobs Act
Troubled Debt Restructurings
Time-Based Restricted Stock Awards
Trust Preferred Securities
U.S. Generally Accepted Accounting Principles
Variable Interest Entity
ITEM 1. BUSINESS
General
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 through its Community Banking, National Lending
and Venture Banking groups. Community Banking provides real estate loans, commercial loans, 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. National Lending
provides asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis.
Venture Banking offers loans and a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture
capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and
asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and a SEC-registered
investment adviser.
PacWest Bancorp was established in October 1999 and has achieved strong market positions by developing and maintaining extensive local relationships
in the communities we serve. By leveraging our business model, service-driven focus, and presence in attractive markets, as well as maintaining a highly
efficient operating model and robust approach to risk management, we have achieved significant and profitable growth, both organically and through
disciplined acquisitions. We have successfully completed 29 acquisitions since 2000 which have contributed to our growth and expanded our market presence
throughout the United States.
As of December 31, 2019, the Company had total assets of $26.8 billion, total loans and leases, net of deferred fees, of $18.8 billion, total deposits of $19.2
billion, and stockholders’ equity of $5.0 billion.
Our Business Strategy
We believe that stable, long-term growth and profitability are the result of building strong customer relationships while maintaining disciplined credit
underwriting standards. We continue to focus on originating high-quality loans and leases and growing our low-cost deposit base through our relationship-
based business lending. These principles enable us to maintain operational efficiency, increase profitability, increase core deposits, and grow loans and leases
in a sound manner.
Our loan and lease portfolio consists primarily of real estate mortgage loans, real estate construction and land loans, and commercial loans and leases.
We pursue attractive growth opportunities to expand and enter new markets aligned with our business model and strategic plans. Additionally, we focus on
cultivating strong relationships with private equity and venture capital firms nationwide, many of which are also our clients and/or may invest in our clients.
Our reputation, expertise, and relationship-based business banking model enable us to deepen our relationships with our customers. We leverage our
relationships with existing customers by providing access to an array of our products and services, including attracting deposits from and offering cash
management solutions to our loan and lease customers. We competitively price our deposit products to meet the needs of our customers with a view to
maximizing our share of each customer's financial services business and prudently managing our cost of funds.
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Focusing on operational efficiency is critical to our profitability and future growth. We carefully manage our cost structure and continuously refine and
implement internal processes and systems to create further efficiencies to enhance our earnings.
Our management team has extensive expertise and a successful track record in evaluating, executing and integrating attractive, franchise-enhancing
acquisitions. We have successfully completed 29 acquisitions since 2000, including the CUB acquisition on October 20, 2017. We will continue to consider
acquisitions that are consistent with our business strategy and financial model as opportunities arise.
Depository Products and Services
Deposits are our primary source of funds to support our interest-earning assets and provide a source of stable low-cost funds and deposit-related fee
income. We offer traditional deposit products to businesses and other customers with a variety of rates and terms, including demand, money market, and time
deposits. We also provide international banking services, multi-state deposit services, and asset management services. The Bank’s deposits are insured by the
FDIC up to statutory limits.
Our branch network allows us to gather deposits, expand our brand presence and service our customers’ banking and cash management needs. In
addition, as banking customers now expect on-line and mobile banking tools for conducting basic banking functions, we are able to serve our customers
through a wide range of non-branch channels, including on-line, mobile, remote deposit, and telephone banking platforms, all of which allows us to expand our
service area to attract new depositors without a commensurate increase in branch locations or branch traffic.
At December 31, 2019, we had ATMs at 59 of our branches located in California and one ATM at our branch in Denver, Colorado. We are a member of the
MoneyPass network that enables our customers to withdraw cash surcharge-free and service charge-free at over 25,000 ATM locations across the country.
We provide access to customer accounts via a 24 hour seven-day-a-week, toll-free, automated telephone customer service and secure on-line banking services.
At December 31, 2019, our total deposits consisted of $16.2 billion in core deposits, $2.5 billion in time deposits, and $496.4 million in non-core non-
maturity deposits. Core deposits represented 84% of total deposits at December 31, 2019, and were comprised of $7.2 billion in noninterest-bearing deposits,
$4.7 billion in money market accounts, $3.8 billion in interest-bearing checking accounts, and $499.6 million in savings accounts. Our deposit base is also
diversified by client type. As of December 31, 2019, no individual depositor represented more than 1.2% of our total deposits, and our top ten depositors
represented 7.5% of our total deposits.
We face strong competition in gathering deposits from nationwide, regional, and community banks, credit unions, money market funds, brokerage firms
and other non-bank financial services companies that target the same customers as we do. We actively compete for deposits and emphasize solicitation of
noninterest-bearing deposits. We seek to provide a higher level of personal service than our larger competitors, many of whom have more assets, capital and
resources than we do and who may be able to conduct more intensive and broader based promotional efforts to reach potential customers. Our cost of funds
fluctuates with market interest rates and may be affected by higher rates being offered by other financial institutions. In certain interest rate environments,
additional significant competition for deposits may be expected to arise from corporate and government debt securities and money market mutual funds.
Competition for deposits is also affected by the ease with which customers can transfer deposits from one institution to another.
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
December 31, 2019, total off-balance sheet client investment funds were $1.5 billion, of which $1.2 billion was managed by PWAM. At December 31, 2018, total
off-balance sheet client investment funds were $1.9 billion, of which $1.5 billion was managed by PWAM.
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Lending Activities
At December 31, 2019 and 2018, total loans and leases held for investment, net of deferred fees, were $18.8 billion and $18.0 billion. Our lending activities
include real estate mortgage loans, real estate construction and land loans, commercial loans and leases, and a small amount of consumer loans. Our commercial
real estate loans and real estate construction loans are secured by a variety of property types. Our commercial loans and leases portfolio is diverse and
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, secured business loans originated through our Community Banking group, and loans to security
alarm monitoring companies. In October 2019, we decided to cease originating new security monitoring loans and healthcare real estate loans in our National
Lending group. New technology is disrupting the security alarm business, causing increased customer acquisition costs and customer attrition, and thereby
adversely impacting business models and valuations. We discontinued originations of healthcare real estate loans in our National Lending group upon the
departure of the manager of this lending team. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent
Events - Ceased Originating Certain Loans” for additional information regarding ceased originations of our security monitoring and healthcare real estate
loans.
We price loans to preserve our interest spread and maintain our net interest margin. Loan interest rates may be floating, fixed, or a combination thereof
(“hybrid”) throughout the loan term. The rates on hybrid loans typically are fixed until a “reset” date when the rates then become floating. While we do not
actively solicit direct consumer loans, we hold consumer loans, consisting primarily of purchased private student loans originated and serviced by third-party
lenders. We also have an additional exposure to consumer loans as many of our lender finance & timeshare loans are secured by the receivables owed to our
borrowers by individual consumers.
Some of our loans are participations in larger loans, and these participations may be considered a SNC. A SNC is any loan or commitment to extend credit
aggregating $100 million or more at origination ($20 million or more prior to January 1, 2018), committed under a formal lending arrangement, and shared by three
or more unaffiliated supervised institutions. The SNC program is governed by an inter-agency agreement among the FRB, the FDIC, and the OCC. These
agencies review a selection of SNCs periodically, with such review conducted at the lead or agent bank, and deliver a credit risk rating to the participants
holding the loans. At December 31, 2019 and 2018, we had SNC loans held for investment to 28 borrowers that totaled $755 million and to 30 borrowers that
totaled $840 million. At December 31, 2019 and 2018, SNC loans held for investment comprised 4.0% and 4.7% of total loans and leases held for investment, net
of deferred fees.
Real Estate Mortgage Loans and Real Estate Construction and Land Loans
Our real estate lending activities focus primarily on loans to professional developers and real estate investors for the acquisition, construction,
refinancing, renovation, and on-going operation of commercial real estate. We also provide commercial real estate loans to borrowers operating businesses at
these sites (owner occupied commercial real estate loans), including loans to municipalities, schools and school districts, and non-profit borrowers as part of
our tax-exempt lending business line.
Our real estate secured loans include the following specific lending products:
• Commercial real estate mortgage. Our commercial real estate mortgage loans generally are collateralized by first deeds of trust on specific
commercial properties. The most prevalent types of properties securing our commercial real estate loans are office properties, hotels, industrial
properties, and retail properties. The properties are typically located in central business districts across the United States with a significant
concentration of collateral properties located in California within our branch footprint. Our commercial real estate loans typically either have
interest and principal payments due on an amortization schedule ranging from 25 to 30 years with a lump sum balloon payment due in one to ten
years or may have an initial interest-only period followed by an amortization schedule with a lump sum balloon payment due in one to ten years.
We also provide commercial real estate secured loans under the SBA's 7(a) Program and 504 Program. Compliant SBA 7(a) loans have an SBA
guaranty for 75% of the principal balance. SBA 504 loans are first deed of trust mortgage loans on owner occupied commercial real estate which
are 50% loan-to-value at origination where a second deed of trust is also provided by a non-profit certified development company. The SBA 7(a)
and 504 mortgage loans repay on a twenty-five year amortization schedule.
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Income producing and other residential real estate mortgage. Our income producing and other residential real estate mortgage loans generally
are collateralized by first deeds of trust on multi-family and other for-rent, non-owner occupied residential properties. The most prevalent types of
properties securing our income producing and other residential real estate loans are multi-family, condominium, pooled single-family rental
properties, and individual single-family properties. We also purchase multi-family secured real estate mortgage loans from other banks due
primarily to the favorable credit risk profile of multi-family loans. When we purchase multi-family loans from other banks, we re-underwrite the
loans at time of purchase. Multi-family loans either repay on a 30-year amortization schedule or may have an initial interest-only period (up to two
years) and then repay on a 30-year amortization schedule. We do not typically originate owner-occupied single-family mortgage loans but we do
have a small portfolio of owner-occupied single-family mortgage loans stemming primarily from banks that we acquired.
• Real estate construction and land. Our real estate construction and land loans generally are collateralized by first deeds of trust on specific
residential and commercial properties. The most prevalent types of properties securing our construction and land loans are multi-family, hotel
properties, and residential condominium properties. Construction loans typically finance from 40% to 70% of the cost to construct residential and
commercial properties. The terms are generally one to three years with short-term, performance-based extension options. A very small component
of this portfolio are single-family construction loans to qualifying home builders within our branch footprint.
Our real estate portfolio is subject to certain risks including, but not limited to, the following:
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increased competition in pricing and loan structure;
the economic conditions of the United States and in the markets where we lend;
decreased demand or decreased values as a result of legislative changes such as new rent control laws;
interest rate increases;
decreased real estate values in the markets where we lend;
the borrower's inability to repay our loan due to decreased cash flow or operating losses;
the borrower’s inability to refinance or payoff our loan upon maturity;
loss of our loan principal stemming from a collateral foreclosure; and
various environmental risks, including natural disasters.
In addition to the points above, real estate construction loans are also subject to project-specific risks including, but not limited to, the following:
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construction costs being more than anticipated;
construction taking longer than anticipated;
failure by developers and contractors to meet project specifications or timelines;
disagreement between contractors, subcontractors and developers;
demand for completed projects being less than anticipated; and
buyers of the completed projects not being able to secure permanent financing.
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Real estate mortgage loans include loans secured by healthcare properties, primarily skilled nursing facilities. In addition to the points above, for a
healthcare real estate loan, we evaluate facility clinical compliance and quality of care, assess the loan-to-value using per bed limitations based on market
information, and analyze the payor mix and state and federal revenue sources. In October 2019, we ceased the origination of healthcare real estate loans in our
National Lending group and expect real estate mortgage loans secured by healthcare properties to be a smaller portion of our real estate mortgage loans in the
future.
Many of the risks outlined above result from market conditions and are not controllable by us. When considering the markets in which to pursue real
estate loans, we consider the market conditions, our current loan portfolio concentrations by property type and by market, and our past experiences with the
borrower, within the specific market, and with the property type.
When underwriting real estate loans, we seek to mitigate risk by using the following framework:
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requiring borrowers to invest and maintain a meaningful cash equity interest in the properties securing our loans;
reviewing each loan request and renewal individually;
using a credit committee approval process for the approval of each loan request (or aggregated credit exposures) over a certain dollar amount;
adhering to written loan acceptance standards, including among other factors, maximum loan to acquisition or construction cost ratios, maximum
loan to as-is or stabilized value ratios, and minimum operating cash flow requirements;
considering market rental and occupancy rates relative to our underwritten or projected rental and occupancy rates;
considering the experience of our borrowers and our borrowers’ abilities to operate and manage the properties securing our loans;
evaluating the supply of comparable real estate and new supply under construction in the collateral's market area;
obtaining independent third-party appraisals that are reviewed by our appraisal department;
obtaining environmental risk assessments; and
obtaining seismic studies where appropriate.
With respect to real estate construction loans, in addition to the foregoing, we attempt to mitigate project-specific risks by:
•
•
•
•
considering the experience of our borrowers and our borrowers’ abilities to manage the properties during construction and into the stabilization
periods;
obtaining project completion guaranties from our borrowers;
including covenants in our construction loan agreements that require the borrowers to fund costs that exceed the initial construction budgets;
implementing a controlled disbursement process for loan proceeds in accordance with an agreed upon schedule, which usually results in the
borrowers' equity being invested before loan advances commence and which ensures the costs to complete the projects are in balance with our
remaining unfunded loan commitments;
•
conducting project site visits and using construction consultants who review the progress of the project; and
• monitoring the construction costs compared to the budgeted costs and the remaining costs to complete.
SBA 7(a) and 504 program loans are subject to the risks outlined above and the risk that an SBA 7(a) guaranty may be invalid if specific SBA procedures
are not followed. We seek to mitigate this risk by maintaining and adhering to additional policies specific to SBA loans which align with SBA requirements.
10
Commercial Loans and Leases
Our commercial loans and leases portfolio is diverse and 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, secured business loans originated through
our Community Banking group, and loans to security alarm monitoring companies.
Our commercial loans and leases include the following specific lending products:
•
Lender finance & timeshare. These are loans to companies used to purchase finance receivables or extend finance receivables to the underlying
obligors and are secured primarily by the finance receivables owed to our borrowers. The borrowers include lenders to small businesses,
consumer lenders, and timeshare operators. The primary sources of repayment are the operating incomes of the borrowers and the collection of
the finance receivables securing the loans. The loans are typically revolving lines of credit with terms of one to three years with contractual
borrowing availability as a percentage of eligible collateral.
• Equipment finance. These are loans and leases used to purchase equipment essential to the operations of our borrower or lessee and are
secured by the specific equipment financed. The primary source of repayment is the operating income of the borrower or lessee. The loan and
lease terms are two to ten years and generally amortize to either a full repayment or residual balance or investment that is expected to be collected
through a sale of the equipment to the lessee or a third party.
• Other asset-based. These are loans used for working capital and are secured by trade accounts receivable and/or inventories. The primary
sources of repayment are the operating incomes of the borrowers, the collection of the receivables securing the loans, and/or the sale of the
inventories securing the loans. The loans are typically revolving lines of credit with terms of one to three years with contractual borrowing
availability as a percentage of eligible collateral.
•
Premium finance. These are loans used to finance annual life insurance premiums and are fully secured by the corresponding cash surrender
value of life insurance contracts and other liquid collateral with one year terms that, generally, renew annually. The primary sources of repayment
are the cash flow of the borrowers and guarantors, repayment from our loans being refinanced by other lenders, or the application of cash
surrender value proceeds to the loans.
• Venture capital. These are loans directly to venture capital firms or loans to venture-backed companies. Equity fund loans are the loans made
directly to venture capital firms, private equity funds, venture capital funds, and venture capital management companies to provide a bridge to the
receipt of capital calls and to support the borrowers’ working capital needs, such as the cost of raising a new venture fund or leasehold
improvements for new office space. The primary sources of repayment are receipt of capital calls, proceeds from sales of portfolio company
investments, and management fees. The loan terms are generally one to four years, and the loans are typically secured by a first position lien on
the assets of the business, an assignment of capital call rights and/or an assignment of management fees. Loans to venture-backed companies
support the borrowers’ operations, including operating losses, working capital requirements, and fixed asset acquisitions. The borrowers are at
various stages in their development (early, expansion, or late), and are, generally, reporting operating losses. The primary sources of repayment
are future additional venture capital equity investments or the sale of the company or its assets. The loan terms are generally one to four years,
and the loans are typically secured by a first priority, secured blanket lien on all corporate assets and/or a lien on intellectual property.
•
Secured business. These are secured business loans originated through the Community Banking group. The primary source of repayment is the
cash flow of the borrowers. The loans can be up to five years and are secured by a specific asset or assets of the borrower.
11
•
Security monitoring. These are loans to security monitoring companies used to support the operations of companies that provide business and
residential security systems and the accompanying alarm monitoring services. Loans to security monitoring companies are secured primarily by
the monitoring contracts between the borrowers and their customers. The primary sources of repayment are the operating incomes of the
borrowers, proceeds from the sales of security monitoring contracts to other monitoring companies, and proceeds from the sale of the borrowers
themselves. The loans are typically revolving lines of credit with terms of one to three years with contractual borrowing availability as a ratio of
the total recurring monthly billing amount from eligible monitoring contracts (collateral). Loans to security monitoring borrowers are usually
considered leveraged loans. According to regulatory guidance, leveraged loans are typically loans where the proceeds are used for buyouts or
acquisitions and where the resulting total debt levels are four or more times the annual adjusted earnings of the borrower. In October 2019, we
decided to no longer originate new security monitoring loans. New technology is disrupting the security alarm business, causing increased
customer acquisition costs and customer attrition and, thereby, adversely impacting business models and valuations.
• Other lending. Loans aggregated into the category of “Other lending” are various commercial loan types including Community Banking group
business loans secured by a blanket lien on the borrowers’ businesses, loans to homeowner associations, loans to municipalities and non-profit
borrowers, and SBA 7(a) loans for small business expansion. The primary sources of repayments for the Community Banking group business
loans, non-profit borrowers, and SBA 7(a) business expansion loans are the operations of the borrowers. The primary sources of repayment for
loans to municipalities are tax collections from their tax jurisdictions.
• Cash flow. Until December 2017, we actively originated cash flow loans to finance business acquisitions and recapitalizations to various types of
borrowers, with greater emphasis on borrowers operating in the healthcare and technology industries. In December 2017, we exited most cash
flow lending business lines, and agreed to sell $1.5 billion of cash flow loans (of which $481.1 million were held for sale at December 31, 2017 and
were subsequently sold in the first quarter of 2018). At December 31, 2019, our remaining cash flow loans totaled $38.1 million.
Our portfolio of commercial loans and leases is subject to certain risks including, but not limited to, the following:
•
•
•
•
•
•
the economic conditions of the United States;
interest rate increases;
deterioration of the value of the underlying collateral;
increased competition in pricing and loan structure;
the deterioration of a borrower’s or guarantor’s financial capabilities; and
various environmental risks, including natural disasters, which can negatively affect a borrower’s business.
When underwriting commercial loans and leases, we seek to mitigate risk by using the following framework:
•
•
•
•
•
•
considering the prospects for the borrower's industry and competition;
considering our past experience with the borrower and with the collateral type;
considering our current loan and lease portfolio concentration by loan type and collateral type;
reviewing each loan request and renewal individually;
using our credit committee approval process for the approval of each loan request (or aggregate credit exposure) over a certain dollar amount;
and
adhering to written loan underwriting policies and procedures including, among other factors, loan structures and covenants.
12
We actively manage real estate and commercial loans and seek to mitigate credit risk on most loans by using the following framework.
• monitoring the economic conditions in the regions or areas in which our borrowers are operating;
• measuring operating performance of our borrower or collateral and comparing it to our underwriting expectations;
•
•
•
•
assessing compliance with financial and operating covenants as set forth in our loan agreements and considering the effects of incidences of
noncompliance and taking corrective actions;
assigning a credit risk rating to each loan and ensuring the accuracy of our credit risk ratings by using an independent credit review function to
assess the appropriateness of the credit risk ratings assigned to loans;
conducting loan portfolio review meetings where senior management and members of credit administration discuss the credit status and related
action plans on loans with unfavorable credit risk ratings; and
subjecting loan modifications and loan renewal requests to underwriting and assessment standards similar to the underwriting and assessment
standards applied before closing the loans.
Consumer Loans
Consumer loans are primarily purchased private student loans originated and serviced by third-parties and not guaranteed by any program of the U.S.
Government. These loans refinanced the outstanding student loan debt of borrowers who met certain underwriting criteria, with terms that fully amortize the
debt over terms ranging from five to twenty years. Consumer loans may also include personal loans, auto loans, home equity lines of credit, revolving lines of
credit, and other loans typically made by banks to individual borrowers.
Our consumer loan portfolio is subject to certain risks, including, but not limited to, the following:
•
•
•
•
•
•
•
the economic conditions of the United States and the levels of unemployment;
the amount of credit offered to consumers in the market;
interest rate increases;
consumer bankruptcy laws which allow consumers to discharge certain debts (excluding student loans);
compliance with consumer lending regulations;
additional regulations and oversight by the CFPB; and
the ability of the sub-servicers of the Bank’s student loans to service the loans in accordance with the terms of the loan purchase agreements.
We seek to mitigate the exposure to such risks through the direct approval of all internally originated consumer loans by reviewing each new loan request
and each renewal individually and adhering to written credit policies. Each purchased pool of loans must meet thresholds we have established for weighted
average credit scores, weighted average borrower annual income, and weighted average borrower monthly free cash flow. For all purchased student loans, we
monitor the performance of the originator and the enforcement of our rights under the loan purchase agreement.
13
Loan Concentrations
The following table presents the composition of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of
the dates indicated:
2019
December 31,
2018
2017
Balance
% of
Total
Balance
% of
Total
Balance
% of
Total
(Dollars in thousands)
Real estate mortgage:
Commercial
$
Income producing and other residential
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Total real estate
Commercial:
Asset-based
Venture capital
Other commercial (1)
Total commercial
Consumer
Total loans and leases held for
4,202,687
3,770,060
7,972,747
1,082,368
1,655,434
2,737,802
10,710,549
3,748,407
2,179,422
1,767,667
7,695,496
440,827
22 % $
20 %
42 %
6 %
9 %
15 %
57 %
20 %
12 %
9 %
41 %
2 %
4,824,298
3,093,843
7,918,141
912,583
1,321,073
2,233,656
10,151,797
3,305,421
2,038,748
2,060,426
7,404,595
401,321
27 % $
17 %
44 %
5 %
8 %
13 %
57 %
18 %
11 %
12 %
41 %
2 %
5,385,740
2,466,894
7,852,634
769,075
822,154
1,591,229
9,443,863
2,924,950
2,122,735
2,071,394
7,119,079
409,801
32 %
14 %
46 %
5 %
5 %
10 %
56 %
17 %
13 %
12 %
42 %
2 %
investment, net of deferred fees
$
18,846,872
100 % $
17,957,713
100 % $
16,972,743
100 %
_______________________________________
(1) At December 31, 2019, the remaining balances of cash flow loans held for investment totaled $38.1 million. At December 31, 2018 and 2017, the balances of these loans totaled
$114.1 million and $278.9 million. Such cash flow loans are included in the "Other commercial" loan portfolio class in the table.
The real estate mortgage loan portfolio is diversified among various property types. At December 31, 2019, the three largest property types securing real
estate mortgage loans were multi-family properties, office properties, and industrial properties, which comprised 45%, 16%, and 11% of our real estate mortgage
loans, respectively. At December 31, 2018, the three largest property types securing real estate mortgage loans were multi-family properties, office properties,
and industrial properties, which comprised 36%, 16%, and 13% of our real estate mortgage loans, respectively.
At December 31, 2019 and 2018, 12% and 13% of the total real estate mortgage loans were owner occupied (where our borrowers were operating
businesses on the premises that collateralize our loans).
The real estate construction and land loan portfolio is diversified among various property types. At December 31, 2019, the three largest property types
for real estate construction and land loans were multi-family properties, hotel properties, and residential condominium properties, which comprised 43%, 14%,
and 9% of our real estate construction and land loans, respectively. At December 31, 2018, the three largest property types for real estate construction and land
loans were multi-family properties, hotel properties, and residential condominium properties, which comprised 32%, 14%, and 13% of our real estate
construction and land loans, respectively.
14
At December 31, 2019, commitments secured by real estate construction and land projects totaled $6.0 billion with related outstanding loan balances of
$2.7 billion. At December 31, 2018, commitments secured by real estate construction and land projects totaled $4.9 billion with related outstanding loan
balances of $2.2 billion. At December 31, 2019, commitments related to construction and land projects in California totaled $3.4 billion or 57% of total real estate
construction and land commitments, and commitments related to construction and land projects in New York City totaled $664 million or 11% of total real estate
construction and land commitments.
At December 31, 2019, there were ten individual real estate construction and land commitments greater than or equal to $100 million with the largest
commitment being $150 million. At December 31, 2019, these ten individual commitments totaled $1.2 billion and had an aggregate outstanding balance of $451
million. The projects financed by these commitments were a hotel, three mixed use properties, and six multi-family projects. For these ten commitments, the
average commitment to budgeted projected cost ratio was 52.4%.
At December 31, 2019, we had 11 individual loan commitments greater than or equal to $150 million that ranged in size from $150 million to $300 million and
totaled $2.1 billion and had an aggregate outstanding balance of $720 million. Seven of these commitments totaling $1.4 billion were equity fund loans, three of
these commitments totaling $500 million were lender finance & timeshare loans, and one of these commitments totaling $150 million was a commercial
construction loan.
At December 31, 2018, we had seven individual loan commitments equal to or greater than $150 million that ranged in size from $150 million to $155 million
and totaled $1.1 billion and had an aggregate outstanding balance of $463 million. Two of these commitments totaling $305 million were equity fund loans, three
of these commitments totaling $450 million were lender finance & timeshare loans, and two of these commitments totaling $300 million were commercial
construction loans.
Financing
We depend on deposits and external financing sources to fund our operations. We employ a variety of financing arrangements, including term debt,
subordinated debt, and equity. As a member of the FHLB, the Bank had secured financing capacity with the FHLB as of December 31, 2019 of $4.2 billion,
collateralized by a blanket lien on $5.9 billion of qualifying loans. The Bank also had secured financing capacity with the FRBSF of $2.0 billion as of
December 31, 2019 collateralized by liens on $2.7 billion of qualifying loans.
Information Technology Systems
We devote significant financial and management resources to maintain stable, reliable, efficient, secure and scalable information technology systems.
Where possible, we utilize third-party software systems that are hosted and supported by nationally recognized vendors. We work with our third-party
vendors to monitor and maximize the efficiency of our use of their applications. We use integrated systems to originate and process loans and deposit
accounts, which reduces processing time, automates numerous internal controls, improves customer experiences and reduces costs. Most customer records
are maintained digitally. We also provide on-line, mobile, and telephone banking services to further improve the overall client experience.
We use an enterprise data warehouse system in order to aggregate, analyze, and report key metrics associated with our customers and products. Data is
collected across multiple systems so that standard and ad hoc reports are available to assist with managing our business.
We maintain an information technology strategic plan. This plan outlines how specific solutions support our overall goals, analyzes infrastructure for
capacity planning, details migration plans to replace aging hardware and software, provides baseline projections for allocating information technology staff,
discusses information security trends and measures, considers future technologies, and provides details on information technology initiatives over the next
several years.
15
Protecting our systems to ensure the safety of customer information is critical to our business. We use multiple layers of protection to control access,
detect unusual activity and reduce risk. We regularly conduct a variety of audits and vulnerability and penetration tests on our platforms, systems and
applications and maintain comprehensive incident response plans to minimize potential risks, including cyber-attacks. To protect our business operations
against disasters, we have a backup off-site core processing system and comprehensive recovery plans.
Risk Oversight and Management
We believe risk management is another core competency of our business. We have a comprehensive risk management process that measures, monitors,
evaluates, and manages the risks we assume in conducting our activities. Our oversight of this risk management process is conducted by the Company’s
Board of Directors (the “Board”) and its standing committees. The committees each report to the Board and the Board has overall oversight responsibility for
risk management.
Our risk framework is structured to guide decisions regarding the appropriate balance between risk and return considerations in our business. Our risk
framework is based upon our business strategy, risk appetite, and financial plans approved by our Board. Our risk framework is supported by an enterprise risk
management program. Our enterprise risk management program integrates all risk efforts under one common framework. This framework includes risk policies,
procedures, measured and reported limits and targets, and reporting. Our Board approves our risk appetite statement, which sets forth the amount and type of
risks we are willing to accept in pursuit of achieving our strategic, business, and financial objectives. Our risk appetite statement provides the context for our
risk management tools, including, among others, risk policies, delegated authorities, limits, portfolio composition, underwriting standards, and operational
processes.
Competition
The banking business is highly competitive. We compete nationwide with other commercial banks and financial services institutions for loans and leases,
deposits, and employees. Some of these competitors are larger in total assets and capitalization, with more offices over a wider geographic area and offer a
broader range of financial services than our operations. Our most direct competition for loans comes from larger regional and national banks, diversified finance
companies, venture debt funds, and community banks that target the same customers as we do. In recent years, competition has increased from institutions not
subject to the same regulatory restrictions as domestic banks and bank holding companies. Those competitors include non-bank specialty lenders, insurance
companies, private investment funds, investment banks, financial technology companies, and other financial and non-financial institutions.
Competition is based on a number of factors, including interest rates charged on loans and leases and paid on deposits, underwriting standards, loan
covenants, required guarantees, the scope and type of banking and financial services offered, convenience of our branch locations, customer service,
technological changes, and regulatory constraints. Many of our competitors are large companies that have substantial capital, technological, and marketing
resources. Some of our competitors have substantial market positions and have access to a lower cost of capital or a less expensive source of funds. Because
of economies of scale, our larger, nationwide competitors may offer loan pricing that is more attractive than what we are willing to offer.
Economic factors, along with legislative and technological changes, will have an ongoing impact on the competitive environment within the financial
services industry. We work to anticipate and adapt to dynamic competitive conditions whether it is by developing and marketing innovative products and
services, adopting or developing new technologies that differentiate our products and services, cross marketing, or providing highly personalized banking
services. We strive to distinguish ourselves from other banks and financial services providers in our marketplace by providing an extremely high level of
service to enhance customer loyalty and to attract and retain business.
16
We differentiate ourselves in the marketplace through the quality of service we provide to borrowers while maintaining competitive interest rates, loan
fees and other loan terms. We emphasize personalized relationship banking services and the efficient decision-making of our lending business units. We
compete effectively based on our in-depth knowledge of our borrowers' industries and their business needs based upon information received from our
borrowers' key decision-makers, analysis by our experienced professionals, and interaction between these two groups; our breadth of loan product offerings
and flexible and creative approach to structuring products that meet our borrowers' business and timing needs; and our dedication to superior client service.
However, we can provide no assurance as to the effectiveness of these efforts on our future business or results of operations, as to our continued ability to
anticipate and adapt to changing conditions, and as to sufficiently improving our services and banking products in order to successfully compete in the
marketplace.
Employees
As of January 31, 2020, we had 1,835 full time equivalent employees. None of the Company's employees are represented by collective bargaining
agreements.
Financial and Statistical Disclosure
Certain of our statistical information is presented within “Item 6. Selected Financial Data,” “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and “Item 7A. Quantitative and Qualitative Disclosure About Market Risk.” This information should be read in
conjunction with the consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”
17
Supervision and Regulation
General
The Company and Bank are subject to extensive regulation under federal and state banking laws that establish a comprehensive framework for our
operations. Such regulation is intended to, among other things, protect the interests of customers, including depositors, and the federal deposit insurance
fund, as well as to minimize risk to the banking system as a whole. These regulations are not, however, generally charged with protecting the interests of our
stockholders or other creditors. Described below are elements of selected laws and regulations applicable to our Company or the Bank. The descriptions are
not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law
or regulations, particularly in the current U.S. political environment, and in their application by regulatory agencies, cannot be predicted, and they may have a
material effect on the business, operations, and results of the Company or the Bank.
Bank Holding Company Regulation
As a bank holding company, PacWest is registered with and subject to supervision, regulation, and examination by the FRB under the BHCA, and we are
required to file with the FRB periodic reports of our operations and additional information regarding the Company and its subsidiaries as the FRB may require.
The Dodd-Frank Act, which codified the FRB's long-standing "source-of-strength" doctrine, requires the Company to act as a source of financial
strength to the Bank including committing resources to support the Bank even at times when the Company may not be in a financial position to do so.
Similarly, under the cross-guarantee provisions of the FDIA, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or
anticipated by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the
FDIC to such a commonly controlled institution.
Pursuant to the BHCA, we are required to obtain the prior approval of the FRB before we acquire all or substantially all of the assets of any bank or the
ownership or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than 5 percent
of such bank. Pursuant to the Bank Merger Act, the prior approval of the FDIC is required for the Bank to merge with another bank or purchase all or
substantially all of the assets or assume any of the deposits of another FDIC-insured depository institution. In reviewing certain merger or acquisition
transactions, the federal regulators will consider the assessment of the competitive effect and public benefits of the transactions, the capital position and
managerial resources of the combined organization, the risks to the stability of the U.S. banking or financial system, our performance record under the CRA, our
compliance with fair housing and other consumer protection laws, and the effectiveness of all organizations involved in combating money laundering activities.
Under the BHCA, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries and such other
activities that the FRB deems to be so closely related to banking as “to be a proper incident thereto.” We are also prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the company is engaged in banking
activities or the FRB determines that the activity is so closely related to banking as to be a proper incident to banking. The FRB’s approval must be obtained
before the shares of any such company can be acquired.
The federal regulatory agencies also have general authority to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or
unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or
unsound banking practice. Further, as discussed below under “-Capital Requirements,” we are required to maintain minimum ratios of Common Equity Tier 1
capital, Tier 1 capital, and total capital to total risk-weighted assets, and a minimum ratio of Tier 1 capital to total adjusted quarterly average assets as defined in
such regulations. The level of our capital ratios may affect our ability to pay dividends or repurchase our shares. See “Item 5. Market for Registrant’s Common
Equity and Related Shareholder Matters - Dividends” and Note 21. Dividend Availability and Regulatory Matters of the Notes to Consolidated Financial
Statements contained in “Item 8. Financial Statements and Supplementary Data.”
18
The Dodd-Frank Act
The Dodd-Frank Act, which was enacted in July 2010, significantly restructured the financial regulatory landscape in the United States, including the
creation of a new systemic risk oversight body, the FSOC. The FSOC oversees and coordinates the efforts of the primary U.S. financial regulatory agencies
(including the FRB, SEC, the Commodity Futures Trading Commission and the FDIC) in establishing regulations to address financial stability concerns. The
Dodd-Frank Act and the FRB’s implementing regulations impose increasingly stringent regulatory requirements on financial institutions as their size and scope
of activities increases.
In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was enacted. While the EGRRCPA reduced the impact
of the Dodd-Frank Act on bank holding companies of our size, including in respect to stress testing, the Dodd-Frank Act nonetheless subjected us to
additional significant regulatory requirements. In addition, as a result of the Dodd-Frank Act and our having in excess of $10 billion in total consolidated
assets, the Company and the Bank are subject to the examination and supervision of the CFPB.
Transactions with Affiliates
Transactions between the Bank and its affiliates are regulated under federal banking law. Subject to certain exceptions set forth in the Federal Reserve
Act, a bank may enter into “covered transactions” with its affiliates if the aggregate amount of the covered transactions to any single affiliate does not exceed
10 percent of the Bank’s capital stock and surplus or 20 percent of the Bank’s capital stock and surplus for covered transaction with all affiliates. Covered
transactions include, among other things, extension of credit, the investment in securities, the purchase of assets, the acceptance of collateral or the issuance
of a guaranty. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization.
Dividends and Share Repurchases
The ability of the Company to pay dividends on or to repurchase its common stock, and the ability of the Bank to pay dividends to the Company, may be
restricted due to several factors including: (a) the DGCL (in the case of the Company) and applicable California law (in the case of the Bank), (b) covenants
contained in our subordinated debentures and borrowing agreements, and (c) the regulatory authority of the FRB, the DBO and the FDIC.
Our ability to pay dividends to our stockholders or to repurchase shares of our common stock is subject to the restrictions set forth in the DGCL. The
DGCL provides that a corporation, unless otherwise restricted by its certificate of incorporation, may declare and pay dividends (or repurchase shares) out of
its surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year, as long as the
amount of capital of the corporation is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having
a preference upon the distribution of assets. Surplus is defined as the excess of a corporation’s net assets (i.e., its total assets minus its total liabilities) over the
capital associated with issuances of its common stock. Moreover, the DGCL permits a board of directors to reduce its capital and transfer such amount to its
surplus. In determining the amount of surplus of a Delaware corporation, the assets of the corporation, including stock of subsidiaries owned by the
corporation, must be valued at their fair market value as determined by the board of directors, regardless of their historical book value.
Our ability to pay cash dividends to our stockholders or to repurchase shares of our common stock may be limited by certain covenants contained in the
indentures governing trust preferred securities issued by us or entities that we have acquired, and the debentures underlying the trust preferred securities.
Generally the indentures provide that if an Event of Default (as defined in the indentures) has occurred and is continuing, or if we are in default with respect to
any obligations under our guarantee agreement which covers payments of the obligations on the trust preferred securities, or if we give notice of any intention
to defer payments of interest on the debentures underlying the trust preferred securities, then we may not, among other restrictions, declare or pay any
dividends with respect to our common stock or repurchase shares of our common stock.
19
In addition, notification to the FRB is required prior to our declaring and paying a cash dividend to our stockholders during any period in which our
quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. Under such circumstances, we
may not pay a dividend should the FRB object until such time as we receive approval from the FRB or no longer need to provide notice under applicable
regulations. In addition, prior approval of the FRB may be required in certain circumstances prior to our repurchasing shares of our common stock.
In connection with the decision regarding dividends and share repurchase programs, our Board will take into account general business conditions, our
financial results, projected cash flows, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by the Bank to the
Company and such other factors as deemed relevant. We can provide no assurance that we will continue to declare dividends on a quarterly basis or otherwise
or to repurchase shares of our common stock. The declaration of dividends by the Company is subject to the discretion of our Board.
PacWest’s primary source of liquidity is the receipt of cash dividends from the Bank. Various statutes and regulations limit the availability of cash
dividends from the Bank. Dividends paid by the Bank are regulated by the DBO and FDIC 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 three previous fiscal years less any dividend paid during such period. The Bank's net
earnings during the previous three fiscal years exceeded dividends paid by the Bank during that same period by $34.8 million. Since the Bank had a retained
deficit of $490.6 million at December 31, 2019, for the foreseeable future, any further cash dividends from the Bank to the Company will continue to require DBO
and FDIC approval.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Holding Company Liquidity” and
Note 21. Dividend Availability and Regulatory Matters of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and
Supplementary Data” for a discussion of other factors affecting the availability of dividends and limitations on the ability to declare dividends.
Capital Requirements
We are subject to the comprehensive capital framework for U.S. banking organizations known as Basel III. Basel III, among other things, (i) implemented
increased capital levels for the Company and the Bank, (ii) introduced a new capital measure called CET1 and related regulatory capital ratio of CET1 to
risk-weighted assets, (iii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iv)
mandated that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (v) expanded the
scope of the deductions from and adjustments to capital as compared to existing regulations. Under Basel III, for most banking organizations the most common
form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of
the allowance for loan and lease losses, in each case, subject to Basel III specific requirements.
Pursuant to Basel III, the minimum capital ratios are as follows:
•
•
•
•
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4% Tier 1 capital to average consolidated assets as reported on regulatory financial statements (known as the “leverage ratio”).
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Basel III also introduced a new “capital conservation buffer”, composed entirely of CET1, on top of the minimum risk-weighted asset ratios. The capital
conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets, Tier 1 to
risk-weighted assets or total capital to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends,
equity repurchases and compensation based on the amount of the shortfall and the institution’s “eligible retained income” (that is, four quarter trailing net
income, net of distributions and tax effects not reflected in net income). As of January 1, 2019, the capital conservation buffer is fully phased-in and the
Company and the Bank are required to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to
risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) total capital to risk-weighted assets of at least 10.5%.
Basel III provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that deferred tax assets arising
from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities
be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
Basel III provides a standardized approach for risk weightings that, depending on the nature of the assets, generally range from 0% for U.S. government
and agency securities, to 1,250% for certain trading securitization exposures, resulting in higher risk weights for a variety of asset classes than previous
regulations.
The Company has outstanding subordinated debentures issued to trusts, which, in turn, issued trust preferred securities. The carrying amount of
subordinated debentures totaled $458.2 million at December 31, 2019. Under Basel III, none of the Company’s trust preferred securities were included in Tier 1
capital, however $444.5 million of such trust preferred securities were included in Tier 2 capital at December 31, 2019. We believe that, as of December 31, 2019,
the Company and the Bank met all capital adequacy requirements under Basel III. See “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Regulatory Matters - Capital” for further information on regulatory capital requirements, capital ratios, and deferred tax asset limits
as of December 31, 2019 for the Company and the Bank.
Stress Testing
Though the Company and Bank are no longer required to prepare annual stress tests pursuant to the Dodd-Frank Act, we continue to prepare an annual
stress test of our capital, consolidated earnings and losses under adverse economic and market conditions. Our stress test results are considered by the FRB
and FDIC in evaluating our capital adequacy and could have a
negative impact on our ability to make capital distributions in the form of dividends or share repurchases.
Safety and Soundness Standards
As required by the FDIA, guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and quality, and compensation, fees
and benefits. The agencies have adopted regulations and interagency guidelines which set forth the safety and soundness standards used to identify and
address problems at insured depository institutions before capital becomes impaired. If an agency determines that a bank fails to satisfy any standard, it may
require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness
compliance plans. If an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the
agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized
institution is subject under the FDIA.
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Deposit Insurance
The Bank is a state-chartered, “non-member” bank regulated by the DBO and the FDIC. The Bank accepts deposits, and those deposits have the benefit
of FDIC insurance up to the applicable limits. The applicable limit for FDIC insurance for most types of accounts is $250,000.
Under the FDIC's risk-based deposit premium assessment system, the assessment rates for an insured depository institution are determined by an
assessment rate calculator, which is based on a number of elements that measure the risk each institution poses to the Deposit Insurance Fund. The calculated
assessment rate is applied to average consolidated assets less the average tangible equity of the insured depository institution during the assessment period
to determine the dollar amount of the quarterly assessment. Under the current system, premiums are assessed quarterly and could increase if, for example,
criticized loans and leases and/or other higher risk assets increase or balance sheet liquidity decreases.
During the first quarter of 2016, the FDIC issued a final rule implementing a 4.5 basis points surcharge on the quarterly FDIC insurance assessments of
insured depository institutions with more than $10 billion in total consolidated assets. The Bank became subject to the FDIC surcharge on July 1, 2016. The
surcharge continued through September 30, 2018, when the Deposit Insurance Fund reserve ratio reached 1.36% of insured deposits, exceeding the statutorily
required minimum reserve ratio of 1.35%. For the year ended December 31, 2019, we incurred $11.5 million of FDIC assessment expense.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Incentive Compensation
In 2010, federal banking regulators issued final joint agency guidance on Sound Incentive Compensation Policies. This guidance applies to executive and
non-executive incentive plans administered by the Bank. The guidance notes that incentive compensation programs must (i) provide employees incentives that
appropriately balance risk and reward, (ii) be compatible with effective controls and risk management and (iii) be supported by strong corporate governance,
including oversight by the Board. The FDIC reviews, as part of its regular examination process, the Bank’s incentive compensation programs.
In addition, the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting
incentive based payment arrangements at specified regulated entities having at least $1 billion in total assets, such as the Company and the Bank, that
encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits that
could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure of
incentive based compensation arrangements to regulators. The agencies proposed initial regulations in April 2011 and proposed revised regulations during the
second quarter of 2016 that would establish general qualitative requirements applicable to all covered entities. The general qualitative requirements include (i)
prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that
encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk
and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate record-keeping.
In August 2015, the SEC adopted final rules implementing the pay ratio provisions of the Dodd-Frank Act by requiring companies to disclose the ratio of
the compensation of its chief executive officer to the median compensation of its employees. Under SEC guidance issued in September 2017, companies such
as the Company are able to use widely-recognized tests to determine who counts as an employee under the rule, use existing internal records such as payroll
and tax information and describe the ratio as an estimate. For a registrant with a fiscal year ending on December 31, such as the Company, the pay ratio was
first required as part of its executive compensation disclosure in proxy statements or Form 10-Ks filed in 2018.
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Consumer Regulation
We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws
include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act,
the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt
Collection Practices Act, the Service Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding
unfair and deceptive acts and practices. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by
customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection
agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission
rights, action by the state and local attorneys general in each jurisdiction in which we operate, and civil money penalties. Failure to comply with consumer
protection regulations may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to
pursue or our prohibition from engaging in such transactions even if approval is not required.
The CFPB has broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws. The CFPB is also
authorized to engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to
underserved consumers and communities. The Bank is subject to direct oversight and examination by the CFPB. The CFPB has broad supervisory,
examination, and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other
payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in
allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. State
regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition, or results of operations.
USA PATRIOT Act and Anti-Money Laundering
The PATRIOT Act, designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications
for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The PATRIOT Act, as implemented by various federal
regulatory agencies, requires the Company and the Bank to establish and implement policies and procedures with respect to, among other matters, anti-money
laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers and prospective customers. The PATRIOT Act
and its underlying regulations permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as
well as among financial institutions, subject to certain conditions, and require the FRB, the FDIC and other federal banking agencies to evaluate the
effectiveness of an applicant in combating money laundering activities when considering a bank holding company acquisition and/or a bank merger act
application.
The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) drafts regulations implementing the PATRIOT ACT and other
anti-money laundering and Bank Secrecy Act legislation. In May 2017, a FinCEN rule became effective which requires financial institutions to obtain beneficial
ownership information with respect to legal entities with which such institutions conduct business, subject to certain exclusions and exemptions.
We regularly evaluate and continue to enhance our systems and procedures to continue to comply with the PATRIOT Act and other anti-money
laundering initiatives. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to
comply with all of the relevant laws or regulations, could have serious legal, strategic, and reputational consequences for the institution and result in material
fines and sanctions.
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Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, designated nationals and others. These
rules are based on their administration by OFAC. The OFAC-administered sanctions targeting designated countries take many different forms. Generally,
however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against
direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making
investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or
specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property
in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any
manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, strategic, and reputational consequences, and result in
civil money penalties on the Company and the Bank.
