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 69 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also provides venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovation hubs across the United States. The Bank also offers financing of business-purpose non-owner-occupied investor properties through Civic, a wholly-owned subsidiary. The Bank also provides a specialized suite of services for the HOA industry. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.
The following table presents balance sheet data as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 | | | | |
| (In thousands) |
Balance Sheet Data: | | | | | | | | | |
Total assets | $ | 40,443,344 | | | $ | 29,498,442 | | | $ | 26,770,806 | | | | | |
Interest-earning deposits in financial institutions | 3,944,686 | | | 3,010,197 | | | 465,039 | | | | | |
Securities available-for-sale | 10,694,458 | | | 5,235,591 | | | 3,797,187 | | | | | |
Loans and leases held for investment, net of deferred fees | 22,941,548 | | | 19,083,377 | | | 18,846,872 | | | | | |
Goodwill | 1,405,736 | | | 1,078,670 | | | 2,548,670 | | | | | |
Core deposit and customer relationship intangibles | 44,957 | | | 23,641 | | | 38,394 | | | | | |
Noninterest-bearing deposits | 14,543,133 | | | 9,193,827 | | | 7,243,298 | | | | | |
Core deposits | 32,734,949 | | | 22,264,480 | | | 16,187,287 | | | | | |
Total deposits | 34,997,757 | | | 24,940,717 | | | 19,233,036 | | | | | |
Borrowings | — | | | 5,000 | | | 1,759,008 | | | | | |
Subordinated debt | 863,283 | | | 465,812 | | | 458,209 | | | | | |
Total liabilities | 36,443,714 | | | 25,903,491 | | | 21,816,109 | | | | | |
Stockholders’ equity | 3,999,630 | | | 3,594,951 | | | 4,954,697 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
At December 31, 2021, the Company had total assets of $40.4 billion, including $22.9 billion of total loans and leases, net of deferred fees, and $10.7 billion of securities available-for-sale, compared to $29.5 billion of total assets, including $19.1 billion of total loans and leases, net of deferred fees, and $5.2 billion of securities available-for-sale at December 31, 2020. The $10.9 billion increase in total assets since year-end was due primarily to a $5.5 billion increase in securities available-for-sale, a $3.9 billion increase in loans and leases, net of deferred fees, a $934.5 million increase in interest-earning deposits in financial institutions, and a $327.1 million increase in goodwill due to the Civic and HOA Business acquisitions.
At December 31, 2021, the Company had total liabilities of $36.4 billion, including total deposits of $35.0 billion and subordinated debt of $863.3 million, compared to $25.9 billion of total liabilities, including $24.9 billion of total deposits and $465.8 million of subordinated debt at December 31, 2020. The $10.5 billion increase in total liabilities since year-end 2020 was due mainly to increases of $10.1 billion in total deposits and $397.5 million in subordinated debt. The increase in total deposits was due primarily to continued strong deposit growth from our venture banking and community banking clients and the acquisition of the HOA Business, which added $4.1 billion of deposits. At December 31, 2021, core deposits totaled $32.7 billion, or 93% of total deposits, including $14.5 billion of noninterest-bearing demand deposits, or 41% of total deposits. The increase in subordinated debt was due to the $400 million of subordinated notes issued by the Bank on April 30, 2021. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
At December 31, 2021, the Company had total stockholders' equity of $4.0 billion compared to $3.6 billion at December 31, 2020. The $404.7 million increase in stockholders' equity since year-end was due mainly to $607.0 million in net earnings, offset partially by $119.4 million of cash dividends paid and a $106.6 million decrease in accumulated other comprehensive income. Consolidated Tier 1 capital and total capital ratios were 9.32% and 12.69% at December 31, 2021, compared to 10.53% and 13.76% at December 31, 2020.
Recent Events
Stock Repurchase Programs
On February 15, 2022, PacWest's Board of Directors authorized a new Stock Repurchase Program, effective March 1, 2022, to repurchase shares of its common stock for an aggregate purchase price not to exceed $100 million with a program maturity date of February 28, 2023.
Acquisition of HOA Business
On October 8, 2021, the Bank completed the acquisition of the HOA Business. The Bank paid cash consideration of $237.8 million, which represented the aggregate of a 5.9% deposit premium and the net book value of certain acquired assets and assumed liabilities. At closing, there were $4.1 billion of deposits, primarily core deposits, related to the HOA Business.
The HOA Business acquisition has been accounted for under the acquisition method of accounting, which resulted in the recognition of goodwill of $201.6 million. All of the recognized goodwill is expected to be deductible for tax purposes. For further information, see Note 2. Acquisitions of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
Subordinated Notes Offering
On April 30, 2021, the Bank issued $400 million aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes (the “Notes”) due May 1, 2031 (the “Maturity Date”), if not previously redeemed. Subject to any redemption prior to the Maturity Date, the Notes will bear interest from and including the original issue date to, but excluding, May 1, 2026 (the “Reset Date”), at a fixed rate of 3.25% per annum and from and including the Reset Date to, but excluding the Maturity Date, the Notes will bear interest at a floating per annum rate equal to a benchmark rate (which is expected to be the Three-Month Term SOFR) plus 252 basis points. For further information, see Note 12. Borrowings and Subordinated Debt in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
Acquisition of Civic
On February 1, 2021, the Bank completed the acquisition of Civic in an all-cash transaction. Civic, located in Redondo Beach, California, is one of the leading lenders in the United States specializing in business-purpose residential non-owner-occupied investment properties. The acquisition of Civic advances the Bank’s strategy to diversify and expand its lending portfolio, diversify its revenue streams, and deploy excess liquidity into higher-yielding assets. Civic operates as a subsidiary of the Bank and at December 31, 2021 had $1.4 billion of loans outstanding. The loans are categorized as either income producing and other residential real estate mortgage or residential real estate construction and land based on their purpose.
The Civic acquisition has been accounted for under the acquisition method of accounting, which resulted in the recognition of goodwill of $125.4 million. All of the recognized goodwill is expected to be deductible for tax purposes. For further information, see Note 2. Acquisitions of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
COVID-19 Pandemic - Impact to Our Business
From a business perspective, the impact in 2021 from the ongoing COVID-19 pandemic has decreased, however, new variants may continue to impact key macroeconomic indicators such as unemployment and GDP and we will continue to closely monitor our loan portfolio. In the early stages of the COVID-19 pandemic, we experienced an increase in customers seeking loan modifications through payment deferrals and extension of terms. Most of the modifications were for payment deferrals for three months, while some deferrals were up to six months. Some loans were subsequently modified with deferrals of three to twelve months. As of December 31, 2021, there were 23 loans with a balance of $42.5 million on deferral. The Company did not apply a TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act.
We actively participated in both rounds of the Paycheck Protection Program ("PPP"), under the provisions of the CARES Act, originating $1.65 billion of PPP loans in 2020 and 2021 before the program ended on May 31, 2021. As of December 31, 2021, PPP loans totaled $156.7 million, net of deferred fees. In the fourth quarter of 2021, forgiven loans under the PPP program totaled approximately $110.6 million. The loans have origination fees that are recognized over the life of the loan with the fee recognition accelerated upon forgiveness or repayment of the loan. Fees recognized in the fourth quarter of 2021 were $3.6 million. As of December 31, 2021, the remaining unamortized fees, net of deferred costs, totaled $4.2 million. The PPP loans are fully guaranteed by the SBA and do not carry an allowance.
As the COVID-19 pandemic unfolded in March 2020, we immediately enhanced the monitoring of our loan and lease portfolio with particular emphasis on certain loan and lease portfolios that we expected to be most impacted by the COVID-19 pandemic, such as the hotel, retail, commercial aviation, restaurant, and oil services loan and lease portfolios. We continue to closely monitor all of our portfolios, although with the increase in oil prices, and with our relatively low loan and lease balances with oil services borrowers ($76.7 million at December 31, 2021), the credit risk in the oil services portfolio has diminished. The hotel portfolio as of December 31, 2021 is comprised of hotel CRE loans of $593.2 million, hotel construction loans of $301.1 million, and hotel SBA loans of $28.0 million. These portfolios - hotel, retail, commercial aviation, and restaurant - have weathered the pandemic well thus far with net charge-offs of $4.6 million since the pandemic started.
The tables below shows our exposure to these loan and lease portfolios, which includes equipment leased to others under operating leases, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | | | | | | | % of |
| | | Special | | | | | | Total Loans |
Loan and Lease Portfolio | Classified | | Mention | | Pass | | Total | | and Leases |
| (Dollars in thousands) |
Hotel | $ | 14,867 | | | $ | 198,685 | | | $ | 708,727 | | | $ | 922,279 | | | 4.0 | % |
Retail CRE | 215 | | | 1,415 | | | 400,504 | | | 402,134 | | | 1.8 | % |
Commercial aviation | — | | | 57,795 | | | 174,105 | | | 231,900 | | | 1.0 | % |
Restaurant | 7,093 | | | 22,427 | | | 115,979 | | | 145,499 | | | 0.6 | % |
Total | $ | 22,175 | | | $ | 280,322 | | | $ | 1,399,315 | | | $ | 1,701,812 | | | 7.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| | | | | | | | | % of |
| | | Special | | | | | | Total Loans |
Loan and Lease Portfolio | Classified | | Mention | | Pass | | Total | | and Leases |
| (Dollars in thousands) |
Hotel | $ | 82,509 | | | $ | 269,970 | | | $ | 798,049 | | | $ | 1,150,528 | | | 6.0 | % |
Retail CRE | 24,478 | | | — | | | 444,670 | | | 469,148 | | | 2.5 | % |
Commercial aviation | 19,417 | | | 109,473 | | | 110,113 | | | 239,003 | | | 1.3 | % |
Restaurant | 6,781 | | | 19,636 | | | 124,598 | | | 151,015 | | | 0.8 | % |
Oil services | $ | 4,274 | | | $ | 5,124 | | | $ | 70,223 | | | $ | 79,621 | | | 0.4 | % |
Total | $ | 137,459 | | | $ | 404,203 | | | $ | 1,547,653 | | | $ | 2,089,315 | | | 10.9 | % |
From a credit perspective, most of our credit metrics improved during 2021 as economic conditions and economic forecasts continued to improve. This improvement led to a provision for credit losses benefit of $162.0 million for 2021, compared to a provision for credit losses of $339.0 million for 2020. For further details on CECL and the impacts to our process, see “- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment” contained herein.
On a Company-wide basis, our operations continue to run normally despite the ongoing pandemic. Our branches and offices are open to serve our customers, although most non-client facing roles continue to work remotely or under a hybrid model. We expect most employees will return to the office sometime in 2022, but remain pleased how employees have embraced new technologies to assist in performing their responsibilities to ensure our operations continue to run smoothly.
Key Performance Indicators
Among other factors, our operating results generally depend on the following key performance indicators:
The Level of Net Interest Income
Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. Net interest margin is net interest income (annualized if related to a quarterly period) expressed as a percentage of average interest-earning assets. Tax equivalent net interest income is net interest income increased by an adjustment for tax-exempt interest on certain loans and investment securities based on a 21% federal statutory tax rate. Tax equivalent net interest margin is calculated as tax equivalent net interest income divided by average interest-earning assets.
Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities. Our primary interest-earning assets are loans and investment securities, and our primary interest-bearing liabilities are deposits and borrowings. Contributing to our strong net interest margin is our strong yield on loans and leases and competitive cost of deposits. While our deposit balances will fluctuate depending on deposit holders’ perceptions of alternative yields available in the market, we seek to minimize the impact of these variances by attracting a high percentage of noninterest-bearing deposits.
Loan and Lease Growth
We actively seek new lending opportunities 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 loans such as multi-family loans from other banks, private student loans from third-party lenders, and, most recently, single-family residential mortgage loans. Prior to our acquisition of Civic, we also purchased loans from Civic. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic, interest-rate risk, credit risk, and product composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified loans and leases, nonaccrual loans and leases, and net charge-offs. We maintain an allowance for credit losses on loans and leases, which is the sum of the allowance for loan and lease losses and the reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off-balance sheet credit exposures. Loans and leases that are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology, which considers the impact of assumptions and is reflective of historical experience, economic forecasts viewed to be reasonable and supportable by management, the current loan and lease composition, and relative credit risks known as of the balance sheet date. For originated and acquired credit-deteriorated loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively.
We regularly review loans and leases to determine whether there has been any deterioration in credit quality resulting from borrower operations or changes in collateral value or other factors which may affect collectability of our loans and leases. Changes in economic conditions, such as the rate of economic growth, the unemployment rate, rate of inflation, increases in the general level of interest rates, declines in real estate values, changes in commodity prices, and adverse conditions in borrowers’ businesses, could negatively impact our borrowers and cause us to adversely classify loans and leases. An increase in classified loans and leases generally results in increased provisions for credit losses and an increased allowance for credit losses. Any deterioration in the real estate market may lead to increased provisions for credit losses because our loans are concentrated in real estate loans.
The Level of Noninterest Expense
Our noninterest expense includes fixed and controllable overhead, the largest components of which are compensation and occupancy expense. It also includes costs that tend to vary based on the volume of activity, such as loan and lease production and the number and complexity of foreclosed assets. We measure success in controlling both fixed and variable costs through monitoring of the efficiency ratio, which is calculated by dividing noninterest expense (less intangible asset amortization, net foreclosed assets expense (income), goodwill impairment, and acquisition, integration and reorganization costs) by net revenues (the sum of tax equivalent net interest income plus noninterest income, less gain (loss) on sale of securities and gain (loss) on sales of assets other than loans and leases).
The following table presents the calculation of our efficiency ratio for the years indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | |
Efficiency Ratio | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands) |
Noninterest expense | $ | 637,417 | | | $ | 1,984,019 | | | $ | 502,251 | |
Less: | Intangible asset amortization | 12,734 | | | 14,753 | | | 18,726 | |
| Foreclosed assets (income) expense, net | (213) | | | (17) | | | (3,555) | |
| Goodwill impairment | — | | | 1,470,000 | | | — | |
| Acquisition, integration and reorganization costs | 9,415 | | | 1,060 | | | 349 | |
Noninterest expense used for efficiency ratio | $ | 615,481 | | | $ | 498,223 | | | $ | 486,731 | |
| | | | | | |
Net interest income (tax equivalent) | $ | 1,119,028 | | | $ | 1,023,466 | | | $ | 1,022,090 | |
Noninterest income | 193,927 | | | 146,060 | | | 142,562 | |
Net revenues | 1,312,955 | | | 1,169,526 | | | 1,164,652 | |
Less: | Gain on sale of securities | 1,615 | | | 13,171 | | | 25,445 | |
Net revenues used for efficiency ratio | $ | 1,311,340 | | | $ | 1,156,355 | | | $ | 1,139,207 | |
| | | | | | |
Efficiency ratio | 46.9 | % | | 43.1 | % | | 42.7 | % |
The increase in noninterest expense used for the efficiency ratio in 2021, and the resulting increase in the efficiency ratio in 2021, were due in part to eleven months of operating expenses for Civic and three months of operating expenses for the HOA Business in 2021.
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 three 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, the carrying value of goodwill and other intangible assets, and the realization of deferred tax assets and liabilities.
Allowance for Credit Losses on Loans and Leases Held for Investment
For information regarding the calculation and policies of the allowance for credit losses on loans and leases held for investment, see " - Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" and Note 1(i). Nature of Operations and Summary of Significant Accounting Policies - Allowance for Credit Losses on Loans and Leases Held for Investment, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise from the acquisition method of accounting for business combinations. For acquisitions, we are required to record the assets acquired, including identified intangible assets such as goodwill, and the liabilities assumed at their estimated fair value. These fair values often involve estimates based on third party valuations, such as appraisals, based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, discount rates, future growth rates, multiples of earnings or other relevant factors. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and instead are tested for impairment annually unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Impairment exists when the carrying value of the goodwill exceeds its fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the consolidated statements of earnings (loss).
Deferred Tax Assets and Liabilities
We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governing taxing authorities. We review income tax expense and the carrying value of deferred tax assets and liabilities quarterly, and as new information becomes available, the balances are adjusted as appropriate. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain tax items will affect taxable income in the various tax jurisdictions. 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 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.
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. In 2020, we changed the calculation of return on average tangible equity to add back intangible asset amortization to net earnings to arrive at adjusted net earnings. Prior periods have been conformed to the current period presentation. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
Return on Average Tangible Equity | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands) |
Net earnings (loss) | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
Add: | Intangible asset amortization | 12,734 | | | 14,753 | | | 18,726 | |
| Goodwill impairment | — | | | 1,470,000 | | | — | |
| Adjusted net earnings used for return on average tangible equity | $ | 619,693 | | | $ | 247,179 | | | $ | 487,362 | |
| | | | | | |
Average stockholders' equity | $ | 3,808,019 | | | $ | 3,857,610 | | | $ | 4,864,332 | |
Less: | Average intangible assets | 1,269,546 | | | 1,470,989 | | | 2,596,389 | |
Average tangible common equity | $ | 2,538,473 | | | $ | 2,386,621 | | | $ | 2,267,943 | |
| | | | | | |
Return on average equity (1) | 15.94 | % | | (32.08) | % | | 9.63 | % |
Return on average tangible equity (2) | 24.41 | % | | 10.36 | % | | 21.49 | % |
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(1) Net earnings (loss) divided by average stockholders' equity.
(2) Adjusted net earnings divided by average tangible common equity.
| | | | | | | | | | | | | | | | | |
Tangible Common Equity Ratio/ | December 31, |
Tangible Book Value Per Share | 2021 | | 2020 | | 2019 |
| (Dollars in thousands, except per share data) |
Stockholders’ equity | $ | 3,999,630 | | | $ | 3,594,951 | | | $ | 4,954,697 | |
Less: Intangible assets | 1,450,693 | | | 1,102,311 | | | 2,587,064 | |
Tangible common equity | $ | 2,548,937 | | | $ | 2,492,640 | | | $ | 2,367,633 | |
| | | | | |
Total assets | $ | 40,443,344 | | | $ | 29,498,442 | | | $ | 26,770,806 | |
Less: Intangible assets | 1,450,693 | | | 1,102,311 | | | 2,587,064 | |
Tangible assets | $ | 38,992,651 | | | $ | 28,396,131 | | | $ | 24,183,742 | |
| | | | | |
Equity to assets ratio | 9.89 | % | | 12.19 | % | | 18.51 | % |
Tangible common equity ratio (1) | 6.54 | % | | 8.78 | % | | 9.79 | % |
Book value per share | $ | 33.45 | | | $ | 30.36 | | | $ | 41.36 | |
Tangible book value per share (2) | $ | 21.31 | | | $ | 21.05 | | | $ | 19.77 | |
Shares outstanding | 119,584,854 | | | 118,414,853 | | | 119,781,605 | |
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(1) Tangible common equity divided by tangible assets.
(2) Tangible common equity divided by shares outstanding.
•Adjusted net earnings and adjusted earnings per share: These non-GAAP measurements are presented in the following tables for the periods presented. For the GAAP calculation of earnings per share, see Note 17. Earnings (Loss) Per Share of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
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Adjusted Net Earnings and | Year Ended December 31, |
Adjusted Earnings Per Share (1) | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands) |
Adjusted Net Earnings: | | | | | |
Net earnings (loss) | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
Add: | Goodwill impairment | — | | | 1,470,000 | | | — | |
| Adjusted net earnings | $ | 606,959 | | | $ | 232,426 | | | $ | 468,636 | |
| | | | | | |
Adjusted Basic Earnings Per Share: | | | | | |
Adjusted net earnings | $ | 606,959 | | | $ | 232,426 | | | $ | 468,636 | |
Less: | Earnings allocated to unvested restricted stock | (10,248) | | | (2,769) | | | (5,182) | |
Adjusted net earnings allocated to common shares | $ | 596,711 | | | $ | 229,657 | | | $ | 463,454 | |
| | | | | | |
Weighted-average basic shares and unvested restricted stock outstanding | 119,349 | | | 118,463 | | | 120,468 | |
Less: | Weighted-average unvested restricted stock outstanding | (2,255) | | | (1,610) | | | (1,502) | |
Weighted-average basic shares outstanding | 117,094 | | | 116,853 | | | 118,966 | |
| | | | | | |
Adjusted basic earnings per share | $ | 5.10 | | | $ | 1.97 | | | $ | 3.90 | |
| | | | | | |
Adjusted Diluted Earnings Per Share: | | | | | |
Adjusted net earnings allocated to common shares | $ | 596,711 | | | $ | 229,657 | | | $ | 463,454 | |
Weighted-average diluted shares outstanding | 117,094 | | | 116,853 | | | 118,966 | |
Adjusted diluted earnings per share | $ | 5.10 | | | $ | 1.97 | | | $ | 3.90 | |
| | | | | | |
| | | | | | |
Results of Operations
Earnings Performance
The following table presents performance metrics for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Year Ended December 31, |
| | | | | | | 2021 | | 2020 | | 2019 |
| | | | | | | (Dollars in thousands, except per share data) |
Earnings Summary: | | | | | | | | | | | |
Interest income | | | | | | | $ | 1,158,729 | | | $ | 1,103,491 | | | $ | 1,219,893 | |
Interest expense | | | | | | | (54,905) | | | (88,933) | | | (205,264) | |
Net interest income | | | | | | | 1,103,824 | | | 1,014,558 | | | 1,014,629 | |
Provision for credit losses | | | | | | | 162,000 | | | (339,000) | | | (22,000) | |
Noninterest income | | | | | | | 193,927 | | | 146,060 | | | 142,562 | |
Operating expense | | | | | | | (637,417) | | | (514,019) | | | (502,251) | |
Goodwill impairment | | | | | | | — | | | (1,470,000) | | | — | |
| | | | | | | | | | | |
Earnings (loss) before income taxes | | | | | | | 822,334 | | | (1,162,401) | | | 632,940 | |
Income tax expense | | | | | | | (215,375) | | | (75,173) | | | (164,304) | |
Net earnings (loss) | | | | | | | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
| | | | | | | | | | | |
Per Common Share Data: | | | | | | | | | | | |
Diluted earnings (loss) per share | | | | | | | $ | 5.10 | | | $ | (10.61) | | | $ | 3.90 | |
Book value per share | | | | | | | $ | 33.45 | | | $ | 30.36 | | | $ | 41.36 | |
Tangible book value per share (1) | | | | | | | $ | 21.31 | | | $ | 21.05 | | | $ | 19.77 | |
| | | | | | | | | | | |
Performance Ratios: | | | | | | | | | | | |
Return on average assets | | | | | | | 1.71 | % | | (4.46) | % | | 1.80 | % |
Return on average tangible equity (1) | | | | | | | 24.41 | % | | 10.36 | % | | 21.49 | % |
Net interest margin (tax equivalent) | | | | | | | 3.40 | % | | 4.05 | % | | 4.54 | % |
Yield on average loans and leases (tax equivalent) | | | | | | | 5.08 | % | | 5.18 | % | | 6.00 | % |
Cost of average total deposits | | | | | | | 0.09 | % | | 0.27 | % | | 0.77 | % |
Efficiency ratio | | | | | | | 46.9 | % | | 43.1 | % | | 42.7 | % |
| | | | | | | | | | | |
Capital Ratios (consolidated): | | | | | | | | | | | |
Common equity tier 1 capital ratio | | | | | | | 8.86 | % | | 10.53 | % | | 9.78 | % |
Tier 1 capital ratio | | | | | | | 9.32 | % | | 10.53 | % | | 9.78 | % |
Total capital ratio | | | | | | | 12.69 | % | | 13.76 | % | | 12.41 | % |
_____________________________
(1) See "- Non-GAAP Measurements."
2021 Compared to 2020
Net earnings for the year ended December 31, 2021 was $607.0 million, or $5.10 per diluted share, compared to net loss for the year ended December 31, 2020 of $1.24 billion, or $10.61 per diluted share. The $1.84 billion increase in net earnings was due primarily to a $1.47 billion goodwill impairment charge in the first quarter of 2020 combined with a decrease in the provision for credit losses of $501.0 million due to improvement in both the macroeconomic forecast variables used in the process to determine the allowance for credit losses and the loan portfolio credit quality metrics, offset partially by net loan growth for the year.
2020 Compared to 2019
Net loss for the year ended December 31, 2020 was $1.24 billion, or $10.61 per diluted share, compared to net earnings for the year ended December 31, 2019 of $468.6 million, or $3.90 per diluted share. The $1.71 billion decrease in net earnings was due primarily to a $1.47 billion goodwill impairment charge in the first quarter of 2020, a higher provision for credit losses of $317.0 million, and higher operating expense of $11.8 million, offset partially by higher noninterest income of $3.5 million and lower income tax expense of $$89.1 million. The increase in the provision for credit losses for 2020 was the result of the impact of the current economic forecast used in our ACL estimation, which reflected a significant deterioration in key macroeconomic forecast variables such as unemployment and GDP growth as a result of the COVID-19 pandemic. The increase in operating expense was due mainly to increases of $9.1 million in other expense, $6.2 million in insurance and assessments, $4.8 million in leased equipment depreciation, $3.7 million in customer related expense, and $3.5 million in foreclosed assets expense, offset partially by decreases of $14.4 million in compensation expense and $4.0 million in intangible asset amortization. The increase in noninterest income for 2020 was due primarily to a $15.6 million increase in dividends and gain on equity investments, offset partially by a $12.3 million decrease in gain on sale of securities.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | Interest | | Yields | | | | Interest | | Yields | | | | Interest | | Yields |
| Average | | Income/ | | and | | Average | | Income/ | | and | | Average | | Income/ | | and |
| Balance | | Expense | | Rates | | Balance | | Expense | | Rates | | Balance | | Expense | | Rates |
| (Dollars in thousands) |
ASSETS: | | | | | | | | | | | | | | | | | |
Loans and leases (1)(2)(3) | $ | 19,762,220 | | | $ | 1,003,027 | | | 5.08 | % | | $ | 19,243,961 | | | $ | 995,973 | | | 5.18 | % | | $ | 18,330,137 | | | $ | 1,099,118 | | | 6.00 | % |
Investment securities (2)(4) | 7,486,009 | | | 162,102 | | | 2.17 | % | | 4,175,918 | | | 112,843 | | | 2.70 | % | | 3,844,328 | | | 121,757 | | | 3.17 | % |
Deposits in financial institutions | 5,692,338 | | | 8,804 | | | 0.15 | % | | 1,856,942 | | | 3,583 | | | 0.19 | % | | 322,366 | | | 6,479 | | | 2.01 | % |
Total interest‑earning assets (2) | 32,940,567 | | | 1,173,933 | | | 3.56 | % | | 25,276,821 | | | 1,112,399 | | | 4.40 | % | | 22,496,831 | | | 1,227,354 | | | 5.46 | % |
Other assets | 2,577,921 | | | | | | | 2,475,591 | | | | | | | 3,608,777 | | | | | |
Total assets | $ | 35,518,488 | | | | | | | $ | 27,752,412 | | | | | | | $ | 26,105,608 | | | | | |
| | | | | | | | | | | | | | | | | |
LIABILITIES AND | | | | | | | | | | | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | | | | | | | | | | | |
Interest checking | $ | 7,198,646 | | | 8,709 | | | 0.12 | % | | $ | 4,394,742 | | | 12,791 | | | 0.29 | % | | $ | 3,406,218 | | | 41,938 | | | 1.23 | % |
Money market | 8,843,122 | | | 12,993 | | | 0.15 | % | | 6,547,027 | | | 19,178 | | | 0.29 | % | | 5,139,623 | | | 56,382 | | | 1.10 | % |
Savings | 606,741 | | | 148 | | | 0.02 | % | | 538,985 | | | 263 | | | 0.05 | % | | 525,809 | | | 891 | | | 0.17 | % |
Time | 1,471,963 | | | 5,958 | | | 0.40 | % | | 2,169,324 | | | 27,431 | | | 1.26 | % | | 2,641,135 | | | 49,249 | | | 1.86 | % |
Total interest-bearing deposits | 18,120,472 | | | 27,808 | | | 0.15 | % | | 13,650,078 | | | 59,663 | | | 0.44 | % | | 11,712,785 | | | 148,460 | | | 1.27 | % |
Borrowings | 231,099 | | | 623 | | | 0.27 | % | | 825,681 | | | 8,161 | | | 0.99 | % | | 1,180,164 | | | 26,961 | | | 2.28 | % |
Subordinated debt | 733,163 | | | 26,474 | | | 3.61 | % | | 461,059 | | | 21,109 | | | 4.58 | % | | 455,537 | | | 29,843 | | | 6.55 | % |
Total interest‑bearing liabilities | 19,084,734 | | | 54,905 | | | 0.29 | % | | 14,936,818 | | | 88,933 | | | 0.60 | % | | 13,348,486 | | | 205,264 | | | 1.54 | % |
Noninterest‑bearing demand | | | | | | | | | | | | | | | | | |
deposits | 12,110,193 | | | | | | | 8,517,281 | | | | | | | 7,537,172 | | | | | |
Other liabilities | 515,542 | | | | | | | 440,703 | | | | | | | 355,618 | | | | | |
Total liabilities | 31,710,469 | | | | | | | 23,894,802 | | | | | | | 21,241,276 | | | | | |
Stockholders’ equity | 3,808,019 | | | | | | | 3,857,610 | | | | | | | 4,864,332 | | | | | |
Total liabilities and | | | | | | | | | | | | | | | | | |
stockholders' equity | $ | 35,518,488 | | | | | | | $ | 27,752,412 | | | | | | | $ | 26,105,608 | | | | | |
Net interest income (2) | | | $ | 1,119,028 | | | | | | | $ | 1,023,466 | | | | | | | $ | 1,022,090 | | | |
Net interest rate spread (2) | | | | | 3.27 | % | | | | | | 3.80 | % | | | | | | 3.92 | % |
Net interest margin (2) | | | | | 3.40 | % | | | | | | 4.05 | % | | | | | | 4.54 | % |
| | | | | | | | | | | | | | | | | |
Total deposits (5) | $ | 30,230,665 | | | $ | 27,808 | | | 0.09 | % | | $ | 22,167,359 | | | $ | 59,663 | | | 0.27 | % | | $ | 19,249,957 | | | $ | 148,460 | | | 0.77 | % |
_____________________
(1) Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans.