Community Reinvestment Act ("CRA")
The CRA generally requires the Bank to identify the communities it serves and to make loans and investments, offer products, make donations in, and
provide services designed to meet the credit needs of these communities. The CRA also requires the Bank to maintain comprehensive records of its CRA
activities to demonstrate how we are meeting the credit needs of our communities. These documents are subject to periodic examination by the FDIC. During
these examinations, the FDIC rates such institutions’ compliance with CRA as “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial
Noncompliance.” The CRA requires the FDIC to take into account the record of a bank in meeting the credit needs of all of the communities served, including
low-and moderate-income neighborhoods, in determining such rating. Failure of an institution to receive at least a “Satisfactory” rating could inhibit such
institution or its holding company from undertaking certain activities, including acquisitions. The Bank received a CRA rating of “Outstanding” as of its most
recent examination. In the case of a bank holding company, such as the Company, when applying to acquire a bank, savings association, or a bank holding
company, the FRB will assess the CRA record of each depository institution of the applicant bank holding company in considering the application.
In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators recommending changes to the CRA’s regulations
to reduce their complexity and associated burden on banks, and in December 2019, the FDIC and the Office of the Comptroller of the Currency proposed for
public comment rules to modernize the agencies' regulations under the CRA. We will continue to evaluate the impact of any changes to the CRA regulations.
Customer Information Privacy and Cybersecurity
The FRB and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal, non-public customer information. These
guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to
create, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer
information, protect against any anticipated threats or hazard to the security or integrity of such information, and protect against unauthorized access to or use
of such information that could result in substantial harm or inconvenience to any customer. We have adopted a customer information security program to
comply with these requirements.
The Gramm-Leach-Bliley Act of 1999 (the “GLBA”) requires financial institutions to implement policies and procedures regarding the disclosure of non-
public personal information about consumers to non-affiliated third parties. The GLBA requires disclosures to consumers on policies and procedures regarding
the disclosure of such non-public personal information and, except as otherwise required by law, prohibit disclosing such information except as provided in the
Bank’s policies and procedures. We have implemented privacy policies addressing these restrictions that are distributed regularly to all existing and new
customers of the Bank.
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In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design
multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by
compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial
institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to
ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial
institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities
and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could
be subject to various regulatory sanctions, including financial penalties.
State regulators have been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have
adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these
programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy
requirements. In June 2018, the California legislature passed the California Consumer Privacy Act of 2018 (the “California Privacy Act”), which took effect on
January 1, 2020. The California Privacy Act, which covers businesses that obtain or access personal information on California resident consumers, grants
consumers enhanced privacy rights and control over their personal information and imposes significant requirements on covered companies with respect to
consumer data privacy rights. We expect this trend of state-level activity to continue, and are continually monitoring developments in the states in which we
operate. For a further discussion of risks related to privacy and cybersecurity, see "Item 1A. Risk Factors" included in this Form 10-K.
Regulation of Certain Subsidiaries
PWAM is registered with the SEC under the Investment Advisers Act of 1940, as amended, and is subject to its rules and regulations. Following the
completion of various studies on investment advisers and broker-dealers required by the Dodd-Frank Act, the SEC has, among other things, recommended to
Congress that it consider various means to enhance the SEC’s examination authority over investment advisers, which may have an impact on PWAM that we
cannot currently assess.
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ITEM 1A. RISK FACTORS
In the course of conducting our business operations, we are exposed to a variety of risks, some of which are inherent in the financial services industry
and others of which are more specific to our own businesses. The discussion below addresses the most significant factors, of which we are currently aware,
that could affect our businesses, results of operations and financial condition. Additional factors that could affect our businesses, results of operations and
financial condition are discussed in "Item 1. Business - Forward-Looking Information." However, other factors not discussed below or elsewhere in this
Annual Report on Form 10-K could adversely affect our businesses, results of operations and financial condition. Therefore, the risk factors below should not
be considered a complete list of potential risks we may face.
Any risk factor described in this Annual Report on Form 10-K or in any of our other SEC filings could by itself, or together with other factors, materially
adversely affect our liquidity, cash flows, competitive position, business, reputation, results of operations, capital position or financial condition, including
materially increasing our expenses or decreasing our revenues, which could result in material losses.
General Economic and Market Conditions Risk
Our business is adversely affected by unfavorable economic, market, and political conditions.
The United States economy has been in a ten-year expansion since the Great Recession ended in 2009. This current expansion has been longer than most
U.S. expansionary periods in recent history. Going into 2020, while global economic growth has continued and the underlying macroeconomic environment
remains largely positive, there continue to be various economic, market and political risks and uncertainties that could materially and adversely affect our
financial condition and results of operation.
In the event of an economic recession, our operating results could be adversely affected because we could experience higher loan and lease charge-offs
and higher operating costs. Global economic conditions also affect our operating results because global economic conditions directly influence the U.S.
economic conditions. Brexit has the potential to impact global economic conditions which may in turn impact U.S. economic conditions, but we would not
expect any direct impact as we do not operate in the United Kingdom. Various market conditions also affect our operating results. Real estate market conditions
directly affect performance of our loans secured by real estate. Debt markets affect the availability of credit which impacts the rates and terms at which we offer
loans and leases. Stock market downturns often signal broader economic deterioration and/or a downward trend in business earnings which may adversely
affect businesses’ ability to raise capital and/or service their debts.
An economic recession or a downturn in various markets could have one or more of the following adverse effects on our business:
•
•
•
•
•
•
•
•
•
a decrease in the demand for our loans and leases and other products and services offered by us;
a decrease in our deposit balances due to overall reductions in the accounts of customers;
a decrease in the value of collateral securing our loans and leases;
an increase in the level of nonperforming and classified loans and leases:
an increase in provisions for credit losses and loan and lease charge-offs;
a decrease in net interest income derived from our lending and deposit gathering activities;
a decrease in the Company's stock price;
a decrease in our ability to access the capital markets; or
an increase in our operating expenses associated with attending to the effects of certain circumstances listed above.
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Our ability to attract and retain qualified employees is critical to our success.
Our employees are our most important resource, and in many areas of the financial services industry, competition for qualified personnel is intense. We
endeavor to attract talented and diverse new employees and retain and motivate our existing employees to assist in executing our growth, acquisition, and
business strategies. We also seek to retain proven, experienced senior employees with superior talent, augmented from time to time by external hires, to provide
continuity of succession of our executive management team. In addition, the Company’s Board oversees succession planning, including review of the
succession plans for the Chief Executive Officer and other members of executive management. Losses of or changes in our current executive officers or other
key personnel, or the inability to recruit and retain qualified personnel in the future could materially and adversely affect our financial condition and results of
operations.
Credit Risk is the Risk of Loss Arising from the Inability or Failure of a Borrower or Counterparty To Meet Its Obligation.
Credit Risk
We may not recover all amounts that are contractually owed to us by our borrowers.
We are dependent on the collection of loan and lease principal, interest, and fees to partially fund our operations. A shortfall in collections and proceeds
may impair our ability to fund our operations or to repay our existing debt.
When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk. The credit quality of
our portfolio can have a significant impact on our earnings. We expect to experience charge-offs and delinquencies on our loans and leases in the future. Our
clients' actual operating results may be worse than our underwriting indicated when we originated the loans and leases, and in these circumstances, if timely
corrective actions are not taken, we could incur substantial impairment or loss of the value on these loans and leases. We may fail to identify problems because
our client did not report them in a timely manner or, even if the client did report the problem, we may fail to address it quickly enough or at all. Even if clients
provide us with full and accurate disclosure of all material information concerning their businesses, we may misinterpret or incorrectly analyze this information.
Mistakes may cause us to make loans and leases that we otherwise would not have made or to fund advances that we otherwise would not have funded, either
of which could result in losses on loans and leases, or necessitate that we significantly increase our allowance for loan and lease losses. As a result, we could
suffer loan losses and have nonperforming loans and leases, which could have a material adverse effect on our net earnings and results of operations and
financial condition, to the extent the losses exceed our allowance for loan and lease losses.
Some of our loans and leases are secured by a lien on specified collateral of the borrower and we may not obtain or properly perfect our liens or the value
of the collateral securing any particular loan may not protect us from suffering a partial or complete loss if the loan becomes nonperforming and we proceed to
foreclose on or repossess the collateral. In such event, we could suffer loan losses, which could have a material adverse effect on our net earnings, allowance
for loan and lease losses, financial condition, and results of operations.
Additionally, loans to venture-backed companies support the borrowers’ operations, including operating losses, working capital requirements and fixed
asset acquisitions. Venture-backed borrowers are at various stages in their development and are, generally, reporting operating losses. The primary sources of
repayment are future additional venture capital equity investments or the sale of the company or its assets. Our venture-backed borrowers’ business plans may
fail, increasing the likelihood for credit losses related to loans to venture-backed companies.
At December 31, 2019 and 2018, loans to venture-backed companies totaled $980.2 million, or 5% of total loans and leases, and $1.2 billion, or 7% of total
loans and leases. For the years ended December 31, 2019 and 2018, net charge-offs related to venture-backed borrowers totaled $1.2 million and $24.2 million.
For these years, net charge-offs related to venture-back borrowers comprised 7% and 55% of total net charge-offs. In accordance with U.S. GAAP, we maintain
an allowance for loan and lease losses to provide for loan defaults and non-performance. Our allowance for loan and lease losses allocable to loans to venture-
backed borrowers may not be adequate to absorb actual credit losses arising from these loans, and future provisions for credit losses could materially and
adversely affect our operating results.
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Our allowance for credit losses may not be adequate to cover actual losses.
In accordance with U.S. GAAP, we maintain an allowance for loan and lease losses to provide for loan and lease defaults and non-performance and a
reserve for unfunded loan commitments, which, when combined, we refer to as the allowance for credit losses. Our allowance for credit losses may not be
adequate to absorb actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results. Our allowance for
credit losses is based on prior experience and an evaluation of the risks inherent in the current portfolio. The amount of future losses is influenced by changes
in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current
estimates.
Further impacting the sufficiency of our current allowance for credit losses is the implementation of a new accounting standard, “Measurement of Credit
Losses on Financial Instruments,” commonly referred to as the “Current Expected Credit Losses” standard, or “CECL,” which is effective on January 1, 2020.
CECL changes the allowance for credit losses methodology from an incurred loss concept to an expected loss concept, which is even more dependent on
future economic forecasts, assumptions and models than existing U.S. GAAP and could result in increases and add volatility to our allowance for credit losses
and future provisions for loan losses. These forecasts, assumptions and models are inherently uncertain and are based upon management’s reasonable
judgment in light of information currently available.
Our federal and state regulators, as an integral part of their examination process, review our loans and leases and allowance for credit losses. While we
believe our allowance for credit losses is appropriate for the risk identified in our loan and lease portfolio, we cannot provide assurance that we will not further
increase the allowance for credit losses, that it will be sufficient to address losses, or that regulators will not require us to increase this allowance. We also
cannot be certain that actual results will be consistent with forecasts and assumptions used in our CECL modeling. Any of these occurrences could materially
and adversely affect our financial condition and results of operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" for more information.
Our loans and leases are concentrated by location, collateral value, and borrower type which could exacerbate credit losses if certain markets or
industries were to experience economic difficulties or operating issues.
Real estate mortgage loans and real estate construction and land loans comprised 57% of our total loans and leases at December 31, 2019. Of total loans
and leases, 35% are secured by real estate collateral located in California, 25% are secured by multi-family properties, and 6% are secured by commercial real
estate construction projects.
For real estate mortgage loans, the respective primary and secondary sources of loan repayments are the net operating incomes of the properties and the
proceeds from the sales or refinancing of the properties. For real estate construction and land loans, the primary source of loan repayments is the proceeds
from the sales or refinancing of the properties following the completion of construction and the stabilization/attainment of sufficient debt service coverage. As
such, our commercial real estate borrowers generally are required to refinance the loans with us or another lender or sell the properties to repay our loans.
We have a number of large credit relationships and individual commitments.
At December 31, 2019, there were ten individual real estate construction and land commitments greater than or equal to $100 million with the largest
commitment being $150 million. At December 31, 2019, these ten individual commitments totaled $1.2 billion and had an aggregate outstanding balance of $451
million. The projects financed by these commitments were a hotel, three mixed use properties, and six multi-family projects. For these ten commitments, the
average commitment to budgeted projected cost ratio was 52.4%.
At December 31, 2019, we had 11 individual loan commitments greater than or equal to $150 million that ranged in size from $150 million to $300 million and
totaled $2.1 billion and had an aggregate outstanding balance of $720 million. Seven of these commitments totaling $1.4 billion were equity fund loans, three of
these commitments totaling $500 million were lender finance & timeshare loans, and one of these commitments totaling $150 million was a commercial
construction loan.
A significant loss related to one of our large lending relationships or individual commitments could have a material adverse effect on our financial
condition and results of operations.
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A slowdown in venture capital investment levels may reduce the market for venture capital investment for our Venture Banking clients, which could
adversely affect our business, results of operations, or financial condition.
Part of our strategy is focused on providing banking products and credit to entrepreneurial and venture-backed businesses, including in particular early-
and expansion-stage companies that receive financial support from sophisticated investors, including venture capital or private equity firms, and corporate
investors. We derive a significant portion of deposits, including large deposits, from these companies and provide them with loans as well as other banking
products and services. In many cases, our credit decisions are based on our analysis of the likelihood that our venture capital-backed clients will receive
additional rounds of equity capital from investors. If the amount of capital available to such companies decreases, we could suffer loan losses, which could
have a material adverse effect on our deposit balances, net earnings, allowance for loan and lease losses, financial condition, and results of operations.
Market Risk
Market Risk Is the Risk That Market Conditions May Adversely Impact the Value of Assets or Liabilities or Otherwise Negatively Impact Earnings. Market
Risk Is Inherent To the Financial Instruments Associated with Our Operations, Including Loans, Deposits, Securities, Short-term Borrowings, Long-term
Debt, and Derivatives.
Our business is subject to interest rate risk, and variations in interest rates may materially and adversely affect our financial performance.
Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or "spread"
between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing
liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing
liabilities. Changes in market interest rates generally affect loan volume, loan yields, funding sources and funding costs. Our net interest spread depends on
many factors that are partly or completely out of our control, including competition, federal economic monetary and fiscal policies, and general economic
conditions.
While an increase in interest rates may increase our loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the
contractual interest and principal due to us. Following an increase in interest rates, our ability to maintain a positive net interest spread is dependent on our
ability to increase our loan offering rates, replace loans that mature and repay or that prepay before maturity with new originations, minimize increases on our
deposit rates, and maintain an acceptable level and composition of funding. We cannot provide assurances that we will be able to increase our loan offering
rates and continue to originate loans due to the competitive landscape in which we operate. Additionally, we cannot provide assurances that we can minimize
the increases in our deposit rates while maintaining an acceptable level of deposits. Finally, we cannot provide any assurances that we can maintain our current
levels of noninterest-bearing deposits as customers may seek higher-yielding products when interest rates increase.
Accordingly, changes in levels of interest rates could materially and adversely affect our net interest spread, net interest margin, cost of deposits, asset
quality, loan origination volume, average loan portfolio balance, liquidity, and overall profitability.
29
We May be Adversely Impacted by the Transition from LIBOR as a Reference Rate.
The Financial Conduct Authority has announced that the London Interbank Offered Rate (“LIBOR”) will no longer be published after 2021. With
LIBOR’s expected discontinuance after 2021, there is uncertainty as to what rate or rates may become accepted alternatives to LIBOR, or what the effect of any
such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. In response, the Alternative Reference Rates Committee
(“ARRC”) was convened in the U.S. to explore alternative reference rates and supporting processes. The ARRC identified a potential successor rate to LIBOR
in the Secured Overnight Financing Rate (“SOFR”) and crafted the Paced Transition Plan to facilitate the transition. However, there are conceptual and
technical differences between LIBOR and SOFR that remain unresolved at this time.
We have a significant number of loans, some securities and borrowings, such as our TruPS, and one deposit product with attributes that are either
directly or indirectly dependent on LIBOR. We have not yet determined the optimal reference rate(s) that we will ultimately use for our financial instruments
going forward; however, it appears likely that it will be SOFR. We have organized a multidisciplinary project team to identify operational and contractual best
practices, assess our risks, identify the detailed list of all financial instruments impacted, manage the transition, facilitate communication with our customers
and counterparties, and monitor the impacts. We have already drafted and begun including fallback language in our loan agreements beginning in August of
2019. The transition from LIBOR could create considerable costs and additional risk. The uncertainty as to the nature and effect of the discontinuance of
LIBOR may adversely affect the value of, the return on or the expenses associated with our financial assets and liabilities that are based on or are linked to
LIBOR, may require extensive changes to the contracts that govern these LIBOR-based products as well as our systems and processes, and could impact our
pricing and interest rate risk models, our loan product structures, our funding costs, our valuation tools and result in increased compliance and operational
costs. In addition, the market transition away from LIBOR to an alternative reference rate could prompt inquiries or other actions from regulators in respect of
our preparation and readiness for the replacement of LIBOR with an alternative reference rate, and result in disputes, litigation or other actions with
counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based financial instruments. Furthermore, failure to
adequately manage this transition process with our customers could adversely impact our reputation.
Although we are currently unable to assess the ultimate impact of the transition from LIBOR, the failure to adequately manage the transition could have a
material adverse effect on our business, financial condition and results of operations.
The value of our securities in our investment portfolio may decline in the future.
The fair market value of our investment securities may be adversely affected by general economic and market conditions, including changes in interest
rates, credit spreads, and the occurrence of any events adversely affecting the issuer of particular securities in our investments portfolio or any given market
segment or industry in which we are invested. We analyze our securities on a quarterly basis to determine if an impairment has occurred. The process for
determining whether any portion of the impairment is credit-related usually requires complex, subjective judgments about the future financial performance of
the issuer in order to assess the probability of receiving principal and interest payments sufficient to recover our amortized cost of the security. Because of
changing economic and market conditions affecting issuers, we may be required to recognize impairments in future periods, which could have a material
adverse effect on our business, financial condition, or results of operations.
30
Liquidity Risk
Liquidity Risk Is the Potential Inability to Meet Our Contractual and Contingent Financial Obligations, On- or Off-Balance Sheet, as They Become Due.
We are subject to liquidity risk, which could adversely affect our financial condition and results of operations.
Effective liquidity management is essential for the operation of our business. Although we have implemented strategies to maintain sufficient and diverse
sources of funding to accommodate planned, as well as unanticipated, changes in assets, liabilities, and off-balance sheet commitments under various
economic conditions, an inability to raise funds through deposits, borrowings, the sale of investment securities and other sources could have a material
adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us
specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level
of our business activity due to a market disruption, a decrease in the borrowing capacity assigned to our pledged assets by our secured creditors, or adverse
regulatory action against us. Deterioration in economic conditions and the loss of confidence in financial institutions may increase our cost of funding and
limit our access to some of our customary sources of liquidity, including, but not limited to, inter-bank borrowings and borrowings from the FRBSF and FHLB.
Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or
negative views and expectations about the prospects for the financial services industry generally as a result of conditions faced by banking organizations in
the domestic and international credit markets.
We may be adversely affected by changes in the actual or perceived soundness or condition of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial and financial soundness of other
financial institutions. Financial institutions are closely related as a result of credit, trading, investment, liquidity management, clearing, counterparty and other
relationships. Loss of public confidence in any one institution, including through default, could lead to liquidity and credit problems, losses, or defaults for
other institutions. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity and credit problems,
losses, or defaults by various institutions. This systemic risk may adversely affect financial intermediaries, such as clearing agencies, banks and exchanges we
interact with on a daily basis or key funding providers such as the Federal Home Loan Banks, any of which could have a material adverse effect on our access
to liquidity or otherwise have a material adverse effect on our business, financial condition, or results of operations.
The primary source of the holding company's liquidity from which we pay dividends, among other things, is the receipt of dividends from the Bank.
The holding company, PacWest, is a legal entity separate and distinct from the Bank and our other subsidiaries. The availability of dividends from the
Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the FRB, the FDIC
and/or the DBO could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event the Bank is unable to pay dividends
to the holding company, it is likely that we, in turn, would have to discontinue capital distributions in the form of dividends or share repurchases and may have
difficulty meeting our other financial obligations, including payments in respect of any outstanding indebtedness or subordinated debentures. 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 dividend paid during such period. The Bank's net earnings during the previous
three fiscal years exceeded dividends paid by the Bank during that same period by $34.8 million. Since the Bank had an accumulated deficit of $490.6 million at
December 31, 2019, for the foreseeable future, any cash dividends from the Bank to the holding company will continue to require DBO and FDIC approval. The
inability of the Bank to pay dividends to the holding company could have a material adverse effect on our business, including the market price of our common
stock.
31
We may reduce or discontinue the payment of dividends on common stock.
Our stockholders are only entitled to receive such dividends as our Board may declare out of funds legally available for such payments. Although we
have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the
future. Our ability to pay dividends is subject to the restrictions set forth in Delaware law, by the FRB, and by certain covenants contained in our subordinated
debentures. Notification to 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. We cannot provide
assurance that we will continue paying dividends on our common stock at current levels or at all.
Capital Risk
We are subject to capital adequacy standards, and a failure to meet these standards could adversely affect our financial condition.
The Company and the Bank are each subject to capital adequacy and liquidity rules and other regulatory requirements specifying minimum amounts and
types of capital that must be maintained. From time to time, the regulators implement changes to these regulatory capital adequacy and liquidity guidelines. If
we fail to meet these minimum capital and liquidity guidelines and other regulatory requirements, we may be restricted in the types of activities we may conduct
and may be prohibited from taking certain capital actions, such as making TruPS payments or paying executive bonuses or dividends, and repurchasing or
redeeming capital securities.
We may need to raise additional capital in the future and such capital may not be available when needed or at all.
We are required by federal and state regulators to maintain adequate levels of capital. We may need to raise additional capital in the future to meet
regulatory or other internal requirements. As a publicly traded company, a likely source of additional funds is the capital markets, accomplished generally
through the issuance of equity, both common and preferred stock, and the issuance of subordinated debentures. Our ability to raise additional capital, if
needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance.
We cannot provide any assurance that access to such capital will be available to us on acceptable terms or at all. Any occurrence that may limit our
access to the capital markets, such as a decline in the confidence of debt purchasers or counter-parties participating in the capital markets, may materially and
adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so
when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. The inability to
raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition, or results of operations.
32
Regulatory, Compliance and Legal Risk
We are subject to extensive regulation, which could materially and adversely affect our business.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the
protection of depositors, customers, federal deposit insurance funds and the banking system as a whole, not for the protection of our stockholders and
creditors. The Company is subject to regulation and supervision by the FRB, and the Bank is subject to regulation and supervision by the FDIC, DBO and
CFPB. The laws and regulations applicable to us govern a variety of matters, including, but not limited to, permissible types, amounts and terms of loans and
investments we make, the maximum interest rate that may be charged, consumer disclosures on the products and services we offer, the amount of reserves we
must hold against our customers' deposits, the types of deposits we may accept and the rates we may pay on such deposits, the establishment of new branch
offices by the Bank, maintenance of adequate capital and liquidity, restrictions on dividends, and stock repurchases. We must obtain approval from our
regulators before engaging in certain activities, including certain acquisitions, and there can be no assurance that any regulatory approvals we may require will
be obtained, or obtained without conditions, either in a timely manner or at all. Our regulators have the ability to compel us to, or restrict us from, taking certain
actions entirely, such as actions that our regulators deem to constitute unsafe or unsound banking practice. While we have policies and procedures designed
to prevent violations of the extensive federal and state regulations, any failure to comply with any applicable laws or regulations, or regulatory policies and
interpretations of such laws and regulations, could result in regulatory enforcement actions, civil monetary penalties, or damage to our reputation, all of which
could have a material adverse effect on our business, financial condition, or results of operation.
Regulations affecting banks and other financial institutions are undergoing continuous review and frequent change. The ultimate effect of such changes
cannot be predicted. Because our business is highly regulated, compliance with such regulations and laws may increase our costs and limit our ability to
pursue business opportunities. There can be no assurance that laws, rules, and regulations, including any future government stabilization program, will not be
proposed or adopted in the future, which could (i) subject us to additional restrictions, (ii) make compliance much more difficult or expensive, (iii) restrict our
ability to originate, broker, or sell loans or accept certain deposits, (iv) further limit or restrict the amount of commissions, interest, or other charges earned on
loans originated or sold, or (v) otherwise materially and adversely affect our business or prospects for business. While new legislation in 2018 scaled back
portions of the Dodd-Frank Act and the current administration in the United States may ultimately roll back or modify certain of the regulations adopted since
the financial crisis, any future changes in bank regulation are uncertain and could negatively impact our business.
Though the Company and Bank are no longer required to prepare annual stress tests pursuant to the Dodd-Frank Act, we continue to prepare an annual
internal capital stress test under adverse economic and market conditions. Our stress test results are considered by the FRB and FDIC in evaluating our capital
adequacy and could have a negative impact on our ability to make capital distributions in the form of dividends or share repurchases.
The Company and its subsidiaries are subject to changes in federal and state tax laws, interpretation of existing laws and examinations and
challenges by taxing authorities.
Our financial performance is impacted by federal and state tax laws. Given the current economic and political environment, and ongoing budgetary
pressures, the enactment of new federal or state tax legislation or new interpretations of existing tax laws could occur. The enactment of such legislation, or
changes in the interpretation of existing law, including provisions impacting income tax rates, apportionment, consolidation or combination, income, expenses,
and credits, may have a material adverse effect on our financial condition, results of operations, and liquidity.
In the normal course of business, we are routinely subjected to examinations and audits from federal, state, and local taxing authorities regarding tax
positions taken by us and the determination of the amount of tax due. These examinations may relate to income, franchise, gross receipts, payroll, property,
sales and use, or other tax returns. The challenges made by taxing authorities may result in adjustments to the amount of taxes due, and may result in the
imposition of penalties and interest. If any such challenges are not resolved in our favor, they could have a material adverse effect on our financial condition,
results of operations, and liquidity.
33
We are subject to claims and litigation which could adversely affect our cash flows, financial condition and results of operations, or cause us
significant reputational harm.
We and certain of our directors, officers, and subsidiaries may be involved, from time to time, in reviews, investigations, litigation, and other proceedings
pertaining to our business activities. If claims or legal actions, whether founded or unfounded, are not resolved in a favorable manner to us, they may result in
significant financial liability. Although we establish accruals for legal matters when and as required by U.S. GAAP and certain expenses and liabilities in
connection with such matters may be covered by insurance, the amount of loss ultimately incurred in relation to those matters may be substantially higher than
the amounts accrued and/or insured. Substantial legal liability could adversely affect our business, financial condition, results of operations, and reputation.
Risk of the Competitive Environment in which We Operate
We face strong competition from financial services companies and other companies that offer banking services, which could materially and adversely
affect our business.
The financial services industry has become even more competitive as a result of legislative, regulatory and technological changes and continued banking
consolidation, which may increase in connection with current economic, market and political conditions. We face substantial competition in all phases of our
operations from a variety of competitors, including national banks, regional banks, community banks and, more recently, financial technology (or "fintech")
companies. Many of our competitors offer the same banking services that we offer and our success depends on our ability to adapt our products and services
to evolving industry standards. Increased competition in our market may result in reduced new loan and lease production and/or decreased deposit balances or
less favorable terms on loans and leases and/or deposit accounts. We also face competition from many other types of financial institutions, including without
limitation, non-bank specialty lenders, insurance companies, private investment funds, investment banks, and other financial intermediaries. While there are a
limited number of direct competitors in the venture banking market, some of our competitors have long-standing relationships with venture firms and the
companies that are funded by such firms. Many of our competitors have significantly greater resources, established customer bases, more locations, and
longer operating histories.
Should competition in the financial services industry intensify, our ability to market our products and services may be adversely affected. If we are unable
to attract and retain banking customers, we may be unable to grow or maintain the levels of our loans and deposits and our results of operations and financial
condition may be adversely affected as a result. Ultimately, we may not be able to compete successfully against current and future competitors.
Our ability to maintain, attract and retain customer relationships and investors is highly dependent on our reputation.
Damage to our reputation could undermine the confidence of our current and potential customers and investors in our ability to provide high-quality
financial services. Such damage could also impair the confidence of our counterparties and vendors and ultimately affect our ability to effect transactions.
Maintenance of our reputation depends not only on our success in maintaining our service-focused culture and controlling and mitigating the various risks
described herein, but also on our success in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-
money laundering, client personal information and privacy issues, customer and other third-party fraud, record-keeping, technology-related issues including
but not limited to cyber fraud, regulatory investigations and any litigation that may arise from the failure or perceived failure to comply with legal and
regulatory requirements. Defense of our reputation, trademarks, and other intellectual property, including through litigation, also could result in costs that
could have a material adverse effect on our business, financial condition, or results of operations.
34
Our acquisitions may subject us to unknown risks.
Risks Related to Risk Management
As an active acquirer having successfully completed 29 acquisitions since 2000, certain events may arise after the date of an acquisition, or we may learn of
certain facts, events or circumstances after the closing of an acquisition, that may affect our financial condition or performance or subject us to risk of loss.
These events include, but are not limited to: litigation resulting from circumstances occurring at the acquired entity prior to the date of acquisition; loan
downgrades and credit loss provisions resulting from deterioration in the credit quality of the acquired loans; personnel changes that cause instability within a
department; delays in implementing new policies or procedures or the failure to apply new policies or procedures; and other events relating to the performance
of our business. Acquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstances that could result in loss or
increased costs or give assurances that our due diligence or mitigation efforts will be sufficient to protect against any such loss or increased costs.
Our ability to execute our strategic initiatives successfully will depend on a variety of factors. These factors likely will vary based on the nature of the
initiative but may include our success in integrating the operations, services, products, personnel and systems of an acquired company into our business,
operating effectively with any partner with whom we elect to do business, retaining key employees, achieving anticipated synergies, meeting expectations and
otherwise realizing the undertaking's anticipated benefits. Our ability to address these matters successfully cannot be assured. In addition, our strategic
initiatives may divert resources or management's attention from ongoing business operations and may subject us to additional regulatory scrutiny. If we do not
successfully execute a strategic undertaking, it could adversely affect our business, financial condition, results of operations, reputation, regulatory
relationships and growth prospects. To the extent we issue capital stock in connection with future acquisitions, these transactions may be dilutive to tangible
book value and will dilute share ownership.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry experiences continuous technological change with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future
success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy
customer demands, as well as to create additional efficiencies in our operations. Many of our competitors, however, have substantially greater resources to
invest in technological improvements or are technology focused start-ups with internally developed cloud-native systems that offer improved user interfaces
and experiences. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and
services to our customers. In addition, we depend on internal and outsourced technology to support all aspects of our business operations. Interruption or
failure of these systems creates a risk of business loss as a result of adverse customer experiences and possible diminishing of our reputation, damage claims
or civil fines. Failure to successfully keep pace with technological change affecting the financial services industry or to successfully implement core processing
strategies could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
A failure, interruption or breach in the security of our systems, or those of contracted vendors, could disrupt our business, result in the disclosure of
confidential information, damage our reputation, and create significant financial and legal exposure.
Although we devote significant resources to maintain and regularly update our systems and processes that are designed to protect the security of our
computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to us and
our customers, there is no assurance that all of our security measures will provide absolute security.
35
Many financial institutions, including the Company, have been subjected to attempts to infiltrate the security of their websites or other systems, some
involving sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service,
sabotage systems or cause other damage, including through the introduction of computer viruses or malware, cyber-attacks and other means. We have been
targeted by individuals and groups using phishing campaigns, pretext calling, malicious code and viruses, and have experienced distributed denial-of-service
attacks with the objective of disrupting on-line banking services and expect to be subject to such attacks in the future.
Despite efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate, detect or recognize threats to our systems or to
implement effective preventive measures against all security breaches of these types inside or outside our business, especially because the techniques used
change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including individuals or
groups who are associated with external service providers or who are or may be involved in organized crime or linked to terrorist organizations or hostile
foreign governments. Those parties may also attempt to fraudulently induce employees, customers, third-party service providers or other users of our systems
to disclose sensitive information in order to gain access to our data or that of our customers or clients. These risks may increase in the future as our web-based
product offerings grow or we expand internal usage of web-based applications.
A successful penetration or circumvention of the security of our systems, including those of our third-party vendors, could cause serious negative
consequences, including significant disruption of our operations, misappropriation of confidential information, or damage to computers or systems, and may
result in violations of applicable privacy and other laws, financial loss, loss of confidence in our security measures, customer dissatisfaction, increased
insurance premiums, significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on our business, financial
condition, results of operations, and future prospects.
We rely on other companies to provide key components of our business infrastructure.
We rely on certain third parties to provide products and services necessary to maintain day-to-day operations, such as data processing and storage,
recording and monitoring transactions, on-line banking interfaces and services, Internet connections, telecommunications, and network access. Even though
we have a vendor management program to help us carefully select and monitor the performance of third parties, we do not control their actions. The failure of a
third-party to perform in accordance with the contracted arrangements under service level agreements as a result of changes in the third party’s organizational
structure, financial condition, support for existing products and services, strategic focus, system interruption or breaches, or for any other reason, could be
disruptive to our operations, which could have a material adverse effect on our business, financial condition and results of operations. Replacing these third
parties could also create significant delays and expense. Accordingly, use of such third parties creates an inherent risk to our business operations.
Our controls and procedures may fail or be circumvented.
We regularly review and update our internal controls, disclosure controls and procedures, compliance monitoring activities and corporate governance
policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to
comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, reputation and financial
condition. In addition, if we identify material weaknesses or significant deficiencies in our internal control over financial reporting or are required to restate our
financial statements, we could be required to implement expensive and time-consuming remedial measures. We could lose investor confidence in the accuracy
and completeness of our financial reports and potentially subject us to litigation. Any material weaknesses or significant deficiencies in our internal control
over financial reporting or restatement of our financial statements could have a material adverse effect on our business, results of operations, reputation, and
financial condition.
36
Severe weather, natural disasters, acts of war or terrorism, public health issues, or other adverse external events could harm the Company's business.
Severe weather, natural disasters, acts of war or terrorism, public health issues, and other adverse external events could have a significant impact on our
ability to conduct business. The nature and level of severe weather and/or natural disasters cannot be predicted and may be exacerbated by global climate
change. Severe weather and natural disasters could harm our operations through interference with communications, including the interruption or loss of our
computer systems, which could prevent or impede us from gathering deposits, originating loans and processing and controlling the flow of business, as well as
through the destruction of facilities and our operational, financial and management information systems. California, in which a substantial portion of our
business and a substantial portion of our loan collateral is located, is susceptible to severe weather and natural disasters such as earthquakes, floods,
droughts and wildfires. Additionally, the United States remains a target for potential acts of war or terrorism. Moreover, a public health issue, such as a major
epidemic or pandemic, could adversely affect economic conditions. Severe weather, natural disasters, acts of war or terrorism, public health issues, or other
adverse external events could each negatively impact our business operations or the stability of our deposit base, cause significant property damage,
adversely impact the values of collateral securing our loans and/or interrupt our borrowers' abilities to conduct their business in a manner to support their debt
obligations, which could result in losses and increased provisions for credit losses. There is no assurance that our business continuity and disaster recovery
program can adequately mitigate the risks of such business disruptions and interruptions.
Risk from Accounting and Other Estimates
The Company's consolidated financial statements are based in part on assumptions and estimates which, if incorrect, could cause unexpected losses in
the future.
We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these
consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from these estimates. Material estimates subject to change in the
near term include, among other items, the allowance for credit losses, particularly in light of adopting the new CECL standard on January 1, 2020; the carrying
value of intangible assets; the fair value estimates of certain assets and liabilities; and the realization of deferred tax assets and liabilities. These estimates may
be adjusted as more current information becomes available, and any adjustment may be significant.
There are risks resulting from the extensive use of models in our business.
We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the
pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting or estimating losses, assessing
capital adequacy and calculating regulatory capital levels, as well as to estimate the value of financial instruments and balance sheet items. Poorly designed or
implemented models present the risk that our business decisions based on information incorporating model output could be adversely affected due to the
inaccuracy of that information. Some of the decisions that our regulators make, including those related to capital distributions, could be affected due to the
perception that the quality of the models used to generate the relevant information is insufficient, which could have a negative impact on our ability to make
capital distributions in the form of dividends or share repurchases. Our reliance on models continues to increase as rules, guidance and expectations change.
The most recent example of this is the additional models that will be used in the determination of our allowance for credit losses under CECL effective January
1, 2020.
37
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of January 31, 2020, we had a total of 152 properties consisting of 76 full-service branch offices and 76 other offices. We own four locations and the
remaining properties are leased. Our properties are located throughout the United States, however, approximately 74% are located in California. We lease our
principal office, which is located at 9701 Wilshire Blvd., Suite 700, Beverly Hills, CA 90212.
For additional information regarding properties of the Company and Pacific Western, see Note 7. Premises and Equipment, Net of the Notes to
Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
ITEM 3. LEGAL PROCEEDINGS
See Note 13. Commitments and Contingencies of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and
Supplementary Data." That information is incorporated into this item by reference.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
38
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Marketplace Designation and Holders
Our common stock is listed on The Nasdaq Global Select Market and is traded under the symbol “PACW.” As of February 14, 2020, and based on the
records of our transfer agent, there were approximately 1,724 record holders of our common stock.
Dividends
For a discussion of dividend restrictions on the Company's common stock, or of dividends from the Company's subsidiaries to the Company, see “Item 1.
Business - Supervision and Regulation - Dividends and Share Repurchases” and Note 21. Dividend Availability and Regulatory Matters of the Notes to
Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2019 regarding securities issued and to be issued under our equity compensation plans in
effect during fiscal year 2019:
Number of Securities
Weighted
Number of Securities
to be Issued Upon
Average Exercise
Remaining Available
Exercise of
Outstanding
Options,
Price of
Outstanding
Options,
for Future Issuance
Under Equity
Compensation Plans
Warrants, and
Warrants, and
Rights
(a)
Rights
(b)
(Excluding Securities
Reflected in Column (a))
(c)
195,293
(2)
$
86,349
(4)
—
281,642
$
—
—
—
—
2,257,923
(3)
—
—
2,257,923
Plan Category
Equity compensation plans
approved by security
holders
Plan Name
PacWest Bancorp
2017 Stock Incentive
Plan (1)
PacWest Bancorp
2003 Stock Incentive
Plan (1)
Equity compensation plans
not approved by security
holders
Total
None
__________________________________
(1) The PacWest Bancorp 2017 Stock Incentive Plan (the “ 2017 Incentive Plan”) was approved by our stockholders at our May 15, 2017 Annual Meeting of Stockholders,
authorizing for issuance 4,000,000 shares. Upon approval of the 2017 Incentive Plan by our stockholders, the PacWest 2003 Stock Incentive Plan (the "2003 Incentive Plan")
was frozen and no new awards can be granted under the 2003 Incentive Plan.
(2) Amount includes PRSUs granted in 2019 and 2018 that may be issued at the end of their three-year performance period if certain financial metrics are met. The number of units
shown represents a target amount and the number of units that will ultimately vest is unknown. Amount does not include 1,307,085 shares of unvested time-based restricted stock
outstanding under the 2017 Incentive Plan with a zero exercise price as of December 31, 2019.
(3) The 2017 Incentive Plan permits these remaining shares to be issued in the form of options, restricted stock, or stock appreciation rights.
(4) Amount represents 86,349 shares that vested and were issued in February 2020 related to PRSUs granted in 2017. Amount does not include 206,112 shares of unvested time-based
restricted stock outstanding under the 2003 Incentive Plan with a zero exercise price as of December 31, 2019.
39
Recent Sales of Unregistered Securities and Use of Proceeds
None.
Repurchases of Common Stock
The following table presents stock repurchases we made during the fourth quarter of 2019:
Total Number of
Maximum Dollar
Shares Purchased
Value of Shares
Total
Number of
Shares
Purchased (1)
Average
Price Paid
Per Share
as Part of
Publicly
Announced
Program (2)
—
27,606
—
27,606
$
$
$
$
—
37.57
—
37.57
That May Yet
Be Purchased
Under the
Program (2)
(In thousands)
124,707
124,707
124,707
$
$
$
—
—
—
—
Purchase Dates
October 1 – October 31, 2019
November 1 – November 30, 2019
December 1 – December 31, 2019
Total
___________________________________
(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.
(2) The Stock Repurchase Program was initially authorized by PacWest's Board of Directors on October 17, 2016. On February 28, 2019, PacWest's Board of Directors authorized a
Stock Repurchase Program to purchase shares of its common stock for an aggregate purchase price not to exceed $225 million until February 29, 2020. All shares repurchased
under the various Stock Repurchase Programs were retired upon settlement.
40
Five-Year Stock Performance Graph
The following chart compares the yearly percentage change in the cumulative stockholder return on our common stock based on the closing price during
the five years ended December 31, 2019, with (1) the Total Return Index for U.S. companies traded on The Nasdaq Stock Market (the “NASDAQ Composite
Index”), and (2) the Total Return Index for KBW NASDAQ Regional Bank Stocks (the “KBW Regional Banking Index”). This comparison assumes $100 was
invested on December 31, 2014, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and
retention of all stock dividends. The Company's total cumulative gain was 7.95% over the five year period ending December 31, 2019 compared to gains of
100.49% and 53.03% for the NASDAQ Composite Index and KBW Regional Banking Index.
___________________________________
* $100 invested on December 31, 2014 in stock or index, including reinvestment of dividends.
Index
PacWest Bancorp
NASDAQ Composite Index
KBW Regional Banking Index
2014
2015
2016
2017
2018
2019
Year Ended December 31,
$
$
100.00
100.00
100.00
$
99.05
106.96
105.91
41
$
131.84
116.45
147.24
$
127.26
150.96
149.82
$
88.07
146.67
123.60
107.95
200.49
153.03
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain of our financial and statistical information for each of the years in the five-year period ended December 31, 2019. The
selected financial data should be read in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations," our
audited consolidated financial statements as of December 31, 2019 and 2018, and for each of the years in the three-year period ended December 31, 2019 and the
related Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.” Our acquisitions may materially affect
the comparability of the information reflected in the selected financial data presented in Item 6. Operating results of acquired companies are included from the
respective acquisition dates. Further information regarding our acquisitions can be found in Note 3. Acquisitions to our consolidated financial statements.
At or For the Year Ended December 31,
2019
2018
2017
2016
2015
(In thousands, except per share amounts and percentages)
$
$
1,219,893
(205,264)
$
1,161,670
(120,756)
1,014,629
1,040,914
(22,000)
992,629
25,445
—
117,117
142,562
3,555
(349)
(505,457)
(502,251)
632,940
(164,304)
468,636
$
(45,000)
995,914
8,176
—
140,459
148,635
751
(1,770)
(510,213)
(511,232)
633,317
(167,978)
465,339
$
1,052,516
$
1,015,912
$
(72,945)
979,571
(57,752)
921,819
(541)
—
129,114
128,573
(1,702)
(19,735)
(474,224)
(495,661)
554,731
(196,913)
357,818
$
(54,621)
961,291
(65,729)
895,562
9,485
(8,917)
111,907
112,475
(1,881)
(200)
(448,020)
(450,101)
557,936
(205,770)
352,166
$
883,938
(60,592)
823,346
(45,481)
777,865
3,744
(18,246)
98,812
84,310
668
(21,247)
(361,460)
(382,039)
480,136
(180,517)
299,619
Results of Operations:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Gain (loss) on sale of securities
FDIC loss sharing expense, net
Other noninterest income
Total noninterest income
Foreclosed assets income (expense), net
Acquisition, integration and reorganization costs
Other noninterest expense
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Per Common Share Data:
Basic and diluted earnings per share (EPS)
Cash dividends declared per share
Book value per share (1)(2)
Tangible book value per share (1)(2)
Shares outstanding at year-end (2)
$
$
$
$
$
$
$
$
$
3.90
2.40
41.36
19.77
119,782
118,966
$
$
$
$
3.72
2.30
39.17
18.02
123,190
123,640
$
$
$
$
2.91
2.00
38.65
18.24
128,783
121,613
$
$
$
$
2.90
2.00
36.93
18.71
121,284
120,239
2.79
2.00
36.22
17.86
121,414
106,327
Average shares outstanding for basic and diluted EPS
________________________________
(1)For information regarding this calculation, see “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Non-GAAP Measurements.”
(2)Includes 1,513,197 shares, 1,344,656 shares, 1,436,120 shares, 1,476,132 shares, and 1,211,951 shares of unvested restricted stock outstanding at December 31, 2019, 2018,
2017, 2016, and 2015.
42
Balance Sheet Data:
Total assets
Cash and cash equivalents
Investment securities
Loans and leases held for investment (3)
Goodwill
Core deposit and customer relationship intangibles
Deposits
Borrowings
Subordinated debentures
Stockholders’ equity
Performance Ratios:
Return on average assets
Return on average equity
Return on average tangible equity (1)
Net interest margin
Yield on average loans and leases
Cost of average total deposits
Efficiency ratio
Equity to assets ratio (1)
Tangible common equity ratio (1)
Average equity to average assets ratio
Dividend payout ratio
Capital Ratios (consolidated):
Tier 1 leverage ratio
Tier 1 capital ratio
Total capital ratio
Allowance for Credit Losses Data (3):
Allowance for credit losses
Allowance for credit losses to loans and leases
Allowance for credit losses to nonaccrual loans and leases
Net charge-offs to average loans and leases
Nonperforming Assets Data (4):
Nonaccrual loans and leases
Accruing loan past due 90 days or more
Foreclosed assets, net
Total nonperforming assets
$
$
$
$
At or For the Year Ended December 31,
2019
2018
2017
2016
2015
(In thousands, except per share amounts and percentages)
$
26,770,806
637,624
3,838,111
18,846,872
2,548,670
38,394
19,233,036
1,759,008
458,209
4,954,697
$
25,731,354
385,767
4,041,534
17,957,713
2,548,670
57,120
18,870,501
1,371,114
453,846
4,825,588
$
24,994,876
398,437
3,795,221
16,914,707
2,548,670
79,626
18,865,536
467,342
462,437
4,977,598
$
21,869,767
419,670
3,245,700
15,347,530
2,173,949
36,366
15,870,611
905,812
440,744
4,479,055
21,288,490
396,486
3,579,147
14,289,209
2,176,291
53,220
15,666,182
621,914
436,000
4,397,691
1.80%
9.63%
20.66%
4.54%
6.00%
0.77%
42.7%
18.5%
9.8%
18.6%
61.7%
9.74%
9.78%
12.41%
1.91%
9.68%
21.22%
5.05%
6.22%
0.44%
41.0%
18.8%
9.6%
19.8%
61.9%
10.13%
10.01%
12.72%
1.58%
7.71%
15.15%
5.10%
5.97%
0.27%
40.8%
19.9%
10.5%
20.5%
69.1%
10.66%
10.91%
13.75%
174,646
$
0.93%
189.1%
0.09%
169,333
$
0.94%
213.5%
0.26%
92,353
—
440
92,793
$
$
79,333
—
5,299
84,632
$
$
161,647
$
0.96%
103.8%
0.40%
157,545
—
1,329
158,874
$
$
1.66%
7.85%
15.52%
5.40%
6.32%
0.20%
39.8%
20.5%
11.5%
21.2%
69.1%
11.91%
12.31%
15.56%
161,278
$
1.05%
94.5%
0.15%
173,527
—
12,976
186,503
$
$
1.70%
7.99%
15.76%
5.60%
6.51%
0.32%
38.5%
20.7%
11.4%
21.3%
71.8%
11.67%
12.60%
15.65%
122,268
0.86%
94.8%
0.06%
133,615
700
22,120
156,435
0.92%
1.08%
Nonaccrual loans and leases to loans and leases
Nonperforming assets to loans and leases and
foreclosed assets
0.49%
0.44%
0.93%
1.12%
0.49%
0.47%
0.94%
1.21%
________________________________
(3)Amounts and ratios related to 2019 and 2018 are for total loans and leases held for investment, net of deferred fees. Amounts and ratios related to 2017 and prior years are for
Non-PCI loans and leases held for investment, net of deferred fees.
(4)Amounts and ratios are for total loans and leases held for investment, net of deferred fees.
43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 through its Community Banking, National Lending
and Venture Banking groups. Community Banking provides real estate loans, commercial loans, 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. National Lending
provides asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis.
Venture Banking offers loans and a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture
capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and
asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered
investment adviser.
Beginning in 2017, we focused on our credit de-risking strategy and reduced our exposures in certain lending portfolios while emphasizing growth in loan
portfolios with favorable credit performance. These efforts included:
•
Exiting the healthcare, technology, and general cash flow lending businesses by selling $1.5 billion of cash flow loans at year-end 2017 and
reducing the cash flow loan portfolio from approximately $2.4 billion at the end of 2016 to approximately $38 million as of December 31, 2019.
• Reducing our exposure to healthcare real estate from approximately $955 million at the end of 2016 to approximately $334 million as of
•
December 31, 2019.
Shifting our Venture Banking strategy to emphasize growth in equity fund loans which, as a percentage of our Venture Banking loan portfolio,
increased from 16% as of the end of 2016 to 55% as of December 31, 2019.
• Ceasing the origination of security monitoring loans and healthcare real estate loans in our National Lending group effective October 2019.
Execution of our de-risking strategy resulted in lower loan yields as reductions in certain loan portfolios were replaced with loans with lower credit risk,
such as multi-family and equity fund loans, thereby placing pressure on our net interest margin. However, these efforts have resulted in an improved credit risk
profile as evidenced by the following:
• Classified loans and leases were reduced to 0.93% of loans and leases as of December 31, 2019 from 2.67% at December 31, 2016.
• Nonaccrual loans and leases were reduced to 0.49% of loans and leases as of December 31, 2019 from 1.11% at December 31, 2016.
•
The provision for credit losses as a percentage of average loans and leases was reduced to 0.12% for the year ended December 31, 2019 from
0.42% in 2016 (excluding PCI provision and average loans).
44
At December 31, 2019, we had total assets of $26.8 billion, including $18.8 billion of total loans and leases, net of deferred fees, and $3.8 billion of
securities available-for-sale, compared to $25.7 billion of total assets, including $18.0 billion of total loans and leases, net of deferred fees, and $4.0 billion of
securities available-for-sale at December 31, 2018. The $1.0 billion increase in total assets during 2019 was due primarily to increases of $889.2 million in loans
and leases, $251.9 million in cash and cash equivalents, and $96.4 million in other assets, offset partially by a $212.2 million decrease in securities available-for-
sale. The net loan growth by loan portfolio class was primarily from income producing and other residential real estate loans, commercial asset-based loans,
and residential real estate construction loans, offset partially by a net decrease in commercial real estate mortgage loans. The increase in other assets was due
mainly to an operating lease ROU asset recorded in connection with the adoption of ASU 2016-02, "Leases (Topic 842)," on January 1, 2019.
At December 31, 2019, we had total liabilities of $21.8 billion, including total deposits of $19.2 billion and borrowings of $1.8 billion, compared to $20.9
billion of total liabilities, including $18.9 billion of total deposits and $1.4 billion of borrowings at December 31, 2018. The $910.3 million increase in total
liabilities during 2019 was due mainly to increases of $543.7 million in time deposits, $387.9 million in borrowings, primarily short-term FHLB advances, and
$155.6 million in accrued interest payable and other liabilities, offset partially by decreases of $159.4 million in core deposits and $21.8 million in non-core non-
maturity deposits. The increase in accrued interest payable and other liabilities was due mainly to operating lease liabilities recorded in connection with the
adoption of ASU 2016-02. The decrease in core deposits was due primarily to a shift in our deposit mix as customers moved funds from noninterest-bearing
accounts into other interest-bearing alternatives as market rates increased in the first half of 2019 and were replaced with non-core wholesale deposits. At
December 31, 2019, core deposits totaled $16.2 billion, or 84% of total deposits, including $7.2 billion of noninterest-bearing demand deposits, or 38% of total
deposits.
At December 31, 2019, we had total stockholders' equity of $4.95 billion compared to $4.83 billion at December 31, 2018. The $129.1 million increase in
stockholders' equity during 2019 was due mainly to $468.6 million in net earnings and an $84.7 million increase in accumulated other comprehensive income,
offset partially by $154.5 million of common stock repurchased under the Stock Repurchase Program and $289.0 million of cash dividends paid. Consolidated
capital ratios remained strong with Tier 1 capital and total capital ratios of 9.78% and 12.41% at December 31, 2019.
Recent Events
Stock Repurchase Programs
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 current Stock Repurchase Program on
February 29, 2020. After the authorization of the new Stock Repurchase Program, the amount that could be used to repurchase shares will be $200 million as of
March 1, 2020.
Ceased Originating Certain Loans
In October 2019, we decided to no longer originate new security monitoring loans and healthcare real estate loans in our National Lending group. New
technology is disrupting the security alarm business, causing increased customer acquisition costs and customer attrition, and thereby adversely impacting
business models and valuations. As of December 31, 2019, the security monitoring loan portfolio was comprised of 37 loans with a $619 million outstanding
balance, $145 million in unfunded commitments, a weighted average maturity of 26 months, and a weighted average coupon of 5.90%. As of December 31, 2019,
the National Lending healthcare real estate portfolio was comprised of 25 loans with a $263 million outstanding balance, $9 million in unfunded commitments, a
weighted average maturity of 34 months, and a weighted average coupon of 5.52%.
Colorado Market Expansion
We have established executive offices and expanded our loan production capabilities to include Community Banking in the Denver, Colorado area. In the
fourth quarter of 2019, we opened a full-service branch office in Denver, Colorado.
45
Key Performance Indicators
Among other factors, our operating results generally depend on the following key performance indicators:
The Level of Net Interest Income
Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. Net interest
margin is net interest income (annualized if related to a quarterly period) expressed as a percentage of average interest-earning assets. Tax equivalent net
interest income is net interest income increased by an adjustment for tax-exempt interest on certain loans and investment securities based on a 21% federal
statutory tax rate for 2019 and 2018, and a 35% federal statutory tax rate for prior periods. Tax equivalent net interest margin is calculated as tax equivalent net
interest income divided by average interest-earning assets.
Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities. Our
primary interest-earning assets are loans and investment securities, and our primary interest-bearing liabilities are deposits. Contributing to our high net
interest margin is our high yield on loans and leases and competitive cost of deposits. While our deposit balances will fluctuate depending on deposit holders’
perceptions of alternative yields available in the market, we seek to minimize the impact of these variances by attracting a high percentage of
noninterest-bearing deposits.
Loan and Lease Growth
We actively seek new lending opportunities under an array of lending products. Our lending activities include real estate mortgage loans, real estate
construction and land loans, commercial loans and leases, and a small amount of consumer lending. Our commercial real estate loans and real estate
construction loans are secured by a range of property types. Our commercial loans and leases portfolio is diverse and generally includes various asset-secured
loans, equipment-secured loans and leases, venture capital loans to support venture capital firms’ operations and the operations of entrepreneurial and
venture-backed companies during the various phases of their early life cycles, and secured business loans. Our loan origination process emphasizes credit
quality. To augment our internal loan production, we have historically purchased multi-family loans from other banks and private student loans from third-party
lenders. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic, interest-rate risk, credit risk, and product
composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other
lenders, and borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified loans and
leases, nonaccrual loans and leases, and net charge-offs. We maintain an allowance for credit losses on loans and leases, which is the sum of the allowance for
loan and lease losses and the reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on
and off-balance sheet credit exposures. Loans and leases which 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 various credit performance measures such as historical and current net
charge-offs, the levels and trends of classified loans and leases, the likelihood of loans defaulting based on the historical degree that similar loans defaulted
and the resulting loss severity for these defaulted loans, and the overall level of outstanding loans and leases. For originated and acquired non-impaired loans,
a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively.
46
We regularly review our 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, foreclosed assets expense (income), net, and acquisition, integration and reorganization costs) by net revenues (the sum of
tax equivalent net interest income plus noninterest income, less gain (loss) on sale of securities and gain (loss) on sales of assets other than loans and leases).
The following table presents the calculation of our efficiency ratio for the years indicated:
Efficiency Ratio
Noninterest expense
Less: Intangible asset amortization
Foreclosed assets (income) expense, net
Acquisition, integration and reorganization costs
Noninterest expense used for efficiency ratio
Net interest income (tax equivalent)
Noninterest income
Net revenues
Less: Gain (loss) on sale of securities
Net revenues used for efficiency ratio
Efficiency ratio
Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
502,251
18,726
(3,555)
349
486,731
1,022,090
142,562
1,164,652
25,445
1,139,207
$
$
$
$
511,232
22,506
(751)
1,770
487,707
1,048,915
148,635
1,197,550
8,176
1,189,374
$
$
$
$
495,661
14,240
1,702
19,735
459,984
999,362
128,573
1,127,935
(541)
1,128,476
42.7%
41.0%
40.8%
$
$
$
$
47
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements and the
notes thereto, which have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements requires us to make a
number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we
evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and
assumptions are reasonable; however, actual results may ultimately differ significantly from these estimates and assumptions, which could have a material
adverse effect on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.
Our significant accounting policies and practices are described in Note 1. Nature of Operations and Summary of Significant Accounting Policies of the
Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." We have identified two policies and
estimates as being critical because they 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 relate to the allowance for credit losses on loans and leases held for investment and the realization of deferred income tax assets
and liabilities.
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 outstanding loan and lease balances and the reserve for
unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the consolidated balance sheets. For loans and leases
acquired and measured at fair value and deemed non-impaired on the acquisition date, our allowance methodology measures deterioration in credit quality or
other inherent risks related to these acquired assets that may occur after the acquisition date.
The allowance for credit losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the
loan and lease portfolio and other extensions of credit at the balance sheet date. The allowance is based upon our review of the credit quality of the loan and
lease portfolio, which includes loan and lease payment trends, borrowers' compliance with loan agreements, borrowers' current and budgeted financial
performance, collateral valuation trends, and current economic factors and external conditions that may affect our borrowers' ability to make payments to us in
accordance with contractual terms. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for
loan and lease losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses has a general reserve component for unimpaired loans and leases and a specific reserve component for impaired
loans and leases.
A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the original contractual terms of
the agreement. We assess our loans and leases for impairment on an ongoing basis using certain criteria such as payment performance, borrower reported
financial results and budgets, and other external factors when appropriate. We measure impairment 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 specific 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. Impaired loans and leases with
outstanding balances less than or equal to $250,000 may not be individually assessed for impairment but would be assessed with reserves based on the
average loss severity on historical impaired loans with similar risk characteristics.
48
Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors which are applied to our
population of unimpaired loans and leases to estimate our general reserves. The quantitative loss factors determination is based on a probability of default/loss
given default ("PD/LGD") methodology which considers the likelihood of loans defaulting based on the historical degree that similar loans defaulted and the
degree of credit losses based on the historical average degree of loss experienced for these similar loans and leases pooled both by loan or lease type and
credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors. The qualitative loss factors consider, among other things,
current economic trends and forecasts, current collateral values and performance trends, credit performance trends, and the loan portfolio's current
composition.
The qualitative criteria we consider when establishing the loss factors include the following:
•
•
•
•
•
•
•
•
•
current economic trends and forecasts;
current collateral values, performance trends, and overall outlook in the markets where we lend;
legal and regulatory matters that could impact our borrowers’ ability to repay loans and leases;
loan and lease portfolio composition and any loan concentrations;
current lending policies and the effects of any new policies or policy amendments;
loan and lease production volume and mix;
loan and lease portfolio credit performance trends;
results of independent credit reviews; and
changes in management related to credit administration functions.
We estimate the reserve for unfunded loan commitments using the same loss factors as used for the allowance for loan and lease losses. The reserve for
unfunded loan commitments is computed using expected future usage of the unfunded commitments based on historical usage of unfunded commitments for
the various loan types.
The allowance for credit losses is directly correlated to the credit risk ratings of our loans. 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 on a regular basis. The credit risk ratings assigned
to every loan and lease are either “pass,” “special mention,” “substandard,” or “doubtful” and defined as follows:
•
•
•
Pass: Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
Special Mention: 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: 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: 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 5. Loans and Leases of the Notes to Consolidated Financial Statements contained in
"Item 8. Financial Statements and Supplementary Data."
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 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.
49
Management believes the allowance for credit losses is appropriate for the known and inherent risks in our loan and lease portfolio and the credit risk
ratings and inherent loss rates currently assigned are appropriate. 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, for example, 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. Although we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the established
allowance will be sufficient to absorb future losses.
Our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s allowance for credit losses.
Our regulators may require the Company to recognize additions to the allowance based on their judgments related to information available to them at the time
of their examinations.
Deferred Tax Assets and Liabilities
Our deferred tax assets and liabilities arise from differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We determine whether a deferred tax asset is
realizable based on facts and circumstances, including our current and projected future tax position, the historical level of our taxable income, and estimates of
our future taxable income. In most cases, the realization of deferred tax assets is based on our future profitability. If we were to experience either reduced
profitability or operating losses in a future period, the realization of our deferred tax assets may no longer be considered more likely than not and, accordingly,
we could be required to record a valuation allowance on our deferred tax assets by charging earnings.
50
Non-GAAP Measurements
We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to
enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among
companies. We use the following non-GAAP measures in this Form 10-K:
• 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.
Return on Average Tangible Equity
2019
2018
2017
Year Ended December 31,
Net earnings
Average stockholders' equity
Less: Average intangible assets
Average tangible common equity
Return on average equity (1)
Return on average tangible equity (2)
____________________________________________________
(1) Net earnings divided by average stockholders' equity.
(2) Net earnings divided by average tangible common equity.
Tangible Common Equity Ratio/
Tangible Book Value Per Share
Stockholders’ equity
Less: Intangible assets
Tangible common equity
Total assets
Less: Intangible assets
Tangible assets
Equity to assets ratio
Tangible common equity ratio (1)
Book value per share
Tangible book value per share (2)
Shares outstanding
_________________________________________________________________
(1)
(2)
Tangible common equity divided by tangible assets.
Tangible common equity divided by shares outstanding.
$
$
$
$
$
$
$
$
$
51
(Dollars in thousands)
468,636
$
465,339
$
357,818
4,864,332
2,596,389
2,267,943
$
$
4,809,667
2,616,820
2,192,847
$
$
9.63 %
20.66 %
9.68 %
21.22 %
4,641,495
2,279,010
2,362,485
7.71 %
15.15 %
2019
December 31,
2018
2017
(Dollars in thousands, except per share data)
4,954,697
2,587,064
2,367,633
26,770,806
2,587,064
24,183,742
$
$
$
$
18.51%
9.79%
$
$
41.36
19.77
119,781,605
4,825,588
2,605,790
2,219,798
25,731,354
2,605,790
23,125,564
$
$
$
$
18.75%
9.60%
39.17
18.02
123,189,833
$
$
4,977,598
2,628,296
2,349,302
24,994,876
2,628,296
22,366,580
19.91%
10.50%
38.65
18.24
128,782,878
Results of Operations
Acquisitions Impact Earnings Performance
The comparability of financial information is affected by our acquisitions. We completed the acquisition of CUB on October 20, 2017, thereby impacting
the comparability of the three years presented. This acquisition was accounted for using the acquisition method of accounting and, accordingly, CUB's
operating results have been included in the consolidated financial statements from its acquisition date.
Earnings Performance
2019 Compared to 2018
Net earnings for the year ended December 31, 2019 were $468.6 million, or $3.90 per diluted share, compared to net earnings for the year ended
December 31, 2018 of $465.3 million, or $3.72 per diluted share. The $3.3 million increase in net earnings was due to a lower provision for credit losses of $23.0
million, lower noninterest expense of $9.0 million, and lower income tax expense of $3.7 million, offset partially by lower net interest income of $26.3 million and
lower noninterest income of $6.1 million.
The provision for credit losses decreased due mainly to lower specific provisions for impaired loans during 2019 and lower provisions related to the
reserve for unfunded loan commitments during 2019 due to updates on utilization factors which estimate the percentage of available credit that will be utilized
by our borrowers.
Noninterest expense declined due principally to lower other expense of $8.8 million. Other expense decreased due mostly to $2.1 million of lower
amortization of non-competition agreements, $2.0 million in lower franchise tax expense, a $1.7 million reversal of previously accrued merger costs, $1.3 million
in lower employee related expenses, and $1.1 million in lower operating and other losses.
Net interest income decreased due to interest expense growth of $84.5 million exceeding interest income growth of $58.2 million. Interest expense
increased due to the cost of deposits increasing to 0.77% in 2019 compared to 0.44% in 2018 due mainly to higher rates paid on deposits in conjunction with
increased market rates. Interest income increased due primarily to a higher average balance of loans and leases, partially offset by a lower yield on loans and
leases due to lower discount accretion and from de-risking initiatives which have resulted in lower yields on newly originated loans compared to the yields on
loans that have matured and paid off.
Noninterest income declined due mostly to lower other income of $13.7 million, lower dividends and gains on equity investments of $4.4 million, a lower
gain on sale of loans of $3.6 million, and lower other commissions and fees of $1.9 million, offset partially by a higher gain on sale of securities of $17.3 million.
Other income declined due primarily to lower gains on early lease terminations, lower legal settlements with former borrowers, and lower BOLI income.
Dividends and gains on equity investments declined due primarily to lower gains on the sale of equity investments and lower dividends received in 2019 as
compared to 2018 as a significant portion of our equity investments were sold in the second quarter of 2018. Gain on sale of loans declined due to a net gain of
$1.1 million on sales of $101.5 million of loans in 2019 compared to a net gain of $4.7 million on sales of $641.9 million of loans during 2018. Other commissions
and fees decreased due primarily to lower loan prepayment penalty fees offset partially by higher foreign exchange fees, unused commitment fees and customer
success fees. Gain on sale of securities increased due mainly to a net gain of $25.4 million on sales of $1.6 billion of securities in 2019 compared to a net gain of
$8.2 million on sales of $563.6 million in 2018.
52
2018 Compared to 2017
Net earnings for the year ended December 31, 2018 were $465.3 million, or $3.72 per diluted share, compared to net earnings for the year ended
December 31, 2017 of $357.8 million, or $2.91 per diluted share. The $107.5 million increase in net earnings was due to higher net interest income of $61.3 million,
lower income tax expense of $28.9 million, a lower provision for credit losses of $12.8 million, and higher noninterest income of $20.1 million, offset partially by
higher noninterest expense of $15.6 million. Net interest income increased due mainly to higher balances of average loans and leases and average investment
securities and a higher yield on average loans and leases, offset partially by a lower yield on average investment securities and higher interest expense. Income
tax expense decreased due primarily to the TCJA which reduced our effective tax rate to 26.5% for the year ended December 31, 2018 from 35.5% for 2017. The
provision for credit losses declined due mainly to lower specific provisions for impaired loans during 2018, higher recoveries of charged-off loans during 2018,
and lower amounts of loans rated special mention and classified at December 31, 2018 compared to December 31, 2017. Noninterest income increased due
mostly to a higher gain on sale of securities of $8.7 million, higher warrant income of $4.9 million, higher other commissions and fees of $4.1 million, and higher
other income of $3.7 million. Noninterest expense increased due mainly to higher compensation expense of $16.0 million, higher intangible asset amortization of
$8.3 million, higher other professional services expense of $4.6 million, and higher occupancy expense of $4.4 million, offset partially by lower acquisition,
integration and reorganization costs of $18.0 million. The increases in these expense categories were due primarily to twelve months of CUB incremental
operating expenses in 2018 compared to only 72 days of expense in 2017.
53
Net Interest Income
The following table summarizes the distribution of average assets, liabilities, and stockholders’ equity, as well as interest income and yields earned on
average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, presented on a tax equivalent basis, for the years
indicated:
2019
2018
2017
Year Ended December 31,
Interest
Yields
Interest
Yields
Interest
Yields
Average
Income/
and
Average
Income/
and
Average
Income/
and
Balance
Expense
Rates
Balance
Expense
(Dollars in thousands)
Rates
Balance
Expense
Rates
$
$
$
ASSETS:
Loans and leases (1)(2)(3)
Investment securities (2)(4)
Deposits in financial institutions
Total interest-earning assets (2)
Other assets
Total assets
LIABILITIES AND
STOCKHOLDERS’ EQUITY:
Interest checking
Money market
Savings
Time
Total interest-bearing deposits
Borrowings
Subordinated debentures
Total interest-bearing liabilities
Noninterest-bearing demand
deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
$ 1,099,118
121,757
6,479
1,227,354
18,330,137
3,844,328
322,366
22,496,831
3,608,777
26,105,608
6.00% $
3.17%
2.01%
5.46%
$
16,863,673
3,809,383
116,282
20,789,338
3,516,020
24,305,358
$ 1,048,984
118,605
2,082
1,169,671
6.22% $
3.11%
1.79%
5.63%
$
15,954,026
3,504,808
137,228
19,596,062
3,038,673
22,634,735
$
953,200
117,564
1,543
1,072,307
5.97%
3.35%
1.12%
5.47%
3,406,218
5,139,623
525,809
2,641,135
11,712,785
1,180,164
455,537
13,348,486
7,537,172
355,618
21,241,276
4,864,332
41,938
56,382
891
49,249
148,460
26,961
29,843
205,264
1.23% $
1.10%
0.17%
1.86%
1.27%
2.28%
6.55%
1.54%
2,445,094
5,107,888
641,720
1,856,126
10,050,828
570,216
454,702
11,075,746
20,049
39,194
1,009
19,888
80,140
11,985
28,631
120,756
0.82% $
0.77%
0.16%
1.07%
0.80%
2.10%
6.30%
1.09%
1,928,249
5,027,453
707,301
2,247,168
9,910,171
388,896
447,684
10,746,751
8,715
22,924
1,162
12,893
45,694
3,638
23,613
72,945
0.45%
0.46%
0.16%
0.57%
0.46%
0.94%
5.27%
0.68%
8,211,475
208,470
19,495,691
4,809,667
7,076,445
170,044
17,993,240
4,641,495
stockholders' equity
$
26,105,608
$
24,305,358
$
22,634,735
Net interest income (2)
Net interest rate spread (2)
Net interest margin (2)
$ 1,022,090
$ 1,048,915
$
999,362
3.92%
4.54%
4.54%
5.05%
$
19,249,957
Total deposits (5)
_____________________
(1) Includes nonaccrual loans and leases and loan fees. Starting with the third quarter of 2017, includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2) Tax equivalent.
(3) Includes discount accretion on acquired loans of $12.1 million, $29.3 million, and $26.1 million for 2019, 2018, and 2017, respectively.
(4) Includes tax-equivalent adjustments of $6.2 million, $7.0 million, and $19.4 million for 2019, 2018, and 2017, respectively, related to tax-exempt interest on investment
18,262,303
16,986,616
0.77% $
0.44% $
148,460
45,694
80,140
$
$
$
4.79%
5.10%
0.27%
securities. The federal statutory rate utilized was 21% for 2019 and 2018 and 35% for 2017.
(5) Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total
deposits divided by average total deposits.
54
Net interest income is affected by changes in both interest rates and the amounts of average interest-earning assets and interest-bearing liabilities. The
changes in the yields earned on average interest-earning assets and rates paid on average interest-bearing liabilities are referred to as changes in “rate.” The
changes in the amounts of average interest-earning assets and interest-bearing liabilities are referred to as changes in “volume.” The change in interest
income/expense attributable to rate reflects the change in rate multiplied by the prior year’s volume. The change in interest income/expense attributable to
volume reflects the change in volume multiplied by the prior year’s rate. The change in interest income/expense not attributable specifically to either rate or
volume is allocated ratably between the two categories.
The following table presents changes in interest income (tax equivalent) and interest expense and related changes in rate and volume for the years
indicated:
2019 Compared to 2018
2018 Compared to 2017
Total
Increase
Increase (Decrease)
Due to
Total
Increase
Increase (Decrease)
Due to
(Decrease)
Rate
Volume
(Decrease)
Rate
Volume
(In thousands)
$
50,134
3,152
4,397
57,683
$
(38,762 ) $
2,058
284
(36,420 )
$
88,896
1,094
4,113
94,103
$
95,784
1,041
539
97,364
$
55,647
9,815
(264 )
65,198
21,889
17,188
(118 )
29,361
68,320
14,976
1,212
84,508
12,272
16,943
74
18,686
47,975
1,125
1,159
50,259
9,617
245
(192 )
10,675
20,345
13,851
53
34,249
11,334
16,270
(153 )
6,995
34,446
8,347
5,018
47,811
2,807
373
(105 )
(2,569 )
506
2,272
375
3,153
40,137
(8,774 )
803
32,166
8,527
15,897
(48 )
9,564
33,940
6,075
4,643
44,658
Interest Income:
Loans and leases (1)
Investment securities (2)
Deposits in financial institutions
Total interest income (2)
Interest Expense:
Interest checking deposits
Money market deposits
Savings deposits
Time deposits
Total interest-bearing deposits
Borrowings
Subordinated debentures
Total interest expense
Net interest income (2)
_____________________
(1) Starting with the third quarter of 2017, includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2) Tax equivalent.
(26,825 ) $
59,854
$
(86,679 ) $
$
49,553
$
62,045
$
(12,492 )
2019 Compared to 2018
Net interest income decreased by $26.3 million to $1.01 billion for the year ended December 31, 2019 compared to $1.04 billion for the year ended
December 31, 2018 due to interest expense growth exceeding interest income growth. Interest expense increased by $84.5 million due mainly to a higher cost
and balance of average interest-bearing deposits, a lower balance of average noninterest-bearing deposits, and a higher balance and cost of average
borrowings. Interest income increased by $58.2 million due primarily to a higher balance of average loans and leases, offset partially by a lower rate on average
loans and leases. The tax equivalent yield on average loans and leases was 6.00% for the year ended December 31, 2019 compared to 6.22% for 2018. The
decrease in the yield on average loans and leases was due in part to lower discount accretion on acquired loans (seven basis points for 2019 compared to 17
basis points for 2018). The decrease in the average loan and lease yield was also influenced by 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 fund loans. These factors were
partially offset by upward repricing of variable-rate loans attributable to four quarter-point increases in the fed funds target rate during 2018 and in effect
through the first half of 2019, only recently mitigated by three quarter-point cuts to the fed funds target rate during the second half of 2019.
55
The tax equivalent NIM for the year ended December 31, 2019 was 4.54% compared to 5.05% for the year ended December 31, 2018. The decrease in the
tax equivalent NIM was due mostly to higher deposit and borrowing costs, as well as the decrease in the yield on average loans and leases as described
above. Total discount accretion on acquired loans contributed six basis points to the NIM for 2019 compared to 14 basis points for 2018.
The cost of average total deposits increased to 0.77% for the year ended December 31, 2019 from 0.44% for 2018 due mainly to higher rates paid on
deposits in conjunction with increased market rates, along with a shift in our deposit mix resulting from increases in average interest-bearing deposits and a
decrease in average noninterest-bearing demand deposits.
2018 Compared to 2017
Net interest income increased by $61.3 million to $1.04 billion for the year ended December 31, 2018 compared to $979.6 million for the year ended
December 31, 2017 due mainly to higher balances of average loans and leases and average investment securities and a higher yield on average loans and
leases, offset partially by a lower yield on average investment securities and higher interest expense. The yield on average loans and leases was 6.22% for the
year ended December 31, 2018 compared to 5.97% for 2017. The increase in the yield on average loans and leases was due mainly to repricing of variable-rate
loans attributable to higher short-term market interest rates.
The tax equivalent NIM for the year ended December 31, 2018 was 5.05% compared to 5.10% for the year ended December 31, 2017. The decrease in the
tax equivalent NIM was due mostly to a higher cost of average interest-bearing liabilities, a lower yield on average investment securities, and a decrease of six
basis points resulting from a smaller tax equivalent adjustment due to the lower statutory federal tax rate, offset partially by the increase in the yield on average
loans and leases as described above. The taxable equivalent adjustment for tax-exempt interest income on investment securities contributed three basis points
to the tax equivalent NIM for the year ended December 31, 2018 and 10 basis points for 2017.
The cost of average total deposits increased to 0.44% for the year ended December 31, 2018 from 0.27% for 2017 due mainly to higher rates paid on
deposits in conjunction with increased market interest rates.
56
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 years indicated:
Provision For Credit Losses:
Addition to allowance for loan and lease losses
(Reduction in) addition to reserve for unfunded
loan commitments
Total provision for credit losses
Credit Quality Metrics (1):
Net charge-offs on loans and leases held for
investment (2)
Net charge-offs to average loans and leases
At year-end:
Allowance for credit losses
Allowance for credit losses to loans and leases
held for investment
Allowance for credit losses to nonaccrual loans
and leases held for investment
Nonaccrual loans and leases held for investment
Performing TDRs held for investment
Total impaired loans and leases
Classified loans and leases held for investment
$
$
$
$
$
$
$
2019
Increase
(Decrease)
Year Ended December 31,
2018
(Dollars in thousands)
Increase
(Decrease)
2017
23,000
$
(13,774 ) $
36,774
$
(14,192 ) $
50,966
(1,000 )
22,000
$
(9,226 )
(23,000 ) $
8,226
45,000
$
1,440
(12,752 ) $
6,786
57,752
16,687
$
0.09 %
(27,071 ) $
43,758
$
0.26 %
(19,199 ) $
62,957
0.40 %
174,646
$
5,313
$
169,333
$
7,686
$
161,647
0.93 %
189.1 %
92,353
12,257
104,610
$
$
$
13,020
(5,444 )
7,576
$
0.94 %
213.5 %
0.96 %
103.8 %
79,333
17,701
97,034
$
$
(76,451 ) $
(39,137 )
(115,588 ) $
155,784
56,838
212,622
175,912
$
(61,198 ) $
237,110
$
(41,295 ) $
278,405
______________________
(1) Amounts and ratios related to 2019 and 2018 are for total loans and leases held for investment, net of deferred fees. Amounts and ratios related to 2017 are for Non-PCI loans
(2)
and leases held for investment, net of deferred fees.
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 on and off-balance sheet credit exposures. 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.
The allowance for loan and lease losses has a general reserve component for loans and leases with no credit impairment and a specific reserve component
for impaired loans and leases. Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors that are
applied against the population of unimpaired loans and leases. The quantitative loss factors consider the likelihood of loans defaulting based on the historical
degree that similar loans defaulted and the degree of credit losses based on the historical average degree of loss experienced for these similar loans and leases
pooled both by loan or lease type and credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors. The qualitative loss
factors consider, among other things, current economic trends and forecasts, current collateral values and performance trends, credit performance trends, and
the loan portfolio's current composition.
57
The provision for credit losses decreased by $23.0 million to $22.0 million for the year ended December 31, 2019 compared to $45.0 million for the year
ended December 31, 2018 due mainly to lower specific provisions for impaired loans during 2019 and lower provisions related to the reserve for unfunded loan
commitments during 2019 due to updates on utilization factors which estimate the percentage of available credit that will be utilized by our borrowers.
The provision for credit losses declined by $12.8 million to $45.0 million for the year ended December 31, 2018 compared to $57.8 million for the year ended
December 31, 2017 due mostly to lower specific provisions for impaired loans during 2018, higher recoveries of charged off loans during 2018, and lower
amounts of loans rated special mention and classified at December 31, 2018 compared to December 31, 2017. Loans rated special mention and classified have a
higher general reserve amount than loans rated pass.
Certain circumstances may lead to increased provisions for credit losses in the future including the adoption of CECL on January 1, 2020. Examples of
such circumstances are an increased amount of classified and/or impaired 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. For information
regarding the allowance for credit losses on loans and leases held for investment, see "- Critical Accounting Policies and Estimates - Allowance for Credit
Losses on Loans and Leases Held for Investment," "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment," Note 1
(i). Nature of Operations and Summary of Significant Accounting Policies, and Note 5. Loans and Leases of the Notes to Consolidated Financial Statements
contained in “Item 8. Financial Statements and Supplementary Data.”
Noninterest Income
The following table summarizes noninterest income by category for the years indicated:
Noninterest Income
Other commissions and fees
Leased equipment income
Service charges on deposit accounts
Gain on sale of loans and leases
Gain (loss) on sale of securities
Other income:
Dividends and (losses) gains on equity investments
Warrant income
Other
Total noninterest income
$
$
2019
Increase
(Decrease)
Year Ended December 31,
2018
(In thousands)
Increase
(Decrease)
2017
$
(1,920) $
846
(1,872)
(3,561)
17,269
(4,374)
1,191
(13,652)
(6,073) $
$
45,543
37,881
16,509
4,675
8,176
3,807
7,478
24,566
148,635
$
$
4,121
181
1,202
(1,522)
8,717
(1,312)
4,946
3,729
20,062
$
41,422
37,700
15,307
6,197
(541)
5,119
2,532
20,837
128,573
43,623
38,727
14,637
1,114
25,445
(567)
8,669
10,914
142,562
$
58
2019 Compared to 2018
Noninterest income declined by $6.1 million to $142.6 million for the year ended December 31, 2019 compared to $148.6 million for the year ended
December 31, 2018 due mostly to decreases in other income of $13.7 million, dividends and gains on equity investments of $4.4 million, gain on sale of loans
and leases of $3.6 million, and other commissions and fees of $1.9 million, offset partially by an increase in gain on sale of securities of $17.3 million. Other
income declined due primarily to lower gains on early lease terminations, lower legal settlements with former borrowers, and lower BOLI income. Dividends and
gains on equity investments decreased due primarily to lower gains on the sale of equity investments and lower dividends received in 2019 as compared to
2018 as a significant portion of our equity investments were sold in the second quarter of 2018. Gain on sale of loans and leases declined due to a net gain of
$1.1 million on sales of $101.5 million of loans and leases during 2019 compared to a net gain of $4.7 million on sales of $641.9 million of loans and leases during
2018. The loans and leases sold during 2018 included the sale of a large nonaccrual loan for a $2.4 million gain and the settlement of our December 31, 2017
loans held for sale of $481.1 million for a $1.3 million gain. Other commissions and fees decreased due primarily to lower loan prepayment penalty fees of $4.2
million, offset partially by higher foreign exchange fees of $0.8 million, higher unused commitment fees of $0.8 million, and higher customer success fees of $0.5
million. Gain on sale of securities increased due mainly to a net gain of $25.4 million on sales of $1.6 billion of securities during the year ended December 31,
2019 compared to a net gain of $8.2 million on sales of $563.6 million of securities during 2018. The higher gain on sale of securities in 2019 is due primarily to
the repositioning of a portion of our securities portfolio in the second quarter of 2019 to shorten the duration of the portfolio, to enhance liquidity, and to take
advantage of municipal security price appreciation due to market dynamics from tax law changes. The securities sold in 2018 included $299.9 million that were
sold for a gain of $6.3 million in the first quarter of 2018 primarily for reinvestment in higher quality liquid assets, yield, and credit risk purposes.
2018 Compared to 2017
Noninterest income increased by $20.1 million to $148.6 million for the year ended December 31, 2018 compared to $128.6 million for the year ended
December 31, 2017 due primarily to increases in gain on sale of securities of $8.7 million, warrant income of $4.9 million, other commissions and fees of $4.1
million, and other income of $3.7 million. Gain on sale of securities increased due to a net gain of $8.2 million on sales of $563.6 million of securities during the
year ended December 31, 2018 compared to a net loss of $0.5 million on sale of $759.8 million of securities during 2017. The securities sold in 2018 included
$299.9 million that were sold for a gain of $6.3 million in the first quarter of 2018 principally for reinvestment in higher quality liquid assets, yield, and credit risk
purposes. Warrant income increased due mainly to a $3.1 million gain on a warrant in a company that completed an IPO. Other commissions and fees increased
due mostly to higher foreign exchange fees of $3.1 million and higher credit card fee income of $1.5 million. Other income increased due primarily to higher gains
on early lease terminations and higher BOLI income, offset partially by lower legal settlements with former borrowers.
59
Noninterest Expense
The following table summarizes noninterest expense by category for the years indicated:
Noninterest Expense
Compensation
Occupancy
Data processing
Leased equipment depreciation
Intangible asset amortization
Other professional services
Insurance and assessments
Customer related expense
Loan expense
Acquisition, integration and reorganization costs
Foreclosed assets (income) expense, net
Other
Total noninterest expense
2019 Compared to 2018
$
$
2019
Increase
(Decrease)
Year Ended December 31,
2018
(In thousands)
Increase
(Decrease)
2017
$
285,862
57,407
27,556
24,016
18,726
17,803
16,404
13,839
12,931
349
(3,555)
30,913
502,251
$
$
3,294
4,184
331
2,645
(3,780)
(4,149)
(4,301)
3,486
2,362
(1,421)
(2,804)
(8,828)
(8,981) $
$
282,568
53,223
27,225
21,371
22,506
21,952
20,705
10,353
10,569
1,770
(751)
39,741
511,232
$
$
16,001
4,360
650
604
8,266
4,599
972
2,056
(3,263)
(17,965)
(2,453)
1,744
15,571
$
266,567
48,863
26,575
20,767
14,240
17,353
19,733
8,297
13,832
19,735
1,702
37,997
495,661
Noninterest expense decreased by $9.0 million to $502.3 million for the year ended December 31, 2019 compared to $511.2 million for the year ended
December 31, 2018 due primarily to a decline in other expense of $8.8 million. Other expense decreased due mostly to $2.1 million of lower amortization of non-
competition agreements, $2.0 million in lower franchise tax expense, a $1.7 million reversal of previously accrued merger costs, $1.3 million in lower employee
related expenses, and $1.1 million in lower operating and other losses. There were also noteworthy year-over-year fluctuations in compensation expense,
occupancy expense, other professional services expense, insurance and assessments expense, customer related expense and foreclosed assets (income)
expense, net. Compensation expense increased primarily due to higher bonus expense due to achievement of performance metrics in excess of targets.
Occupancy expense increased mainly due to an increased number of office locations. Other professional services expense decreased mainly as a result of lower
legal and consulting expense. Insurance and assessments expense decreased primarily due to the 4.5 basis point FDIC surcharge ending in the third quarter of
2018. Customer related expense increased due to an increase in the number of deposit customers on analysis and a higher utilization of analysis credits by
customers to pay third-party expenses. Foreclosed assets (income) expense, net, increased mainly due to higher gains on the sale of foreclosed assets.
2018 Compared to 2017
Noninterest expense increased by $15.6 million to $511.2 million for the year ended December 31, 2018 compared to $495.7 million for the year ended
December 31, 2017 due primarily to increases in compensation expense of $16.0 million, intangible asset amortization of $8.3 million, other professional services
expense of $4.6 million, and occupancy expense of $4.4 million, offset partially by a decrease in acquisition, integration and reorganization costs of $18.0 million.
Compensation expense increased due mainly to higher salary expense of $11.9 million, higher stock compensation expense of $4.2 million, and higher bonus
expense of $3.6 million, offset partially by lower severance and retention expense of $4.1 million. Intangible asset amortization increased due mostly to the
intangible assets added from the CUB acquisition in October 2017. Other professional services expense increased due primarily to higher consulting and legal
expense. Occupancy expense increased due primarily to inclusion of the CUB operations for a full year in 2018. The acquisition, integration and reorganization
costs for the year ended December 31, 2018 related to the terminated El Dorado Savings Bank merger agreement, while the costs for 2017 related to the CUB
acquisition.
60
Income Taxes
The effective tax rates were 26.0%, 26.5% and 35.5% for the years ended December 31, 2019, 2018, and 2017. The decrease in the effective tax rate for the
year ended December 31, 2019 was due primarily to $9.1 million of benefits related to changes in state apportionment, net of the federal tax effect. The
Company's 2019 blended statutory tax rate for federal and state was 27.9%.
The decrease in the effective tax rate for the year ended December 31, 2018 was due to the enactment of the TCJA, which reduced the federal statutory
corporate tax rate to 21% effective January 1, 2018 from 35% in prior periods. The Company remeasured its federal deferred tax assets and liabilities as a result
of the TCJA in its financial statements as of December 31, 2017.
For further information on income taxes, see Note 15. Income Taxes of the Notes to Consolidated Financial Statements contained in “Item 8. Financial
Statements and Supplementary Data.”
61
Fourth Quarter Results
The following table sets forth our unaudited quarterly results and certain performance metrics for the periods indicated:
Earnings Summary:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Gain on sale of securities
Other noninterest income
Total noninterest income
Foreclosed assets income (expense), net
Acquisition, integration and reorganization costs
Other noninterest expense
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Performance Measures:
Diluted earnings per share
Annualized return on:
Average assets
Average tangible equity (1)(2)
Net interest margin (tax equivalent)
Yield on average loans and leases (tax equivalent)
Cost of average total deposits
Efficiency ratio
____________________
(1) Calculation reduces average equity by average intangible assets.
(2) See "Non-GAAP Measurements."
Fourth Quarter of 2019 Compared to Third Quarter of 2019
$
$
$
Three Months Ended
December 31,
September 30,
2019
2019
(Dollars in thousands, except per share data)
293,593
(46,974)
246,619
(3,000)
243,619
184
26,992
27,176
3,446
269
(127,443)
(123,728)
147,067
29,186
117,881
$
$
0.98
$
1.77%
19.98%
4.33%
5.67%
0.71%
44.8%
307,208
(54,972)
252,236
(7,000)
245,236
908
32,521
33,429
(8)
—
(126,801)
(126,809)
151,856
41,830
110,026
0.92
1.65%
19.01%
4.46%
5.91%
0.83%
42.3%
Net earnings were $117.9 million, or $0.98 per diluted share, for the fourth quarter of 2019 compared to $110.0 million, or $0.92 per diluted share, for the
third quarter of 2019. The quarter-over-quarter increase in net earnings of $7.9 million was due to decreases in income tax expense of $12.6 million, provision for
credit losses of $4.0 million, and noninterest expense of $3.1 million, offset partially by declines in noninterest income of $6.3 million and net interest income of
$5.6 million.
Income tax expense decreased due primarily to $9.1 million of benefits related to changes in state apportionment, net of the federal tax effect.
62
Noninterest expense declined by $3.1 million to $123.7 million for the fourth quarter of 2019 compared to $126.8 million for the third quarter of 2019
attributable primarily to a $3.5 million increase in foreclosed assets income and $2.7 million decrease in other expense, offset partially by a $3.2 million increase
in compensation expense. Foreclosed assets income increased due to a $3.3 million gain on the sale of a repossessed asset. Other expense decreased due
primarily to a $1.7 million reversal of previously accrued merger costs and a $1.1 million credit adjustment to franchise tax expense for refunds related to state
apportionment changes. Compensation expense increased due mainly to higher bonus expense of $2.9 million.
Noninterest income decreased by $6.3 million to $27.2 million for the fourth quarter of 2019 compared to $33.4 million for the third quarter of 2019 due
mainly to a $2.7 million decrease in warrant income, a $1.7 million decrease in other income, a $0.8 million decrease in dividends and gain on equity investments,
a $0.7 million decrease in gain on sale of loans and leases, and a $0.7 million decrease in gain on sale of securities, offset partially by a $1.0 million increase in
leased equipment income. The decrease in warrant income was due to lower gains resulting from exercised warrants. The decrease in other income was due
mainly to lower gains from lease terminations. The decreases in gain on sale of loans and leases and gain on sale of securities were attributable to a lower level
of sales activity in the fourth quarter of 2019 as compared to the third quarter of 2019. The increase in leased equipment income was due primarily to a higher
average balance of leased equipment in the fourth quarter compared to the third quarter.
Net interest income declined by $5.6 million to $246.6 million for the fourth quarter of 2019 compared to $252.2 million for the third quarter of 2019 due
primarily to a lower yield on average loans and leases and a lower balance of average loans and leases. The tax equivalent yield on average loans and leases
was 5.67% for the fourth quarter of 2019 compared to 5.91% for the third quarter of 2019. The decrease in the yield on average loans and leases was due
principally to the repricing of variable-rate loans causing lower coupon interest in addition to lower loan fee income in the fourth quarter compared to the third
quarter, offset partially by higher loan prepayment fees. The prepayment fees added seven basis points to the fourth quarter yield on average loans and leases
and five basis points to the third quarter yield on average loans and leases.
The tax equivalent NIM was 4.33% for the fourth quarter of 2019 compared to 4.46% for the third quarter of 2019. The decrease in the NIM was due mainly
to the repricing of variable-rate loans causing lower coupon interest and lower loan fee income, offset partially by the lower cost of average interest-bearing
liabilities.
The cost of average total deposits decreased to 0.71% for the fourth quarter of 2019 from 0.83% for the third quarter of 2019 due mainly to a lower cost of
average interest-bearing deposits, offset partially by a lower average balance of noninterest-bearing deposits. Our cost of average total deposits has declined
from a 2019 peak of 86 basis points in the month of July to a 2019 low of 66 basis points in the month of December. The lower cost of average interest-bearing
deposits reflected actions taken to reduce deposit rates in light of the fed funds target rate cuts during the second half of 2019.