(2) Tax equivalent.
(3) Includes net loan premium amortization of $11.4 million for 2021 and net loan discount accretion of $5.6 million and $8.4 million for 2020 and 2019, respectively.
(4) Includes tax-equivalent adjustments of $8.6 million, $6.1 million, and $6.2 million for 2021, 2020, and 2019, respectively, related to tax-exempt interest on investment securities. The federal statutory rate utilized was 21%.
(5) Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 Compared to 2020 | | 2020 Compared to 2019 |
| Total | | Increase (Decrease) | | Total | | Increase (Decrease) |
| Increase | | Due to | | Increase | | Due to |
| (Decrease) | | Rate | | Volume | | (Decrease) | | Rate | | Volume |
| (In thousands) |
Interest Income: | | | | | | | | | | | |
Loans and leases (1) | $ | 7,054 | | | $ | (19,473) | | | $ | 26,527 | | | $ | (103,145) | | | $ | (155,925) | | | $ | 52,780 | |
Investment securities (1) | 49,259 | | | (25,701) | | | 74,960 | | | (8,914) | | | (18,926) | | | 10,012 | |
Deposits in financial institutions | 5,221 | | | (865) | | | 6,086 | | | (2,896) | | | (10,322) | | | 7,426 | |
Total interest income (1) | 61,534 | | | (46,039) | | | 107,573 | | | (114,955) | | | (185,173) | | | 70,218 | |
| | | | | | | | | | | |
Interest Expense: | | | | | | | | | | | |
Interest checking deposits | (4,082) | | | (9,742) | | | 5,660 | | | (29,147) | | | (38,750) | | | 9,603 | |
Money market deposits | (6,185) | | | (11,296) | | | 5,111 | | | (37,204) | | | (49,689) | | | 12,485 | |
Savings deposits | (115) | | | (151) | | | 36 | | | (628) | | | (650) | | | 22 | |
Time deposits | (21,473) | | | (14,598) | | | (6,875) | | | (21,818) | | | (14,042) | | | (7,776) | |
Total interest-bearing deposits | (31,855) | | | (35,787) | | | 3,932 | | | (88,797) | | | (103,131) | | | 14,334 | |
Borrowings | (7,538) | | | (3,788) | | | (3,750) | | | (18,800) | | | (12,280) | | | (6,520) | |
Subordinated debt | 5,365 | | | (5,166) | | | 10,531 | | | (8,734) | | | (9,091) | | | 357 | |
Total interest expense | (34,028) | | | (44,741) | | | 10,713 | | | (116,331) | | | (124,502) | | | 8,171 | |
| | | | | | | | | | | |
Net interest income (1) | $ | 95,562 | | | $ | (1,298) | | | $ | 96,860 | | | $ | 1,376 | | | $ | (60,671) | | | $ | 62,047 | |
_____________________
(1) Tax equivalent.
2021 Compared to 2020
Net interest income increased by $89.3 million to $1.1 billion for the year ended December 31, 2021 compared to $1.0 billion for the year ended December 31, 2020 due mainly to higher income on investment securities attributable to a higher average balance, offset partially by a lower yield combined with lower interest expense due to lower rates paid on deposits, borrowings, and subordinated debt in conjunction with decreased market rates, offset partially by higher average balances for interest-bearing deposits and subordinated debt. The tax equivalent yield on average loans and leases was 5.08% for the year ended December 31, 2021 compared to 5.18% for 2020 attributable mainly to decreased market rates and the purchases of lower yielding single-family residential mortgage loans primarily in the second half of 2021.
The tax equivalent NIM for the year ended December 31, 2021 was 3.40% compared to 4.05% for the year ended December 31, 2020. The decrease in the tax equivalent NIM was due mostly to the change in the mix of average interest-earning assets and the lower yields on average investment securities and loans and leases, offset partially by lower costs of deposits, borrowings, and subordinated debt. The change in the mix of average interest-earning assets was due to a $3.8 billion increase in average deposits in financial institutions, a $3.3 billion increase in average investment securities, and a $518.3 million increase in average loans and leases. Average loans and leases as a percentage of average interest-earning assets was 60% for the year ended December 31, 2021 compared to 76% for the year ended December 31, 2020. Average investment securities as a percentage of average interest-earning assets was 23% for the year ended December 31, 2021 compared to 17% for the year ended December 31, 2020. Average deposits in financial institutions as a percentage of average interest-earning assets was 17% for the year ended December 31, 2021 compared to 7% for the year ended December 31, 2020.
The cost of average total deposits decreased to 0.09% for the year ended December 31, 2021 from 0.27% for 2020 due to lower rates paid on deposits in conjunction with decreased market rates.
2020 Compared to 2019
Net interest income held steady at $1.01 billion for both the year ended December 31, 2020 and the year ended December 31, 2019 due mainly to a lower yield on average loans and leases, offset partially by a lower cost of average interest-bearing deposits and a higher balance of average loans and leases. The tax equivalent yield on average loans and leases was 5.18% for the year ended December 31, 2020 compared to 6.00% for 2019. The decrease in the yield on average loans and leases was due mainly to lower loan coupon interest from the repricing of variable-rate loans in conjunction with decreased market rates and a lower rate on loan production from the impact of the PPP loans. Excluding the PPP loans, which have a coupon rate of 1%, the tax equivalent yield on average loans and leases was 5.27% in 2020.
The tax equivalent NIM for the year ended December 31, 2020 was 4.05% compared to 4.54% for the year ended December 31, 2019. The decrease in the tax equivalent NIM was due mostly to the decrease in the yield on average loans and leases as described above, offset partially by the lower cost of average interest-bearing deposits. Excluding the PPP loans, the tax equivalent NIM was 4.08% for the year ended December 31, 2020.
The cost of average total deposits decreased to 0.27% for the year ended December 31, 2020 from 0.77% for 2019 due mainly to lower rates paid on deposits resulting from decreased market rates.
Provision for Credit Losses
The following table sets forth the details of the provision for credit losses on loans and leases held for investment and information regarding credit quality metrics for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | | Increase | | | | Increase | | |
| 2021 | | (Decrease) | | 2020 | | (Decrease) | | 2019 (2) |
| (Dollars in thousands) |
Provision For Credit Losses: | | | | | | | | | |
(Reduction in) addition to allowance for | | | | | | | | | |
loan and lease losses | $ | (149,500) | | | $ | (442,500) | | | $ | 293,000 | | | $ | 270,000 | | | $ | 23,000 | |
Addition to (reduction in) reserve for | | | | | | | | | |
unfunded loan commitments | (12,500) | | | (58,500) | | | 46,000 | | | 47,000 | | | (1,000) | |
Total provision for credit losses | $ | (162,000) | | | $ | (501,000) | | | $ | 339,000 | | | $ | 317,000 | | | $ | 22,000 | |
| | | | | | | | | |
Credit Quality Metrics: | | | | | | | | | |
Net (recoveries) charge‑offs on loans and leases | | | | | | | | | |
held for investment (1) | $ | (1,883) | | | $ | (89,104) | | | $ | 87,221 | | | $ | 70,534 | | | $ | 16,687 | |
Net (recoveries) charge‑offs to average | | | | | | | | | |
loans and leases | (0.01) | % | | | | 0.45 | % | | | | 0.09 | % |
At year-end: | | | | | | | | | |
Allowance for credit losses | $ | 273,635 | | | $ | (160,117) | | | $ | 433,752 | | | $ | 259,106 | | | $ | 174,646 | |
Allowance for credit losses to loans and leases | | | | | | | | | |
held for investment | 1.19 | % | | | | 2.27 | % | | | | 0.93 | % |
Allowance for credit losses to nonaccrual loans | | | | | | | | | |
and leases held for investment | 447.3 | % | | | | 475.8 | % | | | | 189.1 | % |
| | | | | | | | | |
Nonaccrual loans and leases held for investment | $ | 61,174 | | | $ | (29,989) | | | $ | 91,163 | | | $ | (1,190) | | | $ | 92,353 | |
Performing TDRs held for investment | $ | 24,430 | | | $ | 10,176 | | | $ | 14,254 | | | $ | 1,997 | | | $ | 12,257 | |
Classified loans and leases held for investment | $ | 116,104 | | | $ | (149,158) | | | $ | 265,262 | | | $ | 89,350 | | | $ | 175,912 | |
______________________
(1) See "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" for detail of charge-offs and recoveries by loan portfolio segment, class, and subclass for the periods presented.
(2) 2019 is pre-CECL adoption on January 1, 2020; the ACL ratio under CECL at adoption was 0.97%.
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 provision for credit losses decreased by $501.0 million to a provision for credit losses benefit of $162.0 million for the year ended December 31, 2021 compared to a provision of $339.0 million for the year ended December 31, 2020 as a result of improvement in both the macroeconomic forecast variables used in the process to determine the allowance for credit losses and the loan portfolio credit quality metrics, offset partially by net loan growth for the year.
The provision for credit losses increased by $317.0 million to $339.0 million for the year ended December 31, 2020 compared to $22.0 million for the year ended December 31, 2019 primarily as a result of the impact of the current economic forecast used in our ACL estimation, which reflected a significant deterioration in key macroeconomic forecast variables such as unemployment and GDP growth as a result of the COVID-19 pandemic.
Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances are an increased amount of classified and/or nonperforming 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 "- 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 - Allowance for Credit Losses on Loans and Leases Held for Investment, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | | Increase | | | | Increase | | |
Noninterest Income | 2021 | | (Decrease) | | 2020 | | (Decrease) | | 2019 |
| (In thousands) |
Leased equipment income | $ | 45,746 | | | $ | 2,118 | | | $ | 43,628 | | | $ | 4,901 | | | $ | 38,727 | |
Other commissions and fees | 42,287 | | | 1,940 | | | 40,347 | | | (3,276) | | | 43,623 | |
Service charges on deposit accounts | 13,269 | | | 2,918 | | | 10,351 | | | (4,286) | | | 14,637 | |
Gain on sale of loans and leases | 1,733 | | | (406) | | | 2,139 | | | 1,025 | | | 1,114 | |
Gain on sale of securities | 1,615 | | | (11,556) | | | 13,171 | | | (12,274) | | | 25,445 | |
| | | | | | | | | |
Dividends and gains (losses) on equity investments | 23,115 | | | 8,131 | | | 14,984 | | | 15,551 | | | (567) | |
Warrant income | 49,341 | | | 38,732 | | | 10,609 | | | 1,940 | | | 8,669 | |
Other income | 16,821 | | | 5,990 | | | 10,831 | | | (83) | | | 10,914 | |
Total noninterest income | $ | 193,927 | | | $ | 47,867 | | | $ | 146,060 | | | $ | 3,498 | | | $ | 142,562 | |
2021 Compared to 2020
Noninterest income increased by $47.9 million to $193.9 million for the year ended December 31, 2021 compared to $146.1 million for the year ended December 31, 2020 due mainly to increases of $38.7 million in warrant income, $8.1 million in dividends and gains on equity investments, and $6.0 million in other income, offset partially by a decrease of $11.6 million in gain on sale of securities. Warrant income increased due principally to higher gains from exercised warrants, driven by the active capital markets. Dividends and gains on equity investments increased due primarily to higher gains on sales of equity investments and higher income distributions on SBIC investments, offset partially by lower fair value gains on equity investments still held and lower fair value marks on SBIC investments. Other income increased due principally to higher gains from early lease terminations. The decrease in gain on sale of securities resulted from the sale of $365.7 million of securities for a gain of $1.6 million for the year ended December 31, 2021 compared to sales of $160.3 million of securities for a gain of $13.2 million for the year ended December 31, 2020.
2020 Compared to 2019
Noninterest income increased by $3.5 million to $146.1 million for the year ended December 31, 2020 compared to $142.6 million for the year ended December 31, 2019 due mainly to increases of $15.6 million in dividends and gains on equity investments and $4.9 million in leased equipment income, offset partially by decreases of $12.3 million in gain on sale of securities, $4.3 million in service charges on deposit accounts, and $3.3 million in other commissions and fees. Dividends and gains on equity investments increased due primarily to increases in the fair value of equity investments still held and higher gains on sale of equity investments sold. Leased equipment income increased due to early lease terminations resulting in higher termination gains in the year ended December 31, 2020 as compared to the year ended December 31, 2019 and a higher average balance of leases in 2020 resulting in higher lease income as compared to 2019, offset partially by lower rental income attributable to two operating leases placed on nonaccrual status in 2020. The decrease in gain on sale of securities resulted from the sale of $160.3 million of securities for a gain of $13.2 million for the year ended December 31, 2020 compared to sales of $1.6 billion of securities for a gain of $25.4 million for the year ended December 31, 2019. Service charges on deposit accounts decreased due primarily to lower analysis fees and NSF fees for the year ended December 31, 2020 as compared to last year as we waived certain fees for a period of time as part of our response to the COVID-19 pandemic. Other commissions and fees decreased primarily due to lower credit card fee income and lower foreign exchange fees, offset partially by higher customer success fees.
Noninterest Expense
The following table summarizes noninterest expense by category for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | | Increase | | | | Increase | | |
Noninterest Expense | 2021 | | (Decrease) | | 2020 | | (Decrease) | | 2019 |
| (In thousands) |
Compensation | $ | 368,450 | | | $ | 96,956 | | | $ | 271,494 | | | $ | (14,368) | | | $ | 285,862 | |
Occupancy | 58,422 | | | 867 | | | 57,555 | | | 148 | | | 57,407 | |
Leased equipment depreciation | 35,755 | | | 6,890 | | | 28,865 | | | 4,849 | | | 24,016 | |
Data processing | 30,277 | | | 3,498 | | | 26,779 | | | (777) | | | 27,556 | |
Other professional services | 21,492 | | | 1,575 | | | 19,917 | | | 2,114 | | | 17,803 | |
Customer related expense | 20,504 | | | 2,972 | | | 17,532 | | | 3,693 | | | 13,839 | |
Insurance and assessments | 17,365 | | | (5,260) | | | 22,625 | | | 6,221 | | | 16,404 | |
Loan expense | 17,031 | | | 3,577 | | | 13,454 | | | 523 | | | 12,931 | |
Intangible asset amortization | 12,734 | | | (2,019) | | | 14,753 | | | (3,973) | | | 18,726 | |
Acquisition, integration and reorganization costs | 9,415 | | | 8,355 | | | 1,060 | | | 711 | | | 349 | |
Foreclosed assets income, net | (213) | | | (196) | | | (17) | | | 3,538 | | | (3,555) | |
Other | 46,185 | | | 6,183 | | | 40,002 | | | 9,089 | | | 30,913 | |
Total operating expense | 637,417 | | | 123,398 | | | 514,019 | | | 11,768 | | | 502,251 | |
Goodwill impairment | — | | | (1,470,000) | | | 1,470,000 | | | 1,470,000 | | | — | |
Total noninterest expense | $ | 637,417 | | | $ | (1,346,602) | | | $ | 1,984,019 | | | $ | 1,481,768 | | | $ | 502,251 | |
2021 Compared to 2020
Noninterest expense decreased by $1.35 billion to $637.4 million for the year ended December 31, 2021 compared to $2.0 billion for the year ended December 31, 2020 due mainly to a $1.47 billion goodwill impairment charge incurred in the first quarter of 2020. Excluding the goodwill impairment charge, noninterest expense increased by $123.4 million in 2021 compared to 2020. This increase was due primarily to increases of $97.0 million in compensation expense, $8.4 million in acquisition, integration and reorganization costs, $6.9 million in leased equipment depreciation, and $6.2 million in other expense, offset partially by a $5.3 million decrease in insurance and assessment expense. The increase in compensation expense was due to the incremental compensation expense from 11 months of Civic operations and three months of HOA Business operations in the 2021 period and higher bonus expense, given the operating results in 2021, while the 2020 bonus amounts were below historical levels as a result of the higher provisions for credit losses in 2020. The increase in acquisition, integration, and reorganization costs was due to the costs related to the Civic and HOA Business acquisitions. Leased equipment depreciation increased due to a higher average balance of leased equipment. Other expense increased due mainly to higher legal settlement costs. Insurance and assessment expense decreased due mostly to a decrease in the FDIC assessment rate in 2021 partially offset by a higher assessment base. The assessment rate was higher in 2020 due to the goodwill impairment recorded in the first quarter of 2020 resulting in a higher assessment rate for the next four quarters.
2020 Compared to 2019
Noninterest expense increased by $1.48 billion to $1.98 billion for the year ended December 31, 2020 compared to $502.3 million for the year ended December 31, 2019 due mainly to a $1.47 billion goodwill impairment charge incurred in the first quarter of 2020. Excluding the goodwill impairment charge, noninterest expense increased by $11.8 million to $514.0 million in 2020. This increase was due mainly to increases of $9.1 million in other expense, $6.2 million in insurance and assessments, $4.8 million in leased equipment depreciation, $3.7 million in customer related expense, and $3.5 million in foreclosed assets expense, offset partially by decreases of $14.4 million in compensation expense and $4.0 million in intangible asset amortization. Other expense increased due mainly to $6.6 million in prepayment penalties incurred in the second quarter of 2020 from the early payoff of $750 million of FHLB term advances and higher litigation accruals, offset partially by lower business development expenses and employee related expenses as a result of COVID-19. Insurance and assessments expense increased due primarily to an increase in our FDIC assessment rate as a result of the first quarter 2020 loss from the goodwill impairment charge. Leased equipment depreciation increased due principally to a higher average balance of leased equipment. Customer related expenses increased due mostly to higher customer analysis expenses and reciprocal deposit referral fees. Foreclosed assets expense increased due principally to lower gains on the sale of foreclosed assets. Compensation expense decreased due mainly to lower bonus expense in the 2020 period compared to the prior year based on Company financial performance in 2020. Intangible asset amortization decreased due mostly to lower CDI amortization related to financial institutions acquired in 2015 and 2017.
Income Taxes
The effective tax rates were 26.2%, (6.5)%, and 26.0% for the years ended December 31, 2021, 2020, and 2019. Excluding non-deductible goodwill impairment, the effective income tax rate was 24.4% for the year ended December 31, 2020. The increase in the effective tax rate for 2021 compared to the 24.4% rate for 2020 was due primarily to an increase in the state apportionment rates for 2021 and a tax benefit recorded in 2020 for amended state returns. The Company's 2021 blended statutory tax rate for federal and state was 27.8%. For further information on income taxes, see Note 16. Income Taxes of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
| Fair | | % of | | Duration | | Fair | | % of | | Duration | | Fair | | % of | | Duration |
Security Type | Value | | Total | | (in years) | | Value | | Total | | (in years) | | Value | | Total | | (in years) |
| (Dollars in thousands) |
Agency residential MBS | $ | 2,898,210 | | | 27 | % | | 2.9 | | | $ | 341,074 | | | 7 | % | | 1.9 | | | $ | 305,198 | | | 8 | % | | 3.3 | |
Municipal securities | 2,315,968 | | | 22 | % | | 7.7 | | | 1,531,617 | | | 29 | % | | 8.2 | | | 735,159 | | | 19 | % | | 7.6 | |
Agency commercial MBS | 1,688,967 | | | 16 | % | | 5.2 | | | 1,281,877 | | | 24 | % | | 3.2 | | | 1,108,224 | | | 29 | % | | 4.4 | |
Agency residential CMOs | 1,038,134 | | | 10 | % | | 3.2 | | | 1,219,880 | | | 23 | % | | 2.7 | | | 1,136,397 | | | 30 | % | | 3.7 | |
U.S. Treasury securities | 966,898 | | | 9 | % | | 6.6 | | | 5,302 | | | — | % | | 1.3 | | | 5,181 | | | — | % | | 3.2 | |
Corporate debt securities | 527,094 | | | 5 | % | | 4.2 | | | 311,889 | | | 6 | % | | 3.7 | | | 20,748 | | | 1 | % | | 11.3 | |
Private label commercial MBS | 450,217 | | | 4 | % | | 7.5 | | | 82,957 | | | 2 | % | | 1.8 | | | 72,304 | | | 2 | % | | 2.7 | |
Collateralized loan obligations | 385,362 | | | 4 | % | | 0.1 | | | 135,876 | | | 3 | % | | — | | | 123,756 | | | 3 | % | | 0.2 | |
Private label residential CMOs | 264,417 | | | 2 | % | | 3.9 | | | 116,946 | | | 2 | % | | 2.1 | | | 99,483 | | | 3 | % | | 3.2 | |
Asset-backed securities | 129,547 | | | 1 | % | | 0.1 | | | 166,546 | | | 3 | % | | 0.1 | | | 142,479 | | | 4 | % | | 0.3 | |
SBA securities | 29,644 | | | — | % | | 3.7 | | | 41,627 | | | 1 | % | | 3.2 | | | 48,258 | | | 1 | % | | 4.0 | |
Total securities available- | | | | | | | | | | | | | | | | | |
for-sale | $ | 10,694,458 | | | 100 | % | | 4.8 | | | $ | 5,235,591 | | | 100 | % | | 4.3 | | | $ | 3,797,187 | | | 100 | % | | 4.4 | |
The following table presents the geographic composition of the majority of our municipal securities portfolio as of the date indicated:
| | | | | | | | | | | |
| December 31, 2021 |
| Fair | | % of |
Municipal Securities by State | Value | | Total |
| (Dollars in thousands) |
California | $ | 569,288 | | | 25 | % |
Texas | 477,499 | | | 21 | % |
Washington | 357,536 | | | 15 | % |
Oregon | 143,838 | | | 6 | % |
Maryland | 74,334 | | | 3 | % |
Georgia | 68,662 | | | 3 | % |
New York | 65,831 | | | 3 | % |
Colorado | 58,503 | | | 3 | % |
Minnesota | 55,911 | | | 2 | % |
Florida | 41,629 | | | 2 | % |
Total of ten largest states | 1,913,031 | | | 83 | % |
All other states | 402,937 | | | 17 | % |
Total municipal securities | $ | 2,315,968 | | | 100 | % |
The following table presents a summary of contractual rates and contractual maturities of our securities available‑for‑sale as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Due After | | Due After | | | | | | | | |
| Due | | One Year | | Five Years | | | | | | | | |
| Within | | Through | | Through | | Due After | | | | |
| One Year | | Five Years | | Ten Years | | Ten Years | | Total |
| Fair | | | | Fair | | | | Fair | | | | Fair | | | | Fair | | |
December 31, 2021 | Value | | Rate(1) | | Value | | Rate(1) | | Value | | Rate(1) | | Value | | Rate(1) | | Value | | Rate(1) |
| (Dollars in thousands) |
Agency residential MBS | $ | 31 | | | 4.85 | % | | $ | 8,335 | | | 3.77 | % | | $ | 6,909 | | | 3.93 | % | | $ | 2,882,935 | | | 2.70 | % | | $ | 2,898,210 | | | 2.71 | % |
Municipal securities | 28,542 | | | 4.23 | % | | 120,882 | | | 3.80 | % | | 720,580 | | | 2.29 | % | | 1,445,964 | | | 3.15 | % | | 2,315,968 | | | 2.93 | % |
Agency commercial MBS | 8,823 | | | 3.66 | % | | 463,242 | | | 2.66 | % | | 1,052,581 | | | 1.97 | % | | 164,321 | | | 2.38 | % | | 1,688,967 | | | 2.21 | % |
Agency residential CMOs | — | | | 0.00 | % | | 1,906 | | | 3.18 | % | | 220,885 | | | 2.54 | % | | 815,343 | | | 2.30 | % | | 1,038,134 | | | 2.35 | % |
U.S. Treasury securities | — | | | 0.00 | % | | 5,146 | | | 2.67 | % | | 961,751 | | | 1.17 | % | | — | | | 0.00 | % | | 966,897 | | | 1.18 | % |
Corporate debt securities | — | | | 0.00 | % | | 28,513 | | | 4.60 | % | | 410,030 | | | 4.29 | % | | 88,551 | | | 4.49 | % | | 527,094 | | | 4.34 | % |
Private label Commercial MBS | 4,961 | | | 4.05 | % | | 8,676 | | | 3.43 | % | | 41,510 | | | 2.63 | % | | 395,070 | | | 2.48 | % | | 450,217 | | | 2.53 | % |
Collateralized loan obligations | — | | | 0.00 | % | | — | | | 0.00 | % | | 121,093 | | | 2.00 | % | | 264,269 | | | 1.85 | % | | 385,362 | | | 1.89 | % |
Private label residential CMOs | — | | | 0.00 | % | | — | | | 0.00 | % | | — | | | 0.00 | % | | 264,417 | | | 2.68 | % | | 264,417 | | | 2.68 | % |
Asset-backed securities | 10,464 | | | 0.79 | % | | 25,248 | | | 1.52 | % | | 1,736 | | | 0.79 | % | | 92,099 | | | 1.11 | % | | 129,547 | | | 1.16 | % |
SBA securities | 1,864 | | | 4.07 | % | | 429 | | | 3.24 | % | | 7,612 | | | 2.76 | % | | 19,740 | | | 2.87 | % | | 29,645 | | | 2.93 | % |
Total securities | | | | | | | | | | | | | | | | | | | |
available-for-sale | $ | 54,685 | | | 3.46 | % | | $ | 662,377 | | | 2.93 | % | | $ | 3,544,687 | | | 2.14 | % | | $ | 6,432,709 | | | 2.69 | % | | $ | 10,694,458 | | | 2.53 | % |
_______________________________________
(1) Rates presented are weighted average rates. Rates on tax-exempt securities are contractual rates and are not presented on a tax-equivalent basis.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
| | | % of | | | | % of | | | | % of |
| Balance | | Total | | Balance | | Total | | Balance | | Total |
| (Dollars in thousands) | | |
Real estate mortgage: | | | | | | | | | | | |
Other commercial real estate | $ | 2,429,791 | | | 11 | % | | $ | 2,747,526 | | | 14 | % | | $ | 2,685,930 | | | 14 | % |
SBA program | 623,579 | | | 3 | % | | 599,788 | | | 3 | % | | 556,889 | | | 3 | % |
Hotel | 593,203 | | | 3 | % | | 571,917 | | | 3 | % | | 625,798 | | | 3 | % |
Healthcare real estate | 115,726 | | | — | % | | 177,440 | | | 1 | % | | 334,070 | | | 2 | % |
Total commercial real estate mortgage | 3,762,299 | | | 17 | % | | 4,096,671 | | | 21 | % | | 4,202,687 | | | 22 | % |
Income producing residential | 4,647,503 | | | 20 | % | | 3,718,457 | | | 20 | % | | 3,665,790 | | | 19 | % |
Other residential real estate | 2,768,918 | | | 12 | % | | 84,808 | | | — | % | | 104,270 | | | 1 | % |
Total income producing and other residential | | | | | | | | | | | |
real estate mortgage | 7,416,421 | | | 32 | % | | 3,803,265 | | | 20 | % | | 3,770,060 | | | 20 | % |
Total real estate mortgage | 11,178,720 | | | 49 | % | | 7,899,936 | | | 41 | % | | 7,972,747 | | | 42 | % |
Real estate construction and land: | | | | | | | | | | | |
Commercial | 832,591 | | | 4 | % | | 1,117,121 | | | 6 | % | | 1,082,368 | | | 6 | % |
Residential | 2,604,536 | | | 11 | % | | 2,243,160 | | | 12 | % | | 1,655,434 | | | 9 | % |
Total real estate construction and land (1) | 3,437,127 | | | 15 | % | | 3,360,281 | | | 18 | % | | 2,737,802 | | | 15 | % |
Total real estate | 14,615,847 | | | 64 | % | | 11,260,217 | | | 59 | % | | 10,710,549 | | | 57 | % |
Commercial: | | | | | | | | | | | |
Lender finance | 2,617,712 | | | 11 | % | | 2,095,963 | | | 11 | % | | 2,118,767 | | | 11 | % |
Equipment finance | 681,266 | | | 3 | % | | 700,042 | | | 4 | % | | 852,278 | | | 5 | % |
Premium finance | 586,267 | | | 3 | % | | 438,761 | | | 2 | % | | 467,469 | | | 2 | % |
Other asset-based | 190,232 | | | 1 | % | | 194,517 | | | 1 | % | | 309,893 | | | 2 | % |
Total asset-based | 4,075,477 | | | 18 | % | | 3,429,283 | | | 18 | % | | 3,748,407 | | | 20 | % |
Equity fund loans | 1,707,143 | | | 7 | % | | 1,032,718 | | | 5 | % | | 1,199,268 | | | 6 | % |
Venture lending | 613,450 | | | 3 | % | | 665,790 | | | 4 | % | | 980,154 | | | 6 | % |
Total venture capital | 2,320,593 | | | 10 | % | | 1,698,508 | | | 9 | % | | 2,179,422 | | | 12 | % |
Secured business loans | 486,088 | | | 2 | % | | 430,263 | | | 2 | % | | 583,300 | | | 3 | % |
Paycheck Protection Program | 156,699 | | | 1 | % | | 1,057,422 | | | 5 | % | | — | | | — | % |
Security monitoring | 89,597 | | | — | % | | 329,312 | | | 2 | % | | 619,260 | | | 3 | % |
Other lending | 739,597 | | | 3 | % | | 558,117 | | | 3 | % | | 565,107 | | | 3 | % |
Total other commercial | 1,471,981 | | | 6 | % | | 2,375,114 | | | 12 | % | | 1,767,667 | | | 9 | % |
Total commercial | 7,868,051 | | | 34 | % | | 7,502,905 | | | 39 | % | | 7,695,496 | | | 41 | % |
Consumer | 457,650 | | | 2 | % | | 320,255 | | | 2 | % | | 440,827 | | | 2 | % |
Total loans and leases held for investment, | | | | | | | | | | | |
net of deferred fees | $ | 22,941,548 | | | 100 | % | | $ | 19,083,377 | | | 100 | % | | $ | 18,846,872 | | | 100 | % |
________________________________
(1) Includes $151.8 million, $167.1 million, and $173.4 million, at December 31, 2021, 2020, and 2019 of land acquisition and development loans.