63
Balance Sheet Analysis
Securities Available-for-Sale
Our securities available-for sale portfolio consists primarily of U.S. government agency and government-sponsored enterprise (“agency") obligations and
obligations of states and political subdivisions (“municipal securities”).
The following table presents the composition and durations of our securities available-for-sale as of the dates indicated:
Security Type
Agency residential CMOs
$
Agency commercial MBS
Municipal securities
Agency residential MBS
Asset-backed securities
Collateralized loan obligations
Private label residential CMOs
SBA securities
Corporate debt securities
U.S. Treasury securities
Equity investments (1)
Total securities available-
2019
% of
Duration
Total
(in years)
Fair
Value
2018
% of
Duration
Total
(in years)
Fair
Value
2017
% of
Duration
Total
(in years)
Fair
Value
December 31,
1,136,397
1,108,224
735,159
305,198
214,783
123,756
99,483
48,258
20,748
5,181
—
(Dollars in thousands)
30%
29%
19%
8%
6%
3%
3%
1%
1%
—%
—%
$
3.7
4.4
7.6
3.3
1.1
0.2
3.2
4.0
11.3
3.2
—
632,850
1,112,704
1,312,194
281,088
81,385
—
101,205
67,047
17,553
403,405
—
16%
28%
33%
7%
2%
—%
2%
2%
—%
10%
—%
$
4.3
4.9
7.3
3.7
2.4
—
4.2
3.5
11.0
3.0
—
275,709
1,163,969
1,680,068
246,274
88,710
7,015
125,987
160,334
19,295
—
7,070
7%
31%
45%
7%
2%
—%
3%
4%
1%
—%
—%
6.8
5.4
7.3
3.0
3.0
0.3
5.1
2.0
11.8
—
—
6.0
for-sale
$
3,797,187
100%
4.4
$
4,009,431
100%
5.2
$
3,774,431
100%
____________________________
(1)
In connection with our adoption of ASU 2016-01 and ASU 2018-03 on January 1, 2018, we reclassified $7.1 million of equity investments from securities available-for-sale to
other assets in the first quarter of 2018. The reclassification was applied prospectively without prior period amounts being restated.
The following table presents the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
Municipal Securities by State
California
Washington
New York
Texas
Utah
Oregon
Florida
Illinois
District of Columbia
Ohio
Total of ten largest states
All other states
Total municipal securities
December 31, 2019
Fair
Value
% of
Total
(Dollars in thousands)
231,386
114,809
52,228
40,672
37,717
30,585
29,806
24,943
17,669
17,476
597,291
137,868
735,159
32%
16%
7%
6%
5%
4%
4%
3%
2%
2%
81%
19%
100%
$
$
64
The following table presents a summary of contractual rates and contractual maturities of our securities available-for-sale as of the date indicated:
Due
Within
One Year
Due After
One Year
Through
Five Years
Due After
Five Years
Through
Ten Years
Due After
Ten Years
Total
December 31, 2019
Value
Rate(1)
Value
Rate(1)
Value
Rate(1)
Value
Rate(1)
Value
Rate(1)
Fair
Fair
Fair
Fair
Fair
Agency residential CMOs
$
Agency commercial MBS
Municipal securities
Agency residential MBS
Asset-backed securities
Collateralized loan obligations
Private label residential CMOs
SBA securities
Corporate debt securities
U.S. Treasury securities
Total securities
—
1,693
6,191
11
—
—
2
—
—
—
— % $
2.96 %
4.52 %
4.65 %
— %
—%
5.07 %
— %
—%
—
—
202,084
14,068
6,010
50,798
—
353
4,565
—
5,181
— % $
2.88 %
4.36 %
4.01 %
3.44 %
—%
3.59 %
3.66 %
—%
2.65 %
(Dollars in thousands)
116,479
780,510
56,935
20,502
14,651
10,890
—
13,087
3.40 % $ 1,019,918
2.78 %
123,937
2.05 %
657,965
3.78 %
278,675
2.62 %
149,334
3.71 %
112,866
— %
99,128
2.80 %
30,606
20,748
—
— —%
— —%
2.96 % $ 1,136,397
3.22 %
1,108,224
3.58 %
735,159
3.95 %
305,198
3.02 %
214,783
3.23 %
123,756
3.59 %
99,483
2.91 %
48,258
4.88 %
20,748
5,181
—%
3.00 %
2.85 %
3.49 %
3.94 %
3.09 %
3.28 %
3.59 %
2.95 %
4.88 %
2.65 %
available-for-sale
$
7,897
4.18 % $ 283,059
3.09 % $ 1,013,054
2.84 % $ 2,493,177
3.30 % $ 3,797,187
3.17 %
_______________________________________
(1)
Rates presented are weighted average rates. Rates on tax-exempt securities are contractual rates and are not presented on a tax-equivalent basis.
65
Loans and Leases Held for Investment
The following table presents the composition of our total loans and leases held for investment, net of deferred fees, by loan portfolio segment, class, and
subclass as of the dates indicated:
$
Real estate mortgage:
Healthcare real estate
Hospitality
SBA program
Other commercial real estate
Total commercial real estate mortgage
Income producing residential
Other residential real estate
Total income producing and other residential
real estate mortgage
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land (1)
Total real estate
Commercial:
Lender finance & timeshare
Equipment finance
Premium finance
Other asset-based
Total asset-based
Equity fund loans
Early stage
Expansion stage
Late stage
Total venture capital
Security monitoring
Secured business loans
Other lending
Cash flow
Total other commercial
Total commercial
Consumer
Total loans and leases held for investment,
2019
2018
2017
2016
2015
(In thousands)
December 31,
$
334,070
625,798
556,889
2,685,930
4,202,687
3,665,790
104,270
3,770,060
7,972,747
1,082,368
1,655,434
2,737,802
10,710,549
2,118,767
852,278
467,469
309,893
3,748,407
1,199,268
212,509
693,459
74,186
2,179,422
619,260
583,300
527,049
38,058
1,767,667
7,695,496
440,827
$
451,776
575,516
559,113
3,237,893
4,824,298
2,971,213
122,630
3,093,843
7,918,141
912,583
1,321,073
2,233,656
10,151,797
1,780,731
734,331
356,354
434,005
3,305,421
797,500
225,566
908,047
107,635
2,038,748
643,369
788,012
514,947
114,098
2,060,426
7,404,595
401,321
$
843,653
695,043
551,606
3,295,438
5,385,740
2,245,058
221,836
2,466,894
7,852,634
769,075
822,154
1,591,229
9,443,863
1,609,937
656,995
232,664
425,354
2,924,950
471,163
443,370
953,199
255,003
2,122,735
573,066
743,824
475,584
278,920
2,071,394
7,119,079
409,801
$
955,477
689,158
454,196
2,297,865
4,396,696
1,169,267
144,769
1,314,036
5,710,732
581,246
384,001
965,247
6,675,979
1,666,855
691,967
161,835
428,284
2,948,941
325,047
448,458
920,006
294,389
1,987,900
428,759
354,822
310,896
2,373,235
3,467,712
8,404,553
375,422
1,230,787
656,750
473,960
2,284,036
4,645,533
1,035,164
176,045
1,211,209
5,856,742
345,991
184,382
530,373
6,387,115
1,587,577
890,349
108,738
498,671
3,085,335
228,863
347,298
600,541
281,311
1,458,013
438,113
352,679
300,383
2,335,469
3,426,644
7,969,992
121,147
net of deferred fees
$
18,846,872
$
17,957,713
$
16,972,743
$
15,455,954
$
14,478,254
________________________________
(1)
Includes $173.4 million, $168.9 million, $180.1 million, $152.9 million, and $75.2 million at December 31, 2019, 2018, 2017, 2016, and 2015 of land acquisition and
development loans.
66
Our loan portfolio segments of real estate mortgage loans, real estate construction and land loans, and commercial loans comprised 42%, 15%, and 41% of
our total loans and leases held for investment at December 31, 2019, respectively, compared to 44%, 13%, and 41% at December 31, 2018, respectively.
The changes during 2019 in the portfolio classes comprising these portfolio segments reflected the following:
• Commercial real estate mortgage loans decreased by 13% to $4.2 billion or 22% of total loans and leases held for investment at December 31, 2019
from $4.8 billion or 27% at December 31, 2018. The lower balance and composition ratio was attributable primarily to the balance of other
commercial real estate loans declining to $2.7 billion at December 31, 2019 from $3.2 billion at December 31, 2018. This decline occurred because
loan prepayments exceeded the amount of newly originated loans. Also contributing to the lower balance and composition ratio was the balance
of healthcare real estate loans declining to $334.1 million at December 31, 2019 from $451.8 million at December 31, 2018. This decline in new
healthcare real estate lending resulted from having fewer loan opportunities meeting our credit standards and then ceasing the origination of
healthcare real estate loans in our National Lending group in October 2019.
•
Income producing and other residential real estate mortgage loans increased by 22% to $3.8 billion or 20% of total loans and leases held for
investment at December 31, 2019 from $3.1 billion or 17% at December 31, 2018. The higher balance and composition ratio was attributable to our
continued emphasis on originating and purchasing multi-family secured real estate mortgage loans during 2019 due primarily to the favorable
credit risk profile of those loans. We purchased $549 million of multi-family loans in 2019 compared to $473 million in 2018.
• Commercial real estate construction and land loans increased by 19% to $1.1 billion or 6% of total loans and leases held for investment at
December 31, 2019 from $912.6 million or 5% at December 31, 2018. The higher balance and comparable composition ratio was attributable to our
continued origination of these types of loans and increases in balances on existing loans as disbursements occur during construction.
• Residential real estate construction and land loans increased by 25% to $1.7 billion or 9% of total loans and leases held for investment at
December 31, 2019 from $1.3 billion or 8% at December 31, 2018. The higher balance and composition ratio was attributable to our continued
emphasis on originating multi-family secured real estate construction loans in markets with strong demand for new multi-family housing and
increases in balances on existing loans as disbursements occur during construction.
• Asset-based loans and leases increased by 13% to $3.7 billion or 20% of total loans and leases held for investment at December 31, 2019 from $3.3
billion or 18% at December 31, 2018. The higher balance and composition ratio was due primarily to net loan growth in lender finance & timeshare
loans and premium finance loans attributable to continued emphasis on originations for these loan types because of their favorable historical
credit performance. Lender finance & timeshare loans increased to $2.1 billion at December 31, 2019 from $1.8 billion at December 31, 2018, and
premium finance loans increased to $467.5 million at December 31, 2019 from $356.4 million at December 31, 2018.
• Venture capital loans increased by 7% to $2.2 billion or 12% of total loans and leases held for investment at December 31, 2019 from $2.0 billion or
11% at December 31, 2018. The higher balance and composition ratio was attributable primarily to higher equity fund loans, offset partially by
lower expansion stage, early stage, and late stage loans to venture-backed companies. Equity fund loans increased to $1.2 billion at December 31,
2019 from $797.5 million at December 31, 2018. The increase in equity fund loans was due to continued emphasis on originations because of
favorable historical credit performance. Expansion stage loans, early stage loans, and late stage loans decreased collectively to $980.2 million at
December 31, 2019 from $1.2 billion at December 31, 2018.
• Other commercial loans decreased by 14% to $1.8 billion or 9% of total loans and leases held for investment at December 31, 2019 from $2.1 billion
or 12% at December 31, 2018. The lower balance was attributable primarily to lower secured business loans, which decreased to $583.3 million at
December 31, 2019 from $788.0 million at December 31, 2018, and to the declining balance of the cash flow loans, which decreased to $38.1 million
at December 31, 2019 from $114.1 million at December 31, 2018.
67
The following table presents the geographic composition of our real estate loans held for investment, net of deferred fees, by the top ten states and all
other states combined (in the order presented for the current year-end) as of the dates indicated:
Real Estate Loans by State
Balance
December 31,
2019
2018
% of
Total
Balance
(Dollars in thousands)
% of
Total
California
New York
Florida
Washington
Oregon
Texas
District of Columbia
Arizona
New Jersey
Virginia
Total of 10 largest states
All other states
Total real estate loans held for investment, net of deferred fees
$
$
6,510,094
711,301
598,561
324,588
288,764
260,513
166,641
162,317
159,791
150,646
9,333,216
1,377,333
10,710,549
61% $
7%
6%
3%
3%
2%
2%
1%
1%
1%
87%
13%
100% $
5,798,045
855,644
547,054
253,545
227,067
378,834
81,174
235,425
179,045
206,920
8,762,753
1,389,044
10,151,797
57%
8%
5%
3%
2%
4%
1%
2%
2%
2%
86%
14%
100%
At December 31, 2019 and 2018, 61% and 57% of our real estate loans were collateralized by property located in California because our full-service
branches and our community banking activities are primarily located in California.
68
The following table presents a roll forward of loans and leases held for investment, net of deferred fees, for the years indicated:
Roll Forward of Loans and Leases Held for Investment,
Year Ended December 31,
Net of Deferred Fees (1)
Balance, beginning of year
Additions:
Production
Disbursements
Total production and disbursements
Reductions:
Payoffs
Paydowns
Total payoffs and paydowns
Sales
Transfers to foreclosed assets
Charge-offs
Transfers to loans held for sale
Total reductions
Loans acquired through CUB acquisition
Net increase
Balance, end of year
2019
2018
2017
(Dollars in thousands)
$
17,957,713
$
16,972,743
$
15,455,954
4,863,288
5,092,219
9,955,507
(4,669,530 )
(4,262,977 )
(8,932,507 )
(76,335 )
(120 )
(32,262 )
(25,124 )
(9,066,348 )
—
889,159
18,846,872
$
$
4,888,614
4,104,335
8,992,949
(4,289,297 )
(3,480,997 )
(7,770,294 )
(161,729 )
(16,914 )
(59,042 )
—
(8,007,979 )
—
984,970
17,957,713
$
4,685,763
3,204,272
7,890,035
(3,801,592 )
(2,769,309 )
(6,570,901 )
(1,316,259 )
(580 )
(80,296 )
(481,100 )
(8,449,136 )
2,075,890
1,516,789
16,972,743
Weighted average rate on production (2)
_______________________________________
(1)
(2) The weighted average rate on production presents contractual rates on a tax equivalent basis and does not include amortized fees. Amortized fees added approximately 22 basis
Includes direct financing leases but excludes equipment leased to others under operating leases.
5.23 %
5.06 %
4.98 %
points to loan yields in 2019, 31 basis points to loan yields in 2018, and 30 basis points to loan yields in 2017.
Loan and Lease Interest Rate Sensitivity
The following table presents contractual maturity information for loans and leases held for investment, net of deferred fees, as of the date indicated:
December 31, 2019
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total loans and leases held for investment, net of deferred fees
Due
Within
One Year
Due After
One Year
Through
Five Years
Due
After
Five Years
Total
(In thousands)
$
2,139,286
1,416,937
4,057,286
75,783
7,689,292
$
4,824,314
161,698
998,740
348,700
6,333,452
$
$
7,972,747
2,737,802
7,695,496
440,827
18,846,872
$
$
1,009,147
1,159,167
2,639,470
16,344
4,824,128
$
$
69
At December 31, 2019, we had $4.8 billion of loans and leases held for investment due to mature over the next twelve months. For any of these loans and
leases held for investment, in the event that we provide a concession through a refinance or modification that we would not ordinarily consider in order to
protect as much of our investment as possible, such loans may be considered TDRs even though the loans have performed in accordance with their
contractual terms. The circumstances regarding any modifications and a borrower's specific situation, such as its ability to obtain financing from another
source at similar market terms, are evaluated on an individual basis to determine if a contractual loan renewal or loan extension constitutes a TDR. Higher levels
of TDRs may result in increases in classified loans and credit loss provisions.
The following table presents the interest rate profile of loans and leases held for investment, net of deferred fees, due after one year as of the date
indicated:
December 31, 2019
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total loans and leases held for investment, net of deferred fees
Fixed
Rate
Due After One Year
Variable
Rate
(In thousands)
875,856
274,608
1,574,448
382,467
3,107,379
$
$
6,087,744
1,304,027
3,481,578
42,016
10,915,365
$
$
$
$
Total
6,963,600
1,578,635
5,056,026
424,483
14,022,744
For information regarding our variable-rate loans subject to interest rate floors, see "Item 7A. Quantitative and Qualitative Disclosures About Market
Risk."
Allowance for Credit Losses on Loans and Leases Held for Investment
For a discussion of our policy and methodology on the allowance for credit losses on loans and leases held for investment, see "- Critical Accounting
Policies and Estimates - Allowance for Credit Losses on Loans and Leases Held for Investment." For further information on the allowance for loan and lease
losses on loans and leases held for investment, see Note 1(i). Nature of Operations and Summary of Significant Accounting Policies, and Note 5. Loans and
Leases of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
The following table presents information regarding the allowance for credit losses on loans and leases held for investment as of the dates indicated:
Allowance for Credit Losses Data (1)
2019
2018
2017
2016
2015
December 31,
Allowance for loan and lease losses
Reserve for unfunded loan commitments
Total allowance for credit losses
$
$
138,785
35,861
174,646
$
$
132,472
36,861
169,333
$
(Dollars in thousands)
$
$
133,012
28,635
161,647
$
143,755
17,523
161,278
$
$
105,534
16,734
122,268
Allowance for credit losses to loans and leases
held for investment
Allowance for credit losses to nonaccrual loans and leases
0.93%
0.94%
0.96%
1.05%
held for investment
189.1%
213.5%
103.8%
94.5%
_______________________________________
(1) Amounts and ratios related to 2019 and 2018 are for total loans and leases. Amounts and ratios related to 2017 and prior years are for Non-PCI loans and leases.
0.86%
94.8%
70
The following table presents the changes in our allowance for credit losses on loans and leases held for investment for the years indicated:
Allowance for Credit Losses Roll Forward (1)
2019
2018
2017
2016
2015
Year Ended December 31,
Balance, beginning of year (2)
Provision for credit losses:
Addition to allowance for loan and lease losses
(Reduction in) addition to reserve for unfunded loan
commitments
Total provision for credit losses
Loans and leases charged off:
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total loans and leases charged off
Recoveries on loans charged off:
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total recoveries on loans charged off
Net charge-offs
Fair value of acquired reserve for unfunded loan
commitments
Balance, end of year
$
169,333
$
168,091
(Dollars in thousands)
$
161,278
$
23,000
(1,000)
22,000
(997)
—
(30,426)
(839)
(32,262)
983
—
14,397
195
15,575
(16,687)
36,774
8,226
45,000
(8,190)
—
(50,481)
(371)
(59,042)
2,350
195
12,566
173
15,284
(43,758)
52,214
6,786
59,000
(2,410)
—
(70,709)
(1,023)
(74,142)
1,209
429
9,415
132
11,185
(62,957)
122,268
$
76,767
60,211
789
61,000
(2,059)
—
(32,210)
(823)
(35,092)
4,519
673
7,794
116
13,102
(21,990)
42,604
5,677
48,281
(2,489)
—
(13,354)
(156)
(15,999)
3,582
1,082
3,399
410
8,473
(7,526)
$
—
174,646
$
—
169,333
$
4,326
161,647
$
—
161,278
$
4,746
122,268
Net charge-offs to average loans and leases
_______________________________________
(1) Amounts and ratios related to 2019 and 2018 are for total loans and leases. Amounts and ratios related to 2017 and prior years are for Non-PCI loans and leases.
(2) The allowance for loan losses related to PCI loans of $6.4 million as of December 31, 2017 is reflected in the beginning balance for 2018.
0.15%
0.09%
0.40%
0.26%
0.06%
71
The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:
Allowance for Credit Losses Charge-offs (1)
2019
2018
2017
2016
2015
(In thousands)
Year Ended December 31,
Real estate mortgage:
Healthcare real estate
Hospitality
SBA program
Other commercial real estate
Total commercial real estate mortgage
Income producing residential
Other residential real estate
Total income producing and other residential
real estate mortgage
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Commercial:
Lender finance & timeshare
Equipment finance
Other asset-based
Premium finance
Total asset-based
Equity fund loans
Early stage
Expansion stage
Late stage
Total venture capital
Security monitoring
Secured business loans
Other lending
Cash flow
Total other commercial
Total commercial
Consumer
Total charge-offs
$
$
—
—
897
9
906
—
91
91
997
—
—
—
—
—
11,950
31
11,981
—
2,161
7,208
—
9,369
1,707
1,426
2,784
3,159
9,076
30,426
839
32,262
$
$
—
—
2,679
5,305
7,984
145
61
206
8,190
—
—
—
8
2,934
1,033
—
3,975
—
15,070
17,907
—
32,977
—
1,984
1,606
9,939
13,529
50,481
371
59,042
$
$
—
692
1,237
65
1,994
—
416
416
2,410
—
—
—
202
19
400
—
621
—
20,317
17,014
2,970
40,301
—
948
1,301
27,538
29,787
70,709
1,023
74,142
$
$
—
163
227
885
1,275
231
553
784
2,059
—
—
—
904
24,911
—
—
25,815
—
927
2,262
—
3,189
—
684
1,674
848
3,206
32,210
823
35,092
$
$
—
615
1,436
281
2,332
30
127
157
2,489
—
—
—
—
8,088
—
—
8,088
—
—
—
—
—
—
2,260
339
2,667
5,266
13,354
156
15,999
_______________________________________________
(1) Charge-offs related to 2019 and 2018 are for total loans and leases. Charge-offs related to 2017 and prior years are for Non-PCI loans and leases.
Real estate mortgage gross charge-offs declined to $1.0 million for the year ended December 31, 2019 from $8.2 million for the year ended December 31,
2018. The 2018 amount included a $4.3 million gross charge-off related to a single loan secured by a traditional mall that was foreclosed upon and sold during
2018.
Asset-based gross charge-offs increased to $12.0 million for the year ended December 31, 2019 from $4.0 million for the year ended December 31, 2018.
The 2019 amount included an $11.8 million gross charge-off related to a single loan.
72
Venture capital gross charge-offs declined to $9.4 million for the year ended December 31, 2019 from $33.0 million for the year ended December 31, 2018.
The 2019 lower venture capital gross charge-off experience is attributable to improvements made in venture capital loan underwriting and credit administration
and our de-risking strategy, which emphasizes originations of equity fund loans (which had no gross charge-offs in 2019 and 2018).
Other commercial gross charge-offs declined to $9.1 million for the year ended December 31, 2019 from $13.5 million for the year ended December 31, 2018.
The 2019 lower other commercial gross charge-off experience is attributable to our de-risking strategy under which we discontinued cash flow lending. Cash
flow gross charge-offs declined to $3.2 million for the year ended December 31, 2019 from $9.9 million for the year ended December 31, 2018.
The following table presents recoveries by portfolio segment, class, and subclass for the periods indicated:
Allowance for Credit Losses Recoveries (1)
2019
2018
2017
2016
2015
Year Ended December 31,
(In thousands)
Real estate mortgage:
Healthcare real estate
Hospitality
SBA program
Other commercial real estate
Total commercial real estate mortgage
Income producing residential
Other residential real estate
Total income producing and other residential
real estate mortgage
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Commercial:
Lender finance & timeshare
Equipment finance
Other asset-based
Premium finance
Total asset-based
Equity fund loans
Early stage
Expansion stage
Late stage
Total venture capital
Security monitoring
Secured business loans
Other lending
Cash flow
Total other commercial
Total commercial
Consumer
Total recoveries
$
$
—
—
382
162
544
276
163
439
983
—
—
—
6
11
1,416
—
1,433
—
5,811
2,340
—
8,151
181
2,877
760
995
4,813
14,397
195
15,575
$
$
—
—
452
477
929
1,208
213
1,421
2,350
61
134
195
23
90
255
—
368
—
2,664
6,131
—
8,795
—
895
1,620
888
3,403
12,566
173
15,284
$
$
—
—
413
567
980
—
229
229
1,209
90
339
429
—
3,377
—
—
3,377
—
3,827
503
—
4,330
—
934
774
—
1,708
9,415
132
11,185
$
$
—
12
181
3,836
4,029
115
375
490
4,519
381
292
673
—
1,854
—
—
1,854
—
—
91
—
91
—
801
2,522
2,526
5,849
7,794
116
13,102
$
$
—
269
198
2,712
3,179
103
300
403
3,582
29
1,053
1,082
—
77
1
—
78
—
—
—
—
—
—
2,946
375
—
3,321
3,399
410
8,473
___________________________________________
(1) Recoveries related to 2019 and 2018 are for total loans and leases. Recoveries related to 2017 and prior years are for Non-PCI loans and leases.
73
The following table presents the allowance for loan and lease losses on loans and leases held for investment by loan portfolio segment as of the dates
indicated:
Allowance for Loan and Lease Losses by Portfolio Segment (1)
Real Estate
Real Estate
Construction
Mortgage
and Land
Commercial
Consumer
Total
(Dollars in thousands)
$
$
$
$
$
44,575
$
42%
46,021
$
44%
34,981
$
46%
37,765
$
37%
36,654
$
40%
30,544
$
15%
28,209
$
13%
13,055
$
10%
10,045
$
6%
7,137
$
4%
61,528
$
41%
56,360
$
41%
82,726
$
42%
93,853
$
55%
61,082
$
55%
2,138
$
2%
1,882
$
2%
2,250
$
2%
2,092
$
2%
661
$
1%
138,785
100%
132,472
100%
133,012
100%
143,755
100%
105,534
100%
December 31, 2019
Allowance for loan and lease losses
% of loans to total loans
December 31, 2018
Allowance for loan and lease losses
% of loans to total loans
December 31, 2017
Allowance for loan and lease losses
% of loans to total loans
December 31, 2016
Allowance for loan and lease losses
% of loans to total loans
December 31, 2015
Allowance for loan losses
% of loans to total loans
_______________________________________
(1) Amounts and ratios related to 2019 and 2018 are for total loans and leases. Amounts and ratios related to 2017 and prior years are for Non-PCI loans and leases.
The allowance for loan and lease losses attributable to real estate mortgage loans was $44.6 million and $46.0 million at December 31, 2019 and 2018. As
ratios to real estate mortgage loans at those dates, these percentages were 0.56% and 0.58%, and were comparable.
The allowance for loan and lease losses attributable to real estate construction and land loans was $30.5 million and $28.2 million at December 31, 2019
and 2018. As ratios to real estate construction and land loans at those dates, these percentages were 1.12% and 1.26%. Although the amount of the allowance
increased year over year as well as the loan balance, the ratio of the allowance to loans decreased, which was attributable to a lower probability of default given
the favorable credit performance of the loans during 2019.
The allowance for loan and lease losses attributable to commercial loans and leases was $61.5 million and $56.4 million at December 31, 2019 and 2018. As
ratios to commercial loans and leases at those dates, these percentages were 0.80% and 0.76%. The increase in the ratio at December 31, 2019 was due primarily
to a greater degree of impaired commercial loans and leases with specific reserves at December 31, 2019 than at December 31, 2018.
74
Deposits
The following table presents a summary of our average deposit amounts and average rates paid during the years indicated:
Deposit Composition
Interest checking
Money market
Savings
Time
Total interest-bearing deposits
Noninterest-bearing demand
Total deposits
Year Ended December 31,
2019
2018
2017
Average
Balance
Weighted
Average
Rate
Average
Balance
Weighted
Average
Rate
(Dollars in thousands)
Average
Balance
Weighted
Average
Rate
$
$
3,406,218
5,139,623
525,809
2,641,135
11,712,785
7,537,172
19,249,957
1.23 % $
1.10 %
0.17 %
1.86 %
1.27 %
—
0.77 % $
2,445,094
5,107,888
641,720
1,856,126
10,050,828
8,211,475
18,262,303
0.82 % $
0.77 %
0.16 %
1.07 %
0.80 %
—
0.44 % $
1,928,249
5,027,453
707,301
2,247,168
9,910,171
7,076,445
16,986,616
0.45 %
0.46 %
0.16 %
0.57 %
0.46 %
—
0.27 %
The following table presents the balance of each major category of deposits as of the dates indicated:
Deposit Composition
Balance
2019
December 31,
2018
2017
% of
Total
Balance
% of
Total
Balance
% of
Total
(Dollars in thousands)
Noninterest-bearing demand
Interest checking
Money market
Savings
Total core deposits
Non-core non-maturity deposits
Total non-maturity deposits
Time deposits $250,000 and under
Time deposits over $250,000
Total time deposits
Total deposits
$
$
7,243,298
3,753,978
4,690,420
499,591
16,187,287
496,407
16,683,694
2,065,733
483,609
2,549,342
19,233,036
38% $
19%
24%
3%
84%
3%
87%
11%
2%
13%
100% $
7,888,915
2,842,463
5,043,871
571,422
16,346,671
518,192
16,864,863
1,593,453
412,185
2,005,638
18,870,501
42% $
15%
27%
3%
87%
3%
90%
8%
2%
10%
100% $
8,508,044
2,226,885
4,511,730
690,353
15,937,012
863,202
16,800,214
1,709,980
355,342
2,065,322
18,865,536
45%
12%
24%
4%
85%
4%
89%
9%
2%
11%
100%
During 2019, total deposits increased by $362.5 million to $19.2 billion at December 31, 2019, due to an increase in time deposits of $543.7 million, offset
partially by decreases of $159.4 million in core deposits and $21.8 million in non-core non-maturity deposits. The decrease in core deposits was due primarily to
customers shifting deposits into interest-bearing accounts as market rates increased during the first half of the year resulting in decreases of $645.6 million in
noninterest-bearing demand deposits, $353.5 million in money market deposits, and $71.8 million in savings deposits, offset partially by an increase of $911.5
million in interest checking deposits. At December 31, 2019, core deposits totaled $16.2 billion, or 84% of total deposits, including $7.2 billion of noninterest-
bearing demand deposits, or 38% of total deposits. Our deposit base is also diversified by client type. As of December 31, 2019, no individual depositor
represented more than 1.2% of our total deposits, and our top ten depositors represented 7.5% of our total deposits.
75
The following table summarizes the maturities of time deposits as of the date indicated:
December 31, 2019
Maturities:
Due in three months or less
Due in over three months through six months
Due in over six months through twelve months
Total due within twelve months
Due in over 12 months through 24 months
Due in over 24 months
Total
Client Investment Funds
$250,000
and Under
Time Deposits
Over
$250,000
(In thousands)
$
$
991,908
608,857
368,597
1,969,362
81,070
15,301
2,065,733
$
$
151,858
150,093
159,343
461,294
20,610
1,705
483,609
$
$
Total
1,143,766
758,950
527,940
2,430,656
101,680
17,006
2,549,342
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
December 31, 2019, total off-balance sheet client investment funds were $1.5 billion of which $1.2 billion was managed by PWAM. At December 31, 2018, total
off-balance sheet client investment funds were $1.9 billion, of which $1.5 billion was managed by PWAM.
Borrowings and Subordinated Debentures
The Bank has various available lines of credit. These include the ability to borrow funds from time to time on a long-term, short-term, or overnight basis
from the FHLB, the FRBSF, or other financial institutions. The maximum amount that the Bank could borrow under its secured credit line with the FHLB at
December 31, 2019 was $4.2 billion, of which $2.9 billion was available on that date. The maximum amount that the Bank could borrow under its secured credit
line with the FRBSF at December 31, 2019 was $2.0 billion, all of which was available on that date. The FHLB and FRBSF secured credit lines are collateralized
by liens on $5.9 billion and $2.7 billion of qualifying loans, respectively. In addition to its secured lines of credit, the Bank also maintains unsecured lines of
credit for the borrowing of overnight funds, subject to availability, of $141.0 million with the FHLB and $180.0 million in the aggregate with several
correspondent banks. As of December 31, 2019, there was a $141.0 million balance outstanding related to the FHLB unsecured line of credit. The Bank is a
member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The
availability of funds changes daily. As of December 31, 2019, the Bank had borrowed $300.0 million through the AFX.
76
The following table presents information on our borrowings as of the dates indicated:
Borrowings
Balance
2019
Weighted
Average
Rate
December 31,
2018
Weighted
Average
Rate
Balance
(Dollars in thousands)
2017
Weighted
Average
Rate
Balance
FHLB secured short-term advances
FHLB unsecured overnight advance
AFX short-term borrowings
Non-recourse debt
Total borrowings
Averages for the year:
Total borrowings
$
$
$
1,318,000
141,000
300,000
8
1,759,008
1.66 % $
1.56 %
1.61 %
7.50 %
1.64 % $
1,040,000
141,000
190,000
114
1,371,114
2.56 % $
2.53 %
2.56 %
7.50 %
2.56 % $
332,000
135,000
—
342
467,342
1.41 %
1.34 %
— %
6.87 %
1.39 %
1,180,164
2.28 % $
570,216
2.10 % $
388,896
0.94 %
The subordinated debentures are variable-rate and based on 3-month LIBOR plus a margin, except for one which is based on 3-month EURIBOR plus a
margin. The margins on the 3-month LIBOR debentures range from 1.55% to 3.10%, while the margin on the 3-month EURIBOR debenture is 2.05%. The
subordinated debentures are all long-term, with maturities ranging from September 2033 to July 2037.
The following table presents summary information on our subordinated debentures as of the dates indicated:
Subordinated Debentures
Balance
2019
Weighted
Average
Rate
December 31,
2018
Weighted
Average
Rate
Balance
(Dollars in thousands)
2017
Weighted
Average
Rate
Balance
Gross subordinated debentures:
With no unamortized discount
With unamortized discount
Total gross subordinated debentures
Unamortized discount
Net subordinated debentures
Averages for the year:
Net subordinated debentures
$
$
$
135,055
405,635
540,690
(82,481)
458,209
4.33% $
3.72%
3.87%
135,055
406,289
541,344
(87,498)
5.08% $
4.33%
4.51%
$
453,846
$
4.03%
3.25%
3.42%
120,622
434,524
555,146
(92,709)
462,437
455,537
6.55% $
454,702
6.30% $
447,684
5.27%
77
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:
2019
2018
2017
2016
2015
December 31,
Nonaccrual loans and leases held for investment (1)
Accruing loan contractually past due 90 days or more
Foreclosed assets, net
Total nonperforming assets
Performing TDRs held for investment (2)
Classified loans and leases held for investment (2)
Nonaccrual loans and leases held for investment to
loans and leases held for investment (1)
Nonperforming assets to loans and leases
$
$
$
$
92,353
—
440
92,793
$
$
79,333
—
5,299
84,632
(Dollars in thousands)
$
$
157,545
—
1,329
158,874
$
$
173,527
—
12,976
186,503
$
$
12,257
175,912
$
$
17,701
237,110
$
$
56,838
278,405
$
$
64,952
409,645
$
$
0.49 %
0.44 %
0.93 %
1.12 %
held for investment and foreclosed assets, net (1)
0.49 %
0.47 %
0.94 %
1.21 %
Classified loans and leases held for investment to
loans and leases held for investment (2)
0.93 %
1.32 %
1.65 %
2.67 %
133,615
700
22,120
156,435
40,182
391,754
0.92 %
1.08 %
2.74 %
_______________________________________
(1) Amounts and ratios are for total loans and leases held for investment, net of deferred fees.
(2) Amounts and ratio related to 2019 and 2018 are for total loans and leases held for investment, net of deferred fees. Amounts related to 2017 and prior years are for Non-PCI
loans and leases held for investment, net of deferred fees.
Nonaccrual Loans and Leases Held for Investment
During 2019, nonaccrual loans and leases held for investment increased by $13.0 million to $92.4 million at December 31, 2019 due mainly to $79.9 million
in nonaccrual additions, offset partially by $26.9 million in charge-offs and $39.9 million in principal payments and other reductions. As of December 31, 2019,
the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $50.3 million and represented 54% of total nonaccrual
loans and leases.
78
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:
Nonaccrual Loans and Leases
December 31, 2019
December 31, 2018
% of
Loan
% of
Loan
Balance
Category
Balance
Category
(Dollars in thousands)
Accruing and
30 - 89 Days Past Due
December 31,
December 31,
2019
Balance
2018
Balance
$
Real estate mortgage:
Commercial
Income producing and other residential
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Commercial:
Asset-based
Venture capital
Other commercial
Total commercial
Consumer
Total held for investment
$
Foreclosed Assets
18,346
2,478
20,824
364
—
364
30,162
12,916
27,594
70,672
493
92,353
0.4%
0.1%
0.3%
—%
—%
—%
0.8%
0.6%
1.6%
0.9%
0.1%
0.5%
$
$
15,321
2,524
17,845
442
—
442
32,324
20,299
7,380
60,003
1,043
79,333
0.3%
0.1%
0.2%
—%
—%
—%
1.0%
1.0%
0.4%
0.8%
0.3%
0.4%
$
$
1,735
2,094
3,829
—
1,429
1,429
19
—
2,258
2,277
1,006
8,541
$
$
The following table presents foreclosed assets (primarily OREO) by property type as of the dates indicated:
Property Type
2019
December 31,
2018
(In thousands)
2017
Commercial real estate
Construction and land development
Multi-family
Single-family residence
Total OREO, net
Other foreclosed assets
Total foreclosed assets
$
$
221
219
—
—
440
—
440
$
$
2,004
219
1,059
953
4,235
1,064
5,299
$
$
During 2019, foreclosed assets decreased by $4.9 million to $0.4 million at December 31, 2019 due mainly to sales of $4.9 million.
79
3,276
1,557
4,833
—
1,527
1,527
47
1,028
2,467
3,542
581
10,483
64
219
—
1,019
1,302
27
1,329
Performing TDRs Held for Investment
The following table presents our performing TDRs held for investment by loan portfolio segment as of the dates indicated:
Performing TDRs (1)
Balance
2019
Number
of
Loans
December 31,
2018
Number
of
Loans
Balance
(Dollars in thousands)
2017
Number
of
Loans
Balance
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total performing TDRs held for investment
$
$
10,165
1,470
550
72
12,257
22
1
12
2
37
$
$
11,484
5,420
692
105
17,701
27
2
6
3
38
$
$
47,560
5,690
3,488
100
56,838
______________________________________
(1) Amounts related to 2019 and 2018 are for total loans and leases held for investment, net of deferred fees. Amounts related to 2017 are for Non-PCI loans and leases held for
investment, net of deferred fees.
During 2019, performing TDRs held for investment decreased by $5.4 million to $12.3 million at December 31, 2019 due primarily to transfers of performing
TDRs to nonaccrual status of $0.5 million and principal payments and other reductions of $5.7 million, offset partially by additions of $0.5 million and transfers
from nonaccrual status to performing TDRs of $0.3 million. The majority of the number of performing TDRs were on accrual status prior to the restructurings
and have remained on accrual status after the restructurings due to the borrowers making payments before and after the restructurings.
Classified and Special Mention Loans and Leases Held for Investment
The following table presents the credit risk ratings of our loans and leases held for investment, net of deferred fees, as of the dates indicated:
Loan and Lease Credit Risk Ratings (1)
2019
2018
2017
December 31,
Pass
Special mention
Classified
Total loans and leases held for investment, net of deferred fees
(Dollars in thousands)
$
$
18,348,004
322,956
175,912
18,846,872
$
$
17,459,205
261,398
237,110
17,957,713
$
$
16,334,134
302,168
278,405
16,914,707
______________________________________
(1) Amounts related to 2019 and 2018 are for total loans and leases held for investment, net of deferred fees. Amounts related to 2017 are for Non-PCI loans and leases held for
investment, net of deferred fees.
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 2019, special mention loans and leases increased by $61.6 million to $323.0 million at December 31, 2019. This increase was due primarily to
security monitoring special mention loans increasing to $163.1 million from $28.9 million, offset partially by other commercial real estate special mention loans
decreasing to $7.2 million from $32.8 million.
During 2019, classified loans and leases decreased by $61.2 million to $175.9 million at December 31, 2019. This decline was due mainly to other
commercial real estate classified loans decreasing to $15.5 million from $44.5 million and security monitoring classified loans decreasing to $34.7 million from
$54.6 million.
80
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 December 31, 2019, 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%. Regulatory capital requirements limit the amount of deferred tax assets that may be included when
determining the amount of regulatory capital. Deferred tax asset amounts in excess of the calculated limit are disallowed from regulatory capital. At
December 31, 2019, such disallowed amounts were $195,000 for the Company and none for the Bank. No assurance can be given that the regulatory capital
deferred tax asset limitation will not increase in the future or that the Company or Bank will not have increased deferred tax assets that are disallowed.
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
December 31, 2019, the Company and Bank were in compliance with the capital conservation buffer requirement.
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:
December 31, 2019
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)
CET1 capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
Pacific Western Bank
Tier 1 capital (to average assets)
CET1 capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
Minimum Required
Plus Capital
Conservation
For Well
Buffer
Phase-In (1)
Capitalized
Requirement
For Capital
Adequacy
Purposes
4.00%
4.50%
6.00%
8.00%
4.00%
4.50%
6.00%
8.00%
4.00%
7.00%
8.50%
10.50%
4.00%
7.00%
8.50%
10.50%
N/A
N/A
N/A
N/A
5.00%
6.50%
8.00%
10.00%
Actual
9.74%
9.78%
9.78%
12.41%
10.95%
11.00%
11.00%
11.74%
81
December 31, 2018
PacWest Bancorp Consolidated
Tier 1 capital (to average assets)
CET1 capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
Pacific Western Bank
Tier 1 capital (to average assets)
CET1 capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
Minimum Required
For Capital
Adequacy
Purposes
Plus Capital
Conservation
For Well
Plus Capital
Conservation
Buffer
Capitalized
Buffer Fully
Phase-In (1)
Requirement
Phased-In
4.00%
4.50%
6.00%
8.00%
4.00%
4.50%
6.00%
8.00%
4.000%
6.375%
7.875%
9.875%
4.000%
6.375%
7.875%
9.875%
N/A
N/A
N/A
N/A
5.00%
6.50%
8.00%
10.00%
4.00%
7.00%
8.50%
10.50%
4.00%
7.00%
8.50%
10.50%
Actual
10.13%
10.01%
10.01%
12.72%
10.80%
10.68%
10.68%
11.44%
_______________________________________
(1) Ratios for December 31, 2019 reflect the minimum required plus the fully phased-in capital conservation buffer of 2.50%; ratios for December 31, 2018 reflect the minimum
required plus capital conservation buffer phase-in for 2018 of 1.875%.
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 $458.2 million at December 31, 2019. At December 31, 2019, none of the trust
preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $444.5 million were included in Tier II capital.
For a more detailed discussion of our subordinated debentures, see "Item 1: Business - Supervision and Regulation - Capital Requirements."
Dividends on Common Stock and Interest on Subordinated Debentures
As a bank holding company, PacWest is required to notify 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.
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.
82
We manage our liquidity by maintaining pools of liquid assets on-balance sheet, consisting of cash and due from banks, interest-earning deposits in
other financial institutions, and unpledged securities available-for-sale, which we refer to as our primary liquidity. We also maintain available borrowing
capacity under secured credit lines with the FHLB and the FRBSF, which we refer to as our secondary liquidity.
As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB of $4.2 billion at December 31, 2019, of which $2.9 billion was
available on that date. The FHLB secured credit line was collateralized by a blanket lien on $5.9 billion of qualifying loans. The Bank also had secured
borrowing capacity with the FRBSF of $2.0 billion at December 31, 2019, all of which was available on that date. The FRBSF secured credit line was
collateralized by liens on $2.7 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 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of December 31, 2019, there was a $141.0
million balance outstanding related to the FHLB unsecured line of credit. The Bank is a member of the AFX, through which it may either borrow or lend funds
on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of December 31, 2019, the
Bank had borrowed $300.0 million through the AFX.
The following tables provide a summary of the Bank’s primary and secondary liquidity levels as of the dates indicated:
Primary Liquidity - O n -Balance Sheet
2019
December 31,
2018
(Dollars in thousands)
Cash and due from banks
Interest-earning deposits in financial institutions
Securities available-for-sale
Less: pledged securities
Total primary liquidity
Ratio of primary liquidity to total deposits
Secondary Liquidity - Off-Balance Sheet
Available Secured Borrowing Capacity
Total secured borrowing capacity with the FHLB
Less: secured advances outstanding
Available secured borrowing capacity with the FHLB
Available secured borrowing capacity with the FRBSF
Total secondary liquidity
$
$
$
$
$
172,585
465,039
3,797,187
(486,200 )
$
175,830
209,937
4,009,431
(458,143 )
3,948,611
$
3,937,055
$
2017
233,215
165,222
3,774,431
(449,187 )
3,723,681
20.5 %
20.9 %
19.7 %
2019
4,229,788
(1,318,000 )
$
2,911,788
1,988,028
4,899,816
$
December 31,
2018
(In thousands)
3,746,970
(1,040,000 )
$
2,706,970
2,003,269
4,710,239
$
2017
3,789,949
(332,000 )
3,457,949
1,766,188
5,224,137
During 2019, the Company's primary liquidity increased by $11.6 million to $3.9 billion at December 31, 2019 due primarily to a $255.1 million increase in
interest-earning deposits in financial institutions, offset partially by a $212.2 million decrease in securities available-for-sale and a $28.1 million increase in
pledged securities. During 2019, the Company's secondary liquidity increased by $189.6 million to $4.9 billion at December 31, 2019 due mainly to a $482.8
million increase in the borrowing capacity on the secured credit line with the FHLB, offset partially by a $278.0 million increase in advances outstanding on that
secured credit line and a $15.2 million decrease in the borrowing capacity on the secured credit line with the FRBSF. The increase in the borrowing capacity
with the FHLB was due primarily to an increase in loan collateral pledged for the facility.
83
In addition to our primary liquidity, we generate liquidity from cash flows from our loan and securities portfolios and our large base of core customer
deposits, defined as noninterest-bearing demand, interest checking, savings, and non-brokered money market accounts. At December 31, 2019, core deposits
totaled $16.2 billion and represented 84% of the Company's total deposits. Core deposits are normally less volatile, often with customer relationships tied to
other products offered by the Bank promoting long-standing relationships and stable funding sources. See "- Balance Sheet Analysis - Deposits" for
additional information and detail of our core deposits.
Our deposit balances may decrease if interest rates increase significantly or if customers withdraw funds from the Bank. In order to address the Bank’s
liquidity risk as 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 December 31, 2019, brokered deposits totaled $1.7 billion, consisting primarily of $1.2 billion of brokered time deposits and $496.4 million of non-
maturity brokered accounts. At December 31, 2018, brokered deposits totaled $1.3 billion, consisting mainly of $729.4 million of brokered time deposits and
$518.2 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
December 31, 2019, we were in compliance with all of our established liquidity guidelines.
Holding Company Liquidity
PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the
holding company include dividends from the Bank, intercompany tax payments from the Bank, and PacWest's ability to raise capital, issue subordinated debt,
and secure outside borrowings. Our ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common stock, and
other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations
that limit its ability to transfer funds to the holding company through intercompany loans, advances, or cash dividends.
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 previous three fiscal years exceeded dividends paid by the Bank during that same period by $34.8 million. During the year ended
December 31, 2019, PacWest received $336.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $490.6 million at December 31,
2019, for the foreseeable future, any dividends from the Bank to the holding company will continue to require DBO and FDIC approval.
At December 31, 2019, PacWest had $114.0 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, including any stock repurchases pursuant to the Company's Stock Repurchase Program, which terminates on February 28, 2021. See "- Recent Events -
Stock Repurchase Program" for additional information.
84
Contractual Obligations
The following table summarizes the known contractual obligations of the Company as of the date indicated:
December 31, 2019
One Year
Three Years
Due
Within
Due After
One Year
Through
Due After
Three Years
Through
Five Years
(In thousands)
Due
After
Five Years
Total
Time deposits (1)
Short-term borrowings
Long-term debt obligations (1)
Contractual interest (2)
Operating lease obligations
Other contractual obligations
Total
$
$
2,430,656
1,759,000
8
14,530
33,221
83,320
4,320,735
$
$
114,947
—
—
2,070
56,123
55,586
228,726
$
$
3,341
—
—
117
37,278
9,937
50,673
$
$
398
—
540,690
17
33,575
24,020
598,700
$
$
2,549,342
1,759,000
540,698
16,734
160,197
172,863
5,198,834
_______________________________________
(1) Excludes purchase accounting fair value adjustments.
(2) Excludes interest on subordinated debentures as these instruments are floating rate.
Operating lease obligations, time deposits, and debt obligations are discussed in Note 7. Premises and Equipment, Net, Note 11. Deposits, and Note 12.
Borrowings and Subordinated Debentures of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary
Data.” 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 December 31, 2019, our loan commitments and standby letters of credit were $8.2 billion and $355.5 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 13. Commitments and Contingencies of the Notes to Consolidated Financial
Statements contained in “Item 8. Financial Statements and Supplementary Data.”
Recent Accounting Pronouncements
See Note 1. Nature of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in
“Item 8. Financial Statements and Supplementary Data” for information on recent accounting pronouncements and their expected impact, if any, on our
consolidated financial statements.
85
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk - Foreign Currency Exchange
We enter into foreign exchange contracts with our clients and counter-party 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 derivative instruments that hedge those exposures. As of December 31, 2019, the U.S. Dollar notional amounts of loans receivable and
subordinated debentures payable denominated in foreign currencies were $60.6 million and $28.9 million, and the U.S. Dollar notional amounts of derivatives
outstanding to hedge these foreign currency exposures were $62.0 million and $29.2 million. We recognized foreign currency translation net gains of $0.2
million, $0.3 million, and $0.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Asset/Liability Management and Interest Rate Sensitivity
Interest Rate Risk
We measure our IRR position on a monthly basis using two methods: (i) NII simulation analysis; and (ii) MVE modeling. The Executive ALM Committee
and the Board Asset/Liability Management Committee review the results of these analyses quarterly. If hypothetical changes to interest rates cause changes
to our simulated net present value of equity and/or net interest income outside our pre-established limits, we may adjust our asset and liability mix in an effort
to bring our interest rate risk exposure within our established limits.
We evaluated the results of our NII simulation model and MVE model prepared as of December 31, 2019, 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 December 31, 2019. This model is an interest rate risk management tool and the results are not necessarily an indication of our
future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time.
We have assumed no growth or changes in the product mix of either our total interest-sensitive assets or liabilities over the next 12 months, therefore the
results reflect an interest rate shock to a static balance sheet.
This analysis calculates the difference between NII forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve
at December 31, 2019. In order to arrive at the base case, we extend our balance sheet at December 31, 2019 one year and reprice any assets and liabilities that
would contractually reprice or mature during that period using the products’ pricing as of December 31, 2019. Based on such repricing, we calculate an
estimated tax equivalent NII and NIM for each rate scenario.
86
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 (imbedded 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 December 31, 2019
assumes interest-bearing deposits reprice at 34% of the change in market rates (this is commonly referred to as the "deposit beta"). The effects of certain
balance sheet attributes, such as fixed-rate loans, variable-rate loans that have reached their floors, and the volume of noninterest-bearing deposits as a
percentage of earning assets, impact our assumptions and consequently the results of our NII simulation model. Changes that could vary significantly from our
assumptions include loan and deposit growth or contraction, loan and deposit pricing, changes in the mix of our 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:
December 31, 2019
Interest Rate Scenario:
Up 300 basis points
Up 200 basis points
Up 100 basis points
BASE CASE
Down 25 basis points
Down 50 basis points
Down 100 basis points
Forecasted
Net Interest
Income
Percentage
Change
Forecasted
Net Interest
Forecasted
Net Interest
Margin
Margin Change
(Tax Equivalent)
From Base
(Tax Equivalent)
From Base
(Dollars in millions)
$
$
$
$
$
$
$
1,119.6
1,063.6
1,007.3
961.8
955.1
948.5
931.3
16.4%
10.6%
4.7%
—
(0.7)%
(1.4)%
(3.2)%
4.83%
4.58%
4.34%
4.15%
4.12%
4.09%
4.01%
0.68%
0.43%
0.19%
—
(0.03)%
(0.06)%
(0.14)%
During 2019, total base case year 1 tax equivalent NII decreased by $86.9 million to $961.8 million at December 31, 2019 compared to $1.05 billion at
December 31, 2018. This decrease was attributable to a lower loan portfolio yield and an increase in the mix of interest-bearing deposits to noninterest-bearing
deposits, offset partially by higher loan volume and a decrease in the cost of funds.
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. 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. In the “Bear Flattener” scenario, Year 1 tax equivalent NII increases by 7.0%, and in the “Ramped Sharp Decrease”
scenario, Year 1 tax equivalent NII decreases by 1.3%.
87
At December 31, 2019, we had $18.9 billion of total loans that included $11.3 billion with variable interest rate terms (excluding hybrid loans discussed
below). Of the variable interest rate loans, $7.6 billion, or 68%, contained interest rate floor provisions, which included $3.0 billion of "in-the-money" loans,
meaning the loan coupon will not adjust down if there are future decreases to the index interest rate. The cumulative amount of loans with "in-the-money"
floors for assumed additional market rate decreases are as follows:
December 31, 2019
Total Amount of
Loans With
Basis Points of
"In-the-Money"
Rate Decreases
Loan Floors
(Dollars in millions)
50 bps
100 bps
150 bps
200 bps
250 bps
$4,472
$6,206
$7,398
$7,607
$7,610
At December 31, 2019, we also had $4.0 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 $647 million, $1.0 billion, and $1.5 billion in the next one, two, and three years.
LIBOR is expected to be phased out after 2021, and, 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.
Market Value of Equity
We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities, and off-balance sheet
items, defined as the market value of equity, using our MVE model. This simulation model assesses the changes in the market value of our interest-sensitive
financial instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest rates of 100, 200, and 300 basis
points. This analysis assigns significant value to our noninterest-bearing deposit balances. The projections include various assumptions regarding cash flows
and interest rates and are by their nature forward-looking and inherently uncertain.
The MVE model is an interest rate risk management tool and the results are not necessarily an indication of our actual future results. Actual results may
vary significantly from the results suggested by the market value of equity table. Loan prepayments and deposit attrition, changes in the mix of our earning
assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions. The base case is
determined by applying various current market discount rates to the estimated cash flows from the different types of assets, liabilities, and off-balance sheet
items existing at December 31, 2019.
88
The following table shows the projected change in the market value of equity for the rate scenarios presented as of the date indicated:
December 31, 2019
Interest Rate Scenario:
Up 300 basis points
Up 200 basis points
Up 100 basis points
BASE CASE
Down 100 basis points
Down 200 basis points
Down 300 basis points
Projected
Market Value
Dollar
Change
of Equity
From Base
Percentage
Change
From Base
Percentage
of Total
Assets
(Dollars in millions)
Ratio of
Projected
Market Value
to Book Value
$
$
$
$
$
$
$
7,964.5
7,799.0
7,615.3
7,363.9
7,063.6
6,590.1
6,120.8
$
$
$
$
$
$
$
600.6
435.0
251.4
—
(300.4 )
(773.9 )
(1,243.2 )
8.2%
5.9%
3.4%
—
(4.1)%
(10.5)%
(16.9)%
29.8%
29.1%
28.4%
27.5%
26.4%
24.6%
22.9%
160.7%
157.4%
153.7%
148.6%
142.6%
133.0%
123.5%
During 2019, total base case projected market value of equity increased by $1.9 billion to $7.4 billion at December 31, 2019 compared to $5.5 billion at
December 31, 2018. The overall MVE sensitivity reflects a more asset-sensitive profile. The increase in asset sensitivity of MVE is due to revised deposit
attrition and pricing models implemented during 2019, which reflect longer deposit account average life and lower deposit pricing betas than the models used
previously. The $1.9 billion increase in base case projected MVE was due primarily to: (1) a $1.2 billion increase in the mark-to-market adjustment for loans and
leases due to decreased credit spreads used for loan valuation and price appreciation from the decreases in market interest rates, (2) a $580 million decrease in
the mark-to-market adjustment for total deposits due to the longer average life and lower pricing beta assumed in the new deposit models, and (3) a $129 million
increase in the book value of stockholders' equity due mainly to $469 million in net earnings and an $85 million increase in accumulated other comprehensive
income, offset partially by $155 million of common stock repurchased under the Stock Repurchase Program and $289 million of cash dividends paid.
89
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Contents
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Earnings for the Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018, and 2017
Notes to Consolidated Financial Statements
90
91
92
95
96
97
98
99
101
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of PacWest Bancorp, including its consolidated subsidiaries, is responsible for establishing and maintaining adequate internal control
over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of
Directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management’s
authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to see that information and communication flows are
effective and to monitor performance, including performance of internal control procedures.
As of December 31, 2019, PacWest Bancorp management assessed the effectiveness of the Company’s internal control over financial reporting based on
the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2019, is
effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the control procedures may deteriorate.
KPMG LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Annual
Report on Form 10-K, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. The report,
which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, is included in
this Item under the heading “Report of Independent Registered Public Accounting Firm.”
91
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
PacWest Bancorp:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of PacWest Bancorp and subsidiaries (the Company) as of December 31, 2019 and 2018, the
related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). We also have audited the Company's internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in
conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
92
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements
and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on
the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for loan and lease losses related to loans collectively evaluated for impairment
As discussed in Note 1 and Note 5 to the consolidated financial statements, the Company’s allowance for loan and lease losses related to loans and
leases collectively evaluated for impairment (general reserve) is calculated and updated on a quarterly basis. The Company’s general reserve includes
both quantitative and qualitative loss factors. At December 31, 2019, the Company’s general reserve was $132.6 million. The Company’s methodology for
estimating the quantitative loss factors includes a probability of default (PD) and loss given default (LGD) which are applied based on loan type and
credit-risk ratings for loans collectively evaluated for impairment. The Company’s general reserve methodology also includes a qualitative component.
We identified the assessment of the general reserve as a critical audit matter because the significant measurement uncertainty required complex auditor
judgment and industry knowledge and experience. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The
assessment of the general reserve encompassed the evaluation of the methodologies, inputs, and assumptions used to estimate the general reserve. This
included assessing the PD/LGD methodology; the key inputs and assumptions, including segmentation, look-back period, loss emergence period, the
credit risk ratings (non-consumer loan portfolio segments); and the qualitative loss factors.
93
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the
development and approval of the general reserve methodology, the determination of key inputs and assumptions used to calculate the general reserve,
and the analysis of the Company’s allowance for loan and lease losses results, trends and ratios. We tested the Company’s process to develop the
general reserve. Specifically, we tested the sources of data, factors, and assumptions that the Company used by considering whether they are relevant
and reliable, and whether additional factors and alternative assumptions should be used. We tested, with the assistance of credit risk professionals with
specialized skills and industry knowledge and experience, the following:
– the general reserve methodology’s ability to produce an estimate in compliance with U.S. generally accepted accounting principles,
– the determination of the loan segmentation, look-back period, and loss emergence period, by comparing these inputs and assumptions to the
Company’s historical loss information, internal policies and procedures, external metrics, and portfolio risk characteristics,
– the credit risk ratings across the non-consumer loan portfolio segments for a selection of loans based on knowledge of the Company’s credit
policies and industry expertise, and
– the evaluation of the methodology used to develop the resulting qualitative loss factors and the effect of those factors on the ALLL compared with
both internal and external credit factors and consistency with credit trends.
We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the Company’s
allowance for loan and lease losses.
/s/ KPMG LLP
We have served as the auditor for the Company or its predecessors since 1982.
Irvine, California
February 27, 2020
94
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2019
2018
(Dollars in thousands, except par value amounts)
ASSETS:
Cash and due from banks
Interest-earning deposits in financial institutions
Total cash and cash equivalents
Securities available-for-sale, at fair value
Federal Home Loan Bank stock, at cost
Total investment securities
Gross loans and leases held for investment
Deferred fees, net
Allowance for loan and lease losses
Total loans and leases held for investment, net
Equipment leased to others under operating leases
Premises and equipment, net
Foreclosed assets, net
Goodwill
Core deposit and customer relationship intangibles, net
Other assets
Total assets
LIABILITIES:
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Borrowings
Subordinated debentures
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)
Common stock ($0.01 par value, 200,000,000 shares authorized at December 31, 2019 and 2018;
121,890,008 and 125,079,705 shares issued, respectively, includes 1,513,197 and 1,344,656
shares of unvested restricted stock, respectively)
Additional paid-in capital
Retained earnings
Treasury stock, at cost (2,108,403 and 1,889,872 shares at December 31, 2019 and 2018)
Accumulated other comprehensive income (loss), net
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
$
172,585
465,039
637,624
3,797,187
40,924
3,838,111
18,910,740
(63,868 )
(138,785 )
18,708,087
324,084
38,585
440
2,548,670
38,394
636,811
26,770,806
7,243,298
11,989,738
19,233,036
1,759,008
458,209
365,856
21,816,109
$
$
175,830
209,937
385,767
4,009,431
32,103
4,041,534
18,026,365
(68,652 )
(132,472 )
17,825,241
292,677
34,661
5,299
2,548,670
57,120
540,385
25,731,354
7,888,915
10,981,586
18,870,501
1,371,114
453,846
210,305
20,905,766
—
—
1,219
3,306,006
1,652,248
(83,434 )
78,658
4,954,697
26,770,806
$
1,251
3,722,723
1,182,674
(74,985 )
(6,075 )
4,825,588
25,731,354
See accompanying Notes to Consolidated Financial Statements.
95
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
2019
2018
2017
(Dollars in thousands, except per share amounts)
$
952,771
98,202
1,543
1,052,516
Interest income:
Loans and leases
Investment securities
Deposits in financial institutions
Total interest income
Interest expense:
Deposits
Borrowings
Subordinated debentures
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Other commissions and fees
Leased equipment income
Service charges on deposit accounts
Gain on sale of loans and leases
Gain (loss) on sale of securities
Other income
Total noninterest income
Noninterest expense:
Compensation
Occupancy
Data processing
Leased equipment depreciation
Intangible asset amortization
Other professional services
Insurance and assessments
Customer related expense
Loan expense
Acquisition, integration and reorganization costs
Foreclosed assets (income) expense, net
Other expense
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Earnings per share:
Basic
Diluted
$
$
$
$
$
1,097,845
115,569
6,479
1,219,893
148,460
26,961
29,843
205,264
1,014,629
22,000
992,629
43,623
38,727
14,637
1,114
25,445
19,016
142,562
285,862
57,407
27,556
24,016
18,726
17,803
16,404
13,839
12,931
349
(3,555 )
30,913
502,251
632,940
164,304
468,636
$
1,047,969
111,619
2,082
1,161,670
80,140
11,985
28,631
120,756
1,040,914
45,000
995,914
45,543
37,881
16,509
4,675
8,176
35,851
148,635
282,568
53,223
27,225
21,371
22,506
21,952
20,705
10,353
10,569
1,770
(751 )
39,741
511,232
633,317
167,978
465,339
$
3.90
3.90
$
$
3.72
3.72
$
$
See accompanying Notes to Consolidated Financial Statements.
96
45,694
3,638
23,613
72,945
979,571
57,752
921,819
41,422
37,700
15,307
6,197
(541 )
28,488
128,573
266,567
48,863
26,575
20,767
14,240
17,353
19,733
8,297
13,832
19,735
1,702
37,997
495,661
554,731
196,913
357,818
2.91
2.91
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net earnings
$
468,636
$
465,339
$
357,818
2019
Year Ended December 31,
2018
(In thousands)
2017
Other comprehensive income (loss), net of tax:
Unrealized net holding gains (losses) on securities available-for-sale
arising during the year
Income tax (expense) benefit related to net unrealized holding gains
(losses) arising during the year
Unrealized net holding gains (losses) on securities available-for-sale,
net of tax
Reclassification adjustment for net (gains) losses included in net earnings (1)
Income tax expense (benefit) related to reclassification adjustment
Reclassification adjustment for net (gains) losses included in
net earnings, net of tax
Other comprehensive income (loss), net of tax
Comprehensive income
__________________________________
(1) Entire amount recognized in "Gain (loss) on sale of securities" on the Consolidated Statements of Earnings.
$
143,019
(52,559)
(40,058)
15,015
102,961
(25,445)
7,217
(18,228)
84,733
553,369
$
(37,544)
(8,176)
2,338
(5,838)
(43,382)
421,957
$
42,190
(17,481)
24,709
541
(61)
480
25,189
383,007
See accompanying Notes to Consolidated Financial Statements.
97
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
Par
Shares
Value
Additional
Paid-in
Capital
Accumulated
Other
Retained
Earnings
Treasury
Comprehensive
Stock
Income (Loss)
Total
(Dollars in thousands)
Balance, December 31, 2016
121,283,669
$
1,228
$
4,162,132
$
366,073
$
(56,360) $
5,982
$
4,479,055
Cumulative effect of change in
accounting principle (1)
Net earnings
Other comprehensive income
Issuance of common stock for
—
—
—
acquisition of CU Bancorp
9,298,451
Restricted stock awarded and
earned stock compensation,
net of shares forfeited
Restricted stock surrendered
Common stock repurchased under
470,855
(188,870)
—
—
—
93
5
711
—
—
446,140
25,563
Stock Repurchase Program
(2,081,227)
(21)
(99,656)
(420)
357,818
—
—
—
—
—
—
—
—
—
(9,476)
—
—
—
25,189
—
—
—
291
357,818
25,189
446,233
25,568
(9,476)
(99,677)
—
128,782,878
—
1,305
(247,403)
4,287,487
—
723,471
—
(65,836)
—
31,171
(247,403)
4,977,598
—
—
—
437,831
(181,642)
—
—
—
4
—
—
—
—
29,764
—
(6,136)
465,339
—
—
—
—
6,136
—
(43,382)
—
465,339
(43,382)
—
—
—
—
(9,149)
—
—
—
—
29,768
(9,149)
(306,393)
—
123,189,833
—
1,251
(288,193)
3,722,723
—
1,182,674
—
(74,985)
—
(6,075)
(288,193)
4,825,588
Stock Repurchase Program
(5,849,234)
(58)
(306,335)
—
—
—
798,248
(218,531)
—
—
—
8
—
—
—
—
938
468,636
—
—
—
—
26,807
—
—
—
—
—
(8,449)
—
—
—
84,733
—
—
—
938
468,636
84,733
26,815
(8,449)
(154,516)
(289,048)
$
4,954,697
Stock Repurchase Program
(3,987,945)
(40)
(154,476)
—
119,781,605
$
—
1,219
$
(289,048)
3,306,006
$
—
1,652,248
$
—
(83,434) $
—
78,658
Impact due to adoption on January 1, 2017 of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting."
Impact due to adoption on January 1, 2018 of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities " and ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income."
Impact due to adoption on January 1, 2019 of ASU 2016-02, "Leases (Topic 842)," and the related amendments.
(3)
See accompanying Notes to Consolidated Financial Statements.
98
Cash dividends paid:
Common stock, $2.00/share
Balance, December 31, 2017
Cumulative effect of changes in
accounting principles (2)
Net earnings
Other comprehensive loss
Restricted stock awarded and
earned stock compensation,
net of shares forfeited
Restricted stock surrendered
Common stock repurchased under
Cash dividends paid:
Common stock, $2.30/share
Balance, December 31, 2018
Cumulative effect of change in
accounting principle (3)
Net earnings
Other comprehensive income
Restricted stock awarded and
earned stock compensation,
net of shares forfeited
Restricted stock surrendered
Common stock repurchased under
Cash dividends paid:
Common stock, $2.40/share
Balance, December 31, 2019
________________________
(1)
(2)
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Amortization of net premiums on securities available-for-sale
Amortization of intangible assets
Amortization of operating lease ROU assets
Provision for credit losses
Gain on sale of foreclosed assets, net
Provision for losses on foreclosed assets
Gain on sale of loans and leases, net
Loss (gain) on sale of premises and equipment
(Gain) loss on sale of securities, net
Gain on BOLI death benefits
Unrealized gain on derivatives and foreign currencies, net
Earned stock compensation
Decrease (increase) in deferred income taxes, net
Decrease (increase) in other assets
(Decrease) increase in accrued interest payable and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Cash acquired in acquisitions, net of cash consideration paid
Net increase in loans and leases
Proceeds from sales of loans and leases
Proceeds from maturities and paydowns of securities available-for-sale
Proceeds from sales of securities available-for-sale
Purchases of securities available-for-sale
Net (purchases) redemptions of Federal Home Loan Bank stock
Proceeds from sales of foreclosed assets
Purchases of premises and equipment, net
Proceeds from sales of premises and equipment
Proceeds from BOLI death benefits
Net increase in equipment leased to others under operating leases
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposits
Net increase (decrease) in interest-bearing deposits
Net increase (decrease) in borrowings
Net decrease in subordinated debentures
Common stock repurchased and restricted stock surrendered
Cash dividends paid, net
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Year Ended December 31,
2019
2018
(In thousands)
2017
$
468,636
$
465,339
$
357,818
39,115
13,962
18,726
29,393
22,000
(3,689)
78
(1,114)
599
(25,445)
—
(228)
26,815
14,714
15,547
(36,449)
582,660
—
(1,005,478)
102,573
325,863
1,584,860
(1,569,421)
(8,821)
8,590
(15,104)
73
555
(54,996)
(631,306)
(643,530)
1,008,152
387,894
—
(162,965)
(289,048)
300,503
251,857
385,767
637,624
$
35,168
23,938
22,506
—
45,000
(609)
74
(4,675)
(20)
(8,176)
(1,338)
(325)
29,768
(136)
25,117
(23,604)
608,027
—
(1,209,986)
646,587
290,177
571,800
(1,180,545)
(11,313)
13,479
(12,385)
57
3,546
(28,610)
(917,193)
(615,263)
624,094
903,772
(12,372)
(315,542)
(288,193)
296,496
(12,670)
398,437
385,767
$
32,029
41,450
14,240
—
57,752
(871)
2,138
(6,197)
(386)
541
(1,050)
(429)
25,568
76,860
(118,477)
2,982
483,968
160,318
(1,303,752)
1,322,456
435,925
759,300
(1,298,105)
12,982
12,345
(7,919)
10,309
2,478
(73,596)
32,741
343,663
(63,700)
(461,349)
—
(109,153)
(247,403)
(537,942)
(21,233)
419,670
398,437
$
See accompanying Notes to Consolidated Financial Statements.
99
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Loans transferred to foreclosed assets
Transfers from loans held for investment to loans held for sale
Common stock issued in acquisitions
Year Ended December 31,
2019
2018
(In thousands)
2017
$
$
200,463
123,533
120
25,124
—
$
119,042
98,575
16,914
—
—
69,477
208,066
580
481,100
446,233
See accompanying Notes to Consolidated Financial Statements.
100
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 through its Community Banking, National Lending
and Venture Banking groups. Community Banking provides real estate loans, commercial loans, 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. National Lending
provides asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis.
Venture Banking offers loans and a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture
capital and private equity investors, with offices located in key innovation hubs across the United States. In addition, we provide investment advisory and
asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered
investment adviser.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and
fees received in connection with deposit services, extending credit and other services offered, including treasury management and investment management
services. Our major operating expenses are the interest paid by the Bank on deposits and borrowings, compensation, occupancy, and general operating
expenses.
(a) Accounting Standards Adopted in 2019
Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and the related amendments to this new standard issued in 2018.
ASU 2016-02 supersedes ASC Topic 840, “Leases,” and is intended to increase transparency and comparability among organizations by requiring the
recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are
required to meet the objective of enabling users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the new standard using the optional transition method under ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” and
recognized a cumulative effect adjustment to increase retained earnings by $938,000, net of taxes, without restating prior periods and applying the requirements
of the new standard prospectively. The Company has elected the following practical expedients: (1) to not separate lease and non-lease components for
facilities leases; (2) to not reassess whether any expired or existing contracts are or contain leases and to maintain existing lease classifications; (3) to not
record short-term leases (initial term less than 12 months) on the balance sheet; and (4) to present sales tax on a net basis for those transactions in which the
Company is the lessor.
The standard had a more significant impact on our consolidated balance sheet than our consolidated statement of earnings. The most significant impact
was the recognition of ROU assets and lease liabilities for operating leases, while the accounting for leases as a lessor remained substantially unchanged. The
ROU asset is included within "Other assets," while the ROU liability is included within "Accrued interest payable and other liabilities." See Note 9. Other
Assets and Note 10. Leases for further details.
101
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective January 1, 2019, the Company early-adopted and removed or modified disclosures as permitted by ASU 2018-13, “Fair Value Measurement
(Topic 820): Disclosure Framework - Changes to Disclosure Requirements for Fair Value Measurements,” but deferred adoption of the additional
disclosures until the effective date of January 1, 2020 as permitted in the transition guidance in ASU 2018-13.
Effective January 1, 2019, the Company early-adopted ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (a consensus of the FASB
Emerging Issues Task Force)," which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the
requirements for capitalizing implementation costs incurred for an internal-use software license. The new guidance also prescribes the balance sheet, income
statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and
qualitative disclosures. The Company opted to apply ASU 2018-15 prospectively. The primary effect of the provisions is to capitalize eligible implementation
costs during the application development phase and to amortize those costs over the life of the agreement. There was no impact to our consolidated financial
statements from the adoption of this new standard.
(b) Basis of Presentation
The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles, which we may refer to as
U.S. GAAP. 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 have been included.
(c) Use of Estimates
We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these
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 intangible assets, the realization of deferred tax assets, and the fair value estimates of assets acquired and liabilities
assumed in acquisitions. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
As described in Note 3. Acquisitions below, we completed the CUB acquisition on October 20, 2017. The acquired assets and liabilities in this acquisition
were measured at their estimated fair values. Management made significant estimates and exercised significant judgment in estimating such fair values and
accounting for the acquired assets and assumed liabilities in this transaction.
(d) Reclassifications
Certain prior period amounts have been reclassified to conform to the current period's presentation format. On the consolidated balance sheets, the
"Other assets" category includes "Deferred tax assets," which was previously reported as a separate category. On the consolidated statements of earnings, 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." Prior to January 1, 2018, our credit quality disclosures were only for Non-PCI loans and leases. As our gross PCI loan
portfolio reduced to less than 0.4% of total loans and leases as of the end of 2017, beginning in 2018 the credit quality disclosures reflect our entire loan and
lease portfolio. Accordingly, for the credit quality tables in Note 5. Loans and Leases, amounts related to 2019 and 2018 are for total loans and leases, while
amounts related to 2017 are for Non-PCI loans and leases.
102
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(e) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of: (1) cash and due from banks, and (2) interest-earning
deposits in financial institutions. Interest-earning deposits in financial institutions represent mostly cash held at the FRBSF, the majority of which is
immediately available.
(f) Investment Securities
We determine the classification of securities at the time of purchase. If we have the intent and the ability at the time of purchase to hold securities until
maturity, they are classified as held-to-maturity and stated at amortized cost. We do not classify any securities as held-to-maturity. Securities to be held for
indefinite periods of time, but not necessarily to be held-to-maturity or on a long-term basis, are classified as available-for-sale and carried at estimated fair
value, with unrealized gains or losses reported as a separate component of stockholders’ equity in accumulated other comprehensive income, net of applicable
income taxes. Securities available-for-sale include securities that management intends to use as part of its asset/liability management strategy and that may be
sold in response to changes in interest rates, prepayment risk, and other related factors. Securities are individually evaluated for appropriate classification
when acquired. As a result, similar types of securities may be classified differently depending on factors existing at the time of purchase.
The carrying values of all securities are adjusted for amortization of premiums and accretion of discounts using the interest method. Premiums on callable
securities are amortized to the earliest call date. Realized gains or losses on the sale of securities, if any, are determined using the amortized cost of the specific
securities sold. Such gains or losses are included in "Gain (loss) on sale of securities" on the consolidated statements of earnings. Declines in the fair value of
debt securities classified as available-for-sale are reviewed to determine whether the impairment is other-than-temporary. This review considers a number of
factors, including the severity of the decline in fair value, current market conditions, historical performance of the security, risk ratings, and the length of time
the security has been in an unrealized loss position. If we do not expect to recover the entire amortized cost basis of the security, then an other-than-temporary
impairment is considered to have occurred. The cost basis of the security is written down to its estimated fair value and the amount of the write-down is
recognized through a charge to earnings.
Investments in FHLB stock are carried at cost and evaluated regularly for impairment. FHLB stock is expected to be redeemed at par and is a required
investment based on measurements of the Bank’s assets and/or borrowing levels.
Our accounting policy for investment securities applied to both debt and equity securities in prior periods. Effective January 1, 2018, upon the adoption
of ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU
2018-03, "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities," our accounting policy for investment securities applies only to debt securities. Our accounting policy for equity
investments is described below.
(g) Equity Investments
Investments in common or preferred stock that are not publicly traded and certain investments in limited partnerships are considered equity investments that
do not have a readily determinable fair value. If we have the ability to significantly influence the operating and financial policies of the investee, the investment
is accounted for pursuant to the equity method of accounting. This is generally presumed to exist when we own between 20% and 50% of a corporation, or
when we own greater than 5% of a limited partnership or similarly structured entity. Our equity investment carrying values are included in other assets and our
share of earnings and losses in equity method investees is included in "Noninterest income - other" on the consolidated statements of earnings. Prior to
January 1, 2018 and the adoption of ASU 2016-01, if we did not have significant influence over the investee, the cost method was used to account for the
equity interest.
103
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective January 1, 2018 with the adoption of ASU 2016-01, our accounting treatment for equity investments differs for those with and without readily
determinable fair values. Equity investments with readily determinable fair values are recorded at fair value with changes in fair value recorded in “Noninterest
income - other.” For equity investments without readily determinable fair values we have elected the “measurement alternative,” and therefore carry these
investments at cost, less impairment (if any), plus or minus changes in observable prices. On a quarterly basis, we review our equity investments without
readily determinable fair values for impairment. We consider a number of qualitative factors such as whether there is a significant deterioration in earnings
performance, credit rating, asset quality, or business prospects of the investee in determining if impairment exists. If the investment is considered impaired, an
impairment loss equal to the amount by which the carrying value exceeds its fair value is recorded through a charge to earnings. The impairment loss may be
reversed in a subsequent period if there are observable transactions for the identical or similar investment of the same issuer at a higher amount than the
carrying amount that was established when the impairment was recognized. Impairment as well as upward or downward adjustments resulting from observable
price changes in orderly transactions for identical or similar investments are included in “Noninterest income - other.”
Realized gains or losses resulting from the sale of equity investments are calculated using the specific identification method and are included in
"Noninterest income - other."
(h) Loans and Leases
Originated loans. Loans are originated by the Company with the intent to hold them for investment and are stated at the principal amount outstanding,
net of unearned income. Unearned income includes deferred unamortized nonrefundable loan fees and direct loan origination costs. Net deferred fees or costs
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 sold. The amortization of loan fees or costs is discontinued when a loan is placed on nonaccrual status. Interest income is
recorded on an accrual basis in accordance with the terms of the respective loan.
Purchased loans. Purchased loans are stated at the principal amount outstanding, net of unearned discounts or unamortized premiums. All loans
acquired in our acquisitions are initially measured and recorded at their fair value on the acquisition date. A component of the initial fair value measurement is
an estimate of the credit losses over the life of the purchased loans. Purchased loans are also evaluated for impairment as of the acquisition date and are
accounted for as “acquired non-impaired” or “purchased credit impaired” loans.
Acquired non-impaired loans. Acquired non-impaired loans are those loans for which there was no evidence of credit deterioration at their acquisition
date and it was probable that we would be able to collect all contractually required payments. Acquired non-impaired loans, together with originated loans, are
referred to as Non-PCI loans. Purchase discounts or premiums on acquired non-impaired loans are recognized as an adjustment to interest income over the
contractual life of such loans using the effective interest method or taken into income when the related loans are paid off or sold.
Purchased credit impaired loans. Purchased credit impaired loans are referred to as PCI loans and are accounted for in accordance with ASC Subtopic
310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” A purchased loan is deemed to be credit impaired when there is evidence of
credit deterioration since its origination and it is probable at the acquisition date that collection of all contractually required payments is unlikely. We apply PCI
loan accounting when we acquire loans deemed to be impaired, and as a general policy election when we acquire a portfolio of loans in a distressed bank
acquisition. As our gross PCI loan portfolio represented less than 0.4% of total loans as of the end of 2017, beginning in 2018 the PCI loans were accounted for
as Non-PCI loans as the balance continued to decline and no purchases of credit impaired loans have occurred.
104
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Leases to customers. We provide equipment financing to our customers primarily with direct financing and operating leases. For direct financing leases,
lease receivables are recorded on the balance sheet but the leased property is not, although we generally retain legal title to the leased property 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. Leases acquired in an acquisition are initially measured and recorded at their fair value on the acquisition date. Purchase discount or premium
on acquired leases is recognized as an adjustment to interest income over the contractual life of the leases using the effective interest method or taken into
income when the related leases are paid off. Direct financing leases are subject to our accounting for allowance for loans and leases.
We provide equipment financing through operating leases where we facilitate the purchase of equipment leased to customers. The equipment is shown
on our 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 consolidated statements of earnings, according to our fixed asset accounting policy. We receive
periodic rental income payments under the leases, which are recorded as "Noninterest income" in the consolidated statements of earnings.
Loans and leases held for sale. As part of our management of the loans and leases held in our portfolio, on occasion we will transfer loans from held for
investment to held for sale. Upon transfer, any associated allowance for loan and lease loss is charged off and the carrying value of the loan is adjusted to the
lower of cost or estimated fair value. The unamortized balance of net deferred fees and costs associated with loans held for sale is not accreted or amortized to
interest income until the related loans are sold. Gains or losses on the sale of these loans are recorded as "Noninterest income" in the consolidated statements
of earnings.
Delinquent or past due loans and leases. Loans and leases are considered delinquent when principal or interest payments are past due 30 days or more.
Delinquent loans may remain on accrual status between 30 days and 89 days past due.
Nonaccrual loans and leases. When we discontinue the accrual of interest on a loan or lease it is designated as nonaccrual. We discontinue the accrual
of interest on a loan or lease generally when a borrower's principal or interest payments or a lessee's payments are past due 90 days or when, in the opinion of
management, there is a reasonable doubt as to collectability in the normal course of business. Loans with interest or principal payments past due 90 days or
leases with payments past due 90 days may be accruing if the loans or leases are concluded to be well-secured and in the process of collection; however, these
loans or leases are still reported as nonperforming. When loans or leases are placed on nonaccrual status, all interest previously accrued but not collected is
reversed against current period interest income. Interest on nonaccrual loans or leases is subsequently recognized only to the extent that cash is received and
the loan principal balance or lease balance is deemed collectable. Loans or leases are restored to accrual status when the loans or leases become both
well-secured and are in the process of collection.
Impaired loans and leases. A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan or lease agreement. Impaired loans and leases include loans and leases on nonaccrual status and performing troubled debt
restructured loans. Income from impaired loans is recognized on an accrual basis unless the loan is on nonaccrual status. Income from loans on nonaccrual
status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectable. We measure impairment of a loan or lease by
using the estimated fair value of the collateral, less estimated costs to sell and other applicable costs, if the loan or lease is collateral-dependent and the present
value of the expected future cash flows discounted at the loan’s or lease’s effective interest rate if the loan or lease is not collateral-dependent. The impairment
amount on a collateral-dependent loan or lease is charged-off, and the impairment amount on a loan that is not collateral-dependent is generally recorded as a
specific reserve within our allowance for loan and lease losses.
105
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Troubled debt restructurings. A loan is classified as a troubled debt restructuring when we grant a concession to a borrower experiencing financial
difficulties that we otherwise would not consider under our normal lending policies. These concessions may include a reduction of the interest rate, principal or
accrued interest, extension of the maturity date or other actions intended to minimize potential losses. All modifications of criticized loans are evaluated to
determine whether such modifications are troubled debt restructurings as outlined under ASC Subtopic 310-40, “Troubled Debt Restructurings by Creditors.”
Loans restructured with an interest rate equal to or greater than that of a new loan with comparable market risk at the time the loan is modified may be excluded
from certain restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms.
A loan that has been placed on nonaccrual status that is subsequently restructured will usually remain on nonaccrual status until the borrower is able to
demonstrate repayment performance in compliance with the restructured terms for a sustained period of time, typically for six months. A restructured loan may
return to accrual status sooner based on other significant events or circumstances. A loan that has not been placed on nonaccrual status may be restructured
and such loan may remain on accrual status after such restructuring. In these circumstances, the borrower has made payments before and after the
restructuring. Generally, this restructuring involves maturity extensions, a reduction in the loan interest rate and/or a change to interest-only payments for a
period of time. The restructured loan is considered impaired despite the accrual status and a specific reserve is calculated based on the present value of
expected cash flows discounted at the loan’s original effective interest rate or based on the fair value of the collateral if the loan is collateral-dependent.
(i) 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 outstanding loan and lease balances and the reserve for
unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the consolidated balance sheets. For loans and leases
acquired and measured at fair value and deemed non-impaired on the acquisition date, our allowance methodology measures deterioration in credit quality or
other inherent risks related to these acquired assets that may occur after the acquisition date.
The allowance for credit losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the
loan and lease portfolio and other extensions of credit at the balance sheet date. The allowance is based upon our review of the credit quality of the loan and
lease portfolio, which includes payment trends, borrowers' compliance with loan agreements, borrowers' current and budgeted financial performance, collateral
valuation trends, and current economic factors and external conditions that may affect our borrowers' ability to make payments to us in accordance with
contractual terms. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for loan and lease
losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses has a general reserve component for unimpaired loans and leases and a specific reserve component for impaired
loans and leases.
A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the original contractual terms of
the agreement. We assess our loans and leases for impairment on an ongoing basis using certain criteria such as payment performance, borrower reported
financial results and budgets, and other external factors when appropriate. We measure impairment 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 specific 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. Impaired loans and leases with
outstanding balances less than or equal to $250,000 may not be individually assessed for impairment but would be assessed with reserves based on the
average loss severity on historical impaired loans with similar risk characteristics.
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PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Our allowance methodology for the general reserve component includes both quantitative and qualitative loss factors which are applied to our
population of unimpaired loans and leases to estimate our general reserves. The quantitative loss factors determination is based on a probability of default/loss
given default ("PD/LGD") methodology which considers the likelihood of loans defaulting based on the historical degree that similar loans defaulted and the
degree of credit losses based on the historical average degree of loss experienced for these similar loans and leases pooled both by loan or lease type and
credit risk rating; loans with more adverse credit risk ratings have higher quantitative loss factors. The qualitative loss factors consider, among other things,
current economic trends and forecasts, current collateral values and performance trends, credit performance trends, and the loan portfolio's current
composition.
The quantitative estimation of the allowance for credit losses at December 31, 2019 considered actual historical loan and lease charge-off experience over
a 44-quarter look-back period starting with the first quarter of 2009. This look-back period is inclusive of the average timeframe over which charge-offs typically
occur following loan or lease origination and allows for the capture of sufficient loss observations that are relevant to the current portfolio. When estimating
the general reserve component for the various pools of similar loan types, the loss factors applied to the loan pools consider the current credit risk ratings,
giving greater weight to loans with more adverse credit risk ratings. We recognize that the determination of the allowance for credit losses is sensitive to the
assigned credit risk ratings and inherent loss rates at any given point in time.
The qualitative criteria we consider when establishing the loss factors include the following:
•
•
•
•
•
•
•
•
•
current economic trends and forecasts;
current collateral values, performance trends, and overall outlook in the markets where we lend;
legal and regulatory matters that could impact our borrowers’ ability to repay loans and leases;
loan and lease portfolio composition and any loan concentrations;
current lending policies and the effects of any new policies or policy amendments;
loan and lease production volume and mix;
loan and lease portfolio credit performance trends;
results of independent credit reviews; and
changes in management related to credit administration functions.
We estimate the reserve for unfunded loan commitments using the same loss factors as used for the allowance for loan and lease losses. The reserve for
unfunded loan commitments is computed using expected future usage of the unfunded commitments based on historical usage of unfunded commitments for
the various loan types.
The allowance for credit losses is directly correlated to the credit risk ratings of our loans. 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 on a regular basis. The credit risk ratings assigned
to every loan and lease are either “pass,” “special mention,” “substandard,” or “doubtful” and defined as follows:
•
•
•
Pass: Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
Special Mention: 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: 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: 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.
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PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 5. Loans and Leases.
Management believes the allowance for credit losses is appropriate for the known and inherent risks in our loan and lease portfolio and the credit risk
ratings and inherent loss rates currently assigned are appropriate. 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, for example, increased levels of borrower loan defaults, borrowers' noncompliance with
our loan agreements, adverse changes in collateral values, or negative 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. Although we have established an allowance for credit losses that we consider appropriate, there can be no assurance that the
established allowance will be sufficient to absorb future losses.
(j) Land, Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Land is not depreciated. Depreciation and amortization is
charged to "Noninterest expense" in the consolidated statements of earnings using the straight-line method over the estimated useful lives of the assets. The
estimated useful lives of furniture, fixtures and equipment range from 3 to 7 years and for buildings up to 30 years. Leasehold improvements are amortized over
their estimated useful lives, or the life of the lease, whichever is shorter.
(k) Foreclosed Assets
Foreclosed assets include OREO and repossessed non-real estate assets. Foreclosed assets are initially recorded at the estimated fair value of the
property, based on current independent appraisals obtained at the time of acquisition, less estimated costs to sell, including senior obligations such as
delinquent property taxes. The excess of the recorded loan balance over the estimated fair value of the property at the time of acquisition less estimated costs
to sell is charged to the allowance for loan and lease losses. Any subsequent write-downs are charged to "Noninterest expense" in the consolidated
statements of earnings and recognized through a foreclosed assets valuation allowance. Subsequent increases in the fair value of the asset less selling costs
reduce the foreclosed assets valuation allowance, but not below zero, and are credited to "Noninterest expense." Gains and losses on the sale of foreclosed
assets and operating expenses of such assets are included in "Noninterest expense."
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in
earnings in the period that includes the enactment date. Any interest or penalties assessed by the taxing authorities is classified in the financial statements as
income tax expense. Deferred tax assets and liabilities of the same jurisdiction, net of valuation allowances, are grouped together and reported net on the
consolidated balance sheets.
On a periodic basis, the Company evaluates its deferred tax assets to assess whether they are expected to be realized in the future. This determination is
based on currently available facts and circumstances, including our current and projected future tax positions, the historical level of our taxable income, and
estimates of our future taxable income. In most cases, the realization of deferred tax assets is based on our future profitability. To the extent our deferred tax
assets are not considered more likely than not to be realized, we are required to record a valuation allowance on our deferred tax assets by charging earnings.
The Company also evaluates existing valuation allowances periodically to determine if sufficient evidence exists to support an increase or reduction in the
allowance.
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PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(m) 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 at least
annually unless certain events occur or circumstances change. Goodwill represents the excess of the purchase price over the fair value of the net assets and
other identifiable intangible assets acquired. We test for goodwill impairment annually or earlier if events or changes in circumstances indicate goodwill might
possibly be impaired. 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 consolidated statements of earnings.
Intangible assets with estimable useful lives are amortized over such useful lives to their estimated residual values. CDI and CRI are recognized apart from
goodwill at the time of acquisition based on market valuations. In preparing such valuations, variables considered included deposit servicing costs, attrition
rates, and market discount rates. CDI assets are amortized to expense over their useful lives, which we have estimated to range from 7 to 10 years. CRI assets
are amortized to expense over their useful lives, which we have estimated to range from 4 to 7 years. The amortization expense represents the estimated decline
in the value of the underlying deposits or customer relationships acquired. Both CDI and CRI are reviewed for impairment quarterly or earlier if events or
changes in circumstances indicate that their carrying values may not be recoverable. If the recoverable amount of either CDI or CRI is determined to be less
than its carrying value, we would then measure the amount of impairment based on an estimate of the intangible asset’s fair value at that time. If the fair value is
below the carrying value, then the intangible asset is reduced to such fair value; an impairment loss for such amount would be recognized as a charge to
"Noninterest expense" in the consolidated statements of earnings.
(n) Operating Leases
As of December 31, 2019, the Company only had operating leases related to our leased facilities. The Company determines if an arrangement is a lease at
inception by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset for a period of
time in exchange for consideration. Operating leases with a term of more than one year are included in operating lease right-of-use ("ROU") assets and
operating lease liabilities on the Company's consolidated balance sheets. The Company made a policy election to apply the short-term lease exemption to any
operating leases with an original term of less than 12 months, therefore no ROU asset or lease liability is recorded for these operating leases. The Company has
agreements with lease and non-lease components, which are accounted for as a single lease component. ROU assets represent the Company's right to use an
underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and
liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The Company uses the
incremental borrowing rate commensurate with the lease term based on the information available at the lease commencement date in determining the present
value of lease payments. ROU assets initially equal the lease liability, adjusted for any prepaid lease payments and initial direct costs incurred less any lease
incentives received.
Certain of the Company's lease agreements include rental payments that adjust periodically based on changes in the CPI. We initially measure the present
value of the lease payments using the index at the lease commencement date. Subsequent increases in the CPI are treated as variable lease payments and
recognized in the period in which the obligation for those payments is incurred. The ROU assets and lease liabilities are not re-measured as a result of changes
in the CPI. The Company's lease terms may include options to extend or terminate the lease. These options to extend or terminate are assessed on a lease-by-
lease basis, and the ROU assets and lease liabilities are adjusted when it is reasonably certain that an option will be exercised. Rent expense for lease payments
is recognized on a straight-line basis over the lease term and is included in "Occupancy expense" on the Company's consolidated statements of earnings.