Our loan portfolio segments of real estate mortgage loans, real estate construction and land loans, and commercial loans comprised 49%, 15%, and 34% of our total loans and leases held for investment at December 31, 2021, compared to 41%, 18%, and 39% at December 31, 2020, respectively.
The changes during 2021 in the portfolio classes comprising these portfolio segments reflected the following:
•Commercial real estate mortgage loans decreased by 8% to $3.8 billion or 17% of total loans and leases held for investment at December 31, 2021 from $4.1 billion or 21% at December 31, 2020. The lower balance and composition ratio was attributable primarily to the balance of other commercial real estate loans declining by 12% to $2.4 billion at December 31, 2021 from $2.7 billion at December 31, 2020.
•Income producing and other residential real estate mortgage loans increased by 95% to $7.4 billion or 32% of total loans and leases held for investment at December 31, 2021 from $3.8 billion or 20% at December 31, 2020. The increase was attributable primarily to $2.4 billion of single-family residential mortgage loans purchased during 2021 and loans originated by Civic since its February 1, 2021 acquisition date. Such Civic-originated loans totaled $956.2 million at December 31, 2021 and included business-purpose loans secured by for-rent residential properties, short-term bridge loans, and multi-family loans.
•Commercial real estate construction and land loans decreased by 25% to $832.6 million or 4% of total loans and leases held for investment at December 31, 2021 from $1.1 billion or 6% at December 31, 2020.
•Residential real estate construction and land loans increased by 16% to $2.6 billion or 11% of total loans and leases held for investment at December 31, 2021 from $2.2 billion or 12% at December 31, 2020. The increase was due primarily to the business-purpose loans secured by non-owner-occupied residential properties undergoing renovation that were originated by Civic since its February 1, 2021 acquisition date which totaled $422.4 million at December 31, 2021.
•Asset-based loans and leases increased by 19% to $4.1 billion or 18% of total loans and leases held for investment at December 31, 2021 from $3.4 billion or 18% at December 31, 2020. The higher balance was attributable primarily to the balance of lender finance loans increasing by 25% to $2.6 billion at December 31, 2021 from $2.1 billion at December 31, 2020.
•Venture capital loans increased by 37% to $2.3 billion or 10% of total loans and leases held for investment at December 31, 2021 from $1.7 billion or 9% at December 31, 2020. The higher balance and composition ratio was attributable primarily to higher equity fund loans, offset partially by lower venture lending loans to venture-backed companies. Equity fund loans increased to $1.7 billion at December 31, 2021 from $1.0 billion at December 31, 2020. Venture lending loans decreased to $613.5 million at December 31, 2021 from $665.8 million at December 31, 2020.
•Other commercial loans decreased by 38% to $1.5 billion or 6% of total loans and leases held for investment at December 31, 2021 from $2.4 billion or 12% at December 31, 2020. The lower balance and composition ratio was attributable primarily to the balance of Paycheck Protection Program ("PPP") loans decreasing by 85% to $156.7 million at December 31, 2021 from $1.1 billion at December 31, 2020.
The following table presents the geographic composition of our real estate loans held for investment, net of deferred fees, by the top ten states and all other states combined (in the order presented for the current year-end) as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| | | % of | | | | % of |
Real Estate Loans by State | Balance | | Total | | Balance | | Total |
| (Dollars in thousands) |
California | $ | 8,916,633 | | | 61 | % | | $ | 6,942,768 | | | 62 | % |
Colorado | 721,343 | | | 5 | % | | 386,480 | | | 3 | % |
New York | 675,948 | | | 5 | % | | 716,329 | | | 6 | % |
Florida | 556,057 | | | 4 | % | | 598,167 | | | 5 | % |
Washington | 500,836 | | | 3 | % | | 413,014 | | | 4 | % |
Texas | 392,836 | | | 3 | % | | 263,731 | | | 2 | % |
Oregon | 375,223 | | | 3 | % | | 269,600 | | | 2 | % |
Nevada | 346,838 | | | 2 | % | | 195,663 | | | 2 | % |
Arizona | 253,289 | | | 2 | % | | 171,533 | | | 2 | % |
New Jersey | 214,087 | | | 1 | % | | 108,247 | | | 1 | % |
Total of 10 largest states | 12,953,090 | | | 89 | % | | 10,065,532 | | | 89 | % |
All other states | 1,662,757 | | | 11 | % | | 1,194,685 | | | 11 | % |
Total real estate loans held for investment, net of deferred fees | $ | 14,615,847 | | | 100 | % | | $ | 11,260,217 | | | 100 | % |
At December 31, 2021 and 2020, 61% and 62% 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. The increase in real estate loans in Colorado reflects the growth from opening our Denver branch in November 2019.
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) | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
Balance, beginning of year | $ | 19,083,377 | | | $ | 18,846,872 | | | $ | 17,957,713 | |
Additions: | | | | | |
Production | 9,054,767 | | | 4,243,538 | | | 4,863,288 | |
Disbursements | 5,952,158 | | | 5,159,912 | | | 5,092,219 | |
Total production and disbursements | 15,006,925 | | | 9,403,450 | | | 9,955,507 | |
Reductions: | | | | | |
Payoffs | (7,337,296) | | | (3,738,754) | | | (4,669,530) | |
Paydowns | (3,728,950) | | | (5,193,848) | | | (4,262,977) | |
Total payoffs and paydowns | (11,066,246) | | | (8,932,602) | | | (8,932,507) | |
Sales | (117,263) | | | (125,999) | | | (76,335) | |
Transfers to foreclosed assets | (1,062) | | | (14,755) | | | (120) | |
Charge-offs | (10,715) | | | (93,589) | | | (32,262) | |
Transfers to loans held for sale | (25,554) | | | — | | | (25,124) | |
Total reductions | (11,220,840) | | | (9,166,945) | | | (9,066,348) | |
Loans acquired through acquisition | 72,086 | | | — | | | — | |
Net increase | 3,858,171 | | | 236,505 | | | 889,159 | |
Balance, end of year | $ | 22,941,548 | | | $ | 19,083,377 | | | $ | 18,846,872 | |
| | | | | |
Weighted average rate on production (2) | 4.19 | % | | 3.57 | % | | 5.06 | % |
_______________________________________
(1) Includes direct financing leases but excludes equipment leased to others under operating leases.
(2) The weighted average rate on production presents contractual rates on a tax equivalent basis and does not include amortized fees. Amortized fees added approximately 38 basis points to loan yields in 2021, 25 basis points to loan yields in 2020, and 22 basis points to loan yields in 2019.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Due After | | | | | | |
| Due | | One Year | | Due After | | | | |
| Within | | Through | | Five to | | Due After | | |
December 31, 2021 | One Year | | Five Years | | 15 Years | | 15 Years | | Total |
| (In thousands) |
Real estate mortgage | $ | 1,210,137 | | | $ | 1,738,404 | | | $ | 1,702,726 | | | $ | 6,527,453 | | | $ | 11,178,720 | |
Real estate construction and land | 1,793,440 | | | 1,209,954 | | | 30,140 | | | 403,593 | | | 3,437,127 | |
Commercial | 2,549,356 | | | 4,209,232 | | | 921,124 | | | 188,339 | | | 7,868,051 | |
Consumer | 7,969 | | | 60,707 | | | 218,573 | | | 170,401 | | | 457,650 | |
Total loans and leases held for | | | | | | | | | |
investment, net of deferred fees | $ | 5,560,902 | | | $ | 7,218,297 | | | $ | 2,872,563 | | | $ | 7,289,786 | | | $ | 22,941,548 | |
At December 31, 2021, we had $5.6 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:
| | | | | | | | | | | | | | | | | |
| Due After One Year |
| Fixed | | Variable | | |
December 31, 2021 | Rate | | Rate | | Total |
| (In thousands) |
Real estate mortgage | $ | 3,730,256 | | | $ | 6,238,327 | | | $ | 9,968,583 | |
Real estate construction and land | 596,917 | | | 1,046,770 | | | 1,643,687 | |
Commercial | 1,794,426 | | | 3,524,269 | | | 5,318,695 | |
Consumer | 429,258 | | | 20,423 | | | 449,681 | |
Total loans and leases held for investment, net of deferred fees | $ | 6,550,857 | | | $ | 10,829,789 | | | $ | 17,380,646 | |
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
The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the consolidated balance sheets. The amortized cost basis of loans and leases does not include accrued interest receivable, which is included in "Other assets" on the consolidated balance sheets. The "Provision for credit losses" on the consolidated statement of earnings (loss) is a combination of the provision for loan and lease losses and the provision for unfunded loan commitments.
Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates.
For further information regarding the calculation of the allowance for credit losses on loans and leases held for investment using the CECL methodology, see Note 1(i). Nature of Operations and Summary of Significant Accounting Policies - Allowance for Credit Losses on Loans and Leases Held for Investment of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
In calculating our allowance for credit losses, we continued to consider the impacts of the ongoing COVID-19 pandemic on our estimation of expected credit losses given the changes in economic forecasts and assumptions along with the uncertainty related to the severity and duration of the economic consequences of the COVID-19 pandemic. Our methodology and framework along with the 4-quarter reasonable and supportable forecast period and 2-quarter reversion period have remained consistent since the implementation of CECL on January 1, 2020. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis.
In the fourth quarter of 2021, we used the Moody’s Consensus Forecast dated December 9, 2021 for the calculation of our quantitative component, which is consistent with each of the quarters in 2021. The key macroeconomic variables used improved from the prior quarter as a result of updating and advancing the forecast by a quarter which, when combined with improvements in other credit quality metrics such as a decline in classified and special mention loans, drove the decrease in the allowance for credit losses in the fourth quarter. This decrease was offset partially by provisions for net loan growth.
As part of our allowance for credit losses methodology, we consistently incorporate the use of qualitative factors in determining the overall allowance for credit losses to capture risks that may not be adequately reflected in our quantitative models. During the first quarter of 2021, we added qualitative components that were based on management’s assessment of various qualitative factors such as economic conditions and collateral dependency. These qualitative components were primarily related to certain loan portfolios including hotels, retail, and office properties that may react more slowly to the improvements in the general economic conditions. These sectors may see a slower economic recovery to pre-pandemic levels due to changes in consumer behavior such as less business travel due to more virtual meetings, more online shopping versus in person shopping, or the potential for more permanent shifts to remote or hybrid working arrangements. Additionally, small businesses in these sectors may face greater challenges once debt relief and PPP funding is exhausted. Throughout 2021, these qualitative adjustments were updated based on evolving forecasts of property values and the pace of recovery for small businesses.
The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of allowance for credit losses. As part of our allowance for credit losses process, sensitivity analyses are performed to assess the impact of how changing certain assumptions could impact the estimated allowance for credit losses. At times, these analyses can provide information to further assist management in making decisions on certain assumptions. We calculated alternative values for our December 31, 2021 ACL using two different forecast scenarios (Moody's Baseline and Moody's S5) and the calculated amounts for the quantitative component differed from the Consensus Forecast ranging from lower by 1.31% to higher by 2.60%. However, changing one assumption and not reassessing other assumptions used in the quantitative or qualitative process could yield results that are not reasonable or appropriate, hence all assumptions and information must be considered. From a sensitivity analysis perspective, changing key assumptions such as the macro-economic variable inputs from the economic forecasts, the reasonable and supportable forecast period, prepayment rates, loan segmentation, historical loss factors and/or periods, among others, would all change the outcome of the quantitative components of the allowance for credit losses. Those results would then need to be assessed from a qualitative perspective potentially requiring further adjustments to the qualitative component to arrive at a reasonable and appropriate allowance for credit losses.
The determination of the allowance for credit losses is complex and highly dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses as quantified in the allowance for credit losses considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan and lease composition, and relative credit risks known as of the balance sheet date.
Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's consolidated financial statements.
The following table presents information regarding the allowance for credit losses on loans and leases held for investment as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| December 31, |
Allowance for Credit Losses Data | 2021 | | 2020 | | 2019 (2) |
| (Dollars in thousands) |
Allowance for loan and lease losses | $ | 200,564 | | | $ | 348,181 | | | $ | 138,785 | |
Reserve for unfunded loan commitments | 73,071 | | | 85,571 | | | 35,861 | |
Total allowance for credit losses | $ | 273,635 | | | $ | 433,752 | | | $ | 174,646 | |
| | | | | |
Allowance for credit losses to loans and leases held for investment (1) | 1.19 | % | | 2.27 | % | | 0.93 | % |
Allowance for credit losses to nonaccrual loans and leases held for investment | 447.3 | % | | 475.8 | % | | 189.1 | % |
Nonaccrual loans and leases held for investment to loans and leases held for investment | 0.27 | % | | 0.48 | % | | 0.49 | % |
| | | | | |
_______________________________________
(1) Excluding PPP loans, the ACL ratio as of December 31, 2021 and 2020 was 1.20% and 2.41%.
(2) 2019 is pre-CECL adoption on January 1, 2020; the ACL ratio under CECL at adoption was 0.97%.
The following table presents the changes in our allowance for credit losses on loans and leases held for investment for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Allowance for Credit Losses Roll Forward | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
Balance, beginning of year (2) | $ | 433,752 | | | $ | 174,646 | | | $ | 169,333 | |
Cumulative effect of change in accounting | | | | | |
principle - CECL, as of January 1, 2020: | | | | | |
Allowance for loan and lease losses | — | | | 3,617 | | | — | |
Reserve for unfunded loan commitments | — | | | 3,710 | | | — | |
Total cumulative effect | — | | | 7,327 | | | — | |
Provision for credit losses: | | | | | |
(Reduction in) addition to allowance for loan and lease losses | (149,500) | | | 293,000 | | | 23,000 | |
(Reduction in) addition to reserve for unfunded loan commitments | (12,500) | | | 46,000 | | | (1,000) | |
Total provision for credit losses | (162,000) | | | 339,000 | | | 22,000 | |
Loans and leases charged off: | | | | | |
Real estate mortgage | (1,128) | | | (10,686) | | | (997) | |
Real estate construction and land | (782) | | | — | | | — | |
Commercial | (7,298) | | | (82,105) | | | (30,426) | |
Consumer | (1,507) | | | (798) | | | (839) | |
Total loans and leases charged off | (10,715) | | | (93,589) | | | (32,262) | |
Recoveries on loans charged off: | | | | | |
Real estate mortgage | 6,767 | | | 617 | | | 983 | |
Real estate construction and land | — | | | 21 | | | — | |
Commercial | 5,711 | | | 5,529 | | | 14,397 | |
Consumer | 120 | | | 201 | | | 195 | |
Total recoveries on loans charged off | 12,598 | | | 6,368 | | | 15,575 | |
Net recoveries (charge-offs) | 1,883 | | | (87,221) | | | (16,687) | |
| | | | | |
Balance, end of year | $ | 273,635 | | | $ | 433,752 | | | $ | 174,646 | |
| | | | | |
Net (recoveries) charge-offs to average loans and leases | (0.01) | % | | 0.45 | % | | 0.09 | % |
The following table presents net charge-offs, average loan balance, and ratio of net charge-offs to average loans by loan portfolio segment for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Ratio of Net Charge-offs to Average Loans | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
Real Estate Mortgage: | | | | | |
Net (recoveries) charge-offs | $ | (5,639) | | | $ | 10,069 | | | $ | 14 | |
Average loan balance | $ | 9,119,963 | | | $ | 7,942,883 | | | $ | 8,004,659 | |
Ratio of net (recoveries) charge-offs to average loans | (0.06) | % | | 0.13 | % | | — | % |
| | | | | |
Real Estate Construction and Land: | | | | | |
Net charge-offs (recoveries) | $ | 782 | | | $ | (21) | | | $ | — | |
Average loan balance | $ | 3,396,145 | | | $ | 3,148,522 | | | $ | 2,450,157 | |
Ratio of net charge-offs to average loans | 0.02 | % | | — | % | | — | % |
| | | | | |
Commercial: | | | | | |
Net charge-offs | $ | 1,587 | | | $ | 76,576 | | | $ | 16,029 | |
Average loan balance | $ | 7,310,253 | | | $ | 7,794,969 | | | $ | 7,595,463 | |
Ratio of net charge-offs to average loans | 0.02 | % | | 0.98 | % | | 0.21 | % |
| | | | | |
Consumer: | | | | | |
Net charge-offs | $ | 1,387 | | | $ | 597 | | | $ | 644 | |
Average loan balance | $ | 377,927 | | | $ | 392,904 | | | $ | 413,856 | |
Ratio of net charge-offs to average loans | 0.37 | % | | 0.15 | % | | 0.16 | % |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net recoveries in 2021 were $1.9 million compared to net charge-offs of $87.2 million in 2020. This improvement was due primarily to the real estate mortgage portfolio segment going from net charge-offs of $10.1 million in 2020 to net recoveries of $5.6 million in 2021 and the commercial portfolio segment going from net charge-offs of $76.6 million in 2020 to net charge-offs of $1.6 million in 2021. Real estate mortgage net charge-offs in 2020 included $8.2 million of gross charge-offs related to two retail properties that were adversely affected by pandemic-related business closures. Commercial net charge-offs in 2020 included $59.6 million related to five security monitoring loans and an $11.8 million gross charge-off on a single equipment finance loan. Net charge-offs in 2019 totaled $16.7 million and included $16.0 million of net charge-offs in the commercial portfolio segment which included an $11.8 million gross charge-off on a single asset-based loan.
The following table presents charge-offs by loan portfolio segment, class, and subclass for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Allowance for Credit Losses Charge-offs | 2021 | | 2020 | | 2019 |
| (In thousands) |
Real estate mortgage: | | | | | |
SBA program | $ | 622 | | | $ | 769 | | | $ | 897 | |
Hotel | 343 | | | 422 | | | — | |
Healthcare real estate | — | | | — | | | — | |
Other commercial real estate | — | | | 8,987 | | | 9 | |
Total commercial real estate mortgage | 965 | | | 10,178 | | | 906 | |
Income producing residential | 163 | | | — | | | — | |
Other residential real estate | — | | | 508 | | | 91 | |
Total income producing and other residential real estate mortgage | 163 | | | 508 | | | 91 | |
Total real estate mortgage | 1,128 | | | 10,686 | | | 997 | |
Real estate construction and land: | | | | | |
Commercial | 775 | | | — | | | — | |
Residential | 7 | | | — | | | — | |
Total real estate construction and land | 782 | | | — | | | — | |
Commercial: | | | | | |
Lender finance | 232 | | | — | | | — | |
Equipment finance | — | | | 11,817 | | | — | |
Other asset-based | — | | | — | | | 11,950 | |
Premium finance | — | | | — | | | 31 | |
Total asset-based | 232 | | | 11,817 | | | 11,981 | |
Equity fund loans | — | | | — | | | — | |
Venture lending | 620 | | | 6,819 | | | 9,369 | |
Total venture capital | 620 | | | 6,819 | | | 9,369 | |
Security monitoring | 2,892 | | | 59,605 | | | 1,707 | |
Secured business loans | 210 | | | — | | | 1,426 | |
Other lending | 3,344 | | | 3,864 | | | 5,943 | |
Total other commercial | 6,446 | | | 63,469 | | | 9,076 | |
Total commercial | 7,298 | | | 82,105 | | | 30,426 | |
Consumer | 1,507 | | | 798 | | | 839 | |
Total charge-offs | $ | 10,715 | | | $ | 93,589 | | | $ | 32,262 | |
Commercial real estate mortgage gross charge-offs decreased to $1.0 million for the year ended December 31, 2021 from $10.2 million for the year ended December 31, 2020. The 2020 amount included $8.2 million gross charge-offs related to two retail properties that were adversely affected by pandemic-related business closures.
Asset-based gross charge-offs decreased to $0.2 million for the year ended December 31, 2021 from $11.8 million for the year ended December 31, 2020. The 2020 amount included an $11.8 million gross charge-off in the equipment finance subclass related to a single loan.
Venture capital gross charge-offs decreased to $0.6 million for the year ended December 31, 2021 from $6.8 million for the year ended December 31, 2020. The 2020 amount included one loan for $6.5 million.
Other commercial gross charge-offs decreased to $6.4 million for the year ended December 31, 2021 from $63.5 million for the year ended December 31, 2020. The 2020 amount includes $59.6 million for five security monitoring loans, representing 64% of total gross charge-offs for 2020.
The following table presents recoveries by loan portfolio segment, class, and subclass for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Allowance for Credit Losses Recoveries | 2021 | | 2020 | | 2019 |
| (In thousands) |
Real estate mortgage: | | | | | |
SBA program | $ | 697 | | | $ | 168 | | | $ | 382 | |
Hotel | — | | | — | | | — | |
Healthcare real estate | — | | | — | | | — | |
Other commercial real estate | 5,384 | | | 121 | | | 162 | |
Total commercial real estate mortgage | 6,081 | | | 289 | | | 544 | |
Income producing residential | 28 | | | — | | | 276 | |
Other residential real estate | 658 | | | 328 | | | 163 | |
Total income producing and other residential real estate mortgage | 686 | | | 328 | | | 439 | |
Total real estate mortgage | 6,767 | | | 617 | | | 983 | |
Real estate construction and land: | | | | | |
Commercial | — | | | — | | | — | |
Residential | — | | | 21 | | | — | |
Total real estate construction and land | — | | | 21 | | | — | |
Commercial: | | | | | |
Lender finance | 3 | | | — | | | 6 | |
Equipment finance | 263 | | | 286 | | | 11 | |
Other asset-based | 453 | | | 422 | | | 1,416 | |
Premium finance | — | | | — | | | — | |
Total asset-based | 719 | | | 708 | | | 1,433 | |
Equity fund loans | — | | | — | | | — | |
Venture lending | 404 | | | 1,261 | | | 8,151 | |
Total venture capital | 404 | | | 1,261 | | | 8,151 | |
Security monitoring | — | | | 123 | | | 181 | |
Secured business loans | 2,402 | | | 374 | | | 2,877 | |
Other lending | 2,186 | | | 3,063 | | | 1,755 | |
Total other commercial | 4,588 | | | 3,560 | | | 4,813 | |
Total commercial | 5,711 | | | 5,529 | | | 14,397 | |
Consumer | 120 | | | 201 | | | 195 | |
Total recoveries | $ | 12,598 | | | $ | 6,368 | | | $ | 15,575 | |
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 |
| | | Real Estate | | | | | | |
| Real Estate | | Construction | | | | | | |
| Mortgage | | and Land | | Commercial | | Consumer | | Total |
| (Dollars in thousands) |
December 31, 2021 | | | | | | | | | |
Allowance for loan and lease losses | $ | 98,053 | | | $ | 45,079 | | | $ | 48,718 | | | $ | 8,714 | | | $ | 200,564 | |
% of loans to total loans | 49 | % | | 15 | % | | 34 | % | | 2 | % | | 100 | % |
December 31, 2020 | | | | | | | | | |
Allowance for loan and lease losses | $ | 138,342 | | | $ | 78,356 | | | $ | 126,403 | | | $ | 5,080 | | | $ | 348,181 | |
% of loans to total loans | 41 | % | | 18 | % | | 39 | % | | 2 | % | | 100 | % |
December 31, 2019 | | | | | | | | | |
Allowance for loan and lease losses | $ | 44,575 | | | $ | 30,544 | | | $ | 61,528 | | | $ | 2,138 | | | $ | 138,785 | |
% of loans to total loans | 42 | % | | 15 | % | | 41 | % | | 2 | % | | 100 | % |
The allowance for loan and lease losses attributable to real estate mortgage loans was $98.1 million and $138.3 million at December 31, 2021 and 2020. As ratios to real estate mortgage loans at those dates, these percentages were 0.88% and 1.75%. The decrease was due to a lower allowance for loan losses as a result of improvement in both the macroeconomic forecast variables used in the process to determine the allowance for credit losses and the loan portfolio credit quality metrics, and to a higher loan balance.
The allowance for loan and lease losses attributable to real estate construction and land loans was $45.1 million and $78.4 million at December 31, 2021 and 2020. As ratios to real estate construction and land loans at those dates, these percentages were 1.31% and 2.33%. The decrease was due to a lower allowance for loan losses as a result of improvement in both the macroeconomic forecast variables used in the process to determine the allowance for credit losses and the loan portfolio credit quality metrics, and to a higher loan balance.
The allowance for loan and lease losses attributable to commercial loans and leases was $48.7 million and $126.4 million at December 31, 2021 and 2020. As ratios to commercial loans and leases at those dates, these percentages were 0.62% and 1.68%. The decrease was due to a lower allowance for loan losses as a result of improvement in both the macroeconomic forecast variables used in the process to determine the allowance for credit losses and the loan portfolio credit quality metrics, and to a higher loan balance.
Deposits
The following table presents a summary of our average deposit amounts and average rates paid during the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | Weighted | | | | Weighted | | | | Weighted |
| Average | | Average | | Average | | Average | | Average | | Average |
Deposit Composition | Balance | | Rate | | Balance | | Rate | | Balance | | Rate |
| (Dollars in thousands) |
Interest checking | $ | 7,198,646 | | | 0.12 | % | | $ | 4,394,742 | | | 0.29 | % | | $ | 3,406,218 | | | 1.23 | % |
Money market | 8,843,122 | | | 0.15 | % | | 6,547,027 | | | 0.29 | % | | 5,139,623 | | | 1.10 | % |
Savings | 606,741 | | | 0.02 | % | | 538,985 | | | 0.05 | % | | 525,809 | | | 0.17 | % |
Time | 1,471,963 | | | 0.40 | % | | 2,169,324 | | | 1.26 | % | | 2,641,135 | | | 1.86 | % |
Total interest-bearing deposits | 18,120,472 | | | 0.15 | % | | 13,650,078 | | | 0.44 | % | | 11,712,785 | | | 1.27 | % |
Noninterest-bearing demand | 12,110,193 | | | — | | | 8,517,281 | | | — | | | 7,537,172 | | | — | |
Total deposits | $ | 30,230,665 | | | 0.09 | % | | $ | 22,167,359 | | | 0.27 | % | | $ | 19,249,957 | | | 0.77 | % |
The following table presents the balance of each major category of deposits as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | |
| 2021 | | 2020 | | 2019 | |
| | | % of | | | | % of | | | | % of | |
Deposit Composition | Balance | | Total | | Balance | | Total | | Balance | | Total | |
| (Dollars in thousands) |
Noninterest-bearing demand | $ | 14,543,133 | | | 41 | % | | $ | 9,193,827 | | | 37 | % | | $ | 7,243,298 | | | 38 | % | |
Interest checking | 7,319,898 | | | 21 | % | | 5,974,910 | | | 24 | % | | 3,753,978 | | | 19 | % | |
Money market | 10,241,265 | | | 29 | % | | 6,532,917 | | | 26 | % | | 4,690,420 | | | 24 | % | |
Savings | 630,653 | | | 2 | % | | 562,826 | | | 2 | % | | 499,591 | | | 3 | % | |
Total core deposits | 32,734,949 | | | 93 | % | | 22,264,480 | | | 89 | % | | 16,187,287 | | | 84 | % | |
Non-core non-maturity deposits | 889,976 | | | 3 | % | | 1,149,467 | | | 5 | % | | 496,407 | | | 3 | % | |
Total non-maturity deposits | 33,624,925 | | | 96 | % | | 23,413,947 | | | 94 | % | | 16,683,694 | | | 87 | % | |
Time deposits $250,000 and under | 885,938 | | | 3 | % | | 994,197 | | | 4 | % | | 2,065,733 | | | 11 | % | |
Time deposits over $250,000 | 486,894 | | | 1 | % | | 532,573 | | | 2 | % | | 483,609 | | | 2 | % | |
Total time deposits | 1,372,832 | | | 4 | % | | 1,526,770 | | | 6 | % | | 2,549,342 | | | 13 | % | |
Total deposits | $ | 34,997,757 | | | 100 | % | | $ | 24,940,717 | | | 100 | % | | $ | 19,233,036 | | | 100 | % | |
| | | | | | | | | | | | |
Estimated uninsured deposits | $ | 22,479,674 | | | | | $ | 15,241,530 | | | | | $ | 11,436,515 | | | | |
During 2021, total deposits increased by $10.1 billion, or 40%, to $35.0 billion at December 31, 2021, due primarily to an increase of $10.5 billion in core deposits, offset partially by decreases of $259.5 million in non-core non-maturity deposits and $153.9 million in time deposits. The increase in core deposits was due primarily to continued strong deposit growth from our venture banking and community banking clients and the acquisition of the HOA Business, which added $4.1 billion of core deposits. The increase in core deposits by component was due to increases of $5.3 billion in noninterest-bearing demand deposits, $1.3 billion in interest checking deposits, $3.7 billion in money market deposits, and $67.8 million in savings deposits. At December 31, 2021, core deposits totaled $32.7 billion, or 93% of total deposits, including $14.5 billion of noninterest-bearing demand deposits, or 41% of total deposits. Our deposit base is also diversified by client type. As of December 31, 2021, no individual depositor represented more than 1.7% of our total deposits, and our top ten depositors represented 11.2% of our total deposits.