109
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company uses the long-lived assets impairment guidance under ASC Topic 360-10-35, "Property, Plant and Equipment," to determine whether an
ROU asset is impaired, and if impaired, the amount of loss to recognize. Long-lived assets are tested for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. These could include vacating the leased space, obsolescence, or physical damage
to a facility. Under ASC Topic 842, "Leases," if an impairment loss is recognized for a ROU asset, the adjusted carrying amount of the ROU asset would be its
new accounting basis. The remaining ROU asset (after the impairment write-down) is amortized on a straight-line basis over the remaining lease term.
(o) Stock-Based Compensation
The Company issues stock-based compensation instruments consisting of TRSAs and PRSUs. Compensation expense related to TRSAs is based on the
fair value of the underlying stock on the award date and is recognized over the vesting period using the straight-line method. Forfeitures of stock-based
awards are recognized when they occur. Compensation expense related to PRSUs is based on the fair value of the underlying stock on the award 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 of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion 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 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’s 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.
Unvested TRSAs participate with common stock in any dividends declared and paid. Dividends are paid on unvested TRSAs and are charged to equity
and the related tax impact is recorded to income tax expense. Dividends paid on forfeited TRSAs are charged to compensation expense. Unvested PRSUs
participate with common stock in any dividends declared, but are only paid on the shares which ultimately vest, if any, at the end of the three-year performance
period. At the time of vesting, the vested shares are entitled to receive cumulative dividends declared and paid during the three-year performance period. Such
dividends are accrued during the three-year performance period at the estimated level of shares to be received by the award holder.
(p) Derivative Instruments
Our derivative contracts primarily manage the foreign currency risk associated with certain assets and liabilities. As of December 31, 2019, all of our derivatives
were held for risk management purposes and none were designated as accounting hedges. The objective is to manage the uncertainty of future foreign
exchange rate fluctuations. These derivatives provide for a fixed exchange rate which has the effect of reducing or eliminating changes to anticipated cash
flows to be received on assets and liabilities denominated in foreign currencies as the result of changes to exchange rates. Our derivatives are carried at fair
value and recorded in other assets or other liabilities, as appropriate. The changes in fair value of our derivatives and the related interest are recognized in
"Noninterest income - other" in the consolidated statements of earnings. At December 31, 2019, our derivative contracts had a notional value of $91.1 million.
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 counterparty credit
review and monitoring procedures.
110
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(q) Comprehensive Income
Comprehensive income consists of net earnings and net unrealized gains (losses) on debt securities available-for-sale, net, and is presented in the
consolidated statements of comprehensive income.
(r) Earnings Per Share
In accordance with ASC Topic 260, “Earnings Per Share,” all outstanding unvested share-based payment awards that contain rights to nonforfeitable
dividends are considered participating securities and are included in the two-class method of determining basic and diluted earnings per share. All of our
unvested restricted stock participates with our common stockholders in dividends. Accordingly, earnings allocated to unvested restricted stock are deducted
from net earnings to determine that amount of earnings available to common stockholders. In the two-class method, the amount of our earnings available to
common stockholders is divided by the weighted average shares outstanding, excluding any unvested restricted stock, for both the basic and diluted earnings
per share.
(s) Business Combinations
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations.”
Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless
of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other
identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceeds
the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if
the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of earnings from
the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.
(t) Business Segments
We regularly assess our strategic plans, operations and reporting structures to identify our reportable segments. Changes to our reportable segments are
expected to be infrequent. As of December 31, 2019 and since December 31, 2015, we operated as one reportable segment. The factors considered in making
this determination include the nature of products and offered services, geographic regions in which we operate, the applicable regulatory environment, and the
discrete financial information reviewed by our key decision makers. Through our network of banking offices nationwide, our entire operations provide
relationship-based banking products, services and solutions for small to mid-sized companies, entrepreneurial and venture-backed businesses, venture capital
and private equity investors, real estate investors, professionals and other individuals. Our products and services include commercial real estate, multi-family,
commercial business, construction and land, consumer and government-guaranteed small business loans, business and personal deposit products, and
treasury cash management services.
111
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective
Date
January 1, 2020
(u) Recently Issued Accounting Standards
Standard
Description
ASU 2016-13,
"Measurement of Credit
Losses on Financial
Instruments,"
ASU 2018-19, “Codification
Improvements to Topic 326,
Financial Instruments -
Credit Losses,”
ASU 2019-05, "Financial
Instruments - Credit Losses
(Topic 326): Targeted
Transition Relief," and
ASU 2019-11, "Codification
Improvements to Topic 326,
Financial Instruments -
Credit Losses"
This Update changes the accounting and
recognition of credit losses and impairment of
financial assets recorded at amortized cost.
Under the CECL model, the standard requires
immediate recognition of estimated credit
losses expected to occur over the remaining
life of the asset. The forward-looking concept
of CECL requires loss estimates for the
remaining estimated life of the financial assets
using historical experience, current conditions
and reasonable and supportable forecasts.
The Update modifies the other-than-temporary
impairment (OTTI) model for AFS debt
securities to require an allowance for credit
impairment instead of a direct write-down,
which allows for reversal of credit
improvements in future periods.
In addition, the Update eliminates the existing
guidance for PCI loans, but requires an
allowance for purchased financial assets with
credit deterioration.
Receivables arising from operating leases are
not within the scope of CECL. The Update
must be applied using the modified
retrospective method with a cumulative-effect
adjustment to retained earnings as of the
beginning of the year of adoption. A
prospective transition approach is required for
available-for-sale debt securities for which an
OTTI had been recognized before the
adoption date. Early adoption is permitted.
Effect on the Financial Statements
or Other Significant Matters
The Company established a multidisciplinary project team
in 2016 to work on the implementation of CECL. During this
implementation project, we developed a detailed
implementation plan, selected a new software solution,
reached accounting decisions on various matters,
developed econometric models for our reasonable and
supportable ("R&S") forecast period, selected key
assumptions used in the economic regression models of
Real GDP, unemployment rates, CRE Price Index and BBB
spreads, developed a prepayment model and framework
based on our historical prepayment experience, completed
the validation of new models, redesigned our qualitative
framework, and conducted five preliminary calculations
during 2019. Key decisions made in our planned approach
under CECL include the use of a probability of default/loss
given default methodology, the use of a single scenario
based on the Moody's consensus forecast for our
economic forecast over the R&S period, an R&S forecast
period of four quarters, a post R&S reversion period of two
quarters using a straight-line approach, and a historical
loss period of at least 40 quarters among other decisions.
As part of performing our preliminary calculations, we
performed sensitivity analyses and other steps to assess
modeling assumptions and results, while also updating our
disclosures, internal controls, policies, and procedures. We
adopted this new standard on January 1, 2020 and, using
our December 31, 2019 loan and lease balances and other
information, calculated the day one impact and transition
adjustment to be an increase in our allowance for credit
losses of approximately $7.3 million, or 4.2%. The day one
impact is a decrease to retained earnings of $5.3 million, net
of tax, or a decrease of approximately two basis points to
our capital ratios. The impact reflects our loan composition,
which is primarily a short-duration commercial portfolio.
The calculation of the allowance for credit losses under
CECL is sensitive and highly dependent on loan
composition, model methodologies, the macroeconomic
conditions, economic forecasts, model assumptions, and
other decisions and judgments made by management. We
expect the provisions for credit losses to be susceptible to
more volatility post-adoption due to these same factors
and influenced by the volume of new loan originations,
loan payoffs, and the seasoning of the loan portfolio.
112
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective
Effect on the Financial Statements
Date
January 1, 2020;
except for Topic
C - January 1,
2019
or Other Significant Matters
Impacts from the adoption of Topics A, B, and E
within this Update have been considered in the
Company's overall CECL implementation and we
adopted concurrent with the adoption of ASU 2016-
13. The adoption of Topic D within this Update did
not have a material impact on the Company's
consolidated financial position or results of
operations upon adoption on January 1, 2020. Topic
C within this Update is not applicable to us and
therefore had no impact on the Company's
consolidated financial position or results of
operations.
Standard
ASU 2019-04, "Codification
Improvements to Topic 326,
Financial Instruments -
Credit Losses, Topic 815,
Derivatives and Hedging,
and Topic 825, Financial
Instruments"
Description
This Update made clarifications and amendments to
five topics: (i) Topic A: Codification Improvements
Resulting from the June and November 2018 Credit
Losses Transition Resource Group ("TRG")
Meetings, (ii) Topic B: Codification Improvements to
ASU 2016-13, (iii) Topic C: Codification
Improvements to ASU 2017-12, "Derivatives and
Hedging (Topic 815)" and Other Hedging Items, (iv)
Topic D: Codification Improvements to ASU 2016-01,
"Financial Instruments - Overall (Subtopic 825-
10)," and (v) Topic E: Codification Improvements
Resulting from the November 2018 Credit Losses
TRG Meeting. In addition to conforming
amendments that correct for errors and oversights,
the Update in Topics A, B, and E, which impacts
CECL implementation, amends or clarifies guidance
for accrued interest; transfers between
classifications or categories of loans and debt
securities; recoveries; effect of prepayments in
determining the effective interest rate; estimated
costs to sell when foreclosure is probable; vintage
disclosure presentation related to line-of-credit
arrangements converted to term loans; contractual
extensions or renewals; and others. Transition
requirements for the amendments are the same as
ASU 2016-13 for the Update in Topics A, B, and E.
The Update in Topic C may be applied
retrospectively as of the date of initial adoption of
ASU 2017-12 or prospectively. The Update in Topic
D must be applied on a modified retrospective
method with a cumulative-effect adjustment to
retained earnings as of the beginning of the year of
adoption and early adoption is permitted.
113
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Standard
ASU 2017-04, "Intangibles
- Goodwill and Other
(Topic 350): Simplifying
the Test for Goodwill
Impairment"
Standard
ASU 2018-13, “Fair Value
Measurement (Topic 820):
Disclosure Framework -
Changes to Disclosure
Requirements for Fair
Value Measurements”
Description
This Update 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 Update must be
applied prospectively and early adoption is
permitted.
Description
This Update modified the disclosure requirements in
ASC Topic 820 to 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. Certain disclosure
requirements in ASC Topic 820 are also removed or
modified. Certain disclosures in ASU 2018-13 would
need to be applied on a retrospective basis and
others on a prospective basis and early adoption is
permitted.
114
Effective
Effect on the Financial Statements
Date
January 1, 2020
or Other Significant Matters
The Company adopted this standard on January 1,
2020 and it did not have a material impact on the
Company’s consolidated financial position or results
of operations.
Effective
Effect on the Financial Statements
Date
January 1, 2020
or Other Significant Matters
The Company has early adopted those provisions of
the standard that permitted the removal or
modification of certain disclosures effective January
1, 2019 but deferred adoption of the additional new
disclosures until January 1, 2020. The adoption of
this guidance will modify disclosures in 2020 but will
not have an impact on the Company’s consolidated
financial position or results of operations.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective
Effect on the Financial Statements
Date
January 1, 2021
or Other Significant Matters
The Company has not yet determined the impact of
this standard on its consolidated financial position
and results of operations.
Effective
Effect on the Financial Statements
Date
January 1, 2021
or Other Significant Matters
The Company has not yet determined the impact of
this standard on its consolidated financial position
and results of operations.
Standard
ASU 2019-12, “Income
Taxes (Topic 740):
Simplifying the
Accounting for Income
Taxes”
Description
This Update does the following, among other things:
(1) requires that an entity reflect the effect of an
enacted change in tax laws or rates in the annual
effective tax rate computation in the interim period
that includes the enactment date; (2) specifies that
an entity is not required to allocate the consolidated
amount of current and deferred income tax expense
to a legal entity that is not subject to income tax in
its separate financial statements; and (3) requires
that an entity evaluate when a step up in the tax
basis of goodwill should be considered part of the
business combination in which the book goodwill
was originally recognized and when it should be
considered a separate transaction.
Standard
ASU 2020-1 “Investments -
Equity Securities (Topic
321), Investments - Equity
Method and Joint
Ventures (Topic 323), and
Derivatives and Hedging
(Topic 815): "Clarifying
the Interactions Between
Topic 321, Topic 323, and
Topic 815”
Description
This Update clarifies, among other things, that a
company should consider observable transactions
that require it to either apply or discontinue the
equity method of accounting for purposes of the
measurement alternative under ASC Topic 321
immediately before applying, or on discontinuing,
the equity method of accounting under ASC Topic
323. Under the ASC Topic 321 measurement
alternative, equity investments without readily
determinable fair values are measured at cost, less
any impairment, plus or minus changes resulting
from observable price changes in orderly
transactions for an identical or similar investment of
the same issuer.
115
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective
Effect on the Financial Statements
Date
January 1, 2020
or Other Significant Matters
The Company adopted this standard on January 1,
2020 and it did not have a material impact on the
Company's consolidated financial position or results
of operations.
Standard
Description
ASU 2020-02 “Financial
Instruments - Credit Losses
(Topic 326) and Leases
(Topic 842): "Amendments
to SEC Paragraphs
Pursuant to Staff
Accounting Bulletin No.
119 and Update to SEC
Section on Effective Date
Related to Accounting
Standards Update No.
2016-02, Leases (Topic
842)"
This Update adds an SEC paragraph to ASC
Subtopic 326-20, "Financial Instruments - Credit
Losses - Measured at Amortized Cost," pursuant to
the issuance of SEC Staff Accounting Bulletin
("SAB") No. 119. The topic of SAB 119 is
"Accounting for Loan Losses by Registrants
Engaged in Lending Activities Subject to FASB
ASC Topic 326." This Update also adds a note to an
SEC paragraph in ASC Subtopic 842-10, "Leases -
Overall." The note relates to effective date
information related to certain public business entities
for ASU 2016-02, "Leases (Topic 842)."
NOTE 2. RESTRICTED CASH BALANCES
The Company is required to maintain reserve balances with the FRBSF. Such reserve requirements are based on a percentage of deposit liabilities and
may be satisfied by cash on hand. The average reserves required to be held at the FRBSF for the years ended December 31, 2019 and 2018 were $131.0 million
and $77.0 million. As of December 31, 2019 and 2018, we pledged cash collateral for our derivative contracts of $3.2 million and $2.6 million.
116
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3. ACQUISITIONS
The following assets acquired and liabilities assumed of CUB are presented at estimated fair value as of the acquisition date:
Assets Acquired:
Cash and due from banks
Interest-earning deposits in financial institutions
Total cash and cash equivalents
Securities available-for-sale
FHLB stock
Loans and leases
Premises and equipment
Goodwill
Core deposit and customer relationship intangibles
Other assets
Total assets acquired
Liabilities Assumed:
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Borrowings
Subordinated debentures
Accrued interest payable and other liabilities
Total liabilities assumed
Total consideration paid
Summary of consideration:
Cash paid
PacWest common stock issued
Total
CUB Acquisition
October 20, 2017
(In thousands)
51,857
332,799
384,656
446,980
11,902
2,075,890
2,981
374,721
57,500
103,498
3,458,128
1,510,285
1,209,597
2,719,882
22,879
12,372
32,424
2,787,557
670,571
224,338
446,233
670,571
$
$
$
$
$
$
$
We acquired CUB on October 20, 2017. As part of the acquisition, CU Bank, a wholly-owned subsidiary of CUB, was merged with and into PacWest's
wholly-owned banking subsidiary, Pacific Western Bank.
We completed the acquisition to, among other things, enhance our Southern California community bank franchise by adding a $2.1 billion loan portfolio
and $2.7 billion of core deposits. The CUB acquisition has been accounted for under the acquisition method of accounting. We acquired $3.5 billion of assets
and assumed $2.8 billion of liabilities upon closing of the acquisition. The assets and liabilities, both tangible and intangible, were recorded at their estimated
fair values as of the acquisition date. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such
acquired assets and liabilities. The application of the acquisition method of accounting resulted in goodwill of $374.7 million. All of the recognized goodwill is
non-deductible for tax purposes.
117
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4. INVESTMENT SECURITIES
Securities Available-for-Sale
The following table presents amortized cost, gross unrealized gains and losses, and fair values of securities available-for-sale as of the dates indicated:
2019
Gross
Gross
Amortized
Unrealized
Unrealized
Security Type
Cost
Gains
Losses
Agency residential CMOs
$
Agency commercial MBS
Municipal securities
Agency residential MBS
Asset-backed securities
Collateralized loan obligations
Private label residential CMOs
SBA securities
Corporate debt securities
U.S. Treasury securities
Total
$
1,112,573
1,083,182
691,647
294,606
216,133
124,134
96,066
47,765
17,000
4,985
3,688,091
$
$
24,403
25,579
43,851
10,593
320
25
3,430
506
3,748
196
112,651
$
$
(579) $
(537)
(339)
(1)
(1,670)
(403)
(13)
(13)
—
—
(3,555) $
December 31,
2018
Gross
Gross
Fair
Value
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
(In thousands)
$
1,136,397
1,108,224
735,159
305,198
214,783
123,756
99,483
48,258
20,748
5,181
3,797,187
$
634,774
1,133,846
1,298,514
281,486
81,762
—
101,313
68,158
17,000
401,056
4,017,909
$
$
3,448
383
21,000
1,902
104
—
1,985
—
553
2,437
31,812
$
(5,372) $
(21,525)
(7,320)
(2,300)
(481)
—
(2,093)
(1,111)
—
(88)
$
(40,290) $
Fair
Value
632,850
1,112,704
1,312,194
281,088
81,385
—
101,205
67,047
17,553
403,405
4,009,431
See Note 14. Fair Value Measurements for information on fair value measurements and methodology.
As of December 31, 2019, securities available-for-sale with a fair value of $486.2 million were pledged as collateral for 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 (losses)
for the years indicated:
Sales of Securities Available-for-Sale
2019
Year Ended December 31,
2018
(In thousands)
2017
Amortized cost of securities sold (1)
Gross realized gains
Gross realized losses
Net realized gains (losses)
$
$
$
1,559,415
$
563,625
$
759,841
$
29,584
(4,139)
25,445
$
$
9,225
(1,049)
8,176
$
3,295
(3,836)
(541)
_______________________________-
(1)
The securities sold in 2017 included $404.5 million of the $447.0 million of securities obtained in the CUB acquisition that were sold for no gain or loss as they were marked to
fair value at the time of acquisition.
118
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, for which
other-than-temporary impairments have not been recognized in earnings, as of the dates indicated:
Security Type
Agency residential CMOs
Agency commercial MBS
Municipal securities
Agency residential MBS
Asset-backed securities
Collateralized loan obligations
Private label residential CMOs
SBA securities
Total
Security Type
Agency residential CMOs
Agency commercial MBS
Municipal securities
Agency residential MBS
Asset-backed securities
Private label residential CMOs
SBA securities
U.S. Treasury securities
Total
$
$
$
$
Less Than 12 Months
December 31, 2019
12 Months or More
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Total
Gross
Unrealized
Losses
Fair
Value
180,071
214,862
38,667
—
165,575
102,469
9,872
4,565
716,081
$
(572) $
(537)
(339)
—
(1,670)
(403)
(11)
(13)
$
(3,545) $
(In thousands)
$
1,456
—
—
186
—
—
114
—
1,756
$
(7) $
—
—
(1)
—
—
(2)
—
(10) $
181,527
214,862
38,667
186
165,575
102,469
9,986
4,565
717,837
$
$
(579)
(537)
(339)
(1)
(1,670)
(403)
(13)
(13)
(3,555)
Less Than 12 Months
December 31, 2018
12 Months or More
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Total
Gross
Unrealized
Losses
Fair
Value
69,859
40,641
52,386
60,164
11,548
32,170
249
49,729
316,746
$
$
(326) $
(341)
(238)
(169)
(38)
(831)
(1)
(88)
(2,032) $
(In thousands)
$
164,097
1,020,684
284,915
85,245
35,859
49,237
66,798
—
1,706,835
$
(5,046) $
(21,184)
(7,082)
(2,131)
(443)
(1,262)
(1,110)
—
(38,258) $
233,956
1,061,325
337,301
145,409
47,407
81,407
67,047
49,729
2,023,581
$
(5,372)
(21,525)
(7,320)
(2,300)
(481)
(2,093)
(1,111)
(88)
$
(40,290)
We reviewed the securities that were in an unrealized loss position at December 31, 2019 and 2018, and 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. Accordingly, we determined the securities were
temporarily impaired and we did not recognize such impairment in the consolidated statements of earnings. Although we periodically sell securities for portfolio
management purposes, we do not foresee having to sell any temporarily impaired securities strictly for liquidity needs and believe that it is more likely than not
we would not be required to sell any temporarily impaired securities before recovery of their amortized cost.
119
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Contractual Maturities of Securities Available-for-Sale
The following table presents the contractual maturities of our available-for-sale securities portfolio based on amortized cost and carrying value as of the
date indicated.
Maturity
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total securities available-for-sale
$
$
December 31, 2019
Amortized
Cost
Fair
Value
(In thousands)
$
7,870
278,393
988,421
2,413,407
3,688,091
$
7,897
283,059
1,013,054
2,493,177
3,797,187
Mortgage-backed securities have contractual maturity dates that reflect the scheduled amortization terms of underlying loan collateral. Actual principal
collections on mortgage-backed securities usually occur more rapidly than the scheduled amortization terms because of prepayments made by obligors of the
underlying loan collateral.
FHLB Stock
In connection with outstanding FHLB advances, the Bank owned FHLB stock carried at cost of $40.9 million and $32.1 million at December 31, 2019 and
2018. At December 31, 2019 and 2018, the Bank was required to own FHLB stock equal to a percentage of outstanding FHLB advances. During the year ended
December 31, 2019, FHLB stock increased by $8.8 million due to $159.0 million in purchases, offset partially by $150.1 million in redemptions. We evaluated the
carrying value of our FHLB stock investment at December 31, 2019 and determined that it was not impaired. Our evaluation considered the long-term nature of
the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the
investment from recurring dividends, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.
Interest Income on Investment Securities
The following table presents the composition of our interest income on investment securities for the years indicated:
Taxable interest
Non-taxable interest
Dividend income
Total interest income on investment securities
2019
Year Ended December 31,
2018
(In thousands)
2017
85,968
27,955
1,646
115,569
$
$
68,504
41,376
1,739
111,619
$
$
52,981
43,355
1,866
98,202
$
$
120
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5. LOANS AND LEASES
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:
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total gross loans and leases held for investment
Deferred fees, net
Total loans and leases held for investment, net of deferred fees
Allowance for loan and lease losses
Total loans and leases held for investment, net
December 31,
2019
2018
(In thousands)
$
7,982,383
2,773,209
7,714,358
440,790
18,910,740
(63,868)
18,846,872
(138,785)
18,708,087
$
7,933,859
2,262,710
7,428,500
401,296
18,026,365
(68,652)
17,957,713
(132,472)
17,825,241
$
$
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:
30 - 89
Days
Past Due
90 or More
Days
Past Due
December 31, 2019
Total
Past Due
(In thousands)
Current
Total
Real estate mortgage:
Commercial
Income producing and other residential
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Commercial:
Asset-based
Venture capital
Other commercial
Total commercial
Consumer
Total
$
$
2,448
2,105
4,553
—
1,429
1,429
19
—
2,781
2,800
1,006
9,788
$
$
5,919
802
6,721
$
8,367
2,907
11,274
$
4,194,320
3,767,153
7,961,473
—
—
—
—
—
4,164
4,164
200
11,085
$
—
1,429
1,429
19
—
6,945
6,964
1,206
20,873
$
1,082,368
1,654,005
2,736,373
3,748,388
2,179,422
1,760,722
7,688,532
439,621
18,825,999
$
$
121
4,202,687
3,770,060
7,972,747
1,082,368
1,655,434
2,737,802
3,748,407
2,179,422
1,767,667
7,695,496
440,827
18,846,872
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
30 - 89
Days
Past Due
90 or More
Days
Past Due
December 31, 2018
Total
Past Due
(In thousands)
Current
Total
Real estate mortgage:
Commercial
Income producing and other residential
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Commercial:
Asset-based
Venture capital
Other commercial
Total commercial
Consumer
Total
$
$
3,487
1,557
5,044
—
1,527
1,527
47
4,705
5,181
9,933
581
17,085
$
$
$
7,541
476
8,017
$
11,028
2,033
13,061
$
4,813,270
3,091,810
7,905,080
442
—
442
646
—
1,285
1,931
333
10,723
$
442
1,527
1,969
693
4,705
6,466
11,864
914
27,808
$
912,141
1,319,546
2,231,687
3,304,728
2,034,043
2,053,960
7,392,731
400,407
17,929,905
$
4,824,298
3,093,843
7,918,141
912,583
1,321,073
2,233,656
3,305,421
2,038,748
2,060,426
7,404,595
401,321
17,957,713
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:
Real estate mortgage:
Commercial
Income producing and other residential
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Commercial:
Asset-based
Venture capital
Other commercial
Total commercial
Consumer
Total
$
$
2019
2018
December 31,
Nonaccrual
Performing
Total
Nonaccrual
Performing
Total
(In thousands)
$
18,346
2,478
20,824
$
4,184,341
3,767,582
7,951,923
$
4,202,687
3,770,060
7,972,747
$
15,321
2,524
17,845
$
4,808,977
3,091,319
7,900,296
364
—
364
30,162
12,916
27,594
70,672
493
92,353
$
1,082,004
1,655,434
2,737,438
3,718,245
2,166,506
1,740,073
7,624,824
440,334
18,754,519
122
$
1,082,368
1,655,434
2,737,802
3,748,407
2,179,422
1,767,667
7,695,496
440,827
18,846,872
$
442
—
442
32,324
20,299
7,380
60,003
1,043
79,333
$
912,141
1,321,073
2,233,214
3,273,097
2,018,449
2,053,046
7,344,592
400,278
17,878,380
$
4,824,298
3,093,843
7,918,141
912,583
1,321,073
2,233,656
3,305,421
2,038,748
2,060,426
7,404,595
401,321
17,957,713
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
amount of interest income that would have been recorded on nonaccrual loans and leases at December 31, 2019 and 2018 had such loans and leases been
current in accordance with their original terms was $8.1 million and $9.3 million for 2019 and 2018.
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 30 to 89 days
past due and $80.0 million of current loans that were placed on nonaccrual status based on management’s judgment regarding their collectability. At
December 31, 2018, nonaccrual loans and leases included $10.7 million of loans and leases 90 or more days past due, $6.6 million of loans 30 to 89 days past due
and $62.0 million of current loans that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of December 31, 2019, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $50.3 million and represented 54%
of total nonaccrual loans and leases.
The following tables present the credit risk rating categories for loans and leases held for investment 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.
Real estate mortgage:
Commercial
Income producing and other residential
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Commercial:
Asset-based
Venture capital
Other commercial
Total commercial
Consumer
Total
December 31, 2019
Classified
Special Mention
Pass
Total
(In thousands)
$
$
$
33,535
8,600
42,135
$
30,070
1,711
31,781
$
4,139,082
3,759,749
7,898,831
—
1,429
1,429
38,936
74,813
174,785
288,534
1,212
322,956
$
1,082,004
1,654,005
2,736,009
3,677,248
2,069,293
1,527,621
7,274,162
439,002
18,348,004
$
364
—
364
32,223
35,316
65,261
132,800
613
175,912
123
$
4,202,687
3,770,060
7,972,747
1,082,368
1,655,434
2,737,802
3,748,407
2,179,422
1,767,667
7,695,496
440,827
18,846,872
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018
Classified
Special Mention
Pass
Total
(In thousands)
$
$
$
57,734
10,521
68,255
$
74,785
968
75,753
$
4,691,779
3,082,354
7,774,133
442
—
442
45,957
28,731
92,526
167,214
1,199
237,110
$
7,041
1,527
8,568
48,338
77,588
50,136
176,062
1,015
261,398
$
905,100
1,319,546
2,224,646
3,211,126
1,932,429
1,917,764
7,061,319
399,107
17,459,205
$
4,824,298
3,093,843
7,918,141
912,583
1,321,073
2,233,656
3,305,421
2,038,748
2,060,426
7,404,595
401,321
17,957,713
Real estate mortgage:
Commercial
Income producing and other residential
Total real estate mortgage
Real estate construction and land:
Commercial
Residential
Total real estate construction and land
Commercial:
Asset-based
Venture capital
Other commercial
Total commercial
Consumer
Total
Nonaccrual loans and leases and performing TDRs are considered impaired for reporting purposes. TDRs are a result of rate reductions, term extensions,
fee concessions and debt forgiveness or a combination thereof. At December 31, 2019 and 2018, we had unfunded commitments related to TDRs of $1.2 million
and $1.3 million.
The following table presents the composition of our impaired loans and leases held for investment, net of deferred fees, by loan portfolio segment as of
the dates indicated:
December 31, 2019
December 31, 2018
Total
Nonaccrual
Impaired
Nonaccrual
Loans
and
Leases
Performing
TDRs
Loans
and
Leases
Loans
and
Leases
Performing
TDRs
Total
Impaired
Loans
and
Leases
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total
$
$
20,824
364
70,672
493
92,353
$
$
10,165
1,470
550
72
12,257
$
$
124
(In thousands)
$
30,989
1,834
71,222
565
104,610
$
17,845
442
60,003
1,043
79,333
$
$
11,484
5,420
692
105
17,701
$
$
29,329
5,862
60,695
1,148
97,034
The following tables present information regarding our impaired loans and leases held for investment, net of deferred fees, by loan portfolio segment and
class as of and for the years indicated:
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Impaired Loans and Leases
With An Allowance Recorded:
Real estate mortgage:
Commercial
Income producing and other residential
Commercial:
Venture capital
Other commercial
With No Related Allowance Recorded:
Real estate mortgage:
Commercial
Income producing and other residential
Real estate construction and land:
Commercial
Commercial:
Asset-based
Venture capital
Other commercial
Consumer
Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total
$
$
$
$
2019
Unpaid
Principal
Balance
Recorded
Investment
December 31,
Related
Recorded
Allowance
Investment
(In thousands)
2018
Unpaid
Principal
Balance
Related
Allowance
$
479
2,002
$
479
2,005
$
71
160
$
1,736
2,569
$
1,648
2,563
7,811
14,805
9,106
15,191
2,581
3,385
11,621
473
13,255
482
$
21,264
7,244
$
36,247
9,442
1,834
1,887
30,162
5,270
13,174
565
52,139
44,468
32,242
728
—
—
—
—
—
—
—
$
$
17,783
7,241
$
32,035
9,425
5,862
5,870
32,324
8,678
7,599
1,148
38,100
41,335
25,740
1,470
30,989
1,834
71,222
565
104,610
$
$
48,173
1,887
153,146
728
203,934
$
$
231
—
5,966
—
6,197
$
$
29,329
5,862
60,695
1,148
97,034
$
$
45,671
5,870
118,912
1,470
171,923
$
$
170
247
3,141
473
—
—
—
—
—
—
—
417
—
3,614
—
4,031
125
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year Ended December 31,
2019
2018
2017 (2)
Weighted
Average
Balance (1)
Interest
Income
Recognized
Weighted
Average
Balance (1)
Interest
Income
Recognized
Weighted
Average
Balance (1)
Interest
Income
Recognized
(In thousands)
$
479
2,001
7,008
3,710
—
$
16,252
6,898
1,834
28,829
4,735
7,303
413
25,630
1,834
51,585
413
79,462
$
$
31
58
—
—
—
230
217
118
—
—
75
5
$
$
1,736
2,199
9,449
35
—
$
$
15,714
7,191
5,460
32,324
689
6,286
844
72
75
—
—
—
236
181
383
—
—
98
7
$
$
15,538
2,787
10,228
20,329
100
$
$
89,554
3,842
5,690
31,388
2,860
3,404
20
536
118
75
5
734
$
$
26,840
5,460
48,783
844
81,927
$
$
564
383
98
7
1,052
$
$
111,721
5,690
68,209
120
185,740
$
$
881
55
—
60
8
2,648
59
306
—
—
84
—
3,643
306
144
8
4,101
Impaired Loans and Leases
With An Allowance Recorded:
Real estate mortgage:
Commercial
Income producing and other residential
Commercial:
Venture capital
Other commercial
Consumer
With No Related Allowance Recorded:
Real estate mortgage:
Commercial
Income producing and other residential
Real estate construction and land:
Commercial
Commercial:
Asset-based
Venture capital
Other commercial
Consumer
Total Loans and Leases With and
Without an Allowance Recorded:
Real estate mortgage
Real estate construction and land
Commercial
Consumer
Total
$
$
$
$
_________________________
(1)
For loans and leases reported as impaired at December 31, 2019, 2018, and 2017, amounts were calculated based on the period of time such loans and leases were impaired
during the reported period.
Excludes PCI loans. See Note 1(h). Nature of Operations and Summary of Significant Accounting Policies.
(2)
126
The following table presents our troubled debt restructurings of loans held for investment and defaulted troubled debt restructurings of loans held for
investment by loan portfolio segment and class for the years indicated:
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Troubled Debt Restructurings
Pre-Modification
Post-Modification
Troubled Debt Restructurings
That Subsequently Defaulted(1)
Number
Outstanding
Outstanding
Number
of
Loans
Recorded
Investment
Recorded
Investment
of
Loans
Recorded
Investment(1)
(Dollars In thousands)
3
9
5
14
20
51
10
10
4
14
19
3
60
5
8
1
5
11
19
1
50
$
$
$
$
$
$
$
121
1,591
3,082
19,017
3,835
27,646
$
$
17,181
3,262
28,947
37,416
14,399
673
101,878
$
$
2,527
1,328
362
4,219
29,733
31,471
97
69,737
$
—
1,591
3,082
19,155
3,835
27,663
2,604
2,203
33,947
36,919
14,027
673
90,373
2,463
489
—
4,219
29,733
22,236
97
59,237
—
1
—
—
4
5
—
—
—
—
—
—
—
—
—
—
—
—
1
—
1
$
$
$
$
$
$
—
254
—
—
154
408
—
—
—
—
—
—
—
—
—
—
—
—
1
—
1
Year Ended December 31, 2019
Real estate mortgage:
Commercial
Income producing and other residential
Commercial:
Asset-based
Venture capital
Other commercial
Total
Year Ended December 31, 2018
Real estate mortgage:
Commercial
Income producing and other residential
Commercial:
Asset-based (2)
Venture capital
Other commercial
Consumer
Total
Year Ended December 31, 2017
Real estate mortgage:
Commercial
Income producing and other residential
Real estate construction and land:
Residential
Commercial:
Asset-based
Venture capital
Other commercial
Consumer
Total
_________________________
(1) The population of defaulted TDRs for the period indicated includes only those loans restructured during the preceding 12-month period. For example, for the year ended
December 31, 2019, the population of defaulted TDRs includes only those loans restructured after December 31, 2018. The table excludes defaulted TDRs in those classes for
which the recorded investment was zero at the end of the period.
(2) One commercial asset-based loan with a pre-modification balance of $27.3 million and a post-modification balance of $32.3 million was previously restructured in December
2017.
127
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 10. Leases for information regarding operating
leases where we are the lessor.
The following table provides the components of leases receivable income for the period indicated:
Component of leases receivable income:
Interest income on net investments in leases
The following table presents the components of leases receivable as of the date indicated:
Net investment in sales type and direct financing leases:
Lease payments receivable
Unguaranteed residual assets
Deferred fees and other
Aggregate net investment in leases
The following table presents maturities of leases receivable as of the date indicated:
Year Ending December 31,
2020
2021
2022
2023
2024
2025 and thereafter
Total undiscounted cash flows
Less: Unearned income
Present value of lease payments
128
Year Ended
December 31, 2019
(In thousands)
11,061
December 31, 2019
(In thousands)
147,729
20,806
655
169,190
December 31, 2019
(In thousands)
66,113
51,735
20,562
12,491
8,856
1,015
160,772
(13,043 )
147,729
$
$
$
$
$
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 years indicated:
Allowance for Loan and lease losses:
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs
(Negative provision) provision
Balance, end of year
Ending Allowance by
Impairment Methodology:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending Loans and Leases by
Impairment Methodology:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balance
$
$
$
$
$
$
Real Estate
Mortgage
Year Ended December 31, 2019
Real Estate
Construction
and Land
Commercial
Consumer
Total
(In thousands)
46,021
$
(997 )
983
(14 )
(1,432 )
44,575
$
28,209
—
—
—
2,335
30,544
$
$
$
56,360
(30,426 )
14,397
(16,029 )
21,197
61,528
$
$
1,882
(839 )
195
(644 )
900
2,138
$
132,472
(32,262 )
15,575
(16,687 )
23,000
138,785
231
$
44,344
$
—
$
30,544
$
5,966
$
55,562
$
—
$
2,138
$
6,197
132,588
28,038
7,944,709
7,972,747
$
$
1,834
2,735,968
2,737,802
$
$
69,674
7,625,822
7,695,496
$
$
—
440,827
440,827
$
$
99,546
18,747,326
18,846,872
129
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Real Estate
Mortgage
Year Ended December 31, 2018
Real Estate
Construction
and Land
Commercial
Consumer
Total
(In thousands)
Allowance for Loan and lease losses:
Balance, beginning of year (1)
Charge-offs
Recoveries
Net (charge-offs) recoveries
Provision (negative provision)
Balance, end of year
Ending Allowance by
Impairment Methodology:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending Loans and Leases by
Impairment Methodology:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending balance
$
$
$
$
$
$
$
40,051
(8,190)
2,350
(5,840)
11,810
46,021
$
13,055
—
195
195
14,959
28,209
$
$
$
84,022
(50,481)
12,566
(37,915)
10,253
56,360
$
$
2,328
(371)
173
(198)
(248)
1,882
$
139,456
(59,042)
15,284
(43,758)
36,774
132,472
417
$
45,604
$
—
28,209
$
$
3,614
$
52,746
$
—
1,882
$
$
4,031
128,441
26,473
7,891,668
7,918,141
$
$
5,862
2,227,794
2,233,656
$
$
59,288
7,345,307
7,404,595
$
$
444
400,877
401,321
$
$
92,067
17,865,646
17,957,713
______________________________________
(1) The allowance for loan losses related to PCI loans of $6.4 million as of December 31, 2017 is reflected in the beginning balance of the allowance for loan and lease losses for
the year ended December 31, 2018.
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 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
years indicated:
Balance, beginning of year
Charge-offs
Recoveries
Net charge-offs
Provision (negative provision)
Balance, end of year
Year Ended December 31, 2019
Allowance for
Reserve for
Total
Loan and
Unfunded Loan
Allowance for
Lease Losses
Commitments
Credit Losses
(In thousands)
$
$
$
132,472
(32,262)
15,575
(16,687)
23,000
138,785
$
$
36,861
—
—
—
(1,000)
35,861
$
169,333
(32,262)
15,575
(16,687)
22,000
174,646
130
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year Ended December 31, 2018
Allowance for
Reserve for
Total
Loan and
Unfunded Loan
Allowance for
Lease Losses
Commitments
Credit Losses
(In thousands)
$
$
$
139,456
(59,042 )
15,284
(43,758 )
36,774
132,472
$
28,635
—
—
—
8,226
36,861
$
$
168,091
(59,042 )
15,284
(43,758 )
45,000
169,333
Balance, beginning of year (1)
Charge-offs
Recoveries
Net charge-offs
Provision
Balance, end of year
_______________________________________
(1) The allowance for loan losses related to PCI loans of $6.4 million as of December 31, 2017 is reflected in the beginning balance of the allowance for loan and lease losses for
the year ended December 31, 2018.
NOTE 6. FORECLOSED ASSETS
The following table summarizes foreclosed assets as of the dates indicated:
Property Type
Commercial real estate
Construction and land development
Multi-family
Single-family residence
Total other real estate owned, net
Other foreclosed assets
Total foreclosed assets, net
$
$
December 31,
2019
2018
(In thousands)
$
221
219
—
—
440
—
440
$
The following table presents the changes in foreclosed assets, net of the valuation allowance, for the years indicated:
Foreclosed Assets
Balance, beginning of year
Transfers to foreclosed assets from loans
Other additions
Provision for losses
Reductions related to sales
Balance, end of year
$
$
131
2019
Year Ended December 31,
2018
(In thousands)
2017
$
5,299
120
—
(78)
(4,901)
440
$
$
1,329
16,914
—
(74)
(12,870)
5,299
$
2,004
219
1,059
953
4,235
1,064
5,299
12,976
580
1,385
(2,138)
(11,474)
1,329
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the changes in the foreclosed assets valuation allowance for the years indicated:
Foreclosed Assets Valuation Allowance
2019
Balance, beginning of year
Provision for losses
Reductions related to sales
Balance, end of year
$
$
Year Ended December 31,
2018
(In thousands)
2017
$
88
78
(79)
87
$
14
74
—
88
$
$
12,696
2,138
(14,820)
14
NOTE 7. PREMISES AND EQUIPMENT, NET
The following table presents the components of premises and equipment as of the dates indicated:
Land
Buildings
Furniture, fixtures and equipment
Leasehold improvements
Premises and equipment, gross
Less: accumulated depreciation and amortization
Premises and equipment, net
December 31,
2019
2018
(In thousands)
$
1,243
8,399
47,581
55,335
112,558
(73,973)
38,585
$
1,243
8,309
45,204
50,214
104,970
(70,309)
34,661
$
$
Depreciation and amortization expense was $10.5 million, $9.4 million, and $7.6 million for the years ended December 31, 2019, 2018, and 2017.
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of our goodwill of $2.5 billion was unchanged for the last three years. We perform our annual goodwill impairment testing in the
fourth quarter. We evaluated the carrying value of our goodwill and determined that it was not impaired.
Our other intangible assets with definite lives are CDI and CRI. CDI and CRI are amortized over their respective estimated useful lives and reviewed for
impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or customer relationships
acquired. The estimated aggregate amortization expense related to our current intangible assets for each of the next five years is $14.7 million for 2020, $10.8
million for 2021, $7.4 million for 2022, $3.8 million for 2023 and $1.7 million for 2024.
132
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the changes in CDI and CRI and the related accumulated amortization for the years indicated:
Gross Amount of CDI and CRI:
Balance, beginning of year
Addition from the CUB acquisition
Fully amortized portion
Balance, end of year
Accumulated Amortization:
Balance, beginning of year
Amortization
Fully amortized portion
Balance, end of year
Net CDI and CRI, end of year
Year Ended December 31,
2019
2018
(In thousands)
2017
$
$
$
119,497
—
(1,924 )
117,573
(62,377 )
(18,726 )
1,924
(79,179 )
38,394
$
$
119,497
—
—
119,497
(39,871 )
(22,506 )
—
(62,377 )
57,120
$
64,187
57,500
(2,190 )
119,497
(27,821 )
(14,240 )
2,190
(39,871 )
79,626
NOTE 9. OTHER ASSETS
The following table presents the detail of our other assets as of the dates indicated:
Other Assets
Cash surrender value of BOLI
Operating lease ROU assets, net
Interest receivable
LIHTC investments
CRA investments (1)
Taxes receivable
Prepaid expenses
Equity investments without readily determinable fair values
Equity warrants
Equity investments with readily determinable fair values
Deferred tax asset, net
Other receivables/assets
Total other assets
$
$
December 31,
2019
2018
(In thousands)
$
199,029
129,301
81,479
75,149
65,152
31,591
17,099
14,890
3,434
2,998
—
16,689
636,811
$
194,897
—
88,754
59,507
59,062
39,096
18,006
14,758
4,793
4,891
17,489
39,132
540,385
________________________
(1)
Includes equity investments without readily determinable fair values of $17.8 million and $12.5 million at December 31, 2019 and 2018.
133
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has purchased life insurance policies on certain employees and has also acquired life insurance policies through acquisitions. BOLI is
recorded at the amount that can be realized under the insurance contract, which is the cash surrender value. The increase in the cash surrender value each
period and the receipt of death benefit proceeds in excess of the cash surrender value are recorded to "Noninterest income - other."
The increase in the ROU assets, net in 2019 was due to the adoption of ASU 2016-02 effective January 1, 2019. See Note 10. Leases for further details.
The Company makes various investments for CRA investment purposes including, but not limited to, CRA-related loan pool investments, CRA-related
equity investments, and investments in LIHTC partnerships. The loan pool and other CRA equity investments primarily consist of investments in partnerships
which provide affordable housing and participations in loan pools which provide low-cost loans to low and moderate income applicants.
The Company invests as a limited partner in LIHTC partnerships that operate qualified affordable housing projects and generate tax benefits for
investors, including federal low income housing tax credits. The partnerships are deemed to be VIEs because they do not have sufficient equity investment at
risk and are structured with non-substantive voting rights; however, we are not the primary beneficiary of the VIEs and do not consolidate them. We amortize
the investment in proportion to the allocated tax benefits using the proportional amortization method of accounting and record such benefits net of investment
amortization in income tax expense.
The Company's equity investments without readily determinable fair values include investments in privately held companies and limited partnerships as
well as investments in entities from which we issued trust preferred securities. On January 1, 2018, we adopted ASU 2016-01 and ASU 2018-03 which changed
the way we account for equity investments without readily determinable fair values previously accounted for using the cost method. Upon adoption, we
elected to measure our equity investments without readily determinable fair values using the measurement alternative. Carrying values of these investments are
adjusted to fair value upon observable transactions for identical or similar investments of the same issuer. Beginning January 1, 2018, unrealized and realized
gains and losses on equity investments without readily determinable fair values are recorded in "Noninterest income - other."
During the year ended December 31, 2019, we recorded impairment of $764,000 in the aggregate on eight of our CRA equity investments without readily
determinable fair values. On a cumulative basis since January 1, 2018 and through December 31, 2019, we recorded impairments of $1.0 million and upward
adjustments of $286,000 to our equity investments without readily determinable fair values.
The Company's equity investments with readily determinable fair values include investments in public companies, often from the exercise of warrants, and
publicly-traded mutual funds. Beginning January 1, 2018, unrealized and realized gains and losses on equity investments with readily determinable fair values
are recorded in "Noninterest income - other."
134
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10. LEASES
The Company adopted ASU 2016-02, "Leases (Topic 842)," effective January 1, 2019, and applied the guidance to all leases within the scope of ASC
Topic 842, "Leases," as of that date. We have adopted the guidance using the optional transition method under ASU 2018-11, “Leases (Topic 842): Targeted
Improvements,” and recognized a cumulative effect adjustment to increase retained earnings by $938,000, net of taxes, without restating prior periods and
applying the requirements of the new standard prospectively.
We determine if an arrangement is a lease at inception by assessing whether there is an identified asset, and whether the contract conveys the right to
control the use of the identified asset for a period of time in exchange for consideration. ASC Topic 842 also requires a lessee to classify a lease as either
finance or operating. As of December 31, 2019, we only had operating leases related to our leased facilities, which consisted of 72 full-service branch offices
and 75 other offices.
ROU assets represent a lessee's right to use an underlying asset for the lease term and lease liabilities represent a lessee's obligation to make lease
payments arising from the lease. On January 1, 2019, ROU assets and operating lease liabilities were initially recognized based on the present value of future
minimum lease payments over the remaining lease terms. We used our incremental borrowing rates on January 1, 2019 to determine the present value of future
payments. The ROU assets also include any prepaid lease payments and initial direct costs incurred less any lease incentives received. We amortize the
operating lease ROU assets and record interest expense on the operating lease liabilities over the lease terms.
Our leases have remaining terms ranging from one to 27 years. Short-term leases (initial term of less than 12 months) are not recorded on the balance
sheet and lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are
accounted for as a single lease component. Most leases include one or more options to renew, with renewal terms that can extend the lease from one to ten
years. The exercise of lease renewal options is at our sole discretion. Some of our leases also include termination options. We have determined that we do not
meet the reasonably certain threshold to exercise any renewal or termination options, therefore our lease terms do not reflect any optional periods. We rent or
sublease certain office space to third parties. Our subleases consist of operating leases for offices that we have fully or partially vacated.
Certain of our lease agreements also include rental payments that adjust periodically based on changes in the CPI. We initially measured our lease
payments using the index at the lease commencement date. Subsequent increases in the CPI are treated as variable lease payments and recognized in the period
in which the obligation for those payments is incurred. The ROU assets and lease liabilities are not re-measured as a result of changes in the CPI. Our lease
agreements do not contain any purchase options, residual value guarantees, or restrictive covenants.
Operating Leases as a Lessee
Our lease expense is a component of "Occupancy expense" on our consolidated statements of earnings. The following table presents the components of
lease expense for the period indicated:
Operating lease expense:
Fixed costs
Variable costs
Short-term lease costs
Sublease income
Net lease expense
135
Year Ended
December 31, 2019
(In thousands)
$
$
33,891
100
926
(4,202)
30,715
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents supplemental cash flow information related to leases for the period indicated:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
ROU assets obtained in exchange for lease obligations:
Operating leases
Year Ended
December 31, 2019
(In thousands)
$
$
32,991
175,569
The following table presents supplemental balance sheet and other information related to operating leases as of the date indicated:
Operating leases:
Operating lease right-of-use assets, net
Operating lease liabilities
Weighted average remaining lease term (in years)
Weighted average discount rate
The following table presents the maturities of operating lease liabilities as of the date indicated:
Year Ending December 31,
2020
2021
2022
2023
2024
2025 and thereafter
Total operating lease liabilities
Less: Imputed interest
Present value of operating lease liabilities
136
December 31, 2019
(Dollars in thousands)
129,301
145,354
6.1
2.82%
December 31, 2019
(In thousands)
32,898
30,657
24,849
22,068
14,885
34,119
159,476
(14,122)
145,354
$
$
$
$
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to the adoption of ASC Topic 842, the Company's operating leases were not recognized on the balance sheet. The following table presents the
undiscounted future minimum lease payments under the Company's operating leases as of December 31, 2018:
Year Ending December 31,
2019
2020
2021
2022
2023
2024 and thereafter
Total
Operating Leases as a Lessor
December 31, 2018
(In thousands)
$
$
32,845
30,267
26,852
20,862
17,745
29,923
158,494
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 our 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 consolidated statements of earnings, according to our fixed asset
accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Noninterest Income" in the consolidated statements
of earnings.
The following table presents the rental payments to be received on operating leases as of the date indicated:
Year Ending December 31,
2020
2021
2022
2023
2024
2025 and thereafter
Total undiscounted cash flows
137
December 31, 2019
(In thousands)
$
$
41,296
39,292
32,240
25,522
20,912
37,304
196,566
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11. DEPOSITS
The following table presents the components of interest-bearing deposits as of the dates indicated:
Deposit Composition
Interest checking
Money market
Savings
Time deposits $250,000 and under
Time deposits over $250,000
Total interest-bearing deposits
$
$
December 31,
2019
2018
(In thousands)
$
3,818,002
5,122,803
499,591
2,065,733
483,609
11,989,738
$
2,972,357
5,432,169
571,422
1,593,453
412,185
10,981,586
Brokered time deposits totaled $1.2 billion and $729.4 million at December 31, 2019 and 2018. Brokered non-maturity deposits totaled $496.4 million and
$518.2 million at December 31, 2019 and 2018.
The following table summarizes the maturities of time deposits as of the date indicated:
December 31, 2019
Year of Maturity:
2020
2021
2022
2023
2024
2025
Total
$250,000
and Under
Time Deposits
Over
$250,000
(In thousands)
1,969,362
81,070
11,813
1,682
1,408
398
2,065,733
$
$
461,294
20,610
1,454
—
251
—
483,609
$
$
Total
2,430,656
101,680
13,267
1,682
1,659
398
2,549,342
$
$
138
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 12. BORROWINGS AND SUBORDINATED DEBENTURES
Borrowings
The following table summarizes our borrowings as of the dates indicated:
Borrowing Type
Balance
December 31,
2019
2018
Weighted
Average
Rate
Balance
Weighted
Average
Rate
Non-recourse debt
FHLB secured advances
FHLB unsecured overnight advance
AFX borrowings
Total borrowings
$
$
8
1,318,000
141,000
300,000
1,759,008
(Dollars in thousands)
7.50% $
1.66%
1.56%
1.61%
1.64% $
114
1,040,000
141,000
190,000
1,371,114
7.50%
2.56%
2.53%
2.56%
2.56%
The non-recourse debt represents the payment stream of certain equipment leases sold to third parties. The debt is secured by the equipment in the
leases and all interest rates are fixed. As of December 31, 2019, this debt had a weighted average remaining maturity of 0.2 years.
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 borrowing capacity with the FHLB of $4.2 billion as of December 31, 2019, collateralized by a blanket
lien on $5.9 billion of qualifying loans. As of December 31, 2019, the balance outstanding was a $1.3 billion overnight advance. As of December 31, 2018, the
balance outstanding was a $1.0 billion overnight advance.
FRBSF Secured Line of Credit. The Bank had secured borrowing capacity with the FRBSF of $2.0 billion as of December 31, 2019, collateralized by liens
on $2.7 billion of qualifying loans. As of December 31, 2019 and 2018, there were no balances outstanding.
FHLB Unsecured Line of Credit. As of December 31, 2019, the Bank had a $141.0 million unsecured line of credit with the FHLB for the borrowing of
overnight funds, of which $141.0 million was outstanding. As of December 31, 2018, the balance outstanding was $141.0 million.
Federal Funds Arrangements with Commercial Banks. As of December 31, 2019, the Bank had unsecured lines of credit of $180.0 million in the aggregate
with several correspondent banks for the borrowing of overnight funds, subject to availability of funds. These lines are renewable annually and have no
unused commitment fees. As of December 31, 2019 and 2018, there were no balances outstanding. The Bank is a member of the AFX, through which it may
either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of
December 31, 2019, the balance outstanding was $300.0 million, which consisted of a $300.0 million overnight borrowing. As of December 31, 2018, there were
$190.0 million in overnight borrowings outstanding.
139
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Subordinated Debentures
The following table summarizes the terms of each issuance of subordinated debentures outstanding as of the dates indicated:
Series
Trust V
Trust VI
Trust CII
Trust VII
Trust CIII
Trust FCCI
Trust FCBI
Trust CS 2005-1
Trust CS 2005-2
Trust CS 2006-1
Trust CS 2006-2
Trust CS 2006-3 (1)
Trust CS 2006-4
Trust CS 2006-5
Trust CS 2007-2
Gross subordinated debentures
Unamortized discount (2)
December 31,
2019
2018
Balance
Rate
Balance
Rate
(Dollars in thousands)
Issue
Date
Maturity
Rate Index
Date
(Quarterly Reset)
$
10,310
10,310
5,155
61,856
20,619
16,495
10,310
82,475
128,866
51,545
51,550
28,902
16,470
6,650
39,177
540,690
(82,481 )
5.00 % $
4.94 %
4.85 %
4.69 %
3.58 %
3.49 %
3.44 %
3.85 %
3.89 %
3.89 %
3.89 %
1.64 %
3.89 %
3.89 %
3.89 %
3.87 %
10,310
10,310
5,155
61,856
20,619
16,495
10,310
82,475
128,866
51,545
51,550
29,556
16,470
6,650
39,177
541,344
(87,498 )
5.89 %
5.84 %
5.74 %
5.27 %
4.48 %
4.39 %
4.34 %
4.74 %
4.47 %
4.47 %
4.47 %
1.73 %
4.47 %
4.47 %
4.47 %
4.51 %
8/15/2003
9/3/2003
9/17/2003
2/5/2004
8/15/2005
1/25/2007
9/30/2005
11/21/2005
12/14/2005
2/22/2006
9/27/2006
9/29/2006
12/5/2006
12/19/2006
6/13/2007
9/17/2033 3-month LIBOR + 3.10
9/15/2033 3-month LIBOR + 3.05
9/17/2033 3-month LIBOR + 2.95
4/23/2034 3-month LIBOR + 2.75
9/15/2035 3-month LIBOR + 1.69
3/15/2037 3-month LIBOR + 1.60
12/15/2035 3-month LIBOR + 1.55
12/15/2035 3-month LIBOR + 1.95
1/30/2036 3-month LIBOR + 1.95
4/30/2036 3-month LIBOR + 1.95
10/30/2036 3-month LIBOR + 1.95
10/30/2036 3-month EURIBOR + 2.05
1/30/2037 3-month LIBOR + 1.95
1/30/2037 3-month LIBOR + 1.95
7/30/2037 3-month LIBOR + 1.95
Net subordinated debentures
___________________
(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.
$
458,209
453,846
$
Interest payments made by the Company on subordinated debentures are considered dividend payments under FRB regulations. Bank holding
companies, such as PacWest, are required to notify 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.
140
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13. COMMITMENTS AND CONTINGENCIES
The following table presents a summary of commitments described below as of the dates indicated:
Loan commitments to extend credit
Standby letters of credit
Commitments to contribute capital to low income housing project partnerships,
small business investment companies, and CRA-related loan pools
Commitments to contribute capital to private equity funds
Total
December 31,
2019
2018
(In thousands)
$
8,183,158
355,503
129,213
50
8,667,924
$
7,528,248
364,210
101,991
50
7,994,499
$
$
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of
involvement that the Company has in particular classes of financial instruments.
Commitments to extend credit are contractual agreements to lend to our customers when customers are in compliance with their contractual credit
agreements and when customers have contractual availability to borrow under such agreements. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
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 some 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 low income housing project partnerships, which provide income tax credits, 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 December 31, 2019 and 2018, we had
commitments to contribute capital to these entities totaling $129.2 million and $102.0 million. We also had commitments to contribute up to an additional $50,000
to private equity funds at December 31, 2019 and 2018.
141
The following table presents the years in which commitments are expected to be paid for our commitments to contribute capital to low income housing
project partnerships, small business investment companies, and CRA-related loan pools as of the date indicated:
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year Ending December 31,
2020
2021
2022
2023
2024
2025 and thereafter
Total
Legal Matters
December 31, 2019
(In thousands)
$
$
78,106
39,997
4,812
852
503
4,943
129,213
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. The range of any reasonably possible liabilities is also not
significant.
NOTE 14. 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.
We use fair value to measure certain assets and liabilities on a recurring basis, primarily securities available-for-sale and derivatives. For assets measured
at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore
considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for
impaired loans and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long-lived assets.
142
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
Measured on a Recurring Basis
Total
Level 1
Level 2
Level 3
Fair Value Measurements as of
December 31, 2019
Securities available-for-sale:
Agency residential CMOs
Agency commercial MBS
Municipal securities
Agency residential MBS
Asset-backed securities
Private label residential CMOs
Collateralized loan obligations
SBA securities
Corporate debt securities
U.S. Treasury securities
Total securities available-for-sale
Equity warrants
Other derivative assets
Equity investments with readily determinable fair values
Total recurring assets
Derivative liabilities
Measured on a Recurring Basis
Securities available-for-sale:
Municipal securities
Agency commercial MBS
Agency residential CMOs
U.S. Treasury securities
Agency residential MBS
Private label residential CMOs
Asset-backed securities
SBA securities
Corporate debt securities
Total securities available-for-sale
Equity warrants
Other derivative assets
Equity investments with readily determinable fair values
Total recurring assets
Derivative liabilities
1,136,397
1,108,224
735,159
305,198
214,783
99,483
123,756
48,258
20,748
5,181
3,797,187
3,434
1,234
2,998
3,804,853
$
$
(In thousands)
—
—
—
—
—
—
—
—
—
5,181
5,181
—
—
2,998
8,179
$
$
1,136,397
1,108,224
735,159
305,198
198,348
93,219
123,756
48,258
20,748
—
3,769,307
—
1,234
—
3,770,541
$
$
755
$
—
$
755
$
—
—
—
—
16,435
6,264
—
—
—
—
22,699
3,434
—
—
26,133
—
Fair Value Measurements as of
December 31, 2018
Total
Level 1
Level 2
Level 3
(In thousands)
1,312,194
1,112,704
632,850
403,405
281,088
101,205
81,385
67,047
17,553
4,009,431
4,793
3,292
4,891
4,022,407
$
$
—
—
—
403,405
—
—
—
—
—
403,405
—
—
4,891
408,296
$
$
1,312,194
1,112,704
632,850
—
281,088
93,917
41,440
67,047
17,553
3,558,793
—
3,292
—
3,562,085
$
$
142
$
—
$
142
$
—
—
—
—
—
7,288
39,945
—
—
47,233
4,793
—
—
52,026
—
$
$
$
$
$
$
143
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the year ended December 31, 2019, there was a $113,000 transfer from Level 3 equity warrants to Level 1 equity investments with readily
determinable fair values measured on a recurring basis. During the year ended December 31, 2018, there was a $78,000 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 the 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:
Unobservable Inputs
Voluntary annual prepayment speeds
Annual default rates (1)
Loss severity rates (1)
Discount rates
Private Label Residential CMOs
Asset-Backed Securities
December 31, 2019
Range of
Inputs
0.0% - 19.1%
0.8% - 35.7%
1.6% - 132.6%
2.5% - 11.4%
Weighted
Average
Input
11.3%
1.7%
56.1%
6.6%
Input or
Range of
Inputs
15.0%
2.0%
60.0%
3.2% - 3.8%
Weighted
Average
Input
15.0%
2.0%
60.0%
3.6%
____________________
(1)
The voluntary annual prepayment speeds, annual default rates, and loss severity rates were the same for all of the asset-backed securities.
The following table presents information about the 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:
Unobservable Inputs
Volatility
Risk-free interest rate
Remaining life assumption (in years)
December 31, 2019
Equity Warrants
Weighted
Average
Input
16.6%
1.6%
3.2
The following table summarizes activity for our Level 3 private label residential CMOs measured at fair value on a recurring basis for the years indicated:
Level 3 Private Label Residential CMOs
2019
Balance, beginning of year
Total included in earnings
Total unrealized loss in comprehensive income
Sales
Transfer from Level 2
Transfers to Level 2
Net settlements
Balance, end of year
$
$
144
Year Ended December 31,
2018
(In thousands)
2017
$
7,288
432
(265 )
—
—
—
(1,191 )
6,264
$
$
22,874
1,737
(1,146 )
(4,880 )
—
—
(11,297 )
7,288
$
56,902
2,256
(742 )
(4,732 )
574
(21,165 )
(10,219 )
22,874
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes activity for our Level 3 asset-backed securities measured at fair value on a recurring basis for the years indicated:
Level 3 Asset-Backed Securities
2019
Year Ended December 31,
2018
(In thousands)
2017
Balance, beginning of year
Total included in earnings
Total unrealized gain (loss) in comprehensive income
Purchases
Net settlements
Balance, end of year
$
$
39,945
$
(77 )
463
—
(23,896 )
16,435
$
42,109
$
(32 )
495
15,158
(17,785 )
39,945
$
8,373
367
(937 )
42,910
(8,604 )
42,109
The following table summarizes activity for our Level 3 equity warrants measured at fair value on a recurring basis for the years indicated:
Level 3 Equity Warrants
2019
Year Ended December 31,
2018
(In thousands)
2017
Balance, beginning of year
Total included in earnings
Exercises and settlements (1)
Issuances
Transfers to Level 1 (equity investments with readily
determinable fair values)
Balance, end of year
$
$
$
4,793
8,669
(10,239 )
324
(113 )
3,434
$
$
5,161
7,478
(8,589 )
821
(78 )
4,793
$
5,497
2,532
(3,093
1,407
(1,182
5,161
______________________
(1)
Includes the exercise of warrants that upon exercise become equity securities in public companies. These are often subject to lock-up restrictions that must be met before the
equity security can be sold, during which time they are reported as equity investments with readily determinable fair values.
The following tables present assets measured at fair value on a non-recurring basis as of the dates indicated:
Measured on a Non-Recurring Basis
Total
Level 1
Level 2
Level 3
Fair Value Measurement as of
December 31, 2019
Impaired loans
OREO
Total non-recurring
Measured on a Non-Recurring Basis
Impaired loans
OREO
Total non-recurring
$
$
$
$
28,706
105
28,811
$
$
(In thousands)
$
—
—
—
$
1,083
—
1,083
$
$
27,623
105
27,728
Fair Value Measurement as of
December 31, 2018
Total
Level 1
Level 2
Level 3
(In thousands)
$
—
—
—
$
1,800
1,136
2,936
$
$
22,632
—
22,632
24,432
1,136
25,568
$
$
145
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents losses recognized on assets measured on a nonrecurring basis for the years indicated:
Loss on Assets Measured on a Non-Recurring Basis
2019
Year Ended December 31,
2018
(In thousands)
2017
Impaired loans
Loans held for sale
OREO
Total net loss
$
$
6,797
—
78
6,875
$
$
9,198
—
74
9,272
$
$
20,422
957
14
21,393
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:
Asset
Impaired loans
Impaired loans
OREO
Total non-recurring Level 3
Valuation
Technique
December 31, 2019
Unobservable
Inputs
Fair Value
(In thousands)
$
$
18,899 Discounted cash flows
8,724
Third party appraisals
105
27,728
Third party appraisals
Discount rates
No discounts
Discount (1)
____________________
(1) Relates to one OREO property at December 31, 2019.
Input or
Range
Weighted
Average
3.75% - 8.77%
7.62%
43.00%
43.00%
ASC Topic 825, “Financial Instruments,” requires disclosure of the estimated fair value of certain financial instruments and the methods and significant
assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable
disclosure requirements.
On January 1, 2018, we adopted ASU 2016-01 and ASU 2018-03 which requires the use of the exit price notion when measuring the fair values of financial
instruments for disclosure purposes. Starting in the first quarter of 2018, we updated our methodology used to estimate the fair value for our loan portfolio to
conform to the new requirements.
146
The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Financial Assets:
Cash and due from banks
Interest-earning deposits in financial institutions
Securities available-for-sale
Investment in FHLB stock
Loans and leases held for investment, net
Equity warrants
Other derivative assets
Equity investments with readily determinable fair values
Financial Liabilities:
Core deposits
Non-core non-maturity deposits
Time deposits
Borrowings
Subordinated debentures
Derivative liabilities
Financial Assets:
Cash and due from banks
Interest-earning deposits in financial institutions
Securities available-for-sale
Investment in FHLB stock
Loans and leases held for investment, net
Equity warrants
Other derivative assets
Equity investments with readily determinable fair values
Financial Liabilities:
Core deposits
Non-core non-maturity deposits
Time deposits
Borrowings
Subordinated debentures
Derivative liabilities
December 31, 2019
Estimated Fair Value
Total
Level 1
Level 2
Level 3
(In thousands)
$
172,585
465,039
3,797,187
40,924
19,055,004
3,434
1,234
2,998
16,187,287
496,407
2,549,260
1,759,008
441,617
755
$
172,585
465,039
5,181
—
—
—
—
2,998
$
—
—
3,769,307
40,924
1,083
—
1,234
—
—
—
22,699
—
19,053,921
3,434
—
—
—
—
—
1,759,000
—
—
16,187,287
496,407
2,549,260
8
441,617
755
—
—
—
—
—
—
December 31, 2018
Estimated Fair Value
Total
Level 1
Level 2
Level 3
(In thousands)
$
175,830
209,937
4,009,431
32,103
17,013,860
4,793
3,292
4,891
16,346,671
518,192
2,017,137
1,371,114
435,251
142
$
175,830
209,937
403,405
—
—
—
—
4,891
$
—
—
3,558,793
32,103
1,800
—
3,292
—
—
—
47,233
—
17,012,060
4,793
—
—
—
—
—
1,371,000
—
—
16,346,671
518,192
2,017,137
114
435,251
142
—
—
—
—
—
—
$
$
$
$
Carrying
Amount
172,585
465,039
3,797,187
40,924
18,708,087
3,434
1,234
2,998
16,187,287
496,407
2,549,342
1,759,008
458,209
755
Carrying
Amount
175,830
209,937
4,009,431
32,103
17,825,241
4,793
3,292
4,891
16,346,671
518,192
2,005,638
1,371,114
453,846
142
147
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following is a description of the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820, “Fair Value
Measurement”) and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825).
Cash and due from banks. The carrying amount is assumed to be the fair value because of the liquidity of these instruments.
Interest-earning deposits in financial institutions. The carrying amount is assumed to be the fair value given the short-term nature of these deposits.
Securities available-for-sale. Securities available-for-sale are measured and carried at fair value on a recurring basis. Unrealized gains and losses on
available-for-sale securities are reported as a component of “Accumulated other comprehensive income” in the consolidated balance sheets. See Note 4.
Investment Securities for further information on unrealized gains and losses on securities available-for-sale.
Fair value for securities categorized as Level 1, which are publicly traded securities, are based on readily available quoted prices. In determining the fair
value of the securities categorized as Level 2, we obtain a report from a nationally recognized broker-dealer detailing the fair value of each investment security
we hold as of each reporting date. The broker-dealer uses observable market information to value our securities, with the primary source being a nationally
recognized pricing service. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the
marketplace and we consider any credit issues related to the securities. As we have not made any adjustments to the market quotes provided to us and they
are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.
Our non-rated private label CMOs and non-rated private label asset-backed securities (collectively, “the Level 3 AFS Securities”) were categorized as
Level 3 due in part to the inactive market for such securities. There is a wide range of prices quoted for our Level 3 AFS Securities among independent third
party pricing services, and this range reflects the significant judgment being exercised over the assumptions and variables that determine the pricing of such
securities. We consider this subjectivity relating to our Level 3 AFS Securities to be a significant unobservable input. Had significant changes in default
expectations, loss severity factors, or discount rates occurred all together or in isolation, it would have resulted in different fair value measurements at
December 31, 2019.
FHLB stock. Investments in FHLB stock are recorded at cost and measured for impairment quarterly. Ownership of FHLB stock is restricted to member
banks and the securities do not have a readily determinable market value. Purchases and sales of these securities are at par value with the issuer. The fair value
of investments in FHLB stock is equal to the carrying amount.
Loans and leases. As loans and leases are not measured at fair value, the following discussion relates to estimating the fair value disclosures under ASC
Topic 825. Fair values are estimated for portfolios of loans and leases with similar characteristics. Loans are segregated by type and further segmented into
fixed and adjustable rate interest buckets by credit risk categories and by maturity dates. To determine the exit price of a loan or lease, the cash flows are
estimated using a model which utilizes credit spreads and illiquidity premiums. The credit spread for a loan is determined by mapping loans' credit risk ratings to
an equivalent corporate bond rating. Once the corporate bond rating is assigned, the credit spread is determined using corporate credit curves for corporate
bonds that have a similar corporate bond rating and remaining term as the loan being valued. Illiquidity premiums are assigned to individual loans in a similar
manner as an illiquidity premium amount is determined for each corporate bond rating. The credit spread above the appropriate rate curve and the illiquidity
premium are considered to arrive at the discount rate curve applied to loan cash flows. The Community Bank group originates and purchases a number of
similar, homogeneous loans. For this portfolio, management may make adjustments to the discount rate arrived at using the previously described methodology
based upon the pricing for recent loan pool purchases and/or rates on recent originations.
148
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Impaired loans and leases. Nonaccrual loans and leases and performing troubled debt restructured loans are considered impaired for reporting purposes
and are measured and recorded at fair value on a non-recurring basis. Impaired loans and leases with outstanding balances over $250,000 are reviewed
individually for the amount of impairment, if any. Impaired loans and leases with outstanding balances less than or equal to $250,000 may not be individually
assessed for impairment but are assessed with reserves based on the average loss severity on historical impaired loans with similar risk characteristics.
To the extent a loan is collateral dependent, we measure such impaired loan based on the estimated fair value of the underlying collateral. The fair value of
each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to
liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. The Level 2
measurement is based on appraisals obtained within the last 12 months and for which a charge-off was recognized or a change in the specific valuation
allowance was made during the year ended December 31, 2019.
When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the
collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The impaired loans
categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the
strength of a guarantor, including an SBA government guarantee, cash flows discounted at the effective loan rate, and management’s judgment.
The impaired loan and lease balances shown above as measured on a non-recurring basis represent those nonaccrual and restructured loans for which
impairment was recognized during the year ended December 31, 2019. The amounts shown as net losses include the impairment recognized during the year
ended December 31, 2019, for the loan and lease balances shown.
OREO. The fair value of OREO is generally based on the lower of estimated market prices from independently prepared current appraisals or negotiated
sales prices with potential buyers, less estimated costs to sell; such valuation inputs result in a fair value measurement that is categorized as a Level 2
measurement on a nonrecurring basis. As a matter of policy, appraisals are required annually and may be updated more frequently as circumstances require in
the opinion of management. The Level 2 measurement for OREO is based on appraisals obtained within the last 12 months and for which a write-down was
recognized during the year ended December 31, 2019.
When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value as
a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement that is
categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market
price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement. The OREO losses disclosed are write-downs
based on either a recent appraisal obtained after foreclosure or an accepted purchase offer by an independent third party received after foreclosure.
Equity warrants. Equity warrants with net settlement terms are received in connection with extending loan commitments to certain of our customers. We
estimate the fair value of equity warrants using a Black-Scholes option pricing model to approximate fair market value. We typically classify our equity warrant
derivatives in Level 3 of the fair value hierarchy.
Equity investments with readily determinable fair values. Our equity investments with readily determinable fair values include investments in public
companies and publicly-traded mutual funds. Equity investments with readily determinable fair values are recorded at fair value with changes in fair value
recorded in “Noninterest income - other.” Fair value measurements related to these investments are typically classified within Level 1 of the fair value
hierarchy.
Deposits. Deposits are carried at historical cost. The fair values of deposits with no stated maturity, such as core deposits (defined as noninterest-bearing
demand, interest checking, money market, and savings accounts) and non-core non-maturity deposits, are equal to the amount payable on demand as of the
balance sheet date and considered Level 2. The fair value of time deposits is based on the discounted value of contractual cash flows and considered Level 2.
The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. No value has been separately assigned to the
Company’s long-term relationships with its deposit customers, such as a core deposit intangible.
149
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Borrowings. Borrowings include overnight FHLB advances and other fixed-rate term borrowings. Borrowings are carried at amortized cost. The fair value
of overnight FHLB advances is equal to the carrying value and considered Level 1. The fair value of fixed-rate borrowings is calculated by discounting
scheduled cash flows through the maturity dates or call dates, if applicable, using estimated market discount rates that reflect current rates offered for
borrowings with similar remaining maturities and characteristics and are considered Level 2.
Subordinated debentures. Subordinated debentures are carried at amortized cost. The fair value of subordinated debentures with variable rates is
determined using a market discount rate on the expected cash flows and are considered Level 2.
Derivative assets and liabilities. Derivatives are carried at fair value on a recurring basis and primarily relate to forward exchange contracts which we
enter into to manage foreign exchange risk. Our derivatives are principally traded in over-the-counter markets where quoted market prices are not readily
available. Instead, the fair value of derivatives is estimated using market observable inputs such as foreign exchange forward rates, interest rate yield curves,
volatilities and basis spreads. We also consider counter-party credit risk in valuing our derivatives. We typically classify our foreign exchange derivatives in
Level 2 of the fair value hierarchy.
Commitments to extend credit. The majority of our commitments to extend credit carry current market interest rates if converted to loans. Because these
commitments are generally not assignable by either the borrower or us, they only have value to the borrower and us. The estimated fair value approximates the
recorded deferred fee amounts and is excluded from the table above because it is not material.
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 conservative 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
December 31, 2019, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
NOTE 15. INCOME TAXES
The following table presents the components of income tax expense for the years indicated:
2019
Year Ended December 31,
2018
(In thousands)
2017
Current Income Tax Expense:
Federal
State
Total current income tax expense
Deferred Income Tax Expense (Benefit):
Federal
State
Total deferred income tax expense (benefit)
Total income tax expense
$
$
150
$
113,807
34,575
148,382
5,062
10,860
15,922
164,304
$
100,466
69,909
170,375
4,746
(7,143)
(2,397)
$
167,978
$
74,769
38,933
113,702
63,463
19,748
83,211
196,913
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents a reconciliation of the recorded income tax expense to the amount of taxes computed by applying the applicable federal
statutory income tax rates of 21% for 2019 and 2018 and 35% for 2017 to earnings before income taxes:
Computed expected income tax expense at federal statutory rate
$
State tax expense, net of federal tax benefit
Tax-exempt interest benefit
Increase in cash surrender value of life insurance
Low income housing tax credits, net of amortization
Nondeductible employee compensation
Nondeductible acquisition-related expense
Nondeductible FDIC premiums
Change in unrecognized tax benefits
Valuation allowance change
Expired capital loss carryforward
Federal rate change
State rate and apportionment changes
Other, net
Recorded income tax expense
$
2019
Year Ended December 31,
2018
(In thousands)
2017
$
132,917
43,575
(8,092 )
(1,298 )
(3,217 )
4,430
—
1,302
941
(32,036 )
3,136
—
19,138
3,508
164,304
$
$
132,997
45,945
(9,810 )
(1,742 )
(2,025 )
2,552
71
1,664
(169 )
(15,721 )
8,097
1,859
3,736
524
167,978
$
194,156
33,729
(15,510 )
(1,853 )
(2,054 )
1,781
1,608
—
1,157
(13,071 )
—
(1,156 )
(3,735 )
1,861
196,913
The Company recognized $20.0 million, $14.0 million, and $8.4 million of tax credits and other tax benefits associated with its investments in LIHTC
partnerships for the years ended December 31, 2019, 2018, and 2017. The amount of amortization of such investments reported in income tax expense under the
proportional amortization method of accounting was $16.7 million for 2019, $11.9 million for 2018, and $6.3 million for 2017.
At December 31, 2019, we had no federal net operating loss carryforwards and approximately $669.3 million of unused state net operating loss
carryforwards available to be applied against future taxable income. A majority of the state net operating loss carryforwards will expire in varying amounts
beginning in 2020 through 2039. A portion of the state net operating loss carryforwards generated after December 31, 2017 will carry forward indefinitely due to
the state conformity to the federal net operating loss carryforward provisions as modified by the TCJA.
As of December 31, 2019, for federal tax purposes, we had foreign tax credit carryforwards of $3.4 million. The foreign tax credit carryforwards are available
to offset federal taxes on future foreign source income. If not used, these carryforwards will fully expire in 2021.
151
The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities
as of the dates indicated:
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deferred Tax Assets:
Book allowance for loan losses in excess of tax specific charge-offs
$
Interest on nonaccrual loans
Deferred compensation
Premises and equipment, principally due to differences in depreciation
Foreclosed assets valuation allowance
State tax benefit
Net operating losses
Capital loss carryforwards
Accrued liabilities
Unrealized loss from FDIC-assisted acquisitions
Unrealized loss on securities available-for-sale
Tax mark-to-market
Equity investments
Goodwill
Tax credits
Lease liability
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred Tax Liabilities:
Core deposit and customer relationship intangibles
Deferred loan fees and costs
Unrealized gain on securities available-for-sale
FHLB stock
Tax mark-to-market
Subordinated debentures
Operating leases
ROU assets
Other
Gross deferred tax liabilities
Total net deferred tax (liabilities) assets
$
December 31,
2019
2018
(In thousands)
$
54,664
4,550
5,809
3,478
263
5,721
39,517
—
28,158
1,678
—
5,052
5,953
5,434
3,426
40,533
—
204,236
(46,371)
157,865
9,853
5,330
30,438
647
—
20,183
83,878
36,359
2,830
189,518
(31,653) $
58,375
4,389
6,015
4,506
263
6,570
68,026
4,212
35,750
3,559
2,435
—
4,896
10,418
5,237
—
4,887
219,538
(78,407)
141,131
15,159
7,275
—
658
1,636
23,164
75,750
—
—
123,642
17,489
Based upon our taxpaying history and estimates of taxable income over the years in which the items giving rise to the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the benefits of these deferred tax assets.
152
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company had net income taxes receivable of $30.8 million and $38.9 million at December 31, 2019 and December 31, 2018.
As of December 31, 2019 and 2018, the Company had a valuation allowance of $46.4 million and $78.4 million against DTAs. Periodic reviews of the
carrying amount of DTAs are made to determine if a valuation allowance is necessary. A valuation allowance is required, based on available evidence, when it
is more likely than not that all or a portion of a DTA will not be realized due to the inability to generate sufficient taxable income in the period and/or of the
character necessary to utilize the benefit of the DTA. All available evidence, both positive and negative, that may affect the realizability of the DTA is
identified and considered in determining the appropriate amount of the valuation allowance. It is more likely than not that these deferred tax assets subject to a
valuation allowance will not be realized primarily due to their character and/or the expiration of the carryforward periods.
The net reduction in the total valuation allowance during the year ended December 31, 2019 was $32.0 million. Of this amount, $27.3 million consisted
principally of adjustments to state net operating loss DTAs. The adjustment to the state operating loss DTAs at December 31, 2019, was a result of changes in
state apportionments. The DTAs had been subjected to a full valuation allowance because the Company had previously determined that they were more likely
than not to be expired unused. As a result, the change in the tax attributes supporting the $27.3 million of deferred tax assets had no impact on the Company's
effective tax rate for the year ended December 31, 2019. The remaining $4.7 million reduction in the valuation allowance was primarily due to an increase in the
amount of foreign tax credit expected to be utilized prior to expiration and adjustments to capital loss carryforwards.
The following table summarizes the activity related to the Company's unrecognized tax benefits for the years indicated:
Unrecognized Tax Benefits
Balance, beginning of year
Increase based on tax positions related to prior years
Reductions related to settlements
Reductions for tax positions as a result of a lapse of the applicable statute of limitations
Balance, end of year
Unrecognized tax benefits that would have impacted the effective tax rate if recognized
Year Ended December 31,
2019
2018
(In thousands)
$
9,572
1,733
(255)
(302)
10,748
$
6,981
$
10,209
1,278
(684)
(1,231)
9,572
5,806
$
$
$
Due to the potential for the resolution of federal and state examinations and the expiration of various statutes of limitations, it is reasonably possible that
our gross unrecognized tax benefits may decrease within the next twelve months by as much as $4.5 million.
We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the year ended December 31, 2019, we
recognized $0.7 million in expense for interest expense and penalties. For the year ended December 31, 2018, we recognized $0.2 million in expense related to
these items. For the year ended December 31, 2017, we recognized $0.2 million in expense for interest expense and penalties. We had $1.5 million and $0.8 million
accrued for the payment of interest and penalties as of December 31, 2019 and 2018.
We file federal and state income tax returns with the Internal Revenue Service ("IRS") and various state and local jurisdictions and generally remain
subject to examinations by these tax jurisdictions for tax years 2015 through 2018. We are currently under examination by certain state jurisdictions for tax years
2012 through 2017.
153
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 16. EARNINGS PER SHARE
The following table presents the computation of basic and diluted net earnings per share for the years indicated:
Basic Earnings Per Share:
Net earnings
Less: earnings allocated to unvested restricted stock(1)
Net earnings allocated to common shares
Weighted-average basic shares and unvested restricted stock outstanding
Less: weighted-average unvested restricted stock outstanding
Weighted-average basic shares outstanding
Basic earnings per share
Diluted Earnings Per Share:
Net earnings allocated to common shares
Weighted-average diluted shares outstanding
Year Ended December 31,
2019
2018
2017
(Dollars in thousands, except per share data)
468,636
$
(5,182 )
463,454
$
120,468
(1,502 )
118,966
465,339
$
(5,119 )
460,220
$
125,100
(1,460 )
123,640
357,818
(4,184 )
353,634
123,060
(1,447 )
121,613
3.90
$
3.72
$
2.91
463,454
$
460,220
$
118,966
123,640
3.90
$
3.72
$
353,634
121,613
2.91
$
$
$
$
$
Diluted earnings per share
________________________
(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.
154
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17. REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company adopted ASC Topic 606, "Revenue from Contracts with Customers," effective as of January 1, 2018, and has applied the guidance to all
contracts within the scope of ASC Topic 606 as of that date. Revenue from contracts with customers in the scope of ASC Topic 606 is measured based on the
consideration specified in the contract with a customer, and excludes amounts collected on behalf of third parties. The Company recognizes revenue from
contracts with customers when it satisfies its performance obligations. The Company's performance obligations are typically satisfied as services are rendered
and payment is generally collected at the time services are rendered, or on a monthly, quarterly, or annual basis. The Company had no material unsatisfied
performance obligations as of December 31, 2019.
In certain cases, other parties are involved with providing products and services to our customers. If the Company is a principal in the transaction
(providing goods or services itself), revenues are reported based on the gross consideration received from the customer and any related expenses are reported
gross in noninterest expense. If the Company is an agent in the transaction (arranging for another party to provide goods or services), the Company reports its
net fee or commission retained as revenue. Rebates, waivers, and reversals are recorded as a reduction of revenue either when the revenue is recognized by the
Company or at the time the rebate, waiver, or reversal is earned by the customer.
The Company has elected the following practical expedients: (1) we do not disclose information about remaining performance obligations that have
original expected durations of one year or less; and (2) we do not adjust the consideration from customers for the effects of a significant financing component
if at contract inception the period between when the Company transfers the goods or services and when the customer pays for that good or service will be one
year or less.
Nature of Goods and Services
Substantially all of the Company's revenue, such as interest income on loans, investment securities, and interest-earning deposits in financial institutions,
is specifically out-of-scope of ASC Topic 606. For the revenue that is in-scope, the following is a description of principal activities, separated by the timing of
revenue recognition, from which the Company generates its revenue from contracts with customers:
•
Revenue earned at a point in time. Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, NSF fees, and
credit and debit card interchange fees. Revenue is generally derived from transactional information accumulated by our systems and is recognized
as revenue immediately as the transactions occur or upon providing the service to complete the customer's transaction. The Company is the
principal in each of these contracts with the exception of credit and debit card interchange fees, in which case the Company is acting as the agent
and records revenue net of expenses paid to the principal.
• Revenue earned over time. The Company earns certain revenue from contracts with customers monthly. Examples of this type of revenue are
deposit account service fees, investment management fees, merchant referral services, MasterCard marketing incentives, and safe deposit box
fees. Account service charges, management fees, and referral fees are recognized on a monthly basis while any transaction-based revenue is
recorded as the activity occurs. Revenue is primarily based on the number and type of transactions and is generally derived from transactional
information accumulated by our systems. Revenue is recorded in the same period as the related transactions occur or services are rendered to the
customer.
155
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Disaggregation of Revenue
The following table presents interest income and noninterest income, the components of total revenue, as disclosed in the consolidated statements of
earnings and the related amounts which are from contracts with customers within the scope of ASC Topic 606. As illustrated here, substantially all of our
revenue is specifically excluded from the scope of ASC Topic 606.
Year Ended December 31,
2019
2018
Total
Recorded
Revenue
Revenue from
Contracts with
Customers
Total
Recorded
Revenue
Revenue from
Contracts with
Customers
Total interest income
Noninterest income:
Other commissions and fees
Leased equipment income
Service charges on deposit accounts
Gain on sale of loans
Gain on sale of securities
Other income
Total noninterest income
Total revenue
$
$
1,219,893
$
43,623
38,727
14,637
1,114
25,445
19,016
142,562
1,362,455
$
(In thousands)
$
—
1,161,670
$
19,216
—
14,637
—
—
1,617
35,470
35,470
$
45,543
37,881
16,509
4,675
8,176
35,851
148,635
1,310,305
$
The following table presents revenue from contracts with customers based on the timing of revenue recognition for the period indicated:
Year Ended December 31,
2019
2018
Products and services transferred at a point in time
Products and services transferred over time
Total revenue from contracts with customers
Contract Balances
$
$
(In thousands)
$
19,253
16,217
35,470
$
—
19,080
—
16,509
—
—
1,791
37,380
37,380
18,681
18,699
37,380
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
Receivables, which are included in "Other assets"
Contract assets, which are included in "Other assets"
Contract liabilities, which are included in "Accrued interest payable and other liabilities"
December 31,
2019
2018
(In thousands)
$
$
$
1,094
—
490
1,334
—
621
$
$
$
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 year ended December 31, 2019 due to revenue recognized that was included in the contract liability balance at the beginning of the
year was $131,000.
156
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 18. STOCK-BASED COMPENSATION
The Company’s 2017 Stock Incentive Plan, or the 2017 Plan, permits stock-based compensation awards to officers, directors, key employees, and
consultants. The 2017 Plan authorized grants of stock-based compensation instruments to issue up to 4,000,000 shares of Company common stock. As of
December 31, 2019, there were 2,453,216 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 $26.2 million, $29.1 million, and $24.9 million for the years ended December 31, 2019, 2018, and 2017. Such amounts
are included in compensation expense on the accompanying consolidated statements of earnings. The income tax benefit recognized in the consolidated
statements of earnings related to this expense was $6.8 million, $7.7 million, and $8.9 million for the years ended December 31, 2019, 2018, and 2017. The amount
of unrecognized compensation expense related to all unvested TRSAs and PRSUs as of December 31, 2019 totaled $51.6 million. Such expense is expected to be
recognized over a weighted average period of 1.4 years.
The following table presents a summary of restricted stock transactions during the year ended December 31, 2019:
TRSAs
PRSUs
Weighted
Average
Grant Date
Fair Value
(Per Share)
$47.43
$38.66
$44.12
$46.91
$43.68
Number
of
Shares
1,344,656
836,326
(471,798)
(195,987)
1,513,197
Weighted
Average
Grant Date
Fair Value
(Per Unit)
$43.34
$39.56
$32.01
$23.04
$50.27
Number
of
Units
325,741
112,815
(106,008)
(56,162)
276,386
Year Ended December 31, 2019
Unvested restricted stock, beginning of year
Granted
Vested
Forfeited
Unvested restricted stock, end of year
Time-Based Restricted Stock Awards
At December 31, 2019, there were 1,513,197 shares of unvested TRSAs outstanding pursuant to the Company's 2003 and 2017 Stock Incentive Plans (the
"Plans"). The TRSAs generally vest 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 stock on the award date and is recognized over the vesting period using
the straight-line method.
TRSA grants are subject to "double-trigger" vesting in the event of a change in control of the Company, as defined in the Plans, and in the event an
employee's employment is terminated within 24 months after the change in control by the Company without Cause or by the employee for Good Reason, as
defined in the Plans, such awards will vest.
The weighted average grant date fair value per share of TRSAs granted during 2019, 2018, and 2017 were $38.66, $53.69, and $50.08. The vesting date fair
value of TRSAs that vested during 2019, 2018, and 2017 were $18.1 million, $25.9 million, and $24.9 million.
157
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Performance-Based Restricted Stock Units
At December 31, 2019, there were 276,386 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 PRSUs are not considered issued and outstanding until they vest. PRSUs are
granted and initially expensed based on a target number. The number of shares that will ultimately vest based on actual performance will range from zero to a
maximum of either 150% or 200% of target. Compensation expense related to PRSUs is based on the fair value of the underlying stock on the award 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 of the amortization is suspended, or (2) attainment of the financial metrics is improbable, in which case a portion 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 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’s 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.
Upon a change in control, each PRSU will (i) be deemed earned at the target level with respect to all open performance periods if the change in control
occurs within six months after the grant date, and (ii) be deemed earned at the actual performance level as of the date of the change in control if a change in
control occurs more than six months after the grant date, and in both cases, the PRSU will cease to be subject to any further performance conditions, but will be
subject to time-based service vesting following the change in control in accordance with the original performance period.
The weighted average grant date fair value per share of PRSUs granted during 2019, 2018, and 2017 was $39.56, $57.52 and $57.80. The vesting date fair
value of PRSUs that vested during 2019 was $5.6 million. There were no PRSUs that vested during 2018 and 2017.
NOTE 19. BENEFIT PLANS
401(K) Plans
The Company sponsors a defined contribution plan for the benefit of its employees. Participants are eligible to participate immediately as long as they are
scheduled to work a minimum of 1,000 hours and are at least 18 years of age. Eligible participants may contribute up to 60% of their annual compensation, not
to exceed the dollar limit imposed by the Internal Revenue Code. Employer contributions are determined annually by the Board of Directors in accordance with
plan requirements and applicable tax code. Expense related to 401(k) employer matching contributions was $4.1 million, $4.3 million and $4.0 million for the years
ended December 31, 2019, 2018, and 2017.
158
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20. STOCKHOLDERS' EQUITY
Common Stock Repurchased
The Company's common stock repurchased consisted of: (1) restricted stock surrendered as treasury shares and (2) stock purchased under the
Company's Stock Repurchase Programs and retired.
Treasury Shares
As a Delaware corporation, the Company records treasury shares for shares surrendered to the Company resulting from statutory payroll tax obligations
arising from the vesting of restricted stock. During the years ended December 31, 2019, 2018, and 2017, the Company purchased 218,531 treasury shares at a
weighted average price of $38.66 per share, 181,642 treasury shares at a weighted average price of $50.37 per share, and 188,870 treasury shares at a weighted
average price of $50.17 per share.