The following table summarizes the maturities of time deposits as of the date indicated:
| | | | | | | | | | | | | | | | | |
| Time Deposits |
| $250,000 | | Over | | |
December 31, 2021 | and Under | | $250,000 | | Total |
| (In thousands) |
Maturities: | | | | | |
Due in three months or less | $ | 274,030 | | | $ | 222,816 | | | $ | 496,846 | |
Due in over three months through six months | 183,369 | | | 164,468 | | | 347,837 | |
Due in over six months through 12 months | 205,770 | | | 86,416 | | | 292,186 | |
Total due within 12 months | 663,169 | | | 473,700 | | | 1,136,869 | |
Due in over 12 months through 24 months | 110,917 | | | 10,824 | | | 121,741 | |
Due in over 24 months | 111,852 | | | 2,370 | | | 114,222 | |
Total due over 12 months | 222,769 | | | 13,194 | | | 235,963 | |
Total | $ | 885,938 | | | $ | 486,894 | | | $ | 1,372,832 | |
The following table summarizes the maturities of estimated uninsured time deposits as of the date indicated:
| | | | | | | | | |
| | | | | Uninsured |
| | | | | Time |
December 31, 2021 | | | | | Deposits |
| | | | | (In thousands) |
Maturities: | | | | | |
Due in three months or less | | | | | $ | 183,939 | |
Due in over three months through six months | | | | | 145,718 | |
Due in over six months through 12 months | | | | | 50,862 | |
Total due within 12 months | | | | | 380,519 | |
| | | | | |
| | | | | |
Total due over 12 months | | | | | 999 | |
Total | | | | | $ | 381,518 | |
Client Investment Funds
In addition to deposit products, we also offer select clients non-depository cash investment options through PWAM, our SEC registered investment adviser subsidiary, and third-party money market sweep products. PWAM provides customized investment advisory and asset management solutions. At December 31, 2021, total off-balance sheet client investment funds were $1.4 billion of which $0.9 billion was managed by PWAM. At December 31, 2020, total off-balance sheet client investment funds were $1.3 billion, of which $1.0 billion was managed by PWAM.
Borrowings and Subordinated Debt
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, 2021 was $4.0 billion, of which all was available on that date. The maximum amount that the Bank could borrow under its secured credit line with the FRBSF at December 31, 2021 was $1.4 billion, all of which was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $6.2 billion of certain qualifying loans. The FRBSF secured credit line was collateralized by liens on $1.8 billion of qualifying loans. In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit for the borrowing of overnight funds, subject to availability, of $112.0 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of December 31, 2021, there was no balance outstanding related to these unsecured lines 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, 2021, the Bank had no outstanding borrowings through the AFX.
The following table presents information on our borrowings as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
| | | Weighted | | | | Weighted | | | | Weighted |
| | | Average | | | | Average | | | | Average |
Borrowings | Balance | | Rate | | Balance | | Rate | | Balance | | Rate |
| (Dollars in thousands) |
FHLB secured short-term advances | $ | — | | | — | % | | $ | 5,000 | | | — | % | | $ | 1,318,000 | | | 1.66 | % |
FHLB unsecured overnight advance | — | | | — | % | | — | | | — | % | | 141,000 | | | 1.56 | % |
AFX short-term borrowings | — | | | — | % | | — | | | — | % | | 300,000 | | | 1.61 | % |
Non‑recourse debt | — | | | — | % | | — | | | — | % | | 8 | | | 7.50 | % |
Total borrowings | $ | — | | | — | % | | $ | 5,000 | | | — | % | | $ | 1,759,008 | | | 1.64 | % |
Averages for the year: | | | | | | | | | | | |
Total borrowings | $ | 231,099 | | | 0.27 | % | | $ | 825,681 | | | 0.99 | % | | $ | 1,180,164 | | | 2.28 | % |
| | | | | | | | | | | |
The following table presents summary information on our subordinated debt as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
| | | Weighted | | | | Weighted | | | | Weighted |
| | | Average | | | | Average | | | | Average |
Subordinated Debt | Balance | | Rate | | Balance | | Rate | | Balance | | Rate |
| (Dollars in thousands) |
Gross subordinated debt: | | | | | | | | | | | |
With no unamortized acquisition discount | | | | | | | | | | | |
or unamortized issuance costs | $ | 135,055 | | | 2.58 | % | | $ | 135,055 | | | 2.63 | % | | $ | 135,055 | | | 4.33 | % |
With unamortized acquisition discount | | | | | | | | | | | |
or unamortized issuance costs | 806,039 | | | 2.65 | % | | 408,220 | | | 2.11 | % | | 405,635 | | | 3.72 | % |
Total gross subordinated debt | 941,094 | | | 2.64 | % | | 543,275 | | | 2.24 | % | | 540,690 | | | 3.87 | % |
Unamortized issuance costs | (5,366) | | | | | — | | | | | — | | | |
Unamortized acquisition discount | (72,445) | | | | | (77,463) | | | | | (82,481) | | | |
Net subordinated debt | $ | 863,283 | | | | | $ | 465,812 | | | | | $ | 458,209 | | | |
Averages for the year: | | | | | | | | | | | |
Net subordinated debt | $ | 733,163 | | | 3.61 | % | | $ | 461,059 | | | 4.58 | % | | $ | 455,537 | | | 6.55 | % |
The subordinated debt is variable rate and based on 3-month LIBOR plus a margin, except for one which is based on 3-month EURIBOR plus a margin and $400 million of subordinated notes issued on April 30, 2021 that is fixed rate at 3.25% until May 1, 2026 when it changes to floating rate and resets quarterly at a benchmark rate plus 252 basis points. 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 interest rate on the LIBOR-based subordinated debt will default to the last published or determined rate of LIBOR, and for Trust CS 2006-4, the Base Rate, defined as the greater of Prime and the federal funds rate, upon cessation of LIBOR and effectively converting these instruments to fixed rate, if not modified prior to June 30, 2023. The subordinated debt is all long-term, with maturities ranging from May 2031 to July 2037.
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:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
Nonaccrual loans and leases held for investment | $ | 61,174 | | | $ | 91,163 | | | $ | 92,353 | |
Accruing loan contractually past due 90 days or more | — | | | — | | | — | |
Foreclosed assets, net | 12,843 | | | 14,027 | | | 440 | |
Total nonperforming assets | $ | 74,017 | | | $ | 105,190 | | | $ | 92,793 | |
| | | | | |
Performing TDRs held for investment | $ | 24,430 | | | $ | 14,254 | | | $ | 12,257 | |
Classified loans and leases held for investment | $ | 116,104 | | | $ | 265,262 | | | $ | 175,912 | |
Nonaccrual loans and leases held for investment to | | | | | |
loans and leases held for investment | 0.27 | % | | 0.48 | % | | 0.49 | % |
Nonperforming assets to loans and leases held for investment | | | | | |
and foreclosed assets, net | 0.32 | % | | 0.55 | % | | 0.49 | % |
Allowance for credit losses to nonaccrual loans and leases | | | | | |
held for investment | 447.31 | % | | 475.80 | % | | 189.11 | % |
Classified loans and leases held for investment to | | | | | |
loans and leases held for investment | 0.51 | % | | 1.39 | % | | 0.93 | % |
Nonaccrual Loans and Leases Held for Investment
During 2021, nonaccrual loans and leases held for investment decreased by $30.0 million to $61.2 million at December 31, 2021 due mainly to the sale of one security monitoring loan for $25.6 million, charge-offs of $7.9 million, transfers to accrual status of $7.0 million, and principal payments and other reductions of $59.0 million, offset partially by $69.4 million in additions. As of December 31, 2021, the Company's three largest loan relationships on nonaccrual status had an aggregate carrying value of $14.2 million and represented 23% of total nonaccrual loans and leases.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 | | Increase (Decrease) |
| | | Accruing | | | | Accruing | | | | Accruing |
| | | and 30-89 | | | | and 30-89 | | | | and 30-89 |
| | | Days Past | | | | Days Past | | | | Days Past |
| Nonaccrual | | Due | | Nonaccrual | | Due | | Nonaccrual | | Due |
| (Dollars in thousands) |
Real estate mortgage: | | | | | | | | | | | |
Commercial | $ | 27,540 | | | $ | 2,165 | | | $ | 43,731 | | | $ | 3,636 | | | $ | (16,191) | | | $ | (1,471) | |
Income producing and other residential | 12,292 | | | 39,929 | | | 1,826 | | | 600 | | | 10,466 | | | 39,329 | |
Total real estate mortgage | 39,832 | | | 42,094 | | | 45,557 | | | 4,236 | | | (5,725) | | | 37,858 | |
Real estate construction and land: | | | | | | | | | | | |
Commercial | — | | | — | | | 315 | | | — | | | (315) | | | — | |
Residential | 4,715 | | | 5,031 | | | — | | | 759 | | | 4,715 | | | 4,272 | |
Total real estate construction and land | 4,715 | | | 5,031 | | | 315 | | | 759 | | | 4,400 | | | 4,272 | |
Commercial: | | | | | | | | | | | |
Asset-based | 1,464 | | | — | | | 2,679 | | | — | | | (1,215) | | | — | |
Venture capital | 2,799 | | | — | | | 1,980 | | | 540 | | | 819 | | | (540) | |
Other commercial | 11,950 | | | 630 | | | 40,243 | | | 2,078 | | | (28,293) | | | (1,448) | |
Total commercial | 16,213 | | | 630 | | | 44,902 | | | 2,618 | | | (28,689) | | | (1,988) | |
Consumer | 414 | | | 1,004 | | | 389 | | | 1,260 | | | 25 | | | (256) | |
Total held for investment | $ | 61,174 | | | $ | 48,759 | | | $ | 91,163 | | | $ | 8,873 | | | $ | (29,989) | | | $ | 39,886 | |
During 2021, loans accruing and 30-89 days past due increased by $39.9 million to $48.8 million at December 31, 2021 due primarily to a $39.3 million increase in past due loans in the income producing and other residential loan portfolio class, which was attributable mostly to increases of $20.0 million in past due purchased single-family residential mortgage loans and $16.1 million in past due business-purpose loans secured by for-rent residential properties and short-term bridge loans originated by Civic. The delinquency related to the purchased single-family residential mortgage loans was attributable to delayed payment applications stemming from servicing being transferred following our purchase of these loans.
Foreclosed Assets
The following table presents foreclosed assets (primarily OREO) by property type as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| December 31, |
Property Type | 2021 | | 2020 | | 2019 |
| (In thousands) |
Commercial real estate | $ | 12,594 | | | $ | 12,979 | | | $ | 221 | |
Construction and land development | — | | | 219 | | | 219 | |
| | | | | |
| | | | | |
Total OREO, net | 12,594 | | | 13,198 | | | 440 | |
Other foreclosed assets | 249 | | | 829 | | | — | |
Total foreclosed assets | $ | 12,843 | | | $ | 14,027 | | | $ | 440 | |
During 2021, foreclosed assets decreased by $1.2 million to $12.8 million at December 31, 2021 due to sales of $2.2 million, offset partially by additions of $1.1 million.
Performing TDRs Held for Investment
The following table presents our performing TDRs held for investment by loan portfolio segment as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
| | | Number | | | | Number | | | | Number |
| | | of | | | | of | | | | of |
Performing TDRs | Balance | | Loans | | Balance | | Loans | | Balance | | Loans |
| (Dollars in thousands) |
Real estate mortgage | $ | 6,204 | | | 18 | | | $ | 6,631 | | | 20 | | | $ | 10,165 | | | 22 | |
Real estate construction and land | 1,428 | | | 1 | | | 1,451 | | | 1 | | | 1,470 | | | 1 | |
Commercial | 16,773 | | | 24 | | | 6,146 | | | 21 | | | 550 | | | 12 | |
Consumer | 25 | | | 1 | | | 26 | | | 1 | | | 72 | | | 2 | |
Total performing TDRs held for investment | $ | 24,430 | | | 44 | | | $ | 14,254 | | | 43 | | | $ | 12,257 | | | 37 | |
| | | | | | | | | | | |
During 2021, performing TDRs held for investment increased by $10.2 million to $24.4 million at December 31, 2021 due primarily to transfers from nonaccrual status to performing TDRs of $18.2 million and additions of $13.2 million, offset partially by transfers of performing TDRs to nonaccrual status of $8.0 million and principal payments and other reductions of $13.2 million.
Classified and Special Mention Loans and Leases Held for Investment
The following table presents the credit risk ratings of our loans and leases held for investment, net of deferred fees, as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| December 31, |
Loan and Lease Credit Risk Ratings | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
Pass | $ | 22,433,833 | | | $ | 18,096,830 | | | $ | 18,348,004 | |
Special mention | 391,611 | | | 721,285 | | | 322,956 | |
Classified | 116,104 | | | 265,262 | | | 175,912 | |
Total loans and leases held for investment, net of deferred fees | $ | 22,941,548 | | | $ | 19,083,377 | | | $ | 18,846,872 | |
| | | | | |
| | | | | |
| | | | | |
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. Both special mention and classified loans had significant increases in 2020 primarily as a result of proactively downgrading loans and leases in the first quarter of 2020 due to the uncertainty surrounding the long-term economic effects of the COVID-19 pandemic. A high percentage of these downgrades were in industries more acutely impacted by the COVID-19 pandemic such as hotels, commercial aviation, and retail.
During 2021, as economic conditions improved, classified loans and leases decreased by $149.2 million to $116.1 million at December 31, 2021 due mainly to decreases of $65.9 million in other commercial classified loans, $42.6 million in commercial real estate construction and land classified loans, $29.3 million in commercial real estate mortgage classified loans, and $23.3 million in asset-based classified loans and leases, offset partially by an increase of $8.9 million in income producing and other residential real estate mortgage classified loans. Classified loans and leases peaked in the second quarter of 2020 at $293.2 million.
During 2021, as economic conditions improved, special mention loans and leases decreased by $329.7 million to $391.6 million at December 31, 2021 due primarily to decreases of $103.3 million in venture capital special mention loans, $75.0 million in asset-based special mention loans and leases, $70.7 million in commercial real estate mortgage special mention loans, $41.5 million in income producing and other residential special mention loans, and $39.9 million in commercial real estate construction and land special mention loans. Special mention loans and leases peaked in the first quarter of 2020 at $898.7 million in conjunction with our initial downgrades at the onset of the pandemic.
The following table presents the classified and special mention credit risk rating categories for loans and leases held for investment, net of deferred fees, by loan portfolio segment and class and the related net changes as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | December 31, 2020 | | Increase (Decrease) |
| | | Special | | | | Special | | | | Special |
| Classified | | Mention | | Classified | | Mention | | Classified | | Mention |
| (In thousands) |
Real estate mortgage: | | | | | | | | | | | |
Commercial | $ | 62,206 | | | $ | 191,809 | | | $ | 91,543 | | | $ | 262,462 | | | $ | (29,337) | | | $ | (70,653) | |
Income producing and other residential | 17,700 | | | 19,848 | | | 8,767 | | | 61,384 | | | 8,933 | | | (41,536) | |
Total real estate mortgage | 79,906 | | | 211,657 | | | 100,310 | | | 323,846 | | | (20,404) | | | (112,189) | |
Real estate construction and land: | | | | | | | | | | | |
Commercial | — | | | 67,727 | | | 42,558 | | | 107,592 | | | (42,558) | | | (39,865) | |
Residential | 4,715 | | | 1,720 | | | — | | | 759 | | | 4,715 | | | 961 | |
Total real estate construction and land | 4,715 | | | 69,447 | | | 42,558 | | | 108,351 | | | (37,843) | | | (38,904) | |
Commercial: | | | | | | | | | | | |
Asset-based | 4,591 | | | 78,305 | | | 27,867 | | | 153,301 | | | (23,276) | | | (74,996) | |
Venture capital | 4,794 | | | 14,833 | | | 6,508 | | | 118,125 | | | (1,714) | | | (103,292) | |
Other commercial | 21,659 | | | 15,528 | | | 87,557 | | | 14,930 | | | (65,898) | | | 598 | |
Total commercial | 31,044 | | | 108,666 | | | 121,932 | | | 286,356 | | | (90,888) | | | (177,690) | |
Consumer | 439 | | | 1,841 | | | 462 | | | 2,732 | | | (23) | | | (891) | |
Total | $ | 116,104 | | | $ | 391,611 | | | $ | 265,262 | | | $ | 721,285 | | | $ | (149,158) | | | $ | (329,674) | |
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, 2021, banks considered to be “well capitalized” must maintain a minimum Tier 1 leverage ratio of 5.00%, a minimum common equity Tier 1 risk-based capital ratio of 6.50%, a minimum Tier 1 risk-based capital ratio of 8.00%, and a minimum total risk-based capital ratio of 10.00%.
Basel III currently requires all banking organizations to maintain a 2.50% capital conservation buffer above the minimum risk-based capital requirements to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. Effective January 1, 2019, the common equity Tier 1, Tier 1, and total capital ratio minimums inclusive of the capital conservation buffer were 7.00%, 8.50%, and 10.50%. At December 31, 2021, the Company and Bank were in compliance with the capital conservation buffer requirements.
The Company and Bank elected the CECL 5-year regulatory transition guidance for calculating regulatory capital ratios and the December 31, 2021 ratios include this election. This regulatory guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through December 31, 2022. This cumulative amount will then be phased out of regulatory capital over the next three years from 2023 to 2025. The add-back as of December 31, 2021 ranged from 0 basis points to 10 basis points for the capital ratios below.
In the third quarter of 2021, approximately $131.0 million of trust preferred securities were reclassified from Tier II capital to Tier I capital due to a reassessment of the Basel III implementation rule that permitted the grandfathering of certain trust preferred securities as Tier I capital. Prior periods were not required to be revised for this change.
The following tables present a comparison of our actual capital ratios to the minimum required ratios and well capitalized ratios as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Minimum Required |
| | | For Capital | | For Well | | For Capital |
| | | Adequacy | | Capitalized | | Conservation |
| Actual | | Purposes | | Classification | | Buffer |
December 31, 2021 | | | | | | | |
PacWest Bancorp Consolidated | | | | | | | |
Tier 1 leverage capital ratio | 6.84% | | 4.00% | | N/A | | N/A |
CET1 capital ratio | 8.86% | | 4.50% | | N/A | | 7.00% |
Tier 1 capital ratio | 9.32% | | 6.00% | | N/A | | 8.50% |
Total capital ratio | 12.69% | | 8.00% | | N/A | | 10.50% |
| | | | | | | |
Pacific Western Bank | | | | | | | |
Tier 1 leverage capital ratio | 7.00% | | 4.00% | | 5.00% | | N/A |
CET1 capital ratio | 9.56% | | 4.50% | | 6.50% | | 7.00% |
Tier 1 capital ratio | 9.56% | | 6.00% | | 8.00% | | 8.50% |
Total capital ratio | 11.80% | | 8.00% | | 10.00% | | 10.50% |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Minimum Required |
| | | For Capital | | For Well | | For Capital |
| | | Adequacy | | Capitalized | | Conservation |
| Actual | | Purposes | | Classification | | Buffer |
December 31, 2020 | | | | | | | |
PacWest Bancorp Consolidated | | | | | | | |
Tier 1 leverage capital ratio | 8.55% | | 4.00% | | N/A | | N/A |
CET1 capital ratio | 10.53% | | 4.50% | | N/A | | 7.00% |
Tier 1 capital ratio | 10.53% | | 6.00% | | N/A | | 8.50% |
Total capital ratio | 13.76% | | 8.00% | | N/A | | 10.50% |
| | | | | | | |
Pacific Western Bank | | | | | | | |
Tier 1 leverage capital ratio | 9.53% | | 4.00% | | 5.00% | | N/A |
CET1 capital ratio | 11.73% | | 4.50% | | 6.50% | | 7.00% |
Tier 1 capital ratio | 11.73% | | 6.00% | | 8.00% | | 8.50% |
Total capital ratio | 12.99% | | 8.00% | | 10.00% | | 10.50% |
Subordinated Debt
We issued or assumed through mergers subordinated debt to trusts that were established by us or entities we acquired, which, in turn, issued trust preferred securities. On April 30, 2021, the Bank completed the sale of $400 million aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due May 1, 2031. For further information, see Note 12. Borrowings and Subordinated Debt in the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
The carrying value of subordinated debt totaled $863.3 million at December 31, 2021. At December 31, 2021, $131.0 million of the trust preferred securities were included in the Company's Tier I capital and $718.2 million were included in Tier II capital. For a more detailed discussion of our subordinated debt, see "Item 1: Business - Supervision and Regulation - Capital Requirements."
Dividends on Common Stock and Interest on Subordinated Debt
As a bank holding company, PacWest is required to notify and receive approval from the FRB prior to declaring and paying a dividend to stockholders during any period in which quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. Interest payments made on subordinated debt are considered dividend payments under FRB regulations. We may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. Given the impact of the goodwill impairment charge on net earnings in the first quarter of 2020, we were required to receive approval from the FRB prior to declaring a dividend from March 31, 2020 through March 31, 2021, but are no longer required to obtain such approval.
Liquidity
Liquidity Management
The goals of our liquidity management are to ensure the ability of the Company to meet its financial commitments when contractually due and to respond to other demands for funds such as the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers who have unfunded commitments. We have an Executive Management Asset/Liability Management Committee ("Executive ALM Committee") that is comprised of members of senior management and is responsible for managing commitments to meet the needs of customers while achieving our financial objectives. Our Executive ALM Committee meets regularly to review funding capacities, current and forecasted loan demand, and investment opportunities.
We manage our liquidity by maintaining pools of liquid assets on-balance sheet, consisting of cash and due from banks, interest-earning deposits in other financial institutions, and unpledged securities available-for-sale, which we refer to as our primary liquidity. We also maintain available borrowing capacity under secured credit lines with the FHLB and the FRBSF, which we refer to as our secondary liquidity.
As a member of the FHLB, the Bank had secured borrowing capacity with the FHLB of $4.0 billion at December 31, 2021, of which all was available on that date. The FHLB secured credit line was collateralized by a blanket lien on $6.2 billion of certain qualifying loans. The Bank also had secured borrowing capacity with the FRBSF of $1.4 billion at December 31, 2021, all of which was available on that date. The FRBSF secured credit line was collateralized by liens on $1.8 billion of qualifying loans.
In addition to its secured lines of credit, the Bank also maintains unsecured lines of credit for the purpose of borrowing overnight funds, subject to availability, of $112.0 million with the FHLB and $180.0 million in the aggregate with several correspondent banks. As of December 31, 2021, there was no balance outstanding related to these unsecured lines 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, 2021, the Bank had borrowed nothing through the AFX.
The following tables provide a summary of the Bank’s primary and secondary liquidity levels as of the dates indicated:
| | | | | | | | | | | | | | | | | |
| December 31, |
Primary Liquidity - On-Balance Sheet | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
Cash and due from banks | $ | 112,548 | | | $ | 150,464 | | | $ | 172,585 | |
Interest-earning deposits in financial institutions | 3,944,686 | | | 3,010,197 | | | 465,039 | |
Securities available-for-sale | 10,694,458 | | | 5,235,591 | | | 3,797,187 | |
Less: pledged securities | (532,418) | | | (449,330) | | | (486,200) | |
Total primary liquidity | $ | 14,219,274 | | | $ | 7,946,922 | | | $ | 3,948,611 | |
| | | | | |
Ratio of primary liquidity to total deposits | 40.6 | % | | 31.9 | % | | 20.5 | % |
| | | | | | | | | | | | | | | | | |
Secondary Liquidity - Off-Balance Sheet | December 31, |
Available Secured Borrowing Capacity | 2021 | | 2020 | | 2019 |
| (In thousands) |
Total secured borrowing capacity with the FHLB | $ | 3,976,465 | | | $ | 3,330,715 | | | $ | 4,229,788 | |
Less: secured advances outstanding | — | | | (5,000) | | | (1,318,000) | |
Available secured borrowing capacity with the FHLB | 3,976,465 | | | 3,325,715 | | | 2,911,788 | |
Available secured borrowing capacity with the FRBSF | 1,380,191 | | | 1,409,452 | | | 1,988,028 | |
Total secondary liquidity | $ | 5,356,656 | | | $ | 4,735,167 | | | $ | 4,899,816 | |
During 2021, the Company's primary liquidity increased by $6.3 billion to $14.2 billion at December 31, 2021 due mainly to a $5.5 billion increase in securities available-for-sale and a $934.5 million increase in interest-earning deposits in financial institutions, offset partially by an $83.1 million increase in pledged securities. During 2021, the Company's secondary liquidity increased by $621.5 million to $5.4 billion at December 31, 2021 due mostly to a $650.8 million increase in available secured borrowing capacity with the FHLB, offset partially by a $29.3 million decrease in available borrowing capacity on the secured credit line with the FRBSF. The $650.8 million increase in available secured borrowing capacity with the FHLB resulted primarily from a $645.8 million increase in the borrowing capacity related to pledged loans and a $5.0 million decrease in the amount borrowed from the secured borrowing line with the FHLB.
In addition to our primary liquidity, we generate liquidity from cash flows from our loan and securities portfolios and from our large base of core deposits, defined as noninterest-bearing demand, interest checking, savings, and non-brokered money market accounts. At December 31, 2021, core deposits totaled $32.7 billion and represented 93% of the Company's total deposits. Core deposits are normally less volatile, often with customer relationships tied to other products offered by the Bank promoting long-standing relationships and stable funding sources. See "- Balance Sheet Analysis - Deposits" for additional information and detail of our core deposits.
Our deposit balances may decrease if customers withdraw funds from the Bank. In order to address the Bank’s liquidity risk from fluctuating deposit balances, the Bank maintains adequate levels of available liquidity on and off the balance sheet.
We use brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At December 31, 2021, brokered deposits totaled $1.1 billion, consisting primarily of $890.0 million of non-maturity brokered accounts and $195.7 million of brokered time deposits. At December 31, 2020, brokered deposits totaled $1.3 billion, consisting mainly of $1.1 billion of non-maturity brokered accounts and $195.7 million of brokered time deposits.
Our liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Liquidity Buffer Coverage Ratio (the ratio of cash and unpledged securities to the estimated 30 day cash outflow in a defined stress scenario), Liquidity Stress Test Survival Horizon (the number of days that the Bank’s liquidity buffer plus available secured borrowing capacity is sufficient to offset cumulative cash outflow in a defined stress scenario), Loan to Funding Ratio (measurement of gross loans net of fees divided by deposits plus borrowings), Wholesale Funding Ratio (measurement of wholesale funding divided by interest-earning assets), and other guidelines developed for measuring and maintaining liquidity. At December 31, 2021, the Bank was in compliance with all established liquidity guidelines.
Holding Company Liquidity
PacWest acts a source of financial strength for the Bank which can also include being a source of liquidity. The primary sources of liquidity for the holding company include dividends from the Bank, intercompany tax payments from the Bank, and PacWest's ability to raise capital, issue subordinated debt, and secure outside borrowings. PacWest's ability to obtain funds for the payment of dividends to our stockholders, the repurchase of shares of common stock, and other cash requirements is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations that limit its ability to transfer funds to the holding company through intercompany loans, advances, or cash dividends. PacWest's ability to pay dividends is also subject to the restrictions set forth in Delaware law, by the FRB, and by certain covenants contained in our subordinated debt. Approval by the FRB is required prior to our declaring and paying a cash dividend during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. PacWest may not pay a dividend if the FRB objects or until such time as we receive approval from the FRB or we no longer need to provide notice under applicable regulations. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, now or in the future, from paying dividends. Due to the impact of the goodwill impairment charge on net earnings in the first quarter of 2020, we were required to receive approval from the FRB, as described above, prior to declaring a dividend, for the period of March 31, 2020 to March 31, 2021, but are no longer required to obtain such approval.
Dividends paid by California state-chartered banks are regulated by the FDIC for non-member banks and the DFPI under their general supervisory authority. The Bank may declare a dividend without the approval of the DFPI and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for the three previous fiscal years less any dividends paid during such period. The Bank had a cumulative net loss of $155.3 million during the three fiscal years of 2021, 2020, and 2019, compared to dividends of $776.0 million paid by the Bank during that same period. During the year ended December 31, 2021, PacWest received $182.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $1.5 billion at December 31, 2021, for the foreseeable future any dividends from the Bank to PacWest will continue to require DFPI and FDIC approval consistent with what has been required since 2008 when the Bank first had an accumulated deficit triggered by goodwill impairment write-downs during the financial crisis of 2007-2008.
At December 31, 2021, PacWest had $176.9 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.
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, effective February 29, 2020. No shares were repurchased under the new Stock Repurchase Program prior to its expiration on February 28, 2021.
On February 15, 2022, PacWest's Board of Directors authorized a new Stock Repurchase Program, effective March 1, 2022, to repurchase shares of its common stock for an aggregate purchase price not to exceed $100 million with a program maturity date of February 28, 2023.
Material Cash Requirements
Our material contractual obligations are primarily for time deposits, subordinated debt, commitments to contribute capital to investments in LIHTC partnerships, SBICs and CRA-related loan pools, and operating lease obligations. At December 31, 2021, time deposits totaled $1.4 billion, of which $1.1 billion was due within one year. Gross subordinated debt totaled $941.1 million, all of which was due after five years. Our liability to contribute capital to LIHTC partnerships was $170.7 million and our commitment to contribute capital to SBICs and CRA-related loan pools was $85.9 million for a combined total of $256.7 million, of which $94.2 million was due within one year. Our operating lease obligation for leased facilities totaled $153.5 million, of which $35.8 million was due within one year. For further information regarding these items, see Note 11. Deposits, Note 12. Borrowings and Subordinated Debt, Note 9. Other Assets, Note 14. Commitments and Contingencies, and Note 10. Leases of the Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
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, 2021, our loan commitments and standby letters of credit were $9.0 billion and $345.8 million, respectively. 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 14. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk - Foreign Currency Exchange
We enter into foreign exchange contracts with our clients and counterparty banks primarily for the purpose of offsetting or hedging clients' foreign currency exposures arising out of commercial transactions, and we enter into cross currency swaps and foreign exchange forward contracts to hedge exposures to debt instruments denominated in foreign currencies. We have experienced and will continue to experience fluctuations in our net earnings as a result of transaction gains or losses related to revaluing certain asset and liability balances that are denominated in currencies other than the U.S. Dollar, and the derivatives that hedge those exposures. As of December 31, 2021, the U.S. Dollar notional amounts of subordinated debt payable denominated in foreign currencies was $29.3 million, and the U.S. Dollar notional amounts of derivatives outstanding to hedge these foreign currency exposures was $28.5 million. We recognized foreign currency translation net gains of $296,000, $3,000, and $150,000 for the years ended December 31, 2021, 2020, and 2019, 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, 2021, the results of which are presented below. Our NII simulation and MVE model indicate that our balance sheet is asset-sensitive. An asset-sensitive profile would suggest that a sudden sustained increase in rates would result in an increase in our estimated NII and MVE, while a liability-sensitive profile would suggest that these amounts would decrease.
Net Interest Income Simulation
We used a NII simulation model to measure the estimated changes in NII that would result over the next 12 months from immediate and sustained changes in interest rates as of December 31, 2021. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. We have assumed no growth or changes in the product mix of either our total interest-sensitive assets or liabilities over the next 12 months, therefore the results reflect an interest rate shock to a static balance sheet.
This analysis calculates the difference between NII forecasted using both increasing and decreasing interest rate scenarios using the forward yield curve at December 31, 2021. In order to arrive at the base case, we extend our balance sheet at December 31, 2021 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, 2021. Based on such repricing, we calculate an estimated NII and NIM for each rate scenario.
The NII simulation model is dependent upon numerous assumptions. For example, the majority of our loans are variable rate that are assumed to reprice in accordance with their contractual terms. Some loans and investment securities include the opportunity of prepayment (embedded options) and the simulation model uses prepayment assumptions to estimate these accelerated cash flows and reinvest these proceeds at current simulated yields. Our interest-bearing deposits reprice at our discretion and are assumed to reprice at a rate less than the change in market rates. The 12 month NII simulation model as of December 31, 2021 assumes interest-bearing deposits reprice at 31% of the change in market rates in a rising interest rate scenario, depending on the amount of the rate change (this is commonly referred to as the "deposit beta"). The effects of certain balance sheet attributes, such as fixed-rate loans, variable-rate loans that have reached their floors, and the volume of noninterest-bearing deposits as a percentage of earning assets, impact our assumptions and consequently the results of our NII simulation model. Additionally, we assume that all market interest rates have an interest rate floor of 0%. Changes that could vary significantly from our assumptions include loan and deposit growth or contraction, loan and deposit pricing, changes in the mix of earning assets or funding sources, and future asset/liability management decisions, all of which may have significant effects on our net interest income.
The following table presents forecasted net interest income and net interest margin for the next 12 months using the static balance sheet as of December 31, 2021 and forward yield curve as of December 31, 2021 (which presumes three interest rate hikes in 2022) as the base scenario, with immediate and sustained parallel upward movements in interest rates of 100, 200, and 300 basis points and sustained parallel downward movements in interest rates of 25, 50, and 100 basis points as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Forecasted | | | | Forecasted | | Forecasted |
| Net Interest | | Percentage | | Net Interest | | Net Interest |
| Income | | Change | | Margin | | Margin Change |
December 31, 2021 | (Tax Equivalent) | | From Base | | (Tax Equivalent) | | From Base |
| (Dollars in millions) |
Interest Rate Scenario: | | | | | | | |
Up 300 basis points | $ | 1,404.6 | | | 18.7% | | 3.76% | | 0.59% |
Up 200 basis points | $ | 1,328.9 | | | 12.3% | | 3.56% | | 0.39% |
Up 100 basis points | $ | 1,251.3 | | | 5.7% | | 3.35% | | 0.18% |
BASE CASE | $ | 1,183.4 | | | — | | 3.17% | | |
Down 25 basis points | $ | 1,180.6 | | | (0.2)% | | 3.16% | | (0.01)% |
Down 50 basis points | $ | 1,156.3 | | | (2.3)% | | 3.10% | | (0.07)% |
Down 100 basis points | $ | 1,136.4 | | | (4.0)% | | 3.04% | | (0.13)% |
| | | | | | | |
| | | | | | | |
During 2021, total base case year 1 tax equivalent NII increased by $159.2 million to $1.2 billion at December 31, 2021 and the base case tax equivalent NIM decreased to 3.17% from 3.87%. The increase in year 1 NII compared to December 31, 2020 was due mainly to a $184.8 million increase in interest income attributable to higher average balances of loans and leases and investment securities, offset partially by a $25.6 million increase in interest expense due to a higher average balance of deposits and a higher average balance of subordinated debt attributable to the $400 million of subordinated notes issued by the Bank on April 30, 2021. The decrease in the NIM was due mostly to the change in the mix of interest-earning assets to lower yielding interest-earnings deposits in financial institutions and investment securities from higher yielding loans and leases, as well as to lower yields on investment securities and loans and leases.
In addition to parallel interest rate shock scenarios, we also model various alternative rate vectors. The most favorable alternate rate vector that we model is the “Bear Flattener Severe” scenario, when short-term rates increase faster than long-term rates. In the “Bear Flattener Severe” scenario, Year 1 tax equivalent NII increases by 2.3%. Because of the low level of market interest rates and the assumption that market rates contain a 0% floor, the ad hoc scenarios that assume decreasing interest rates do not differ materially from the base case scenario.
At December 31, 2021, we had $23.0 billion of total gross loans that included $10.9 billion with variable interest rate terms (excluding hybrid loans discussed below). Of the variable interest rate loans, $9.2 billion, or 84%, contained interest rate floor provisions, which included $8.5 billion of loans with "in-the-money" floors, meaning the loan coupon will not adjust down if there are future decreases to the index interest rate. The following table summarizes the estimated balance of loans with "in-the-money" floors for the indicated increases in interest rates:
| | | | | | | | |
December 31, 2021 |
| | Total Amount of |
| | Loans With |
Basis Points of | | "In-the-Money" |
Rate Increases | | Loan Floors |
(Dollars in millions) |
50 bps | | $4,746 |
100 bps | | $3,166 |
150 bps | | $2,376 |
200 bps | | $1,466 |
250 bps | | $815 |
At December 31, 2021, we also had $4.2 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 $0.6 billion, $0.9 billion, and $1.2 billion in the next one, two, and three years.
LIBOR is expected to be phased out in 2023, as such the Company stopped originations of LIBOR-indexed loans effective December 31, 2021. The business processes impacted relate primarily to our variable-rate loans and our subordinated debt, both of which are indexed to LIBOR. For further information see Item 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 in market interest rates of 100, 200, and 300 basis points and sustained decrease in market interest rates of 25, 50, and 100 basis points. This analysis assigns significant value to our noninterest-bearing deposit balances. The projections include various assumptions regarding cash flows and interest rates and are by their nature forward-looking and inherently uncertain.
The MVE model is an interest rate risk management tool and the results are not necessarily an indication of our actual future results. Actual results may vary significantly from the results suggested by the market value of equity table. Loan prepayments and deposit attrition, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions. The base case is determined by applying various current market discount rates to the estimated cash flows from the different types of assets, liabilities, and off-balance sheet items existing at December 31, 2021.
The following table shows the projected change in the market value of equity for the rate scenarios presented as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Ratio of |
| Projected | | Dollar | | Percentage | | Percentage | | Projected |
| Market Value | | Change | | Change | | of Total | | Market Value |
December 31, 2021 | of Equity | | From Base | | From Base | | Assets | | to Book Value |
| (Dollars in millions) |
Interest Rate Scenario: | | | | | | | | | |
Up 300 basis points | $ | 10,121.7 | | | $ | 1,449.8 | | | 16.7% | | 25.0% | | 253.1% |
Up 200 basis points | $ | 9,788.9 | | | $ | 1,117.0 | | | 12.9% | | 24.2% | | 244.7% |
Up 100 basis points | $ | 9,325.1 | | | $ | 653.2 | | | 7.5% | | 23.1% | | 233.1% |
BASE CASE | $ | 8,671.8 | | | $ | — | | | — | | 21.4% | | 216.8% |
Down 25 basis points | $ | 8,474.3 | | | $ | (197.6) | | | (2.3)% | | 21.0% | | 211.9% |
Down 50 basis points | $ | 8,278.9 | | | $ | (392.9) | | | (4.5)% | | 20.5% | | 207.0% |
Down 100 basis points | $ | 7,898.6 | | | $ | (773.2) | | | (8.9)% | | 19.5% | | 197.5% |
During 2021, total base case projected market value of equity increased by $2.9 billion to $8.7 billion at December 31, 2021. This increase in base case projected MVE was due primarily to: (1) a $2.4 billion decrease in the mark-to-market adjustment for total deposits, borrowings, and subordinated debt; and (2) a $404.7 million increase in the book value of stockholders' equity due mainly to $607.0 million in net earnings, offset partially by $119.4 million of cash dividends paid and a $106.6 million decrease in accumulated other comprehensive income; offset partially by (3) a $149.4 million increase in the mark-to-market adjustment for loans and leases.
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, 2021 and 2020 | |
Consolidated Statements of Earnings (Loss) for the Years Ended December 31, 2021, 2020, and 2019 | |
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2021, 2020, and 2019 | |
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2021, 2020, and 2019 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020, and 2019 | |
Notes to Consolidated Financial Statements | |
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, 2021, 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, 2021, 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.
On February 1, 2021, the Company acquired Civic Financial Services, LLC. As a result, $1.4 billion of loans, $6.8 million of allowance for credit losses, $74.1 million of loan servicing accounts receivable and $4.9 million of accrued interest receivable included in other assets, and $59.3 million of loan interest income in the Company’s consolidated financial statements as of and for the period ended December 31, 2021 have been excluded from management’s assessment of internal control over financial reporting of the Company as of December 31, 2021.
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, 2021. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”
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, 2021 and 2020, the related consolidated statements of earnings (loss), comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2021, 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, 2021 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Civic Financial Services, LLC during 2021, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2021, Civic Financial Services, LLC's internal control over financial reporting associated with $1.4 billion of loans, $6.8 million of allowance for credit losses, $74.1 million of loan servicing accounts receivable and $4.9 million of accrued interest receivable included in other assets, and $59.3 million of loan interest income included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Civic Financial Services, LLC.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
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.
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 judgments. 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 credit losses for loans and leases collectively evaluated
As discussed in Note 1 to the consolidated financial statements, the Company’s allowance for credit losses for loans and leases collectively evaluated is the combination of an allowance for loan and lease losses collectively evaluated (reserve on pooled loans and leases) and the reserve for unfunded loan commitments (collective ACL). As discussed in Note 5 to the consolidated financial statements, the Company’s total allowance for credit losses as of December 31, 2021 was $273.6 million, of which $271.0 million related to the collective ACL (the collective ACL). The collective ACL is measured with the current expected credit loss (CECL) approach for financial instruments measured at amortized cost and other commitments to extend credit which share similar risk characteristics and reflects losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical loss experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. The Company’s CECL methodology for the reserve on pooled loans and leases component includes both quantitative and qualitative loss factors which are applied to the population of loans and leases and assessed at a pool level. The Company estimates the probability of default (PD) during the reasonable and supportable period using econometric regression models developed to correlate macroeconomic variables to historical credit performance. The loans and unfunded commitments are grouped into loss given default (LGD) pools based on portfolio classes that share similar collateral risk characteristics. LGD rates are computed based on the net charge-offs recognized divided by the exposure at default (EAD) of defaulted loans. The Company estimates the reserve for unfunded loan commitments using the same PD, LGD, and prepayment rates as used for the reserve on pooled loans and leases. The reserve for unfunded loan commitments is computed using expected future utilization rates of the unfunded commitments during the contractual life of the commitments based on historical usage of unfunded commitments by loan pool. For the reasonable and supportable forecast period, future macroeconomic events and
circumstances are estimated using a single scenario economic forecast that is consistent with the Company’s current expectations for the loan pools. The EAD is multiplied by the PD and LGD rates to calculate expected losses through the end of the forecast period. The Company then reverts on a straight-line basis from the PD, LGD and prepayment rates used during the reasonable and supportable period to the Company’s historical PD, LGD and prepayment experience. The qualitative portion of the reserve on pooled loans and leases represents the Company’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative reserve, including consideration of idiosyncratic risk factors, conditions that may not be reflected in quantitatively derived results, or other relevant factors to ensure the collective ACL reflects the Company’s best estimate of current expected credit losses.
We identified the assessment of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment. Specifically, the assessment encompassed the evaluation of the collective ACL methodology, including the methods and models used to estimate the PD, LGD, prepayments and their significant assumptions, including the pooling of loans and leases which share similar risk characteristics, the economic forecast and macroeconomic events and circumstances, the reasonable and supportable forecast period, the reversion to the Company’s historical PD, LGD and prepayment experience for the remaining contractual life of the loans and leases, internal risk ratings for commercial loans, and the qualitative loss factors and their significant assumptions, including the idiosyncratic risk factors. The assessment included an evaluation of the conceptual soundness of the PD, LGD, and prepayment models. The assessment also encompassed the determination of expected future utilization rates on unfunded loan commitments utilized in the reserve for unfunded loan commitments. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL estimate, including controls over the:
•development and approval of the collective ACL methodology
•development of the PD, LGD and prepayment models
•identification and determination of the significant assumptions used in the PD, LGD and prepayment models used to calculate the collective ACL
•development of the qualitative loss factors, including the significant assumptions used in the measurement of the qualitative factors
•development of the expected future utilization rates of unfunded loan commitments
•analysis of the collective ACL results, trends and ratios.
We evaluated the Company’s process to develop the collective ACL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in the following:
•evaluating the collective ACL methodology for compliance with U.S. generally accepted accounting principles
•evaluating judgments made by the Company relative to the development and performance of the PD, LGD, and prepayment models by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•assessing the conceptual soundness and performance of the PD, LGD and prepayment models by inspecting the model documentation to determine whether the models are suitable for their intended use
•evaluating the selection of the economic forecast and underlying assumptions by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•evaluating the economic forecast and macroeconomic events and circumstances through comparison to publicly available forecasts
•evaluating the length of the historical observation period, reasonable and supportable forecast period, and reversion period by comparing them to specific portfolio risk characteristics and trends
•determining whether the loan and lease portfolio is pooled by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices
•evaluating individual internal risk ratings for a selection of commercial loans by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral
•evaluating the methodology used to develop the qualitative loss factors and their significant assumptions, and the effect of those factors on the collective ACL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models
•evaluating the methodology of the expected future utilization rates of unfunded loan commitments by comparing them to relevant Company-specific metrics and trends.
We also assessed the sufficiency of the audit evidence obtained related to the Company’s collective ACL by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimate.
/s/ KPMG LLP
We have served as the Company's auditor since 1982.
Irvine, California
February 28, 2022
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (Dollars in thousands, except par value amounts) |
ASSETS: | | | |
Cash and due from banks | $ | 112,548 | | | $ | 150,464 | |
Interest-earning deposits in financial institutions | 3,944,686 | | | 3,010,197 | |
Total cash and cash equivalents | 4,057,234 | | | 3,160,661 | |
Securities available-for-sale, at fair value | 10,694,458 | | | 5,235,591 | |
Federal Home Loan Bank stock, at cost | 17,250 | | | 17,250 | |
Total investment securities | 10,711,708 | | | 5,252,841 | |
Gross loans and leases held for investment | 23,026,308 | | | 19,153,357 | |
Deferred fees, net | (84,760) | | | (69,980) | |
Allowance for loan and lease losses | (200,564) | | | (348,181) | |
Total loans and leases held for investment, net | 22,740,984 | | | 18,735,196 | |
Equipment leased to others under operating leases | 339,150 | | | 333,846 | |
Premises and equipment, net | 46,740 | | | 39,234 | |
Foreclosed assets, net | 12,843 | | | 14,027 | |
| | | |
Goodwill | 1,405,736 | | | 1,078,670 | |
Core deposit and customer relationship intangibles, net | 44,957 | | | 23,641 | |
Other assets | 1,083,992 | | | 860,326 | |
Total assets | $ | 40,443,344 | | | $ | 29,498,442 | |
| | | |
LIABILITIES: | | | |
Noninterest-bearing deposits | $ | 14,543,133 | | | $ | 9,193,827 | |
Interest-bearing deposits | 20,454,624 | | | 15,746,890 | |
Total deposits | 34,997,757 | | | 24,940,717 | |
Borrowings | — | | | 5,000 | |
Subordinated debt | 863,283 | | | 465,812 | |
Accrued interest payable and other liabilities | 582,674 | | | 491,962 | |
Total liabilities | 36,443,714 | | | 25,903,491 | |
| | | |
Commitments and contingencies | | | |
| | | |
STOCKHOLDERS' EQUITY: | | | |
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding) | — | | | — | |
Common stock ($0.01 par value, 200,000,000 shares authorized at December 31, 2021 and 2020, | | | |
122,105,853 and 120,736,834 shares issued, respectively, includes 2,312,080 and 1,608,126 | | | |
shares of unvested restricted stock, respectively) | 1,221 | | | 1,207 | |
Additional paid-in capital | 3,013,399 | | | 3,100,633 | |
Retained earnings | 1,016,350 | | | 409,391 | |
Treasury stock, at cost (2,520,999 and 2,321,981 shares at December 31, 2021 and 2020) | (97,308) | | | (88,803) | |
Accumulated other comprehensive income, net | 65,968 | | | 172,523 | |
Total stockholders' equity | 3,999,630 | | | 3,594,951 | |
Total liabilities and stockholders' equity | $ | 40,443,344 | | | $ | 29,498,442 | |
See accompanying Notes to Consolidated Financial Statements.
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in thousands, except per share amounts) |
Interest income: | | | | | |
Loans and leases | $ | 996,457 | | | $ | 993,138 | | | $ | 1,097,845 | |
Investment securities | 153,468 | | | 106,770 | | | 115,569 | |
Deposits in financial institutions | 8,804 | | | 3,583 | | | 6,479 | |
Total interest income | 1,158,729 | | | 1,103,491 | | | 1,219,893 | |
Interest expense: | | | | | |
Deposits | 27,808 | | | 59,663 | | | 148,460 | |
Borrowings | 623 | | | 8,161 | | | 26,961 | |
Subordinated debt | 26,474 | | | 21,109 | | | 29,843 | |
Total interest expense | 54,905 | | | 88,933 | | | 205,264 | |
Net interest income | 1,103,824 | | | 1,014,558 | | | 1,014,629 | |
Provision for credit losses | (162,000) | | | 339,000 | | | 22,000 | |
Net interest income after provision for credit losses | 1,265,824 | | | 675,558 | | | 992,629 | |
Noninterest income: | | | | | |
Other commissions and fees | 42,287 | | | 40,347 | | | 43,623 | |
Leased equipment income | 45,746 | | | 43,628 | | | 38,727 | |
Service charges on deposit accounts | 13,269 | | | 10,351 | | | 14,637 | |
Gain on sale of loans and leases | 1,733 | | | 2,139 | | | 1,114 | |
Gain on sale of securities | 1,615 | | | 13,171 | | | 25,445 | |
Dividends and gains (losses) on equity investments | 23,115 | | | 14,984 | | | (567) | |
Warrant income | 49,341 | | | 10,609 | | | 8,669 | |
Other income | 16,821 | | | 10,831 | | | 10,914 | |
Total noninterest income | 193,927 | | | 146,060 | | | 142,562 | |
Noninterest expense: | | | | | |
Compensation | 368,450 | | | 271,494 | | | 285,862 | |
Occupancy | 58,422 | | | 57,555 | | | 57,407 | |
Leased equipment depreciation | 35,755 | | | 28,865 | | | 24,016 | |
Data processing | 30,277 | | | 26,779 | | | 27,556 | |
Insurance and assessments | 17,365 | | | 22,625 | | | 16,404 | |
Other professional services | 21,492 | | | 19,917 | | | 17,803 | |
Customer related expense | 20,504 | | | 17,532 | | | 13,839 | |
Intangible asset amortization | 12,734 | | | 14,753 | | | 18,726 | |
Loan expense | 17,031 | | | 13,454 | | | 12,931 | |
Acquisition, integration and reorganization costs | 9,415 | | | 1,060 | | | 349 | |
Foreclosed assets income, net | (213) | | | (17) | | | (3,555) | |
Goodwill impairment | — | | | 1,470,000 | | | — | |
Other expense | 46,185 | | | 40,002 | | | 30,913 | |
Total noninterest expense | 637,417 | | | 1,984,019 | | | 502,251 | |
Earnings (loss) before income taxes | 822,334 | | | (1,162,401) | | | 632,940 | |
Income tax expense | 215,375 | | | 75,173 | | | 164,304 | |
Net earnings (loss) | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
| | | | | |
Earnings (loss) per share: | | | | | |
Basic | $ | 5.10 | | | $ | (10.61) | | | $ | 3.90 | |
Diluted | $ | 5.10 | | | $ | (10.61) | | | $ | 3.90 | |
See accompanying Notes to Consolidated Financial Statements.
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Net earnings (loss) | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
Other comprehensive income (loss), net of tax: | | | | | |
Unrealized net holding (losses) gains on securities available-for-sale | | | | | |
arising during the year | (146,066) | | | 142,696 | | | 143,019 | |
Income tax benefit (expense) related to net unrealized holding gains | | | | | |
(losses) arising during the year | 40,677 | | | (39,335) | | | (40,058) | |
Unrealized net holding (losses) gains on securities available-for-sale, | | | | | |
net of tax | (105,389) | | | 103,361 | | | 102,961 | |
Reclassification adjustment for net gains included in net earnings (1) | (1,615) | | | (13,171) | | | (25,445) | |
Income tax expense related to reclassification adjustment | 449 | | | 3,675 | | | 7,217 | |
Reclassification adjustment for net gains included in | | | | | |
net earnings, net of tax | (1,166) | | | (9,496) | | | (18,228) | |
Other comprehensive income (loss), net of tax | (106,555) | | | 93,865 | | | 84,733 | |
Comprehensive income (loss) | $ | 500,404 | | | $ | (1,143,709) | | | $ | 553,369 | |
__________________________________
(1) Entire amount recognized in "Gain on sale of securities" on the Consolidated Statements of Earnings (Loss).
See accompanying Notes to Consolidated Financial Statements.
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | Accumulated | | |
| | | | | Additional | | | | | | Other | | |
| | | Par | | Paid-in | | Retained | | Treasury | | Comprehensive | | |
| Shares | | Value | | Capital | | Earnings | | Stock | | Income (Loss) | | Total |
| (Dollars in thousands) |
Balance, December 31, 2018 | 123,189,833 | | | $ | 1,251 | | | $ | 3,722,723 | | | $ | 1,182,674 | | | $ | (74,985) | | | $ | (6,075) | | | $ | 4,825,588 | |
Cumulative effect of change in | | | | | | | | | | | | | |
accounting principles (1) | — | | | — | | | — | | | 938 | | | — | | | — | | | 938 | |
Net earnings | — | | | — | | | — | | | 468,636 | | | — | | | — | | | 468,636 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 84,733 | | | 84,733 | |
Restricted stock awarded and | | | | | | | | | | | | | |
earned stock compensation, | | | | | | | | | | | | | |
net of shares forfeited | 798,248 | | | 8 | | | 26,807 | | | — | | | — | | | — | | | 26,815 | |
Restricted stock surrendered | (218,531) | | | | | | | | | (8,449) | | | | | (8,449) | |
Common stock repurchased under | | | | | | | | | | | | | |
Stock Repurchase Program | (3,987,945) | | | (40) | | | (154,476) | | | — | | | — | | | — | | | (154,516) | |
Cash dividends paid: | | | | | | | | | | | | | |
Common stock, $2.40/share | — | | | — | | | (289,048) | | | — | | | — | | | — | | | (289,048) | |
Balance, December 31, 2019 | 119,781,605 | | | 1,219 | | | 3,306,006 | | | 1,652,248 | | | (83,434) | | | 78,658 | | | 4,954,697 | |
Cumulative effect of change in | | | | | | | | | | | | | |
accounting principle (2) | — | | | — | | | — | | | (5,283) | | | — | | | — | | | (5,283) | |
Net loss | — | | | — | | | — | | | (1,237,574) | | | — | | | — | | | (1,237,574) | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 93,865 | | | 93,865 | |
Restricted stock awarded and | | | | | | | | | | | | | |
earned stock compensation, | | | | | | | | | | | | | |
net of shares forfeited | 800,537 | | | 8 | | | 24,355 | | | — | | | — | | | — | | | 24,363 | |
Restricted stock surrendered | (213,578) | | | — | | | — | | | — | | | (5,369) | | | — | | | (5,369) | |
Common stock repurchased under | | | | | | | | | | | | | |
Stock Repurchase Program | (1,953,711) | | | (20) | | | (69,980) | | | — | | | — | | | — | | | (70,000) | |
Cash dividends paid: | | | | | | | | | | | | | |
Common stock, $1.35/share | — | | | — | | | (159,748) | | | — | | | — | | | — | | | (159,748) | |
Balance, December 31, 2020 | 118,414,853 | | | 1,207 | | | 3,100,633 | | | 409,391 | | | (88,803) | | | 172,523 | | | 3,594,951 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net earnings | — | | | — | | | — | | | 606,959 | | | — | | | — | | | 606,959 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (106,555) | | | (106,555) | |
Restricted stock awarded and | | | | | | | | | | | | | |
earned stock compensation, | | | | | | | | | | | | | |
net of shares forfeited | 1,369,019 | | | 14 | | | 32,209 | | | — | | | — | | | — | | | 32,223 | |
Restricted stock surrendered | (199,018) | | | — | | | — | | | — | | | (8,505) | | | — | | | (8,505) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Cash dividends paid: | | | | | | | | | | | | | |
Common stock, $1.00/share | — | | | — | | | (119,443) | | | — | | | — | | | — | | | (119,443) | |
Balance, December 31, 2021 | 119,584,854 | | | $ | 1,221 | | | $ | 3,013,399 | | | $ | 1,016,350 | | | $ | (97,308) | | | $ | 65,968 | | | $ | 3,999,630 | |
________________________
(1) Impact due to adoption on January 1, 2019 of ASU 2016-02, "Leases (Topic 842)," and the related amendments.
(2) Impact due to adoption on January 1, 2020 of ASU 2016-13, "Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments," and the related amendments, commonly referred to as CECL.
See accompanying Notes to Consolidated Financial Statements.