Stock Repurchase Programs
The Stock Repurchase Program was initially authorized by PacWest's Board of Directors on October 17, 2016, pursuant to which the Company could,
until December 31, 2017, purchase shares of its common stock for an aggregate purchase price not to exceed $400 million. On November 15, 2017, PacWest's
Board of Directors amended the Stock Repurchase Program to reduce the authorized purchase amount to $150 million and extend the maturity date to
December 31, 2018. On February 14, 2018, PacWest's Board of Directors amended the Stock Repurchase Program to increase the authorized purchase amount to
$350 million and extend the maturity date to February 28, 2019. On February 24, 2019, PacWest's Board of Directors authorized a new Stock Repurchase Program
for an aggregate purchase price not to exceed $225 million until February 29, 2020, effective upon the maturity of the previous Stock Repurchase Program.
The common stock repurchases may be effected through open market purchases or in privately negotiated transactions and may utilize any derivative or
similar instrument to effect share repurchase transactions (including, without limitation, accelerated share repurchase contracts, equity forward transactions,
equity option transactions, equity swap transactions, cap transactions, collar transactions, floor transactions or other similar transactions or any combination
of the foregoing transactions).
The amount and exact timing of any repurchases will depend upon market conditions and other factors. The Stock Repurchase Program may be
suspended or discontinued at any time. All shares repurchased under the various Stock Repurchase Programs were retired upon settlement. At December 31,
2019, the remaining amount that could be used to repurchase shares under the then current Stock Repurchase Program was $124.7 million.
The following table shows the repurchase amounts, shares repurchased, and weighted average price for stock repurchases under the various Stock
Repurchase Programs for the years indicated:
Stock Repurchases Under Stock Repurchase Programs
Dollar amount of repurchases (in thousands)
Number of shares repurchased
Weighted average price per share
Year Ended December 31,
2019
2018
2017
154,516
3,987,945
38.75
$
$
306,393
5,849,234
52.38
$
$
99,677
2,081,227
47.89
$
$
159
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 21. DIVIDEND AVAILABILITY AND REGULATORY MATTERS
Holders of Company common stock may receive dividends declared by the Board of Directors out of funds legally available under DGCL and certain
federal laws and regulations governing the banking and financial services business. Our ability to pay dividends to our stockholders is subject to the
restrictions set forth in DGCL and certain covenants contained in our subordinated debentures and borrowing agreements. Notification to the FRB is also
required prior to our declaring and paying dividends during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to
fund the dividend amount, among other requirements. Should the FRB object to payment of dividends, we would not be able to make the payment until
approval is received or we no longer need to provide notice under applicable regulations.
It is possible, depending upon the financial condition of the Bank and other factors, that the FRB, the FDIC, or the DBO, could assert that payment of
dividends or other payments is an unsafe or unsound practice. The Bank is subject to restrictions under certain federal and state laws and regulations
governing banks which limit its ability to transfer funds to the holding company through intercompany loans, advances or cash dividends. Dividends paid by
California state-chartered banks such as Pacific Western are regulated by the DBO and FDIC 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 dividend paid during such period. The Bank's net
earnings during the previous three fiscal years exceeded dividends paid by the Bank during that same period by $34.8 million. During 2019, PacWest received
$336.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $490.6 million at December 31, 2019, for the foreseeable future,
dividends from the Bank to PacWest will continue to require DBO and FDIC approval.
PacWest, as a bank holding company, is subject to regulation by the FRB under the BHCA. The FDICIA required that the federal regulatory agencies
adopt regulations defining capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s
and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios
of common equity Tier 1, Tier 1, and total capital to risk-weighted assets ("total capital ratio"), and of Tier I capital to average assets, adjusted for goodwill and
other non-qualifying intangible assets and other assets (“leverage ratio”). Common equity Tier 1 capital includes common stockholders’ equity less goodwill
and certain other deductions (including a portion of servicing assets and the after-tax unrealized net gains and losses on securities available-for-sale). Tier 1
capital includes common equity Tier 1 plus additional Tier 1 capital instruments meeting certain requirements. Total capital includes Tier 1 capital and other
items such as subordinated debt and the allowance for credit losses. All three measures are stated as a percentage of risk-weighted assets, which are measured
based on their perceived credit risk and include certain off-balance sheet exposures, such as unfunded loan commitments and letters of credit.
Regulatory capital requirements limit the amount of deferred tax assets that may be included when determining the amount of regulatory capital. Deferred
tax asset amounts in excess of the calculated limit are disallowed from regulatory capital. At December 31, 2019, such disallowed amounts were $195,000 for the
Company and none for the Bank. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future or that the
Company or Bank will not have increased deferred tax assets that are disallowed.
160
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Banks considered to be “adequately capitalized” are required to maintain a minimum total capital ratio of 8.0%, a minimum Tier 1 capital ratio of 6.0%, a
minimum common equity Tier 1 capital ratio of 4.5%, and a minimum leverage ratio of 4.0%. Banks considered to be “well capitalized” must maintain a minimum
total capital ratio of 10.0%, a minimum Tier 1 capital ratio of 8.0%, a minimum common equity Tier 1 capital ratio of 6.5%, and a minimum leverage ratio of 5.0%.
As of December 31, 2019, the most recent notification date to the regulatory agencies, the Company and the Bank are each “well capitalized” under the
regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the
Company’s or any of the Bank’s categories.
Management believes, as of December 31, 2019, that the Company and the Bank met all capital adequacy requirements to which we are subject.
Basel III, the comprehensive regulatory capital rules for U.S. banking organizations, requires all banking organizations to maintain a capital conservation
buffer above the minimum risk-based capital requirements in order 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 capital conservation buffer increased by 0.625% to its fully phased-in
2.5%, such that the common equity tier 1, tier 1 and total capital ratio minimums inclusive of the capital conservation buffer were 7.0%, 8.5%, and 10.5%. At
December 31, 2019, the Company and Bank were in compliance with the capital conservation buffer requirement.
The following tables present actual capital amounts and ratios for the Company and the Bank as of the dates indicated:
December 31, 2019
Tier I leverage:
PacWest Bancorp Consolidated
Pacific Western Bank
Common equity Tier I capital:
PacWest Bancorp Consolidated
Pacific Western Bank
Tier I capital:
PacWest Bancorp Consolidated
Pacific Western Bank
Total capital:
PacWest Bancorp Consolidated
Pacific Western Bank
Actual
Well Capitalized
Minimum
Requirement
Capital
Conservation
Buffer
Balance
Ratio
Balance
Ratio
Phase-In (1)
(Dollars in thousands)
$
$
$
$
$
$
$
$
2,306,966
2,589,473
2,306,966
2,589,473
2,306,966
2,589,473
2,926,075
2,764,128
9.74%
10.95%
9.78%
11.00%
9.78%
11.00%
12.41%
11.74%
$
$
$
$
$
$
$
$
1,184,347
1,182,683
1,532,971
1,530,088
1,886,734
1,883,185
2,358,417
2,353,981
5.00%
5.00%
6.50%
6.50%
8.00%
8.00%
10.00%
10.00%
4.00%
4.00%
7.00%
7.00%
8.50%
8.50%
10.50%
10.50%
161
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Actual
Well Capitalized
Minimum
Requirement
Capital
Conservation
Buffer
Balance
Ratio
Balance
Ratio
Phase-In (1)
(Dollars in thousands)
$
$
$
$
$
$
$
$
2,255,588
2,403,244
2,255,588
2,403,244
2,255,588
2,403,244
2,865,152
2,572,586
10.13%
10.80%
10.01%
10.68%
10.01%
10.68%
12.72%
11.44%
$
$
$
$
$
$
$
$
1,113,341
1,112,356
1,464,131
1,462,083
1,802,008
1,799,487
2,252,510
2,249,359
5.00%
5.00%
6.50%
6.50%
8.00%
8.00%
10.00%
10.00%
4.000%
4.000%
6.375%
6.375%
7.875%
7.875%
9.875%
9.875%
December 31, 2018
Tier I leverage:
PacWest Bancorp Consolidated
Pacific Western Bank
Common equity Tier I capital:
PacWest Bancorp Consolidated
Pacific Western Bank
Tier I capital:
PacWest Bancorp Consolidated
Pacific Western Bank
Total capital:
PacWest Bancorp Consolidated
Pacific Western Bank
_______________________________________
(1) Ratios for December 31, 2019 reflect the minimum required plus the fully phased-in capital conservation buffer of 2.50%; ratios for December 31, 2018 reflect the minimum
required plus capital conservation buffer phase-in for 2018 of 1.875%.
We issued or assumed through mergers subordinated debentures to trusts that were established by us or entities that we previously acquired, which, in
turn, issued trust preferred securities. The carrying value of subordinated debentures totaled $458.2 million at December 31, 2019. At December 31, 2019, none
of the trust preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $444.5 million was included in Tier
II capital.
Interest payments on subordinated debentures are considered dividend payments under the FRB regulations and subject to the same notification
requirements for declaring and paying dividends on common stock.
162
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 22. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following tables present the parent company only condensed balance sheets and the related condensed statements of earnings and condensed
statements of cash flows as of and for the years indicated:
Parent Company Only
Condensed Balance Sheets
Assets:
Cash and cash equivalents
Investments in subsidiaries
Other assets
Total assets
Liabilities:
Subordinated debentures
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Parent Company Only
Condensed Statements of Earnings
Miscellaneous income
Dividends from Bank subsidiary
Total income
Interest expense
Operating expenses
Total expenses
Earnings before income taxes and equity in undistributed earnings of
subsidiaries
Income tax benefit
Earnings before equity in undistributed earnings of subsidiaries
Equity in (distributions in excess of) undistributed earnings of subsidiaries
Net earnings
December 31,
2019
2018
(In thousands)
113,961
4,905,033
74,479
5,093,473
135,055
3,721
138,776
4,954,697
5,093,473
$
$
$
$
244,859
4,641,649
79,516
4,966,024
135,055
5,381
140,436
4,825,588
4,966,024
$
$
$
$
2019
Year Ended December 31,
2018
(In thousands)
2017
9,739
336,000
345,739
6,637
9,833
16,470
329,269
2,202
331,471
137,165
468,636
$
$
$
8,358
684,000
692,358
6,550
10,068
16,618
675,740
7,262
683,002
(217,663)
465,339
$
3,393
265,000
268,393
5,519
8,273
13,792
254,601
19,957
274,558
83,260
357,818
$
$
163
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Parent Company Only
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Change in other assets
Change in liabilities
Gain on sale of securities, net
Earned stock compensation
(Equity in) distributions in excess of undistributed earnings
of subsidiaries
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale
Net cash and cash equivalents paid in acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Common stock repurchased and restricted stock surrendered
Net decrease in subordinated debentures
Cash dividends paid, net
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of noncash investing and financing activities:
Common stock issued for acquisitions
2019
Year Ended December 31,
2018
(In thousands)
2017
$
468,636
$
465,339
$
357,818
(35,510 )
(1,661 )
—
26,815
(137,165 )
321,115
—
—
—
(162,965 )
—
(289,048 )
(452,013 )
(130,898 )
244,859
113,961
$
(36,362 )
(953 )
—
29,768
217,663
675,455
—
—
—
(315,542 )
(12,372 )
(288,193 )
(616,107 )
59,348
185,511
244,859
$
(34,274 )
4,857
(15 )
25,568
(83,260 )
270,694
426
(223,818 )
(223,392 )
(109,153 )
—
(247,403 )
(356,556 )
(309,254 )
494,765
185,511
—
$
—
$
446,233
$
$
164
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth our unaudited quarterly results for the periods indicated:
Three Months Ended
December 31,
September 30,
2019
2019
June 30,
2019
March 31,
2019
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Gain on sale of securities
Other noninterest income
Total noninterest income
Foreclosed assets income (expense), net
Acquisition, integration and reorganization costs
Other noninterest expense
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Basic and diluted earnings per share
Cash dividends declared per share
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Gain on sale of securities
Other noninterest income
Total noninterest income
Foreclosed assets income, net
Acquisition, integration and reorganization costs
Other noninterest expense
Total noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Basic and diluted earnings per share
Cash dividends declared per share
$
$
$
$
$
$
$
$
(Dollars in thousands, except per share data)
$
$
293,593
(46,974 )
307,208
(54,972 )
$
314,533
(53,635 )
246,619
(3,000 )
243,619
184
26,992
27,176
3,446
269
(127,443 )
(123,728 )
147,067
(29,186 )
252,236
(7,000 )
245,236
908
32,521
33,429
(8 )
—
(126,801 )
(126,809 )
151,856
(41,830 )
260,898
(8,000 )
252,898
22,192
28,701
50,893
146
—
(125,573 )
(125,427 )
178,364
(50,239 )
117,881
$
110,026
$
128,125
$
0.98
0.60
$
$
0.92
0.60
$
$
1.07
0.60
$
$
304,559
(49,683 )
254,876
(4,000 )
250,876
2,161
28,903
31,064
(29 )
(618 )
(125,640 )
(126,287 )
155,653
(43,049 )
112,604
0.92
0.60
Three Months Ended
December 31,
September 30,
2018
2018
June 30,
2018
March 31,
2018
(Dollars in thousands, except per share data)
$
$
302,739
(40,974 )
292,642
(32,325 )
$
288,514
(26,182 )
261,765
(12,000 )
249,765
786
32,740
33,526
311
(970 )
(128,576 )
(129,235 )
154,056
(39,015 )
260,317
(11,500 )
248,817
826
36,086
36,912
257
(800 )
(127,610 )
(128,153 )
157,576
(41,289 )
262,332
(17,500 )
244,832
253
39,385
39,638
61
—
(126,510 )
(126,449 )
158,021
(42,286 )
115,041
$
116,287
$
115,735
$
0.93
0.60
$
$
0.94
0.60
$
$
0.92
0.60
$
$
165
277,775
(21,275 )
256,500
(4,000 )
252,500
6,311
32,248
38,559
122
—
(127,517 )
(127,395 )
163,664
(45,388 )
118,276
0.93
0.50
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 24. SUBSEQUENT EVENTS
Stock Repurchase Programs
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 current Stock Repurchase Program on
February 29, 2020. After the authorization of the new Stock Repurchase Program, the amount that could be used to repurchase shares will be $200 million as of
March 1, 2020.
Common Stock Dividends
On February 3, 2020, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.60 per common share. The cash
dividend is payable on February 28, 2020 to stockholders of record at the close of business on February 20, 2020.
We have evaluated events that have occurred subsequent to December 31, 2019 and have concluded there are no subsequent events that would require
recognition in the accompanying consolidated financial statements.
166
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and
procedures as of December 31, 2019 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rules 13a-15(f). Our management conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control-Integrated Framework,
our management concluded that our internal control over financial reporting was effective as of December 31, 2019. See "Management's Report on Internal
Control Over Financial Reporting" set forth in Part II, Item 8 for additional information regarding management's evaluation.
(c) Report of the Registered Public Accounting Firm. KPMG LLP, an independent registered public accounting firm, has audited the consolidated
financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our
internal control over financial reporting.
(d) Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during
the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
167
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item regarding the Company’s directors and executive officers, and corporate governance, including information with respect
to beneficial ownership reporting compliance, will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2020 Annual
Meeting of Stockholders. Such information is incorporated herein by reference. Information relating to the registrant’s Code of Business Conduct and Ethics
that applies to its employees, including its senior financial officers, is included in Part I of this Annual Report on Form 10-K under “Available Information.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2020 Annual Meeting
of Stockholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item regarding security ownership of certain beneficial owners and management will appear in the Proxy Statement we
will deliver to our stockholders in connection with our 2020 Annual Meeting of Stockholders. Such information is incorporated herein by reference. Information
relating to securities authorized for issuance under the Company’s equity compensation plans is included in Part II of this Annual Report on Form 10-K under
“Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2020 Annual Meeting
of Stockholders. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2020 Annual Meeting
of Stockholders. Such information is incorporated herein by reference.
168
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
PART IV
The consolidated financial statements of PacWest Bancorp and its subsidiaries and independent auditors’ report are included in Item 8 under Part II
of this Form 10-K.
2. Financial Statement Schedules
All financial statement schedules have been omitted, as they are either inapplicable or included in the Notes to Consolidated Financial Statements.
3. Exhibits
The following documents are included or incorporated by reference in this Annual Report on Form 10-K:
3.1
3.2
3.3
4.1
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).
Certificate of Amendment of Certificate of Incorporation of PacWest Bancorp, a Delaware Corporation, dated May 14, 2010 (Exhibit 3.1 to
Form 8-K filed on May 14, 2010 and incorporated herein by this reference).
Second Amended and Restated Bylaws of PacWest Bancorp, a Delaware Corporation, dated October 25, 2019 (Exhibit 3.5 to Form 8-K
filed on October 29, 2019 and incorporated herein by this reference).
Other long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish
copies of such instruments to the Commission upon request.
4.2 Description of Registered Securities (Filed herewith).
10.1*
10.2*
PacWest Bancorp 2003 Stock Incentive Plan, as amended and restated, dated May 16, 2016 (Exhibit 10.1 to Form 8-K filed on May 18, 2016
and incorporated herein by this reference).
Form of Stock Award Agreement and Grant Notice pursuant to the Company’s 2003 Stock Incentive Plan, as amended and restated
(Exhibit 10.2 to Form 10-Q filed on November 7, 2016 and incorporated herein by this reference).
10.3*
Form of Stock Unit Award Agreement pursuant to the Company’s 2003 Stock Incentive Plan, as amended and restated (Exhibit 10.3 to
Form 10-Q filed on November 7, 2016 and incorporated herein by this reference).
10.4*
PacWest Bancorp 2017 Stock Incentive Plan, dated May 15, 2017 (Exhibit 10.1 to Form S-8 filed on May 15, 2017 and incorporated herein
by this reference).
10.5*
Form of Stock Unit Award Agreement and Grant Notice pursuant to the Company’s 2017 Stock Incentive Plan (Exhibit 10.2 to Form 8-K
filed on May 18, 2017 and incorporated herein by this reference).
10.6*
Form of Stock Award Agreement and Grant Notice pursuant to the Company’s 2017 Stock Incentive Plan (Exhibit 10.3 to Form 8-K filed
on May 18, 2017 and incorporated herein by this reference).
10.7*
Form of Stock Unit Award Agreement and Grant Notice pursuant to the Company's 2017 Stock Incentive Plan, as amended (Exhibit 10.7 to
Form 10-Q filed on August 8, 2019 and incorporated herein by this reference).
10.8*
Form of Stock Award Agreement and Grant Notice pursuant to the Company's 2017 Stock Incentive Plan, as amended (Exhibit 10.8 to
Form 10-Q filed on August 8, 2019 and incorporated herein by this reference).
10.9*
2018 Executive Incentive Plan, as amended and restated February 14, 2018 (Exhibit 10.1 to Form 8-K filed on February 16, 2018 and
incorporated herein by this reference).
169
10.10*
Indemnification Agreement applicable to the directors and executive officers of the Company (Filed herewith).
10.11*
PacWest Bancorp Change in Control Severance Plan, dated February 12, 2020 (Exhibit 10.1 to Form 8-K filed on February 14, 2020 and
incorporated herein by this reference).
21.1 Subsidiaries of the Registrant (Filed herewith).
23.1 Consent of KPMG LLP (Filed herewith).
24.1 Powers of Attorney (included on signature page).
31.1 Section 302 Certification of Chief Executive Officer (Filed herewith).
31.2 Section 302 Certification of Chief Financial Officer (Filed herewith).
32.1 Section 906 Certification of Chief Executive Officer (Filed herewith).
32.2 Section 906 Certification of Chief Financial Officer (Filed herewith).
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2019 and 2018,
(ii) the Consolidated Statements of Earnings for the years ended December 31, 2019, 2018, and 2017, (iii) the Consolidated Statements of
Comprehensive Income for the years ended December 31, 2019, 2018 and 2017, (iv) the Consolidated Statement of Changes in
Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017, (v) the Consolidated Statements of Cash Flows for the years
ended December 31, 2019, 2018 and 2017, and (vi) the Notes to Consolidated Financial Statements. (Pursuant to Rule 406T of
Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and
Section 18 of the Securities Exchange Act of 1934.) (Filed herewith).
The cover page of PacWest Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in Inline XBRL
(contained in Exhibit 101).
104
_________________________
* Management contract or compensatory plan or arrangement.
(b)
Exhibits
The exhibits listed in Item 15(a)3 are incorporated by reference or attached hereto.
(c)
Excluded Financial Statements
Not Applicable
ITEM 16. FORM 10-K SUMMARY
None
170
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.
SIGNATURES
Dated:
February 27, 2020
By:
/s/ Matthew P. Wagner
Matthew P. Wagner
(Chief Executive Officer)
PACWEST BANCORP
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John M. Eggemeyer, Matthew
P. Wagner, Patrick J. Rusnak and Kori L. Ogrosky, and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and
resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such
attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and
Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or
she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
171
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JOHN M. EGGEMEYER
John M. Eggemeyer
Chairman of the Board of Directors
February 27, 2020
/s/ MATTHEW P. WAGNER
Matthew P. Wagner
Chief Executive Officer and Director (Principal Executive
Officer)
February 27, 2020
/s/ PATRICK J. RUSNAK
Patrick J. Rusnak
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
February 27, 2020
/s/ BART R. OLSON
Bart R. Olson
Executive Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ TANYA M. ACKER
Tanya M. Acker
/s/ PAUL R. BURKE
Paul R. Burke
/s/ CRAIG A. CARLSON
Craig A. Carlson
/s/ C. WILLIAM HOSLER
C. William Hosler
/s/ SUSAN E. LESTER
Susan E. Lester
/s/ ARNOLD W. MESSER
Arnold W. Messer
/s/ ROGER H. MOLVAR
Roger H. Molvar
/s/ JAMES J. PIECZYNSKI
James J. Pieczynski
/s/ DANIEL B. PLATT
Daniel B. Platt
/s/ ROBERT A. STINE
Robert A. Stine
/s/ MARK T. YUNG
Mark T. Yung
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
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172
Section 2: EX-4.2 (EXHIBIT 4.2)
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
Exhibit 4.2
DESCRIPTION OF REGISTERED SECURITIES
As of December 31, 2019, PacWest Bancorp (“PacWest”) had only one class of securities registered under Section 12 of the Securities Exchange Act of
1934, as amended: its common stock, par value $0.01 per share. The following summary description of the common stock of PacWest does not purport to be
complete and is qualified in its entirety by reference to PacWest's Certificate of Incorporation and Second Amended and Restated Bylaws (the “Bylaws”), each
of which is incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.2 is a part, as well as the Delaware General
Corporation Law (“DGCL”).
General
Pursuant to PacWest's Certificate of Incorporation, PacWest has the authority to issue up to 200 million shares of common stock, par value $0.01 per
share, and an additional 5 million shares of preferred stock, par value $0.01 per share. Each share of PacWest common stock has the same relative rights, and is
identical in all respects, with each other share of PacWest common stock. PacWest common stock is traded on NASDAQ under the symbol "PACW."
Voting Rights
Holders of PacWest common stock will be entitled to one vote per share on all matters requiring stockholder action, including, but not limited to, the
election of directors. Cumulative voting is permitted so long as the name of the candidates for whom such votes would be cast has been placed in nomination
prior to voting and at least one stockholder has given notice at the meeting prior to voting of such stockholder's intention to cumulate votes. In an election of
directors under cumulative voting, each share of voting stock is entitled to vote the number of votes to which such share would normally be entitled multiplied
by the number of directors to be elected. A stockholder may then cast all such votes for a single candidate or may allocate them among as many candidates as
the stockholder may choose. Cumulative voting may enable a minority stockholder or group of stockholders to elect at least one representative to the PacWest
Board of Directors (the "PacWest Board"). Without cumulative voting, the holders of a majority of the shares present at an annual meeting would have the
power to elect all the directors to be elected at that meeting, and no person could be elected without the support of a majority of the stockholders voting.
Without cumulative voting, any director or the entire board of directors of a corporation may be removed with or without cause with the approval of a majority
of the outstanding shares entitled to vote at an election of directors.
Dividends
Holders of PacWest common stock may receive dividends when, as and if declared by the PacWest Board out of funds legally available for payment of
dividends, subject to any restrictions imposed by Federal regulators and the payment of any preferential amounts to which any class of preferred stock may be
entitled. Other restrictions on PacWest's ability to pay dividends are described below under "Restrictions on Dividends."
Liquidation Preference
Holders of common stock are not entitled to a liquidation preference in respect of their shares. Upon liquidation, dissolution or the winding up of
PacWest, holders of PacWest common stock will be entitled to share ratably in all assets remaining after the payment of all liabilities of PacWest and of
preferential amounts to which any preferred stock may be entitled.
Other Matters
The holders of PacWest common stock have no preemptive or other subscription rights. PacWest common stock is not subject to call or redemption.
Restrictions on Dividends
PacWest's ability to pay dividends or to repurchase its common stock are restricted by several factors. First, PacWest is incorporated in Delaware and is
governed by the DGCL. Delaware law allows a corporation to pay dividends only out of surplus, as determined under Delaware law, or, if there is no surplus,
out of net profits for the fiscal year in which the dividend was declared and/or for the preceding fiscal year. Under Delaware law, however, PacWest cannot pay
dividends out of net profits if, after PacWest pays the dividend, PacWest's capital would be less than the capital represented by the outstanding stock of all
classes having a preference upon the distribution of assets.
Furthermore, notification to the Federal Reserve Bank (“FRB”), is required prior to PacWest's declaring and paying a cash dividend to its stockholders
during any period in which its quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements.
Under such circumstances, PacWest may not pay a dividend should the FRB object until such time as PacWest receives approval from the FRB or no longer
needs to provide notice under applicable regulations.
Restrictions on Ownership of PacWest's Common Stock
Under the Bank Holding Company Act (the “BHC Act”), any person or company is required to obtain the approval of the FRB before acquiring control of
PacWest, which, among other things, includes the acquisition of ownership of or control over 25% or more of any class of voting securities of PacWest or the
power to exercise a "controlling influence" over PacWest. In the case of an acquirer that is a bank or bank holding company, the BHC Act requires approval of
the FRB for the acquisition of ownership or control of any voting securities of PacWest, if the acquisition results in the bank or bank holding company
controlling more than 5% of the outstanding shares of any class of PacWest's voting securities. The Change in Bank Control Act prohibits a person, entity, or
group of persons or entities acting in concert, from acquiring "control" of a bank holding company such as PacWest unless the FRB has been given prior
notice and has not objected to the transaction. Under FRB regulations, the acquisition of 10% or more of a class of voting stock of PacWest would generally
be deemed an acquisition of control of PacWest.
Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws
Certain provisions of PacWest's Certificate of Incorporation and Bylaws could make it less likely that PacWest's management would be changed or
someone would acquire voting control of PacWest without the consent of the PacWest Board. These provisions could delay, deter or prevent tender offers or
takeover attempts that stockholders might believe are in their best interests, including tender offers or takeover attempts that could allow stockholders to
receive premiums over the market price of their common stock.
Preferred Stock
The PacWest Board can at any time, under PacWest's Certificate of Incorporation and without stockholder approval, issue one or more new series of
preferred stock. In some cases, the issuance of preferred stock could discourage or make more difficult attempts to take control of PacWest through a merger,
tender offer, proxy context or otherwise. Preferred stock with special voting rights or other features issued to persons favoring PacWest's management could
stop a takeover by preventing the person trying to take control of PacWest from acquiring enough voting shares necessary to take control.
Nomination Procedures
Holders of PacWest common stock can nominate candidates for the PacWest Board. A stockholder must follow the advance notice procedures described
in the Bylaws. In general, to nominate a person for election to the PacWest Board of directors at a meeting of PacWest's stockholders, a stockholder must
submit a written notice of the proposed nomination to PacWest's corporate secretary at least 90 but not more than 120 days before the meeting.
Amendment of Bylaws
Under the Bylaws, the PacWest Board can adopt, amend or repeal the Bylaws, subject to limitations under the DGCL. PacWest's stockholders also have
the power to amend or repeal the Bylaws.
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Section 3: EX-10.10 (EXHIBIT 10.10)
Exhibit 10.10
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT is made this day of _______, 20[●] (the “Agreement”), by and between PacWest Bancorp (the “Company”)
and _______________ (“Indemnitee”).
WHEREAS, Indemnitee is a director or officer of the Company serving at the request of the Company as a director or officer of the Company or in
another Position (as defined below) at an Affiliated Entity (as defined below);
WHEREAS, in consideration of Indemnitee acting in the Position and assuming the responsibilities attendant to the Position, the Company desires to
provide Indemnitee the rights to indemnification and advance payment or reimbursement of expenses described below;
NOW, THEREFORE, in consideration of the premises above and other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and Indemnitee do hereby covenant and agree as follows:
Section 1.
Definitions. For purposes of this Agreement:
(a) The term “Company” shall include any predecessor of the Company and any constituent corporation (including any constituent of a
constituent) absorbed by the Company in a consolidation or merger.
(b) The term “Expenses” shall include all reasonable fees, costs and expenses, including without limitation, attorney’s fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery
service fees, ERISA excise taxes or penalties assessed on Indemnitee with respect to an employee benefit plan, Federal, state, local or foreign taxes imposed as
a result of the actual or deemed receipt of any payments under this Agreement, penalties and all other disbursements or expenses of the types customarily
incurred in connection with defending, preparing to defend or investigating an actual or threatened action, suit or proceeding (including Indemnitee’s
counterclaims that directly respond to and negate the affirmative claim made against Indemnitee (“Permitted Counterclaims”) in such action, suit or
proceeding), whether civil, criminal, administrative or investigative; and
(c) The term “Position” includes service as a director or officer, or service in a similar capacity, of the Company or any Company advisory
board or of any other corporation, limited liability company, public limited company, partnership, joint venture, trust, employee benefit plan, fund or other
enterprise as to which the Company beneficially owns, directly or indirectly, at least a majority of the voting power of equity or membership interests, or in the
case of employee benefit plans, is sponsored or maintained by the Company or one of the foregoing (any of the foregoing, an “Affiliated Entity”).
Section 2. Indemnification — General. Subject to the terms and conditions of this Agreement, the Company shall indemnify Indemnitee to the full
extent permitted by Delaware law if Indemnitee is made or threatened to be made a party to, or otherwise involved in, any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact of Indemnitee’s Position.
Section 3. Expenses. Subject to the terms and conditions of this Agreement, upon receipt by the Company of an undertaking by Indemnitee to repay
Expenses if it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company, the Company shall promptly pay or reimburse
Expenses reasonably incurred by Indemnitee in defending any action, suit or proceeding, whether civil, criminal, administrative or investigative, brought by
reason of the fact of Indemnitee’s Position (excluding Indemnitee’s counterclaims other than Permitted Counterclaims). Indemnitee’s obligation to reimburse
the Company shall be unsecured and no interest shall be charged thereon.
Section 4. Limitations. The Company shall not indemnify Indemnitee or advance or reimburse Indemnitee’s Expenses if the action, suit or proceeding
alleges (a) claims under Section 16(b) of the Securities Exchange Act of 1934, as amended, (b) violations of the Company’s Code of Business Conduct and
Ethics or Insider Trading Policy or (c) violations of Federal or state insider trading laws, unless, in each case, Indemnitee has been successful on the merits,
received the Company’s written consent to incurring the Expense or settled the case with the written consent of the Company, in which case the Company
shall indemnify and reimburse Indemnitee. In addition, the Company shall not indemnify Indemnitee for the amount of any reimbursement of the Company by
Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the
Company, as required in each case under the Securities Exchange Act of 1934, as amended (including any such reimbursements that arise from an accounting
restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002, or payment to the Company of profits arising from the purchase and
sale by Indemnitee of securities within the meaning of Section 306 of the Sarbanes-Oxley Act of 2002). Furthermore, the Company shall not indemnify
Indemnitee or advance or reimburse Indemnitee’s Expenses if such indemnification or payment would constitute a “prohibited indemnification payment” under
the regulations of the Federal Deposit Insurance Corporation (or any successor provisions) or any other applicable laws, rules or regulations.
Section 5. Selection of Counsel. Upon notification of the Company of the commencement of any action, suit or proceeding as to which
indemnification will or could be sought under this Agreement, the Company or an Affiliated Entity shall be entitled to assume the defense of such action, suit
or proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of
its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same action, suit or
proceeding; provided, that (a) Indemnitee shall have the right to employ his or her own counsel in any such action, suit or proceeding at Indemnitee’s expense;
and (b) if (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee and the Company shall have
reasonably concluded that there may be a conflict of interest between the Company or an Affiliated Entity, as applicable, and Indemnitee in the conduct of any
such defense or (iii) the Company or an Affiliated Entity shall not within sixty (60) days, in fact, have employed counsel to assume the defense of such action,
suit or proceeding, then the Expenses of Indemnitee’s counsel shall be at the expense of the Company. In the event separate counsel is retained by an
Indemnitee pursuant to this Section 5, the Company shall cooperate with Indemnitee with respect to the defense of the action, suit or proceeding, including
making documents, witnesses and other reasonable information related to the defense available to Indemnitee and such separate counsel pursuant to joint-
defense agreements or confidentiality agreements, as appropriate. Neither the Company nor any Affiliated Entity shall be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Company or an Affiliated Entity or as to which Indemnitee and the Company shall have made the
determination provided for in (b)(ii) above.
Section 6. Settlement of Claims. The Company shall not be liable to indemnify Indemnitee under this Agreement or otherwise for any amounts paid in
settlement of any action, suit or proceeding effected without the Company’s written consent. The Company or an Affiliated Entity may settle any action, suit or
proceeding on behalf of Indemnitee, but only with the prior written consent of Indemnitee, except that Indemnitee’s consent to a settlement shall not be
required if the sole relief provided is monetary damages that are paid by the Company and such settlement would not result in (a) the imposition of a consent
order, injunction or decree that would restrict the future activity or conduct of Indemnitee, (b) a finding or admission of a violation of law or violation of the
rights of any person by Indemnitee, (c) a finding or admission that would have an adverse effect on other claims made or threatened against Indemnitee or (d)
any monetary liability of Indemnitee that will not be promptly paid or reimbursed by the Company. Neither the Company nor Indemnitee will unreasonably
withhold their consent to any proposed settlement. The Company shall not be liable to indemnify Indemnitee under this Agreement with regard to any judicial
award if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action; provided, however, that
the Company’s liability hereunder shall not be excused if participation in the action, suit or proceeding by the Company was barred by this Agreement.
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Section 7. Recovery for Expenses of Enforcement. Indemnitee shall be entitled to be reimbursed for Expenses incurred in any action, suit or
proceeding to obtain indemnification or advance payment or reimbursement of Expenses under this Agreement on the same terms and conditions as
Indemnitee is entitled to Expenses under Section 3.
Section 8. Standard of Conduct. No claim for indemnification shall be paid by the Company unless the Company has determined that Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any
criminal action, suit or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Unless ordered by a court, such determinations shall
be made by (a) a majority vote of the Company’s directors who are not parties to the action, suit or proceeding for which indemnification is sought, even
though less than a quorum, or (b) by a committee of such directors designated by a majority vote of the Company’s directors, even though less than a quorum,
(c) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (d) by the Company’s stockholders.
Indemnitee shall be presumed to have met the relevant standard, and, if the determination is not made by the Company within thirty (30) days of a demand by
Indemnitee for indemnification, Indemnitee shall be deemed to have met such standard.
Section 9. Confidentiality. Except as required by law or as otherwise becomes public, Indemnitee agrees to keep confidential any information that
arises in connection with this Agreement, including but not limited to claims for indemnification or the advance payment or reimbursement of Expenses,
amounts paid or payable under this Agreement and any communications between the parties hereto.
Section 10. Nonexclusivity. The rights of Indemnitee under this Agreement shall not be deemed exclusive and shall be in addition to, and not in lieu
of, any right of indemnification or advance payment or reimbursement of Expenses Indemnitee may have under the Company’s certificate of incorporation or
by-laws. This Agreement is entered into pursuant to Section 145(f) of the Delaware General Corporation Law (“DGCL”) and shall not be constrained or limited
to indemnification and advance payment or reimbursement of expenses provided by the DGCL.
Section 11. Inconsistent Provision. To the extent that any other agreement or undertaking of the Company is inconsistent with the terms of this
Agreement, this Agreement shall govern.
Section 12. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment to Indemnitee under this
Agreement to the extent that Indemnitee has otherwise actually received payment of amounts otherwise payable hereunder.
Section 13. Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company or
an Affiliated Entity to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers, directors or employees
of the Company and/or Affiliated Entities with coverage for losses from wrongful acts or to ensure the Company’s performance of its indemnification
obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the
protection afforded by such coverage. In all policies of liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee
the same rights and benefits as are accorded to the most favorably insured of the Company’s and/or its subsidiaries’ directors, if Indemnitee is a director, of the
Company’s and/or its subsidiaries’ officers, if Indemnitee is an officer, or of the Company’s and/or its subsidiaries’ employees, if Indemnitee is an employee.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such
insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage
provided by such insurance is limited by exclusions so as to provide an insufficient benefit, if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company, or for any similar reason.
-3-
Section 14. Subrogation. In the event of any payment under this Agreement, the Company or any applicable Affiliated Entity shall be subrogated to
the extent of such payment to all of the rights of recovery of Indemnitee (under any insurance policy or otherwise), who shall execute all papers required and
shall do everything necessary to secure such rights, including the execution of such documents necessary to enable the Company or any applicable Affiliated
Entity to effectively bring suit to enforce such rights.
Section 15. Notice by Indemnitee. Indemnitee shall promptly notify the Company in writing upon the sooner of (a) becoming aware of an action, suit
or proceeding where indemnification or the advance payment or reimbursement of Expenses may be sought or (b) being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to any matter which may be subject to indemnification or the advance payment or
reimbursement of Expenses covered hereunder. As a condition to indemnification or the advance payment or reimbursement of Expenses, any demand for
payment by Indemnitee hereunder shall be in writing and shall provide reasonable accounting for the Expenses to be paid by the Company. The giving of
notice required under this Section 15 shall be a condition precedent to Indemnitee’s right to be indemnified under this Agreement if the failure to give such
notice materially prejudices any right, claim or defense available to the Company or any applicable Affiliated Entity.
Section 16. Severability. If any provision of this Agreement shall be held to be invalid, inoperative or unenforceable as applied to any particular case
or in any particular jurisdiction, for any reason, such circumstances shall not have the effect of rendering the provision in question invalid, inoperative or
unenforceable in any other distinguishable case or jurisdiction, or of rendering any other provision or provisions herein contained invalid, inoperative or
unenforceable to any extent whatsoever. The invalidity, inoperability or unenforceability of any one or more phrases, sentences, clauses or Sections contained
in this Agreement shall not affect any other remaining part of this Agreement.
Section 17. Successors and Assigns.
(a) This Agreement shall be binding upon, and inure to the benefit of, Indemnitee and Indemnitee’s estate, heirs, legal representatives and
assigns, and upon the Company and its successors and assigns.
(b) If Indemnitee is deceased and is entitled to indemnification under any provision of this Agreement, the Company shall indemnify
Indemnitee’s estate and his or her spouse, heirs, administrators and executors against and shall assume all of the Expenses, judgments, penalties and fines
actually and reasonably incurred by or for Indemnitee or his or her estate, in connection with the investigation, defense, settlement or appeal of any such
action, suit or proceeding; provided, however, that when requested in writing by the spouse of Indemnitee and/or the heirs, executors or administrators of
Indemnitee’s estate, the Company shall provide appropriate evidence of the agreement set forth herein to indemnify Indemnitee against, and to itself assume,
such costs, liabilities and Expenses.
Section 18. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Section 19. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute
part of this Agreement or to affect the construction thereof.
Section 20. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
-4-
Section 21. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly
given if (i) delivered by hand, on the date delivered, (ii) mailed by certified or registered mail, with postage prepaid, on the third business day after the date on
which it is mailed or iii) sent by guaranteed overnight courier service, with postage prepaid, on the business day after the date on which it is sent:
(a) If to Indemnitee, to:
______________________________
______________________________
______________________________
______________________________
(b) If to the Company, to:
PacWest Bancorp
5404 Wisconsin Avenue, Second Floor
Chevy Chase, Maryland 20815
Attention: General Counsel
or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
Section 22. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of
Delaware.
Section 23. Venue. Any action, suit or proceeding regarding indemnification or the advance payment or reimbursement of Expenses arising out of
this Agreement or otherwise shall only be brought and heard and shall only be venued in the Delaware Court of Chancery.
-5-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
AGREED TO AND ACCEPTED BY:
INDEMNITEE
PACWEST BANCORP
By:
Name:
Title:
-6-
(Back To Top)
Section 4: EX-21.1 (EXHIBIT 21.1)
Exhibit 21.1
Page 1 of 3
PACWEST BANCORP
LIST OF SUBSIDIARIES
December 31, 2019
Subsidiaries of PacWest Bancorp:
Pacific Western Bank
10700 West Jefferson Avenue SBL LLC
10790 Civic Center Drive CRE LLC
1127 East Gore Boulevard LLC
12148 Sky Lane SBL LLC
1238 Green Lane CRE LLC
1246 East Turin Avenue CRE LLC
1602 East Central Boulevard SBL LLC
1602 Medical Parkway SBL LLC
2015 East Marshall Avenue SBL LLC
2030 Main Street SBL LLC
22106 East Country Vista SBL LLC
2425 West Fifth Street CRE LLC
2723 Zinfandel Drive CRE LLC
2921 New Highway 51 SBL LLC
3889 Highway 69 North SBL LLC
4635 North Black Canyon Highway SBL LLC
600 North Arrowhead Avenue CRE LLC
7120 West McNichols Avenue SBL LLC
749 West Main Street SBL LLC
State:
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
75 North Main Street SBL LLC
808 West Bartlett Road SBL LLC
8805 South McClintock Drive SBL LLC
ALTEC Capital Trust
CapitalSource CF LLC
CapitalSource Finance LLC
CapitalSource Funding LLC
CapitalSource International LLC
CapitalSource Real Estate Loan LLC, 2006-A
CapitalSource TRS LLC
CapitalSource Trust Preferred Securities 2005-1
CapitalSource Trust Preferred Securities 2005-2
CapitalSource Trust Preferred Securities 2006-1
CapitalSource Trust Preferred Securities 2006-2
CapitalSource Trust Preferred Securities 2006-3
CapitalSource Trust Preferred Securities 2006-4
CapitalSource Trust Preferred Securities 2006-5
CapitalSource Trust Preferred Securities 2007-2
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Exhibit 21.1
Page 2 of 3
PACWEST BANCORP
LIST OF SUBSIDIARIES
December 31, 2019
Cheron Holdings LLC
Chestnut Assets, LLC
CIMC Master Trust
Coastline JX Holdings LLC
Coastline Michigan LLC
Coastline Ohio LLC
Coastline RE Holdings Corp.
Coastline RE Holdings Moorpark Corp.
Coastline RE Holdings NV Corp.
Community (CA) Capital Statutory Trust II
Community (CA) Capital Statutory Trust III
CRE Assets, LLC
CS CF Equity I LLC
CS Equity II LLC
CS Equity III LLC
CS Equity Investments LLC
CS Linton Oaks Holdings LLC
CS SBA Servicing LLC
CSE Equity Holdings LLC
CSE Mortgage LLC
CSE Owned LLC
FCB Statutory Trust I
First California Capital Trust I
FIRST COMMUNITY BANCORP/CA STATUTORY TRUST VII
First Community/CA Statutory Trust V
First Community/CA Statutory Trust VI
Hudson Housing Tax Credit Fund LXXXIV LP
Hudson Kings Canyon LP
Hudson Vista del Puente LP
Kings Canyon Affordable Housing, L.P.
Oak Park 3, LP
Palace and Jetty CRE LLC
PWB OPTICAL LLC
R4 OPCA Acquisition LLC
SC Financial
Pacific Western Asset Management Inc.
Square 1 Ventures, LLC
Stone Eagle Golf Holdings Corp.
Valley Oaks Financial Corporation
Delaware
California
Delaware
Delaware
Michigan
Ohio
California
California
Nevada
Connecticut
Delaware
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Connecticut
Delaware
Delaware
Delaware
Delaware
California
California
Delaware
Delaware
Delaware
California
North Carolina
Delaware
California
California
Exhibit 21.1
Page 3 of 3
PACWEST BANCORP
LIST OF SUBSIDIARIES
December 31, 2019
Vista del Puente, L.P.
Wendy Road Office Development, LLC
1080 Roewill Drive CRE LLC
102 7th Street SBL LLC
102 6th Street SBL LLC
1323 Burnet Avenue SBL LLC
1335 Darby Street SBL LLC
405 Jesus Cruz SBL LLC
409 Jesus Avila SBL LLC
67400 Ramon Road SBL LLC
7537-7547 North Clark Street SBL LLC
PWB ECOM DIRECT LLC
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Section 5: EX-23.1 (EXHIBIT 23.1)
California
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
PacWest Bancorp:
We consent to the incorporation by reference in the registration statement (Nos. 333-107636, 333-138542, 333-162808, 333-181869, 333-195147 and 333-
218010) on Form S-8 of PacWest Bancorp of our report dated February 27, 2020, with respect to the consolidated balance sheets of PacWest Bancorp and
subsidiaries as of December 31, 2019 and 2018, and the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity,
and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively the "consolidated financial
statements"), and the effectiveness of internal control over financial reporting as of December 31, 2019, which report appears in the December 31, 2019 annual
report on Form 10-K of PacWest Bancorp.
/s/ KPMG LLP
Los Angeles, California
February 27, 2020
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Section 6: EX-31.1 (EXHIBIT 31.1)
Certification
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Matthew P. Wagner, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the year ended December 31, 2019 of PacWest Bancorp;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date:
February 27, 2020
/s/ Matthew P. Wagner
Matthew P. Wagner
Chief Executive Officer
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Section 7: EX-31.2 (EXHIBIT 31.2)
Certification
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Patrick J. Rusnak, certify that:
1.
I have reviewed this report on Form 10-K for the year ended December 31, 2019 of PacWest Bancorp;
Exhibit 31.2
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date:
February 27, 2020
/s/ Patrick J. Rusnak
Patrick J. Rusnak
Executive Vice President and Chief Financial Officer
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Section 8: EX-32.1 (EXHIBIT 32.1)
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned officer of PacWest Bancorp (the “Company”)
hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date:
February 27, 2020
/s/ Matthew P. Wagner
Matthew P. Wagner
Chief Executive Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and is not
being filed as part of the Report or as a separate disclosure document.
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Section 9: EX-32.2 (EXHIBIT 32.2)
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), the undersigned officer of PacWest Bancorp (the “Company”)
hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date:
February 27, 2020
/s/ Patrick J. Rusnak
Patrick J. Rusnak
Executive Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and is not
being filed as part of the Report or as a separate disclosure document.
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