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Cash flows from operating activities: | | | | | |
Net earnings (loss) | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
Adjustments to reconcile net earnings (loss) to net cash provided by | | | | | |
operating activities: | | | | | |
Goodwill impairment | — | | | 1,470,000 | | | — | |
Depreciation and amortization | 52,195 | | | 44,839 | | | 39,115 | |
Amortization of net premiums on securities available-for-sale | 44,197 | | | 16,311 | | | 13,962 | |
Amortization of intangible assets | 12,734 | | | 14,753 | | | 18,726 | |
Amortization of operating lease ROU assets | 30,406 | | | 29,432 | | | 29,393 | |
Provision for credit losses | (162,000) | | | 339,000 | | | 22,000 | |
Gain on sale of foreclosed assets, net | (406) | | | (495) | | | (3,689) | |
Provision for losses on foreclosed assets | 14 | | | 267 | | | 78 | |
Gain on sale of loans and leases, net | (1,733) | | | (2,139) | | | (1,114) | |
Loss on sale of premises and equipment | 74 | | | 346 | | | 599 | |
Gain on sale of securities, net | (1,615) | | | (13,171) | | | (25,445) | |
Gain on BOLI death benefits | (491) | | | — | | | — | |
Unrealized (gain) loss on derivatives and foreign currencies, net | (1,134) | | | 66 | | | (228) | |
Earned stock compensation | 32,223 | | | 24,363 | | | 26,815 | |
| | | | | |
(Increase) decrease in other assets | (97,181) | | | (105,749) | | | 30,261 | |
Decrease in accrued interest payable and other liabilities | (11,286) | | | (96,376) | | | (36,449) | |
Net cash provided by operating activities | 502,956 | | | 483,873 | | | 582,660 | |
| | | | | |
Cash flows from investing activities: | | | | | |
Cash acquired in acquisitions, net of cash consideration paid | 3,757,122 | | | — | | | — | |
Net increase in loans and leases | (3,925,829) | | | (463,643) | | | (1,005,478) | |
Proceeds from sales of loans and leases | 144,550 | | | 128,138 | | | 102,573 | |
Proceeds from maturities and paydowns of securities available-for-sale | 847,472 | | | 439,473 | | | 325,863 | |
Proceeds from sales of securities available-for-sale | 367,348 | | | 173,425 | | | 1,584,860 | |
Purchases of securities available-for-sale | (6,863,950) | | | (1,924,917) | | | (1,569,421) | |
Net redemptions (purchases) of Federal Home Loan Bank stock | — | | | 23,674 | | | (8,821) | |
Proceeds from sales of foreclosed assets | 2,638 | | | 1,396 | | | 8,590 | |
Purchases of premises and equipment, net | (17,262) | | | (12,529) | | | (15,104) | |
Proceeds from sales of premises and equipment | 95 | | | 8 | | | 73 | |
Proceeds from BOLI death benefits | 4,143 | | | 761 | | | 555 | |
Net increase in equipment leased to others under operating leases | (30,786) | | | (46,765) | | | (54,996) | |
Net cash used in investing activities | (5,714,459) | | | (1,680,979) | | | (631,306) | |
| | | | | |
Cash flows from financing activities: | | | | | |
Net increase (decrease) in noninterest-bearing deposits | 3,726,157 | | | 1,952,116 | | | (643,530) | |
Net increase in interest-bearing deposits | 2,170,769 | | | 3,757,152 | | | 1,008,152 | |
Net (decrease) increase in borrowings | (55,210) | | | (1,754,008) | | | 387,894 | |
Proceeds from subordinated notes offering, net | 394,308 | | | — | | | — | |
Common stock repurchased and restricted stock surrendered | (8,505) | | | (75,369) | | | (162,965) | |
Cash dividends paid, net | (119,443) | | | (159,748) | | | (289,048) | |
Net cash provided by financing activities | 6,108,076 | | | 3,720,143 | | | 300,503 | |
Net increase in cash and cash equivalents | 896,573 | | | 2,523,037 | | | 251,857 | |
Cash and cash equivalents, beginning of year | 3,160,661 | | | 637,624 | | | 385,767 | |
Cash and cash equivalents, end of year | $ | 4,057,234 | | | $ | 3,160,661 | | | $ | 637,624 | |
| | | | | |
See accompanying Notes to Consolidated Financial Statements.
PACWEST BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid for interest | $ | 53,446 | | | $ | 99,605 | | | $ | 200,463 | |
Cash paid for income taxes | 136,015 | | | 114,235 | | | 123,533 | |
Loans transferred to foreclosed assets | 1,062 | | | 14,755 | | | 120 | |
Transfers from loans held for investment to loans held for sale | 25,554 | | | — | | | 25,124 | |
| | | | | |
Effective February 1, 2021, the Company acquired Civic | | | | | |
in a transaction summarized as follows: | | | | | |
Fair value of assets acquired | $ | 307,997 | | | | | |
Cash paid | (160,420) | | | | | |
Liabilities assumed | $ | 147,577 | | | | | |
| | | | | |
Effective October 8, 2021, the Company acquired the HOA Business | | | | | |
in a transaction summarized as follows: | | | | | |
Fair value of assets acquired | $ | 4,362,893 | | | | | |
Cash paid | (237,798) | | | | | |
Liabilities assumed | $ | 4,125,095 | | | | | |
| | | | | |
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See accompanying Notes to Consolidated Financial Statements.
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 69 full-service branches located in California, one branch located in Durham, North Carolina, one branch located in Denver, Colorado, and numerous loan production offices across the country. The Bank provides community banking products including lending and comprehensive deposit and treasury management services to small and medium-sized businesses conducted primarily through our California-based branch offices and Denver, Colorado branch office. The Bank offers national lending products including asset-based, equipment, and real estate loans and treasury management services to established middle-market businesses on a national basis. The Bank also offers venture banking products including a comprehensive suite of financial services focused on entrepreneurial and venture-backed businesses and their venture capital and private equity investors, with offices located in key innovative hubs across the United States. The Bank also offers financing of business-purpose non-owner-occupied investor properties through Civic, a wholly-owned subsidiary. The Bank also provides a specialized suite of services for the HOA industry. In addition, we provide investment advisory and asset management services to select clients through Pacific Western Asset Management Inc., a wholly-owned subsidiary of the Bank and an SEC-registered investment adviser.
We generate our revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including treasury management and investment management services. Our major operating expenses are the interest paid by the Bank on deposits and borrowings, compensation, occupancy, and general operating expenses.
(a) Accounting Standards Adopted in 2021
Effective January 1, 2021, the Company adopted ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” which simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendment also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2021, the Company adopted ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)” which clarifies that entities that apply the measurement alternative in ASC 321 should consider observable transactions that result in entities initially applying or discontinuing the use of the equity method of accounting under ASC 323. The guidance also clarifies that certain forward contracts and purchased options on equity securities that are not deemed to be in-substance common stock under ASC 323 or accounted for as derivatives under ASC 815 are in the scope of ASC 321. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective January 1, 2021, the Company adopted ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs” which clarifies the Company should reevaluate whether a callable debt security that has multiple call dates is within the scope of ASC 310-20-35-33 at each reporting period. ASC 310-20-35-33 requires that, to the extent the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess should be amortized to the earliest call date. As the Company’s accounting policy to amortize premiums on investments in callable debt securities to the earliest call date is consistent with the manner required by ASU 2020-08, the adoption of this standard had no impact on the Company’s consolidated financial statements.
In August 2021, the FASB issued ASU 2021-06, "Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update)," to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The Company adopted Rule 33-10786 on January 1, 2021 on its effective date and it did not have a material impact on the Company’s consolidated financial statements. The Company also adopted Rule 33-10835 in conjunction with the completion of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The adoption of this disclosure guidance did not have a material impact on our consolidated financial statements.
(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
The Company has 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 goodwill and other intangible assets, and the realization of deferred tax assets. These estimates may be adjusted as more current information becomes available, and any adjustment may be significant.
(d) Reclassifications
Certain prior period amounts have been reclassified to conform to the current period’s presentation format. On the consolidated statements of earnings (loss), new lines are presented for "Dividends and gains (losses) on equity investments" and "Warrant income," as those categories exceeded the disclosure materiality threshold in 2021, which previously had been included as part of "Other income." We realigned our other commercial subclasses by moving our cash flow subclass into the other lending subclass. All of the loan and allowance tables, both current period and prior periods, reflect these realignments. In our securities available-for-sale tables, we presented a new line for private label commercial MBS, which had previously been included with the asset-backed securities line. All of the securities available-for-sale tables, both current period and prior periods, reflect this new presentation.
PACWEST BANCORP AND SUBSIDIARIES
Notes to 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, (2) interest‑earning deposits in financial institutions, and (3) securities purchased under resale agreements. Interest‑earning deposits in financial institutions represent mostly cash held at the FRBSF, the majority of which is immediately available.
(f) Investment in Debt 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 (loss), 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 on sale of securities" on the consolidated statements of earnings (loss).
Prior to January 1, 2020, debt securities available-for-sale were measured at fair value and declines in the fair value were reviewed to determine whether the impairment was other-than-temporary. If the decline in fair value was considered temporary, the decline in fair value below the amortized cost basis of a security was recognized in other comprehensive income (loss). If we did not expect to recover the entire amortized cost basis of the security, then an other-than-temporary impairment was considered to have occurred. The cost basis of the security was written down to its estimated fair value and the amount of the write-down was recognized through a charge to earnings. If the amount of the amortized cost basis expected to be recovered increased in a future period, the cost basis of the security was not increased but rather recognized prospectively through interest income.
Effective January 1, 2020, upon the adoption of ASU 2016-13, "Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments," debt securities available-for-sale are measured at fair value and are subject to impairment testing. A security is impaired if the fair value of the security is less than its amortized cost basis. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components (if any) of the fair value decline. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation allowance would be reduced, but not more than the amount of the current existing allowance for that security.
(g) Equity and Other Investments
Investments in equity securities are classified into one of the following two categories and accounted as follows:
•Securities with a readily determinable fair value are reported at fair value, with changes in fair value recorded in earnings.
•Securities without a readily determinable fair value for which we have elected the "measurement alternative" are reported at cost less impairment (if any) plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. 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.”
Included in our equity investments that do not have a readily determinable fair value are our investments in non-public Small Business Investment Companies ("SBICs"). All of our SBIC investments meet the definition of investment companies, as defined in ASC 946, Financial Services - Investment Companies. We elected the practical expedient available in Topic 820, Fair Value Measurements, which permits the use of net asset value ("NAV") per share or equivalent to value investments in entities that are or are similar to investment companies. SBICs are required to value and report their investments at estimated fair value. We record the unrealized gains and losses resulting from changes in the fair value of our SBIC investments as gains or losses on equity investments in our consolidated statements of earnings (loss). The carrying value of our SBIC investments is equal to the capital account balance per each SBIC entities' quarterly financial statements.
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."
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 (loss).
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.
(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 to determine if they have experienced a more-than-insignificant deterioration in credit quality since origination or issuance as of the acquisition date and are classified as either (i) loans purchased without evidence of deteriorated credit quality (“non-PCD loans”), or (ii) loans purchased that have experienced a more-than-insignificant deterioration in credit quality, referred to as purchased credit deteriorated loans ("PCD loans”).
Acquired non‑PCD loans. Acquired non‑PCD loans are those loans for which there was no evidence of a more-than-insignificant credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments. Acquired non‑PCD loans, together with originated loans, are referred to as Non‑PCD loans. Purchase discounts or premiums on acquired non‑PCD 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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Purchased loans with credit deterioration. Prior to January 1, 2020, purchased credit impaired loans were accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” At the time of acquisition, these loans were recorded at estimated fair value based upon estimated future cash flows with no related allowance for credit losses.
Effective January 1, 2020, upon the adoption of ASU 2016-13, an entity records purchased financial assets with credit deterioration ("PCD assets") at the purchase price plus the allowance for credit losses expected at the time of acquisition. This allowance is recognized through a gross-up that increases the amortized cost basis of the asset with no effect on net income. Subsequent changes (favorable and unfavorable) in expected cash flows are recognized immediately in net income by adjusting the related allowance.
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 (loss), according to our fixed asset accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Noninterest income" in the consolidated statements of earnings (loss).
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.
Individually Evaluated Loans and Leases. Loans and leases that do not share similar risk characteristics with other financial assets are individually evaluated for impairment and excluded from loan pools used within the collective evaluation of estimated credit losses. We defined the following criteria for what constitutes a “default,” which results in a loan no longer sharing similar risk characteristics with other loans, and therefore requires an individual evaluation for expected credit losses. The criteria for default may include any one of the following:
•On nonaccrual status,
•Modified under a TDR,
•Payment delinquency of 90 days or more,
•Partial charge-off recognized,
•Risk rated doubtful or loss, or
•Reasonably expected to be modified under a TDR.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Defaulted loans and leases with outstanding balances over $250,000 are reviewed individually for expected credit loss. Individually evaluated loans are measured at the present value of the expected future cash flows discounted at the loan's initial effective interest rate, unless the loans are collateral dependent, in which case loan impairment is based on the estimated fair value of the underlying collateral. A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the 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. An individually evaluated reserve and/or charge off would be recognized when the present value of expected future cash flows or the fair value of the underlying collateral is below the amortized cost of the loan. If the measured amount of any individually reviewed loan exceeds its amortized cost, further review is required to determine whether a positive allowance should be added (but only up to amounts previously written off) to its amortized cost basis in order to reflect the net amount expected to be collected.
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.
Between March 2020 and December 2021, the Company granted various commercial and consumer loan modifications to provide borrowers relief from the economic impacts of COVID-19. In accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, the Company elected to not apply TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act.
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. Loan modifications that qualify as troubled debt restructurings are individually evaluated for expected credit losses 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.
Impaired loans and leases. Prior to January 1, 2020, a loan or lease was considered impaired when it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan or lease agreement. Impaired loans and leases included loans and leases on nonaccrual status and performing troubled debt restructured loans. Income from impaired loans was recognized on an accrual basis unless the loan was on nonaccrual status. Income from loans on nonaccrual status was recognized to the extent cash was received and when the loan’s principal balance was deemed collectable. We measured 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 was 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 was not collateral‑dependent. The impairment amount on a collateral‑dependent loan or lease was charged‑off, and the impairment amount on a loan that was not collateral‑dependent was generally recorded as a specific reserve within our allowance for loan and lease losses.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(i) Allowance for Credit Losses on Loans and Leases Held for Investment
Effective January 1, 2020, upon the adoption of ASU 2016-13, the Company replaced the incurred loss accounting approach with the current expected credit loss ("CECL") approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.
The allowance for credit losses on loans and leases held for investment is the combination of the allowance for loan and lease losses and the reserve for unfunded loan commitments. The allowance for loan and lease losses is reported as a reduction of the amortized cost basis of loans and leases, while the reserve for unfunded loan commitments is included within "Accrued interest payable and other liabilities" on the consolidated balance sheets. The amortized cost basis of loans and leases does not include accrued interest receivable, which is included in "Other assets" on the consolidated balance sheets. The "Provision for credit losses" on the consolidated statements of earnings (loss) is a combination of the provision for loan and lease losses and the provision for unfunded loan commitments.
Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. The resulting allowance for loan and lease losses is deducted from the associated amortized cost basis to reflect the net amount expected to be collected. Subsequent changes in this estimate are recorded through the provision for credit losses and the allowance. The CECL methodology could result in significant changes to both the timing and amounts of provision for credit losses and the allowance as compared to historical periods. Loans and leases that are deemed to be uncollectable are charged off and deducted from the allowance. The provision for credit losses and recoveries on loans and leases previously charged off are added to the allowance.
The allowance for loan and lease losses is comprised of an individually evaluated component for loans and leases that no longer share similar risk characteristics with other loans and leases and a pooled loans component for loans and leases that share similar risk characteristics.
A loan or lease with an outstanding balance greater than $250,000 is individually evaluated for expected credit loss when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. We select loans and leases for individual assessment on an ongoing basis using certain criteria such as payment performance, borrower reported and forecasted financial results, and other external factors when appropriate. We measure the current expected credit loss of an individually evaluated loan or lease based upon the fair value of the underlying collateral if the loan or lease is collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease is not collateral-dependent. To the extent a loan or lease balance exceeds the estimated collectable value, a reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan is collateral-dependent.
Our CECL methodology for the pooled loans component includes both quantitative and qualitative loss factors which are applied to our population of loans and leases and assessed at a pool level. The quantitative CECL model estimates credit losses by applying pool-specific probability of default ("PD") and loss given default ("LGD") rates to the expected exposure at default ("EAD") over the contractual life of loans and leases. The qualitative component considers internal and external risk factors that may not be adequately assessed in the quantitative model.
The loan portfolio is segmented into four loan segments, eight loan classes, and 18 loan pools (excluding Paycheck Protection Program loans, which are fully government guaranteed) based upon loan type that share similar default risk characteristics to calculate quantitative loss factors for each pool. Two of these loan pools have insignificant current balances and/or insignificant historical losses, thus, estimated losses are calculated using historical loss rates from the first quarter of 2009 to the current period rather than econometric regression modeling. For the remaining 16 loan pools, we estimate the PD during the reasonable and supportable forecast period using seven econometric regression models developed to correlate macroeconomic variables to historical credit performance (based on quarterly transition matrices for the economic cycle from 2009 to 2019, which include risk rating upgrades/downgrades and defaults).
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The loans and unfunded commitments are grouped into eight LGD pools based on portfolio classes that share similar collateral risk characteristics. LGD rates are computed based on the net charge-offs recognized divided by the EAD of defaulted loans starting with the first quarter of 2009 to the current period. The PD and LGD rates are applied to the EAD at the loan or lease level based on contractual scheduled payments and estimated prepayments. We use our actual historical loan prepayment experience from 2009 to 2019, consistent with the economic cycle used for our PD regression models, to estimate future prepayments by loan pool. Loans and leases with outstanding balances less than or equal to $250,000, where it is probable that we will be unable to collect all amounts due according to the contractual terms of the agreement, remain in their respective pools and are assigned a 100% probability of default.
For the reasonable and supportable forecast period, future macroeconomic events and circumstances are estimated over a 4-quarter time horizon using a single scenario economic forecast that is consistent with management's current expectations for the 16 loan pools. We use economic forecasts from Moody's Analytics in this process. The economic forecast is updated monthly; therefore, the forecast used for each quarter-end calculation is generally released a few weeks prior to quarter-end. If economic conditions as of the balance sheet date change materially, management would consider a qualitative adjustment. The key macroeconomic assumptions used in each of the seven PD regression models include two or three of the following economic indicators: Real GDP, unemployment rates, CRE Price Index, the BBB corporate spread, nominal disposable income, and CPI.
The quantitative CECL model applies the projected rates based on the economic forecasts for the 4-quarter reasonable and supportable forecast horizon to EAD to estimate defaulted loans. During this forecast horizon, prepayment rates during a historical period that exhibits economic conditions most similar to the economic forecast are used to estimate EAD. If no historical period from the 2009 to 2019 economic cycle exhibits economic conditions that are similar to the economic forecast, management uses its best estimate of prepayments expected over the reasonable and supportable forecast period which may, in some circumstances, be the average of all historical prepayment experience. Historical LGD rates are applied to estimated defaulted loans to determine estimated credit losses. We then use a 2-quarter reversion period to revert on a straight-line basis from the PD, LGD, and prepayment rates used during the reasonable and supportable forecast period to the Company’s historical PD, LGD, and prepayment experience. Subsequent to the reversion period for the remaining contractual life of loans and leases, the PD, LGD, and prepayment rates are based on historical experience during the economic cycle from 2009 to 2019. PD regression models and prepayment rates are updated on an annual basis. During the annual model performance assessment for 2021, we considered updating the prepayment rates and PD models with 2020 data, however, we elected not to include historical data from 2020 to assess the quantitative expected credit losses because we believe 2020 did not represent normal economic behavior considering the changes in macroeconomic variables and the significant levels of government relief programs. As such, we continued to use the most recent and complete economic cycle from 2009 to 2019 to assess quantitative expected credit losses. LGD rates are updated every quarter to reflect current charge-off activity.
The PDs calculated by the quantitative models are highly correlated to our internal risk ratings assigned to each loan and lease. To ensure the accuracy of our credit risk ratings, an independent credit review function assesses the appropriateness of the credit risk ratings assigned to loans and leases on a regular basis. The credit risk ratings assigned to every loan and lease are as follows:
•High Pass: (Risk ratings 1-2) Loans and leases rated as "high pass" exhibit a favorable credit profile and have minimal risk characteristics. Repayment in full is expected, even in adverse economic conditions.
•Pass: (Risk ratings 3-4) Loans and leases rated as "pass" are not adversely classified and collection and repayment in full are expected.
•Special Mention: (Risk rating 5) Loans and leases rated as "special mention" have a potential weakness that requires management's attention. If not addressed, these potential weaknesses may result in further deterioration in the borrower's ability to repay the loan or lease.
•Substandard: (Risk rating 6) Loans and leases rated as "substandard" have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the possibility that we will sustain some loss if the weaknesses are not corrected.
•Doubtful: (Risk rating 7) Loans and leases rated as "doubtful" have all the weaknesses of those rated as "substandard," with the additional trait that the weaknesses make collection or repayment in full highly questionable and improbable.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
In addition to our internal risk rating process, our federal and state banking regulators, as an integral part of their examination process, periodically review the Company’s loan and lease risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on information available to them at the time of their examinations. Risk rating downgrades generally result in increases in the provisions for credit losses and the allowance for credit losses.
The qualitative portion of the reserve on pooled loans and leases represents management’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative reserve. The qualitative loss factors consider idiosyncratic risk factors, conditions that may not be reflected in quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects our best estimate of current expected credit losses. Current and forecasted economic trends and underlying market values for collateral dependent loans are generally considered to be encompassed within the CECL quantitative reserve. An incremental qualitative adjustment may be considered when economic forecasts exhibit higher levels of volatility or uncertainty.
In addition to economic conditions and collateral dependency, the other qualitative criteria we consider when establishing the loss factors include the following:
•Legal and Regulatory - matters that could impact our borrowers’ ability to repay our loans and leases;
•Concentrations - loan and lease portfolio composition and any loan concentrations;
•Lending Policy - current lending policies and the effects of any new policies or policy amendments;
•Nature and Volume - loan and lease production volume and mix;
•Problem Loan Trends - loan and lease portfolio credit performance trends, including a borrower's financial condition, credit rating, and ability to meet loan payment requirements;
•Loan Review - results of independent credit review; and
•Management - changes in management related to credit administration functions.
We estimate the reserve for unfunded loan commitments using the same PD, LGD, and prepayment rates for the quantitative credit losses and qualitative loss factors as used for the allowance for loan and lease losses. The EAD for the reserve for unfunded loan commitments is computed using expected future utilization rates of the unfunded commitments during the contractual life of the commitments based on historical usage by loan pool from 2015 to 2020. The utilization rates are updated on an annual basis.
The CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Most of the steps in the methodology involve judgment and are subjective in nature including, among other things: segmenting the loan and lease portfolio; determining the amount of loss history to consider; selecting predictive econometric regression models that use appropriate macroeconomic variables; determining the methodology to forecast prepayments; selecting the most appropriate economic forecast scenario; determining the length of the reasonable and supportable forecast and reversion periods; estimating expected utilization rates on unfunded loan commitments; and assessing relevant and appropriate qualitative factors. In addition, the CECL methodology is dependent on economic forecasts which are inherently imprecise and will change from period to period. Although the allowance for credit losses is considered appropriate, there can be no assurance that it will be sufficient to absorb future losses.
Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan and lease portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's consolidated financial statements.
Prior to January 1, 2020, the allowance for loan losses was measured using the incurred loss accounting approach. The allowance for credit losses was 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 was 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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The allowance for loan and lease losses had a general reserve component for unimpaired loans and leases and a specific reserve component for impaired loans and leases.
A loan or lease was considered impaired when it was probable that we would be unable to collect all amounts due according to the original contractual terms of the agreement. We assessed 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 measured impairment of a loan or lease based upon the fair value of the underlying collateral if the loan or lease was collateral-dependent or the present value of cash flows, discounted at the effective interest rate, if the loan or lease was not collateral-dependent. To the extent a loan or lease balance exceeded the estimated collectable value, a specific reserve or charge-off was recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral if the loan was collateral-dependent. Impaired loans and leases with outstanding balances less than or equal to $250,000 might 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.
Our allowance methodology for the general reserve component included both quantitative and qualitative loss factors which were applied to our population of unimpaired loans and leases to estimate our general reserves. The quantitative loss factors determination was based on a probability of default/loss given default ("PD/LGD") methodology which considered 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 had higher quantitative loss factors. The qualitative loss factors considered, 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 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 was inclusive of the average timeframe over which charge-offs typically occurred following loan or lease origination and allowed for the capture of sufficient loss observations that were 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 considered the current credit risk ratings, giving greater weight to loans with more adverse credit risk ratings. We recognized that the determination of the allowance for credit losses was sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time.
(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 (loss) 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 (loss) 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."
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
(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 annually unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Goodwill represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Impairment exists when the carrying value of the goodwill exceeds its fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to "Noninterest expense" in the consolidated statements of earnings (loss).
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 (loss).
(n) Operating Leases
As of December 31, 2021, 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 ROU assets and operating lease liabilities, which are reported in "Other assets" and "Accrued interest payable and other 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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 (loss).
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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(p) Derivative Instruments
The Company uses derivatives to manage exposure to market risk, primarily foreign currency risk and interest rate risk, and to assist customers with their risk management objectives. The Company uses foreign exchange contracts to manage the foreign exchange rate risk associated with certain foreign currency-denominated assets and liabilities. As of December 31, 2021, 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 foreign currency 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 (loss).
The Bank offers interest rate swap products to certain loan customers to allow them to hedge the risk of rising interest rates on their variable-rate loans. When such products are issued, we also enter into an offsetting swap with institutional counterparties to eliminate the interest rate risk to us. These back-to-back swap agreements, which generate fee income for us, are intended to offset each other. We retain the credit risk of the original loan. The net cash flow for us is equal to the interest income received from a variable rate loan originated with the client plus a fee. These swaps are not designated as accounting hedges and are recorded at fair value in "Other assets" and "Accrued interest payable and other liabilities" in the consolidated balance sheets. The changes in fair value are recorded in "Noninterest income - other" in the consolidated statements of earnings (loss).
In connection with negotiated credit facilities and certain other services, we may obtain equity warrant assets giving us the right to acquire stock in primarily private, venture-backed companies. We account for equity warrant assets as derivatives when they contain net settlement terms and other qualifying criteria under ASC 815. These equity warrant assets are measured at estimated fair value on a monthly basis and are classified as "Other assets" in the consolidated balance sheets at the time they are obtained.
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.
(q) Comprehensive Income (Loss)
Comprehensive income (loss) 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 (loss).
(r) Earnings (Loss) 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 (loss) 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 (loss) to determine that amount of earnings (loss) available to common stockholders. In the two‑class method, the amount of our earnings (loss) available to common stockholders is divided by the weighted average shares outstanding, excluding any unvested restricted stock, for both the basic and diluted earnings (loss) per share.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 consolidated statements of earnings (loss) 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, 2021 and since December 31, 2015, we have operated as one reportable segment. Civic, which we acquired on February 1, 2021, is an operating segment, however, it does not meet the quantitative thresholds for disclosure as a 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, HOA services, and treasury cash management services.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(u) Recently Issued Accounting Standards
| | | | | | | | | | | | | | | | | | | | |
| | | | Effective | | Effect on the Financial Statements |
Standard | | Description | | Date | | or Other Significant Matters |
ASU 2020-04, "Reference Rate Reform (Topic 848)" and ASU 2021-01, “Reference Rate Reform (Topic 848): Scope)" | | This standard provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other agreements affected by the anticipated transition away from LIBOR toward new interest reference rates. For agreements that are modified because of reference rate reform and that meet certain scope guidance: (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. Additionally, the amendments in ASU 2021-01 clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. ASU 2020-04 is effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. ASU 2021-01 is also effective immediately. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to January 7, 2021 and up to December 31, 2022.
| | Effective upon the issuance date of March 12, 2020, and once adopted, will apply to contract modifications made and hedging relationships entered into on or before December 31, 2022. | | The Company has established a cross-functional project team and implementation plan to facilitate the LIBOR transition. As of December 31, 2021, the Company permanently ceased originating any new loans or entering into any transaction that would increase its LIBOR-based exposure. For all new variable-rate and hybrid loans, the Company primarily offers Prime and SOFR as the variable-rate index, but may consider alternate rates such as the American Interbank Offered Rate (“Ameribor”) and others based on market conditions and/or the type of loan or financial instrument. The Company has completed its readiness efforts to identify loans and other financial instruments that are impacted by the discontinuance of LIBOR. The Company has also completed its review for fallback language contained in contracts for LIBOR-based loans and other financial instruments and has begun to execute a transition plan to amend those legacy contracts maturing after June 30, 2023 that do not have or have inadequate fallback language by adding fallback language or to convert the base rate of the contract to a SOFR-based rate or another rate or index offered by the Company. The Company will also continue to assess impacts to its operations, financial models, data and technology as part of our transition plan. The Company is currently evaluating the impact of this Update on its consolidated financial statements but does not expect it to have a material impact. |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | |
| | | | Effective | | Effect on the Financial Statements |
Standard | | Description | | Date | | or Other Significant Matters |
ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | | This standard requires that an entity (acquirer) recognizes and measures contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At acquisition date, an acquirer should account for the related revenue contracts with customers in accordance with Topic 606 as if it had originated the contracts. The acquirer should consider the terms of the acquired contracts, such as timing of payment, identify each performance obligation in the contracts and allocate the total transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception or contract modification to determine what should be recorded at the acquisition date. The amendments improve comparability by providing consistent recognition and measurement guidance for revenue contracts with customers whether they are acquired and not acquired in a business combination. The amendments should be applied prospectively to business combinations occurring on or after the effective date. Additionally, early adoption is permitted.
| | January 1, 2023 | | The Company has not yet determined the effect of the adoption of ASU 2021-08 on the Company’s consolidated financial statements. |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2. ACQUISITIONS
The following assets acquired and liabilities assumed, both tangible and intangible, of the acquired entity are presented at estimated fair value as of the acquisition date:
| | | | | | | | | | | |
| Acquisition and | | Acquisition and |
| Date Acquired | | Date Acquired |
| Homeowners | | Civic |
| Association | | Financial |
| Services Division of | | Services, |
| MUFG Union Bank | | LLC |
| October 8, 2021 | | February 1, 2021 |
| (In thousands) |
Assets Acquired: | | | |
Cash and due from banks | $ | 4,118,009 | | | $ | 37,331 | |
| | | |
| | | |
| | | |
| | | |
Loans and leases | 6,486 | | | 67,294 | |
Premises and equipment | 331 | | | 1,197 | |
| | | |
| | | |
Goodwill | 201,618 | | | 125,448 | |
Core deposit and customer relationship intangibles | 33,300 | | | 750 | |
Other assets | 3,149 | | | 75,977 | |
Total assets acquired | $ | 4,362,893 | | | $ | 307,997 | |
| | | |
Liabilities Assumed: | | | |
Noninterest-bearing demand deposits | $ | 1,585,810 | | | $ | 37,339 | |
Interest-bearing deposits | 2,536,965 | | | — | |
Total deposits | 4,122,775 | | | 37,339 | |
Borrowings | — | | | 50,210 | |
| | | |
Accrued interest payable and other liabilities | 2,320 | | | 60,028 | |
Total liabilities assumed | $ | 4,125,095 | | | $ | 147,577 | |
| | | |
Total consideration - paid in cash | $ | 237,798 | | | $ | 160,420 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Acquisition of Civic
On February 1, 2021, the Bank completed the acquisition of Civic in an all-cash transaction. Civic, located in Redondo Beach, California, is one of the leading lenders in the United States specializing in business-purpose residential non-owner-occupied investment properties. The acquisition of Civic advances the Bank’s strategy to diversify and expand its lending portfolio, diversify its revenue streams, and deploy excess liquidity into higher-yielding assets. Civic operates as a subsidiary of the Bank.
The Civic acquisition has been accounted for under the acquisition method of accounting. We acquired $308.0 million of assets and assumed $147.6 million of liabilities upon closing of the acquisition. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The application of the acquisition method of accounting resulted in the recognition of goodwill of $125.4 million. All of the recognized goodwill is expected to be deductible for tax purposes.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Acquisition of HOA Business
On October 8, 2021, the Bank completed the acquisition of the HOA Business in an all-cash transaction. The HOA Business is a long-time provider of specialized HOA banking services to a national base of community HOA management companies and their homeowners associations. This acquisition significantly expanded the Bank’s existing HOA banking practice, which provides lockbox, electronic receivables processing and other financial services to HOA management companies. This acquisition advanced the Bank’s strategy to expand its product offerings to its customers and to diversify its revenue and funding sources.
The Bank paid cash consideration of $237.8 million, which represented the aggregate of a 5.9% deposit premium and the net book value of certain acquired assets and assumed liabilities. The HOA Business acquisition has been accounted for under the acquisition method of accounting. We acquired $4.4 billion of assets and assumed $4.1 billion of liabilities upon closing of the acquisition. We made significant estimates and exercised significant judgment in estimating fair values and accounting for such acquired assets and assumed liabilities. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. The application of the acquisition method of accounting resulted in the recognition of goodwill of $201.6 million. All of the recognized goodwill is expected to be deductible for tax purposes.
NOTE 3. 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 year ended December 31, 2021 and 2020 were $0 and $41.3 million. As of December 31, 2021 and 2020, we pledged cash collateral for our derivative contracts of $2.0 million and $2.9 million.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| | | Gross | | Gross | | | | | | Gross | | Gross | | |
| Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair |
Security Type | Cost | | Gains | | Losses | | Value | | Cost | | Gains | | Losses | | Value |
| (In thousands) |
Agency residential MBS | $ | 2,921,993 | | | $ | 8,866 | | | $ | (32,649) | | | $ | 2,898,210 | | | $ | 329,488 | | | $ | 12,483 | | | $ | (897) | | | $ | 341,074 | |
Municipal securities | 2,248,749 | | | 75,192 | | | (7,973) | | | 2,315,968 | | | 1,438,004 | | | 93,631 | | | (18) | | | 1,531,617 | |
Agency commercial MBS | 1,660,516 | | | 37,664 | | | (9,213) | | | 1,688,967 | | | 1,207,676 | | | 74,238 | | | (37) | | | 1,281,877 | |
Agency residential CMOs | 1,021,716 | | | 22,288 | | | (5,870) | | | 1,038,134 | | | 1,172,166 | | | 47,994 | | | (280) | | | 1,219,880 | |
U.S. Treasury securities | 973,555 | | | 1,641 | | | (8,298) | | | 966,898 | | | 4,989 | | | 313 | | | — | | | 5,302 | |
Corporate debt securities | 514,077 | | | 13,774 | | | (757) | | | 527,094 | | | 308,803 | | | 3,490 | | | (404) | | | 311,889 | |
Private label commercial MBS | 453,314 | | | 147 | | | (3,244) | | | 450,217 | | | 81,878 | | | 1,089 | | | (10) | | | 82,957 | |
Collateralized loan obligations | 385,410 | | | 396 | | | (444) | | | 385,362 | | | 136,777 | | | 23 | | | (924) | | | 135,876 | |
Private label residential CMOs | 265,851 | | | 1,857 | | | (3,291) | | | 264,417 | | | 110,891 | | | 6,076 | | | (21) | | | 116,946 | |
Asset-backed securities | 129,387 | | | 484 | | | (324) | | | 129,547 | | | 166,861 | | | 445 | | | (760) | | | 166,546 | |
SBA securities | 28,950 | | | 726 | | | (32) | | | 29,644 | | | 39,437 | | | 2,217 | | | (27) | | | 41,627 | |
Total | $ | 10,603,518 | | | $ | 163,035 | | | $ | (72,095) | | | $ | 10,694,458 | | | $ | 4,996,970 | | | $ | 241,999 | | | $ | (3,378) | | | $ | 5,235,591 | |
See Note 15. Fair Value Measurements for information on fair value measurements and methodology.
As of December 31, 2021, securities available‑for‑sale with a fair value of $532.4 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 for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Sales of Securities Available-for-Sale | 2021 | | 2020 | | 2019 |
| (In thousands) |
Amortized cost of securities sold | $ | 365,733 | | | $ | 160,254 | | | $ | 1,559,415 | |
| | | | | |
Gross realized gains | $ | 1,680 | | | $ | 13,222 | | | $ | 29,584 | |
Gross realized losses | (65) | | | (51) | | | (4,139) | |
Net realized gains | $ | 1,615 | | | $ | 13,171 | | | $ | 25,445 | |
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 as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less Than 12 Months | | 12 Months or More | | Total |
| | | Gross | | | | Gross | | | | Gross |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
Security Type | Value | | Losses | | Value | | Losses | | Value | | Losses |
| (In thousands) |
Agency residential MBS | $ | 2,502,536 | | | $ | (31,670) | | | $ | 57,329 | | | $ | (979) | | | $ | 2,559,865 | | | $ | (32,649) | |
Municipal securities | 505,080 | | | (6,965) | | | 29,726 | | | (1,008) | | | 534,806 | | | (7,973) | |
Agency commercial MBS | 440,938 | | | (5,066) | | | 106,745 | | | (4,147) | | | 547,683 | | | (9,213) | |
Agency residential CMOs | 216,445 | | | (3,757) | | | 67,340 | | | (2,113) | | | 283,785 | | | (5,870) | |
U.S. Treasury securities | 628,767 | | | (8,298) | | | — | | | — | | | 628,767 | | | (8,298) | |
Corporate debt securities | 32,761 | | | (757) | | | — | | | — | | | 32,761 | | | (757) | |
Private label commercial MBS | 397,619 | | | (3,244) | | | — | | | — | | | 397,619 | | | (3,244) | |
Collateralized loan obligations | 137,619 | | | (374) | | | 43,730 | | | (70) | | | 181,349 | | | (444) | |
Private label residential CMOs | 201,988 | | | (3,291) | | | — | | | — | | | 201,988 | | | (3,291) | |
Asset-backed securities | 38,742 | | | (137) | | | 15,762 | | | (187) | | | 54,504 | | | (324) | |
SBA securities | — | | | — | | | 1,864 | | | (31) | | | 1,864 | | | (32) | |
Total | $ | 5,102,495 | | | $ | (63,559) | | | $ | 322,496 | | | $ | (8,535) | | | $ | 5,424,991 | | | $ | (72,095) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Less Than 12 Months | | 12 Months or More | | Total |
| | | Gross | | | | Gross | | | | Gross |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
Security Type | Value | | Losses | | Value | | Losses | | Value | | Losses |
| (In thousands) |
Agency residential MBS | $ | 90,722 | | | $ | (897) | | | $ | — | | | $ | — | | | $ | 90,722 | | | $ | (897) | |
Municipal securities | 5,919 | | | (18) | | | — | | | — | | | 5,919 | | | (18) | |
Agency commercial MBS | 58,408 | | | (37) | | | — | | | — | | | 58,408 | | | (37) | |
Agency residential CMOs | 97,863 | | | (280) | | | — | | | — | | | 97,863 | | | (280) | |
Corporate debt securities | 87,596 | | | (404) | | | — | | | — | | | 87,596 | | | (404) | |
Private label commercial MBS | 3,058 | | | (10) | | | — | | | — | | | 3,058 | | | (10) | |
Collateralized loan obligations | 96,442 | | | (729) | | | 28,972 | | | (195) | | | 125,414 | | | (924) | |
Private label residential CMOs | 788 | | | (19) | | | 74 | | | (2) | | | 862 | | | (21) | |
Asset-backed securities | 14,636 | | | (53) | | | 61,031 | | | (707) | | | 75,667 | | | (760) | |
SBA securities | 2,127 | | | (27) | | | — | | | — | | | 2,127 | | | (27) | |
Total | $ | 457,559 | | | $ | (2,474) | | | $ | 90,077 | | | $ | (904) | | | $ | 547,636 | | | $ | (3,378) | |
The securities that were in an unrealized loss position at December 31, 2021, were considered impaired and required further review to determine if the unrealized losses were credit-related. We concluded their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. We also considered the seniority of the tranches and U.S. government agency guarantees, if any, to assess whether an unrealized loss was credit-related. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "other comprehensive income" in stockholders' equity. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.
PACWEST BANCORP AND SUBSIDIARIES
Notes to 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.
| | | | | | | | | | | |
| December 31, 2021 |
| Amortized | | Fair |
Maturity | Cost | | Value |
| (In thousands) |
Due in one year or less | $ | 54,301 | | | $ | 54,685 | |
Due after one year through five years | 635,456 | | | 662,377 | |
Due after five years through ten years | 3,526,824 | | | 3,544,687 | |
Due after ten years | 6,386,937 | | | 6,432,709 | |
Total securities available-for-sale | $ | 10,603,518 | | | $ | 10,694,458 | |
MBS and CMOs have contractual maturity dates, but require periodic payments based upon scheduled amortization terms. Actual principal collections on these securities usually occur more rapidly than the scheduled amortization terms because of prepayments made by obligors of the underlying loan collateral.
FHLB Stock
In connection with outstanding FHLB advances, the Bank owned FHLB stock carried at cost of $17.3 million at December 31, 2021 and 2020. At December 31, 2021 and 2020, the Bank was required to own FHLB stock equal to a percentage of outstanding FHLB advances. We evaluated the carrying value of our FHLB stock investment at December 31, 2021 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:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Taxable interest | $ | 118,561 | | | $ | 80,426 | | | $ | 85,968 | |
Non-taxable interest | 33,916 | | | 24,771 | | | 27,955 | |
Dividend income | 991 | | | 1,573 | | | 1,646 | |
Total interest income on investment securities | $ | 153,468 | | | $ | 106,770 | | | $ | 115,569 | |
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:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Real estate mortgage | $ | 11,189,278 | | | $ | 7,905,193 | |
Real estate construction and land | 3,491,340 | | | 3,393,145 | |
Commercial | 7,888,068 | | | 7,534,801 | |
Consumer | 457,622 | | | 320,218 | |
Total gross loans and leases held for investment | 23,026,308 | | | 19,153,357 | |
Deferred fees, net | (84,760) | | | (69,980) | |
Total loans and leases held for investment, net of deferred fees | 22,941,548 | | | 19,083,377 | |
Allowance for loan and lease losses | (200,564) | | | (348,181) | |
Total loans and leases held for investment, net (1) | $ | 22,740,984 | | | $ | 18,735,196 | |
____________________
(1) Excludes accrued interest receivable of $80.3 million and $79.7 million at December 31, 2021 and December 31, 2019, respectively, which is recorded in "Other assets" on the consolidated balance sheets.
The following tables present an aging analysis of our loans and leases held for investment, net of deferred fees, by loan portfolio segment and class as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 30 - 89 | | 90 or More | | | | | | |
| Days | | Days | | Total | | | | |
| Past Due | | Past Due | | Past Due | | Current | | Total |
| (In thousands) |
Real estate mortgage: | | | | | | | | | |
Commercial | $ | 5,307 | | | $ | 2,236 | | | $ | 7,543 | | | $ | 3,754,756 | | | $ | 3,762,299 | |
Income producing and other residential | 40,505 | | | 9,666 | | | 50,171 | | | 7,366,250 | | | 7,416,421 | |
Total real estate mortgage | 45,812 | | | 11,902 | | | 57,714 | | | 11,121,006 | | | 11,178,720 | |
Real estate construction and land: | | | | | | | | | |
Commercial | — | | | — | | | — | | | 832,591 | | | 832,591 | |
Residential | 7,271 | | | 2,223 | | | 9,494 | | | 2,595,042 | | | 2,604,536 | |
Total real estate construction and land | 7,271 | | | 2,223 | | | 9,494 | | | 3,427,633 | | | 3,437,127 | |
Commercial: | | | | | | | | | |
Asset-based | — | | | 464 | | | 464 | | | 4,075,013 | | | 4,075,477 | |
Venture capital | — | | | — | | | — | | | 2,320,593 | | | 2,320,593 | |
Other commercial | 955 | | | 3,601 | | | 4,556 | | | 1,467,425 | | | 1,471,981 | |
Total commercial | 955 | | | 4,065 | | | 5,020 | | | 7,863,031 | | | 7,868,051 | |
Consumer | 1,004 | | | 276 | | | 1,280 | | | 456,370 | | | 457,650 | |
Total | $ | 55,042 | | | $ | 18,466 | | | $ | 73,508 | | | $ | 22,868,040 | | | $ | 22,941,548 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| 30 - 89 | | 90 or More | | | | | | |
| Days | | Days | | Total | | | | |
| Past Due | | Past Due | | Past Due | | Current | | Total |
| (In thousands) |
Real estate mortgage: | | | | | | | | | |
Commercial | $ | 6,750 | | | $ | 29,145 | | | $ | 35,895 | | | $ | 4,060,776 | | | $ | 4,096,671 | |
Income producing and other residential | 600 | | | 373 | | | 973 | | | 3,802,292 | | | 3,803,265 | |
Total real estate mortgage | 7,350 | | | 29,518 | | | 36,868 | | | 7,863,068 | | | 7,899,936 | |
Real estate construction and land: | | | | | | | | | |
Commercial | — | | | — | | | — | | | 1,117,121 | | | 1,117,121 | |
Residential | 759 | | | — | | | 759 | | | 2,242,401 | | | 2,243,160 | |
Total real estate construction and land | 759 | | | — | | | 759 | | | 3,359,522 | | | 3,360,281 | |
Commercial: | | | | | | | | | |
Asset-based | — | | | 2,128 | | | 2,128 | | | 3,427,155 | | | 3,429,283 | |
Venture capital | 540 | | | — | | | 540 | | | 1,697,968 | | | 1,698,508 | |
Other commercial | 2,323 | | | 4,766 | | | 7,089 | | | 2,368,025 | | | 2,375,114 | |
Total commercial | 2,863 | | | 6,894 | | | 9,757 | | | 7,493,148 | | | 7,502,905 | |
Consumer | 1,260 | | | 111 | | | 1,371 | | | 318,884 | | | 320,255 | |
Total | $ | 12,232 | | | $ | 36,523 | | | $ | 48,755 | | | $ | 19,034,622 | | | $ | 19,083,377 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Nonaccrual | | Performing | | Total | | Nonaccrual | | Performing | | Total |
| (In thousands) |
Real estate mortgage: | | | | | | | | | | | |
Commercial | $ | 27,540 | | | $ | 3,734,759 | | | $ | 3,762,299 | | | $ | 43,731 | | | $ | 4,052,940 | | | $ | 4,096,671 | |
Income producing and other residential | 12,292 | | | 7,404,129 | | | 7,416,421 | | | 1,826 | | | 3,801,439 | | | 3,803,265 | |
Total real estate mortgage | 39,832 | | | 11,138,888 | | | 11,178,720 | | | 45,557 | | | 7,854,379 | | | 7,899,936 | |
Real estate construction and land: | | | | | | | | | | | |
Commercial | — | | | 832,591 | | | 832,591 | | | 315 | | | 1,116,806 | | | 1,117,121 | |
Residential | 4,715 | | | 2,599,821 | | | 2,604,536 | | | — | | | 2,243,160 | | | 2,243,160 | |
Total real estate construction and land | 4,715 | | | 3,432,412 | | | 3,437,127 | | | 315 | | | 3,359,966 | | | 3,360,281 | |
Commercial: | | | | | | | | | | | |
Asset-based | 1,464 | | | 4,074,013 | | | 4,075,477 | | | 2,679 | | | 3,426,604 | | | 3,429,283 | |
Venture capital | 2,799 | | | 2,317,794 | | | 2,320,593 | | | 1,980 | | | 1,696,528 | | | 1,698,508 | |
Other commercial | 11,950 | | | 1,460,031 | | | 1,471,981 | | | 40,243 | | | 2,334,871 | | | 2,375,114 | |
Total commercial | 16,213 | | | 7,851,838 | | | 7,868,051 | | | 44,902 | | | 7,458,003 | | | 7,502,905 | |
Consumer | 414 | | | 457,236 | | | 457,650 | | | 389 | | | 319,866 | | | 320,255 | |
Total | $ | 61,174 | | | $ | 22,880,374 | | | $ | 22,941,548 | | | $ | 91,163 | | | $ | 18,992,214 | | | $ | 19,083,377 | |
The amount of interest income that would have been recorded on nonaccrual loans and leases at December 31, 2021 and 2020 had such loans and leases been current in accordance with their original terms was $4.9 million and $7.5 million for 2021 and 2020.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2021, nonaccrual loans and leases included $18.5 million of loans and leases 90 or more days past due, $6.3 million of loans 30 to 89 days past due and $36.4 million of current loans that were placed on nonaccrual status based on management’s judgment regarding their collectability. At December 31, 2020, nonaccrual loans and leases included $36.5 million of loans and leases 90 or more days past due, $3.4 million of loans 30 to 89 days past due and $51.3 million of current loans that were placed on nonaccrual status based on management’s judgment regarding their collectability.
As of December 31, 2021, our three largest loan relationships on nonaccrual status had an aggregate carrying value of $14.2 million and represented 23% of total nonaccrual loans and leases.
The following tables present the credit risk rating categories for loans and leases held for investment 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Classified | | Special Mention | | Pass | | Total |
| (In thousands) |
Real estate mortgage: | | | | | | | |
Commercial | $ | 62,206 | | | $ | 191,809 | | | $ | 3,508,284 | | | $ | 3,762,299 | |
Income producing and other residential | 17,700 | | | 19,848 | | | 7,378,873 | | | 7,416,421 | |
Total real estate mortgage | 79,906 | | | 211,657 | | | 10,887,157 | | | 11,178,720 | |
Real estate construction and land: | | | | | | | |
Commercial | — | | | 67,727 | | | 764,864 | | | 832,591 | |
Residential | 4,715 | | | 1,720 | | | 2,598,101 | | | 2,604,536 | |
Total real estate construction and land | 4,715 | | | 69,447 | | | 3,362,965 | | | 3,437,127 | |
Commercial: | | | | | | | |
Asset-based | 4,591 | | | 78,305 | | | 3,992,581 | | | 4,075,477 | |
Venture capital | 4,794 | | | 14,833 | | | 2,300,966 | | | 2,320,593 | |
Other commercial | 21,659 | | | 15,528 | | | 1,434,794 | | | 1,471,981 | |
Total commercial | 31,044 | | | 108,666 | | | 7,728,341 | | | 7,868,051 | |
Consumer | 439 | | | 1,841 | | | 455,370 | | | 457,650 | |
Total | $ | 116,104 | | | $ | 391,611 | | | $ | 22,433,833 | | | $ | 22,941,548 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Classified | | Special Mention | | Pass | | Total |
| (In thousands) |
Real estate mortgage: | | | | | | | |
Commercial | $ | 91,543 | | | $ | 262,462 | | | $ | 3,742,666 | | | $ | 4,096,671 | |
Income producing and other residential | 8,767 | | | 61,384 | | | 3,733,114 | | | 3,803,265 | |
Total real estate mortgage | 100,310 | | | 323,846 | | | 7,475,780 | | | 7,899,936 | |
Real estate construction and land: | | | | | | | |
Commercial | 42,558 | | | 107,592 | | | 966,971 | | | 1,117,121 | |
Residential | — | | | 759 | | | 2,242,401 | | | 2,243,160 | |
Total real estate construction and land | 42,558 | | | 108,351 | | | 3,209,372 | | | 3,360,281 | |
Commercial: | | | | | | | |
Asset-based | 27,867 | | | 153,301 | | | 3,248,115 | | | 3,429,283 | |
Venture capital | 6,508 | | | 118,125 | | | 1,573,875 | | | 1,698,508 | |
Other commercial | 87,557 | | | 14,930 | | | 2,272,627 | | | 2,375,114 | |
Total commercial | 121,932 | | | 286,356 | | | 7,094,617 | | | 7,502,905 | |
Consumer | 462 | | | 2,732 | | | 317,061 | | | 320,255 | |
Total | $ | 265,262 | | | $ | 721,285 | | | $ | 18,096,830 | | | $ | 19,083,377 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents our nonaccrual loans and leases by loan portfolio segment and class and by with and without an allowance recorded as of the date indicated and interest income recognized on nonaccrual loans and leases for the year indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| At and For the Year Ended | | At and For the Year Ended |
| December 31, 2021 | | December 31, 2020 |
| Nonaccrual | | Interest | | Nonaccrual | | Interest |
| Recorded | | Income | | Recorded | | Income |
| Investment | | Recognized | | Investment | | Recognized |
| (In thousands) |
With An Allowance Recorded: | | | | | | | |
Real estate mortgage: | | | | | | | |
Commercial | $ | 70 | | | $ | — | | | $ | 78 | | | $ | — | |
Income producing and other residential | 3,555 | | | — | | | 1,260 | | | — | |
Real estate construction and land: | | | | | | | |
Commercial | — | | | — | | | — | | | — | |
Residential | 616 | | | — | | | — | | | — | |
Commercial: | | | | | | | |
Asset based | 1,000 | | | — | | | 2,128 | | | — | |
Venture capital | 2,799 | | | — | | | 1,980 | | | — | |
Other commercial | 1,081 | | | — | | | 2,438 | | | — | |
Consumer | 19 | | | — | | | 389 | | | — | |
With No Related Allowance Recorded: | | | | | | | |
Real estate mortgage: | | | | | | | |
Commercial | $ | 27,470 | | | $ | 596 | | | $ | 43,653 | | | $ | 524 | |
Income producing and other residential | 8,737 | | | — | | | 566 | | | — | |
Real estate construction and land: | | | | | | | |
Commercial | — | | | — | | | 315 | | | — | |
Residential | 4,099 | | | — | | | — | | | — | |
Commercial: | | | | | | | |
Asset based | 464 | | | — | | | 551 | | | — | |
Venture capital | — | | | — | | | — | | | — | |
Other commercial | 10,869 | | | 169 | | | 37,805 | | | 5,052 | |
Consumer | 395 | | | — | | | — | | | — | |
Total Loans and Leases With and | | | | | | | |
Without an Allowance Recorded: | | | | | | | |
Real estate mortgage | $ | 39,832 | | | $ | 596 | | | $ | 45,557 | | | $ | 524 | |
Real estate construction and land | 4,715 | | | — | | | 315 | | | — | |
Commercial | 16,213 | | | 169 | | | 44,902 | | | 5,052 | |
Consumer | 414 | | | — | | | 389 | | | — | |
Total | $ | 61,174 | | | $ | 765 | | | $ | 91,163 | | | $ | 5,576 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following tables present our loans held for investment by loan portfolio segment and class, by credit quality indicator (internal risk ratings), and by year of origination (vintage year) as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis | Term Loans by Origination Year | | Revolving | | to Term | | |
December 31, 2021 | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 561 | | | $ | 9,148 | | | $ | 32,304 | | | $ | 8,289 | | | $ | 6,248 | | | $ | 33,493 | | | $ | 3 | | | $ | — | | | $ | 90,046 | |
3-4 Pass | 499,626 | | | 531,989 | | | 321,728 | | | 578,436 | | | 489,727 | | | 932,950 | | | 51,805 | | | 11,977 | | | 3,418,238 | |
5 Special mention | — | | | 4,811 | | | 63,381 | | | 76,372 | | | 6,533 | | | 40,712 | | | — | | | — | | | 191,809 | |
6-8 Classified | — | | | 488 | | | 17,037 | | | 5,340 | | | 6,278 | | | 33,063 | | | — | | | — | | | 62,206 | |
Total | $ | 500,187 | | | $ | 546,436 | | | $ | 434,450 | | | $ | 668,437 | | | $ | 508,786 | | | $ | 1,040,218 | | | $ | 51,808 | | | $ | 11,977 | | | $ | 3,762,299 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | 189 | | | $ | 168 | | | $ | 344 | | | $ | 264 | | | $ | — | | | $ | — | | | $ | 965 | |
Gross recoveries | — | | | — | | | — | | | — | | | (8) | | | (6,073) | | | — | | | — | | | (6,081) | |
Net | $ | — | | | $ | — | | | $ | 189 | | | $ | 168 | | | $ | 336 | | | $ | (5,809) | | | $ | — | | | $ | — | | | $ | (5,116) | |
| | | | | | | | | | | | | | | | | |
Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
Income Producing and | | | | | | | | | | | | | | | | | |
Other Residential | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 95,016 | | | $ | 29,339 | | | $ | 57,874 | | | $ | 47,688 | | | $ | 11,776 | | | $ | 16,703 | | | $ | 28,115 | | | $ | — | | | $ | 286,511 | |
3-4 Pass | 4,405,055 | | | 623,207 | | | 573,718 | | | 616,515 | | | 547,531 | | | 234,525 | | | 91,655 | | | 156 | | | 7,092,362 | |
5 Special mention | 2,871 | | | 3,810 | | | 13,007 | | | — | | | — | | | — | | | 160 | | | — | | | 19,848 | |
6-8 Classified | 5,161 | | | 5,217 | | | — | | | 3,323 | | | 304 | | | 3,424 | | | — | | | 271 | | | 17,700 | |
Total | $ | 4,508,103 | | | $ | 661,573 | | | $ | 644,599 | | | $ | 667,526 | | | $ | 559,611 | | | $ | 254,652 | | | $ | 119,930 | | | $ | 427 | | | $ | 7,416,421 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | 28 | | | $ | 80 | | | $ | — | | | $ | — | | | $ | — | | | $ | 55 | | | $ | — | | | $ | — | | | $ | 163 | |
Gross recoveries | (28) | | | — | | | — | | | — | | | — | | | (357) | | | — | | | (301) | | | (686) | |
Net | $ | — | | | $ | 80 | | | $ | — | | | $ | — | | | $ | — | | | $ | (302) | | | $ | — | | | $ | (301) | | | $ | (523) | |
| | | | | | | | | | | | | | | | | |
Real Estate Construction | | | | | | | | | | | | | | | | | |
and Land: Commercial | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
3-4 Pass | 96,108 | | | 96,448 | | | 386,832 | | | 152,444 | | | 720 | | | 14,122 | | | 18,190 | | | — | | | 764,864 | |
5 Special mention | — | | | — | | | — | | | — | | | 67,727 | | | — | | | — | | | — | | | 67,727 | |
6-8 Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 96,108 | | | $ | 96,448 | | | $ | 386,832 | | | $ | 152,444 | | | $ | 68,447 | | | $ | 14,122 | | | $ | 18,190 | | | $ | — | | | $ | 832,591 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | 775 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 775 | |
Gross recoveries | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Net | $ | — | | | $ | — | | | $ | — | | | $ | 775 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 775 | |
| | | | | | | | | | | | | | | | | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis | Term Loans by Origination Year | | Revolving | | to Term | | |
December 31, 2021 | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
Real Estate Construction | | | | | | | | | | | | | | | | | |
and Land: Residential | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
3-4 Pass | 849,188 | | | 672,864 | | | 851,127 | | | 163,950 | | | 17,526 | | | 3,970 | | | 28,804 | | | 10,672 | | | 2,598,101 | |
5 Special mention | 276 | | | 1,185 | | | — | | | — | | | 259 | | | — | | | — | | | — | | | 1,720 | |
6-8 Classified | 849 | | | 3,278 | | | 588 | | | — | | | — | | | — | | | — | | | — | | | 4,715 | |
Total | $ | 850,313 | | | $ | 677,327 | | | $ | 851,715 | | | $ | 163,950 | | | $ | 17,785 | | | $ | 3,970 | | | $ | 28,804 | | | $ | 10,672 | | | $ | 2,604,536 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | 7 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 7 | |
Gross recoveries | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Net | $ | 7 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 7 | |
| | | | | | | | | | | | | | | | | |
Commercial: Asset-Based | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 138,836 | | | $ | 72,725 | | | $ | 178,291 | | | $ | 123,947 | | | $ | 71,940 | | | $ | 188,411 | | | $ | 706,656 | | | $ | 50,495 | | | $ | 1,531,301 | |
3-4 Pass | 242,209 | | | 71,930 | | | 59,748 | | | 45,375 | | | 8,350 | | | 34,833 | | | 1,992,677 | | | 6,158 | | | 2,461,280 | |
5 Special mention | — | | | — | | | 48,796 | | | 13,138 | | | — | | | — | | | 12,393 | | | 3,978 | | | 78,305 | |
6-8 Classified | — | | | — | | | — | | | — | | | — | | | 464 | | | 4,027 | | | 100 | | | 4,591 | |
Total | $ | 381,045 | | | $ | 144,655 | | | $ | 286,835 | | | $ | 182,460 | | | $ | 80,290 | | | $ | 223,708 | | | $ | 2,715,753 | | | $ | 60,731 | | | $ | 4,075,477 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 232 | | | $ | 232 | |
Gross recoveries | — | | | — | | | — | | | — | | | — | | | (691) | | | (28) | | | — | | | (719) | |
Net | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (691) | | | $ | (28) | | | $ | 232 | | | $ | (487) | |
| | | | | | | | | | | | | | | | | |
Commercial: Venture | | | | | | | | | | | | | | | | | |
Capital | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass (1) | $ | — | | | $ | 1,999 | | | $ | — | | | $ | — | | | $ | (4) | | | $ | 14 | | | $ | 228,820 | | | $ | — | | | $ | 230,829 | |
3-4 Pass | 229,567 | | | 58,283 | | | 46,007 | | | 7,241 | | | 1,614 | | | 4,166 | | | 1,715,057 | | | 8,202 | | | 2,070,137 | |
5 Special mention | 8,980 | | | 2,778 | | | 499 | | | — | | | — | | | 2,593 | | | (17) | | | — | | | 14,833 | |
6-8 Classified | 500 | | | — | | | — | | | 2,000 | | | — | | | — | | | (6) | | | 2,300 | | | 4,794 | |
Total | $ | 239,047 | | | $ | 63,060 | | | $ | 46,506 | | | $ | 9,241 | | | $ | 1,610 | | | $ | 6,773 | | | $ | 1,943,854 | | | $ | 10,502 | | | $ | 2,320,593 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 620 | | | $ | — | | | $ | — | | | $ | 620 | |
Gross recoveries | — | | | — | | | (127) | | | (37) | | | (158) | | | (82) | | | — | | | — | | | (404) | |
Net | $ | — | | | $ | — | | | $ | (127) | | | $ | (37) | | | $ | (158) | | | $ | 538 | | | $ | — | | | $ | — | | | $ | 216 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
____________________
(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis | Term Loans by Origination Year | | Revolving | | to Term | | |
December 31, 2021 | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
Commercial: Other | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass (1) | $ | 134,825 | | | $ | 22,556 | | | $ | 261 | | | $ | 4 | | | $ | 246 | | | $ | (50) | | | $ | 18,206 | | | $ | 693 | | | $ | 176,741 | |
3-4 Pass | 286,281 | | | 73,328 | | | 77,487 | | | 67,591 | | | 46,939 | | | 89,408 | | | 607,197 | | | 9,822 | | | 1,258,053 | |
5 Special mention | — | | | 291 | | | 1 | | | 2,088 | | | 115 | | | 11,911 | | | 1,061 | | | 61 | | | 15,528 | |
6-8 Classified | 53 | | | 1 | | | 395 | | | (3) | | | 223 | | | 4,212 | | | 15,731 | | | 1,047 | | | 21,659 | |
Total | $ | 421,159 | | | $ | 96,176 | | | $ | 78,144 | | | $ | 69,680 | | | $ | 47,523 | | | $ | 105,481 | | | $ | 642,195 | | | $ | 11,623 | | | $ | 1,471,981 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | 1,992 | | | $ | — | | | $ | 122 | | | $ | 47 | | | $ | 139 | | | $ | 797 | | | $ | 985 | | | $ | 2,364 | | | $ | 6,446 | |
Gross recoveries | — | | | — | | | (42) | | | — | | | (268) | | | (4,076) | | | (57) | | | (145) | | | (4,588) | |
Net | $ | 1,992 | | | $ | — | | | $ | 80 | | | $ | 47 | | | $ | (129) | | | $ | (3,279) | | | $ | 928 | | | $ | 2,219 | | | $ | 1,858 | |
| | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 36 | | | $ | 11 | | | $ | — | | | $ | 5 | | | $ | 4 | | | $ | — | | | $ | 646 | | | $ | — | | | $ | 702 | |
3-4 Pass | 261,678 | | | 24,195 | | | 73,860 | | | 35,623 | | | 21,707 | | | 31,916 | | | 5,689 | | | — | | | 454,668 | |
5 Special mention | 797 | | | 363 | | | 496 | | | — | | | 50 | | | 135 | | | — | | | — | | | 1,841 | |
6-8 Classified | — | | | 22 | | | 123 | | | 111 | | | 21 | | | 143 | | | — | | | 19 | | | 439 | |
Total | $ | 262,511 | | | $ | 24,591 | | | $ | 74,479 | | | $ | 35,739 | | | $ | 21,782 | | | $ | 32,194 | | | $ | 6,335 | | | $ | 19 | | | $ | 457,650 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | 185 | | | $ | 654 | | | $ | 156 | | | $ | 270 | | | $ | 188 | | | $ | — | | | $ | 54 | | | $ | 1,507 | |
Gross recoveries | — | | | — | | | — | | | (27) | | | (13) | | | (79) | | | (1) | | | — | | | (120) | |
Net | $ | — | | | $ | 185 | | | $ | 654 | | | $ | 129 | | | $ | 257 | | | $ | 109 | | | $ | (1) | | | $ | 54 | | | $ | 1,387 | |
| | | | | | | | | | | | | | | | | |
Total Loans and Leases | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 369,274 | | | $ | 135,778 | | | $ | 268,730 | | | $ | 179,933 | | | $ | 90,210 | | | $ | 238,571 | | | $ | 982,446 | | | $ | 51,188 | | | $ | 2,316,130 | |
3-4 Pass | 6,869,712 | | | 2,152,244 | | | 2,390,507 | | | 1,667,175 | | | 1,134,114 | | | 1,345,890 | | | 4,511,074 | | | 46,987 | | | 20,117,703 | |
5 Special mention | 12,924 | | | 13,238 | | | 126,180 | | | 91,598 | | | 74,684 | | | 55,351 | | | 13,597 | | | 4,039 | | | 391,611 | |
6-8 Classified | 6,563 | | | 9,006 | | | 18,143 | | | 10,771 | | | 6,826 | | | 41,306 | | | 19,752 | | | 3,737 | | | 116,104 | |
Total | $ | 7,258,473 | | | $ | 2,310,266 | | | $ | 2,803,560 | | | $ | 1,949,477 | | | $ | 1,305,834 | | | $ | 1,681,118 | | | $ | 5,526,869 | | | $ | 105,951 | | | $ | 22,941,548 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | 2,027 | | | $ | 265 | | | $ | 965 | | | $ | 1,146 | | | $ | 753 | | | $ | 1,924 | | | $ | 985 | | | $ | 2,650 | | | $ | 10,715 | |
Gross recoveries | (28) | | | — | | | (169) | | | (64) | | | (447) | | | (11,358) | | | (86) | | | (446) | | | (12,598) | |
Net | $ | 1,999 | | | $ | 265 | | | $ | 796 | | | $ | 1,082 | | | $ | 306 | | | $ | (9,434) | | | $ | 899 | | | $ | 2,204 | | | $ | (1,883) | |
____________________
(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
December 31, 2020 | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | — | | | $ | 28,304 | | | $ | 4,848 | | | $ | 13,184 | | | $ | 12,241 | | | $ | 41,222 | | | $ | — | | | $ | — | | | $ | 99,799 | |
3-4 Pass | 554,143 | | | 413,785 | | | 574,497 | | | 725,503 | | | 405,367 | | | 893,008 | | | 62,586 | | | 13,978 | | | 3,642,867 | |
5 Special mention | 2,622 | | | 78,484 | | | 99,397 | | | 14,625 | | | 9,967 | | | 57,367 | | | — | | | — | | | 262,462 | |
6-8 Classified | 504 | | | 1,255 | | | 7,489 | | | 7,869 | | | 16,797 | | | 57,629 | | | — | | | — | | | 91,543 | |
Total | $ | 557,269 | | | $ | 521,828 | | | $ | 686,231 | | | $ | 761,181 | | | $ | 444,372 | | | $ | 1,049,226 | | | $ | 62,586 | | | $ | 13,978 | | | $ | 4,096,671 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | 154 | | | $ | 3,330 | | | $ | — | | | $ | 6,694 | | | $ | — | | | $ | — | | | $ | 10,178 | |
Gross recoveries | — | | | — | | | — | | | (9) | | | — | | | (280) | | | — | | | — | | | (289) | |
Net | $ | — | | | $ | — | | | $ | 154 | | | $ | 3,321 | | | $ | — | | | $ | 6,414 | | | $ | — | | | $ | — | | | $ | 9,889 | |
| | | | | | | | | | | | | | | | | |
Real Estate Mortgage: | | | | | | | | | | | | | | | | | |
Income Producing and | | | | | | | | | | | | | | | | | |
Other Residential | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 58,714 | | | $ | 55,826 | | | $ | 28,831 | | | $ | 33,017 | | | $ | 18,991 | | | $ | 9,265 | | | $ | — | | | $ | — | | | $ | 204,644 | |
3-4 Pass | 491,504 | | | 850,978 | | | 1,067,109 | | | 577,906 | | | 238,499 | | | 187,959 | | | 113,987 | | | 528 | | | 3,528,470 | |
5 Special mention | 12,307 | | | 4,207 | | | 42,455 | | | 1,554 | | | — | | | — | | | 861 | | | — | | | 61,384 | |
6-8 Classified | — | | | — | | | 2,862 | | | — | | | — | | | 4,950 | | | 118 | | | 837 | | | 8,767 | |
Total | $ | 562,525 | | | $ | 911,011 | | | $ | 1,141,257 | | | $ | 612,477 | | | $ | 257,490 | | | $ | 202,174 | | | $ | 114,966 | | | $ | 1,365 | | | $ | 3,803,265 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 51 | | | $ | — | | | $ | 457 | | | $ | 508 | |
Gross recoveries | — | | | — | | | — | | | — | | | — | | | (327) | | | (1) | | | — | | | (328) | |
Net | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (276) | | | $ | (1) | | | $ | 457 | | | $ | 180 | |
| | | | | | | | | | | | | | | | | |
Real Estate Construction | | | | | | | | | | | | | | | | | |
and Land: Commercial | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
3-4 Pass | 66,114 | | | 369,588 | | | 357,295 | | | 118,586 | | | 36,027 | | | 11,778 | | | 7,583 | | | — | | | 966,971 | |
5 Special mention | — | | | — | | | 40,396 | | | 67,196 | | | — | | | — | | | — | | | — | | | 107,592 | |
6-8 Classified | — | | | — | | | — | | | — | | | 42,243 | | | 315 | | | — | | | — | | | 42,558 | |
Total | $ | 66,114 | | | $ | 369,588 | | | $ | 397,691 | | | $ | 185,782 | | | $ | 78,270 | | | $ | 12,093 | | | $ | 7,583 | | | $ | — | | | $ | 1,117,121 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Gross recoveries | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Net | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
December 31, 2020 | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
Real Estate Construction | | | | | | | | | | | | | | | | | |
and Land: Residential | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
3-4 Pass | 345,134 | | | 670,894 | | | 849,819 | | | 285,072 | | | 28,725 | | | 688 | | | 9,034 | | | 53,035 | | | 2,242,401 | |
5 Special mention | 759 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 759 | |
6-8 Classified | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 345,893 | | | $ | 670,894 | | | $ | 849,819 | | | $ | 285,072 | | | $ | 28,725 | | | $ | 688 | | | $ | 9,034 | | | $ | 53,035 | | | $ | 2,243,160 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Gross recoveries | — | | | — | | | — | | | — | | | — | | | (21) | | | — | | | — | | | (21) | |
Net | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (21) | | | $ | — | | | $ | — | | | $ | (21) | |
| | | | | | | | | | | | | | | | | |
Commercial: Asset-Based | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 116,247 | | | $ | 173,457 | | | $ | 111,630 | | | $ | 69,244 | | | $ | 121,838 | | | $ | 88,201 | | | $ | 275,093 | | | $ | 72,017 | | | $ | 1,027,727 | |
3-4 Pass | 155,221 | | | 84,798 | | | 85,539 | | | 42,928 | | | 8,227 | | | 46,663 | | | 1,750,934 | | | 46,078 | | | 2,220,388 | |
5 Special mention | — | | | 59,822 | | | 41,789 | | | 9,022 | | | 14,274 | | | 482 | | | 23,257 | | | 4,655 | | | 153,301 | |
6-8 Classified | — | | | — | | | — | | | — | | | 19,417 | | | 551 | | | 8,799 | | | (900) | | | 27,867 | |
Total | $ | 271,468 | | | $ | 318,077 | | | $ | 238,958 | | | $ | 121,194 | | | $ | 163,756 | | | $ | 135,897 | | | $ | 2,058,083 | | | $ | 121,850 | | | $ | 3,429,283 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,817 | | | $ | — | | | $ | — | | | $ | 11,817 | |
Gross recoveries | (52) | | | — | | | — | | | — | | | — | | | (420) | | | (236) | | | — | | | (708) | |
Net | $ | (52) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 11,397 | | | $ | (236) | | | $ | — | | | $ | 11,109 | |
| | | | | | | | | | | | | | | | | |
Commercial: Venture | | | | | | | | | | | | | | | | | |
Capital | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 1,999 | | | $ | 4,797 | | | $ | — | | | $ | (4) | | | $ | (4) | | | $ | 52 | | | $ | 167,296 | | | $ | — | | | $ | 174,136 | |
3-4 Pass | 48,132 | | | 103,437 | | | 37,818 | | | 7,789 | | | 29,738 | | | 5,494 | | | 1,161,606 | | | 5,725 | | | 1,399,739 | |
5 Special mention | 21,645 | | | 42,499 | | | 2,202 | | | — | | | — | | | — | | | 46,765 | | | 5,014 | | | 118,125 | |
6-8 Classified | — | | | (1,710) | | | 4,000 | | | — | | | — | | | 3,690 | | | 528 | | | — | | | 6,508 | |
Total | $ | 71,776 | | | $ | 149,023 | | | $ | 44,020 | | | $ | 7,785 | | | $ | 29,734 | | | $ | 9,236 | | | $ | 1,376,195 | | | $ | 10,739 | | | $ | 1,698,508 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | 6,533 | | | $ | — | | | $ | (8) | | | $ | 150 | | | $ | 144 | | | $ | — | | | $ | 6,819 | |
Gross recoveries | — | | | — | | | (478) | | | (176) | | | (154) | | | (3) | | | (450) | | | — | | | (1,261) | |
Net | $ | — | | | $ | — | | | $ | 6,055 | | | $ | (176) | | | $ | (162) | | | $ | 147 | | | $ | (306) | | | $ | — | | | $ | 5,558 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Revolving | | |
| | | | | | | | | | | | | | | Converted | | |
Amortized Cost Basis (1) | Term Loans by Origination Year | | Revolving | | to Term | | |
December 31, 2020 | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Loans | | Loans | | Total |
| (In thousands) |
Commercial: Other | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 1,057,405 | | | $ | 380 | | | $ | 4 | | | $ | 366 | | | $ | 69 | | | $ | 1,350 | | | $ | 74,206 | | | $ | 80 | | | $ | 1,133,860 | |
3-4 Pass | 88,875 | | | 95,110 | | | 99,434 | | | 77,557 | | | 23,305 | | | 89,865 | | | 657,088 | | | 7,533 | | | 1,138,767 | |
5 Special mention | — | | | 40 | | | 2,145 | | | 564 | | | 484 | | | 10,440 | | | 335 | | | 922 | | | 14,930 | |
6-8 Classified | 2 | | | 564 | | | 80 | | | 230 | | | 755 | | | 3,813 | | | 75,046 | | | 7,067 | | | 87,557 | |
Total | $ | 1,146,282 | | | $ | 96,094 | | | $ | 101,663 | | | $ | 78,717 | | | $ | 24,613 | | | $ | 105,468 | | | $ | 806,675 | | | $ | 15,602 | | | $ | 2,375,114 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | — | | | $ | — | | | $ | 506 | | | $ | 239 | | | $ | 33,521 | | | $ | 27,332 | | | $ | 1,871 | | | $ | 63,469 | |
Gross recoveries | — | | | (18) | | | (8) | | | (34) | | | (226) | | | (3,155) | | | (100) | | | (19) | | | (3,560) | |
Net | $ | — | | | $ | (18) | | | $ | (8) | | | $ | 472 | | | $ | 13 | | | $ | 30,366 | | | $ | 27,232 | | | $ | 1,852 | | | $ | 59,909 | |
| | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 15 | | | $ | — | | | $ | 8 | | | $ | 14 | | | $ | — | | | $ | — | | | $ | 509 | | | $ | — | | | $ | 546 | |
3-4 Pass | 40,585 | | | 110,993 | | | 62,833 | | | 39,036 | | | 41,623 | | | 12,831 | | | 8,536 | | | 78 | | | 316,515 | |
5 Special mention | 45 | | | 137 | | | 1,628 | | | 261 | | | 422 | | | 239 | | | — | | | — | | | 2,732 | |
6-8 Classified | — | | | 35 | | | — | | | 36 | | | 56 | | | 306 | | | 2 | | | 27 | | | 462 | |
Total | $ | 40,645 | | | $ | 111,165 | | | $ | 64,469 | | | $ | 39,347 | | | $ | 42,101 | | | $ | 13,376 | | | $ | 9,047 | | | $ | 105 | | | $ | 320,255 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | 97 | | | $ | 86 | | | $ | 177 | | | $ | 363 | | | $ | 44 | | | $ | 22 | | | $ | 9 | | | $ | 798 | |
Gross recoveries | — | | | — | | | (1) | | | (10) | | | (16) | | | (174) | | | — | | | — | | | (201) | |
Net | $ | — | | | $ | 97 | | | $ | 85 | | | $ | 167 | | | $ | 347 | | | $ | (130) | | | $ | 22 | | | $ | 9 | | | $ | 597 | |
| | | | | | | | | | | | | | | | | |
Total Loans and Leases | | | | | | | | | | | | | | | | | |
Internal risk rating: | | | | | | | | | | | | | | | | | |
1-2 High pass | $ | 1,234,380 | | | $ | 262,764 | | | $ | 145,321 | | | $ | 115,821 | | | $ | 153,135 | | | $ | 140,090 | | | $ | 517,104 | | | $ | 72,097 | | | $ | 2,640,712 | |
3-4 Pass | 1,789,708 | | | 2,699,583 | | | 3,134,344 | | | 1,874,377 | | | 811,511 | | | 1,248,286 | | | 3,771,354 | | | 126,955 | | | 15,456,118 | |
5 Special mention | 37,378 | | | 185,189 | | | 230,012 | | | 93,222 | | | 25,147 | | | 68,528 | | | 71,218 | | | 10,591 | | | 721,285 | |
6-8 Classified | 506 | | | 144 | | | 14,431 | | | 8,135 | | | 79,268 | | | 71,254 | | | 84,493 | | | 7,031 | | | 265,262 | |
Total | $ | 3,061,972 | | | $ | 3,147,680 | | | $ | 3,524,108 | | | $ | 2,091,555 | | | $ | 1,069,061 | | | $ | 1,528,158 | | | $ | 4,444,169 | | | $ | 216,674 | | | $ | 19,083,377 | |
Current YTD period: | | | | | | | | | | | | | | | | | |
Gross charge-offs | $ | — | | | $ | 97 | | | $ | 6,773 | | | $ | 4,013 | | | $ | 594 | | | $ | 52,277 | | | $ | 27,498 | | | $ | 2,337 | | | $ | 93,589 | |
Gross recoveries | (52) | | | (18) | | | (487) | | | (229) | | | (396) | | | (4,380) | | | (787) | | | (19) | | | (6,368) | |
Net | $ | (52) | | | $ | 79 | | | $ | 6,286 | | | $ | 3,784 | | | $ | 198 | | | $ | 47,897 | | | $ | 26,711 | | | $ | 2,318 | | | $ | 87,221 | |
______________________
(1) Amounts with negative balances are loans with zero principal balances and deferred loan origination fees.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TDRs are a result of rate reductions, term extensions, fee concessions, transfers to foreclosed assets, discounted loan payoffs, and debt forgiveness, or a combination thereof. Between March 2020 and December 2021, the Company granted various commercial and consumer loan modifications to provide borrowers relief from the economic impacts of COVID-19. In accordance with the CARES Act, the Company elected to not apply TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act. The following table presents our troubled debt restructurings of loans held for investment by loan portfolio segment and class for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Troubled Debt Restructurings |
| Troubled Debt Restructurings | | That Subsequently Defaulted(1) |
| | | Pre-Modification | | Post-Modification | | | | |
| Number | | Outstanding | | Outstanding | | Number | | |
| of | | Recorded | | Recorded | | of | | Recorded |
| Loans | | Investment | | Investment | | Loans | | Investment(1) |
| (Dollars In thousands) |
Year Ended December 31, 2021 | | | | | | | | | |
Real estate mortgage: | | | | | | | | | |
Commercial | 2 | | | $ | 647 | | | $ | — | | | — | | | $ | — | |
Income producing and other residential | 6 | | | 802 | | | 802 | | | — | | | — | |
Real estate construction and land: | | | | | | | | | |
| | | | | | | | | |
Residential | 1 | | | 208 | | | 208 | | | — | | | — | |
Commercial: | | | | | | | | | |
Asset-based | 2 | | | 1,987 | | | 1,987 | | | 1 | | | 464 | |
Venture capital | 5 | | | 4,502 | | | 2,529 | | | — | | | — | |
Other commercial | 40 | | | 48,760 | | | 30,786 | | | 3 | | | 2,066 | |
Consumer | 1 | | | 20 | | | 20 | | | — | | | — | |
Total | 57 | | | $ | 56,926 | | | $ | 36,332 | | | 4 | | | $ | 2,530 | |
Year Ended December 31, 2020 | | | | | | | | | |
Real estate mortgage: | | | | | | | | | |
Commercial | 12 | | | $ | 17,201 | | | $ | 4,222 | | | 1 | | | $ | 412 | |
Income producing and other residential | 9 | | | 1,816 | | | 1,816 | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Commercial: | | | | | | | | | |
Asset-based | 8 | | | 17,008 | | | 1,741 | | | — | | | — | |
Venture capital | 2 | | | 2,047 | | | 2,047 | | | — | | | — | |
Other commercial | 37 | | | 41,906 | | | 27,403 | | | 1 | | | 92 | |
Consumer | 3 | | | 212 | | | 212 | | | — | | | — | |
Total | 71 | | | $ | 80,190 | | | $ | 37,441 | | | 2 | | | $ | 504 | |
Year Ended December 31, 2019 | | | | | | | | | |
Real estate mortgage: | | | | | | | | | |
Commercial | 3 | | | $ | 121 | | | $ | — | | | — | | | $ | — | |
Income producing and other residential | 9 | | | 1,591 | | | 1,591 | | | 1 | | | 254 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Commercial: | | | | | | | | | |
Asset-based | 5 | | | 3,082 | | | 3,082 | | | — | | | — | |
Venture capital | 14 | | | 19,017 | | | 19,155 | | | — | | | — | |
Other commercial | 20 | | | 3,835 | | | 3,835 | | | 4 | | | 154 | |
| | | | | | | | | |
Total | 51 | | | $ | 27,646 | | | $ | 27,663 | | | 5 | | | $ | 408 | |
_________________________
(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, 2021, the population of defaulted TDRs includes only those loans restructured after December 31, 2020. The table excludes defaulted TDRs in those classes for which the recorded investment was zero at the end of the period.
At December 31, 2021 and 2020, we had unfunded commitments related to TDRs of $2.0 million and $0.9 million.
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:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | | 2019 | | |
| (In thousands) | | |
Component of leases receivable income: | | | | | | | |
Interest income on net investments in leases | $ | 8,976 | | | $ | 8,049 | | | $ | 11,061 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table presents the components of leases receivable as of the date indicated:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Net investment in direct financing leases: | | | |
Lease payments receivable | $ | 190,025 | | | $ | 158,740 | |
Unguaranteed residual assets | 21,487 | | | 19,303 | |
Deferred costs and other | 1,373 | | | 996 | |
Aggregate net investment in leases | $ | 212,885 | | | $ | 179,039 | |
The following table presents maturities of leases receivable as of the date indicated:
| | | | | |
| December 31, 2021 |
| (In thousands) |
Year Ending December 31, | |
2022 | $ | 54,831 | |
2023 | 46,499 | |
2024 | 42,154 | |
2025 | 25,653 | |
2026 | 17,829 | |
Thereafter | 26,423 | |
Total undiscounted cash flows | 213,389 | |
Less: Unearned income | (23,364) | |
Present value of lease payments | $ | 190,025 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| | | Real Estate | | | | | | |
| Real Estate | | Construction | | | | | | |
| Mortgage | | and Land | | Commercial | | Consumer | | Total |
| (In thousands) |
Allowance for Loan and Lease Losses: | | | | | | | | | |
Balance, beginning of year | $ | 138,342 | | | $ | 78,356 | | | $ | 126,403 | | | $ | 5,080 | | | $ | 348,181 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Charge-offs | (1,128) | | | (782) | | | (7,298) | | | (1,507) | | | (10,715) | |
Recoveries | 6,767 | | | — | | | 5,711 | | | 120 | | | 12,598 | |
Net recoveries (charge-offs) | 5,639 | | | (782) | | | (1,587) | | | (1,387) | | | 1,883 | |
Provision | (45,928) | | | (32,495) | | | (76,098) | | | 5,021 | | | (149,500) | |
Balance, end of year | $ | 98,053 | | | $ | 45,079 | | | $ | 48,718 | | | $ | 8,714 | | | $ | 200,564 | |
| | | | | | | | | |
Ending Allowance by | | | | | | | | | |
Evaluation Methodology: | | | | | | | | | |
Individually evaluated | $ | 161 | | | $ | — | | | $ | 2,433 | | | $ | — | | | $ | 2,594 | |
Collectively evaluated | $ | 97,892 | | | $ | 45,079 | | | $ | 46,285 | | | $ | 8,714 | | | $ | 197,970 | |
| | | | | | | | | |
Ending Loans and Leases by | | | | | | | | | |
Evaluation Methodology: | | | | | | | | | |
Individually evaluated | $ | 37,030 | | | $ | 10,043 | | | $ | 31,317 | | | $ | — | | | $ | 78,390 | |
Collectively evaluated | 11,141,690 | | | 3,427,084 | | | 7,836,734 | | | 457,650 | | | 22,863,158 | |
Ending balance | $ | 11,178,720 | | | $ | 3,437,127 | | | $ | 7,868,051 | | | $ | 457,650 | | | $ | 22,941,548 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| | | Real Estate | | | | | | |
| Real Estate | | Construction | | | | | | |
| Mortgage | | and Land | | Commercial | | Consumer | | Total |
| (In thousands) |
Allowance for Loan and Lease Losses: | | | | | | | | | |
Balance, beginning of year | $ | 44,575 | | | $ | 30,544 | | | $ | 61,528 | | | $ | 2,138 | | | $ | 138,785 | |
Cumulative effect of change in accounting | | | | | | | | | |
principle - CECL | 5,308 | | | (8,592) | | | 6,860 | | | 41 | | | 3,617 | |
Balance, January 1, 2020 | 49,883 | | | 21,952 | | | 68,388 | | | 2,179 | | | 142,402 | |
Charge-offs | (10,686) | | | — | | | (82,105) | | | (798) | | | (93,589) | |
Recoveries | 617 | | | 21 | | | 5,529 | | | 201 | | | 6,368 | |
Net (charge-offs) recoveries | (10,069) | | | 21 | | | (76,576) | | | (597) | | | (87,221) | |
Provision | 98,528 | | | 56,383 | | | 134,591 | | | 3,498 | | | 293,000 | |
Balance, end of year | $ | 138,342 | | | $ | 78,356 | | | $ | 126,403 | | | $ | 5,080 | | | $ | 348,181 | |
| | | | | | | | | |
Ending Allowance by | | | | | | | | | |
Evaluation Methodology: | | | | | | | | | |
Individually evaluated | $ | 237 | | | $ | — | | | $ | 3,422 | | | $ | — | | | $ | 3,659 | |
Collectively evaluated | $ | 138,105 | | | $ | 78,356 | | | $ | 122,981 | | | $ | 5,080 | | | $ | 344,522 | |
| | | | | | | | | |
Ending Loans and Leases by | | | | | | | | | |
Evaluation Methodology: | | | | | | | | | |
Individually evaluated | $ | 50,139 | | | $ | 1,766 | | | $ | 81,171 | | | $ | — | | | $ | 133,076 | |
Collectively evaluated | 7,849,797 | | | 3,358,515 | | | 7,421,734 | | | 320,255 | | | 18,950,301 | |
Ending balance | $ | 7,899,936 | | | $ | 3,360,281 | | | $ | 7,502,905 | | | $ | 320,255 | | | $ | 19,083,377 | |
The allowance for loan and lease losses decreased by $147.6 million in 2021 due primarily to a provision benefit for loan and lease losses of $149.5 million. The lower provision for loan and lease losses in 2021 was primarily a result of improvement in both macroeconomic forecast variables and loan portfolio credit quality metrics.
We actively participated in both rounds of the Paycheck Protection Program ("PPP"), under the provisions of the CARES Act during 2020 and 2021, originating $1.65 billion of such loans. As of December 31, 2021, PPP loans totaled $156.7 million, net of deferred fees. The loans have two or five year terms, are fully guaranteed by the SBA, and do not carry an allowance.
A loan is considered collateral-dependent, and is individually evaluated for reserve purposes, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent loans held for investment by collateral type as of the following date:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Real | | Business | | | | Real | | Business | | |
| Property | | Assets | | Total | | Property | | Assets | | Total |
| (In thousands) | | (In thousands) |
Real estate mortgage | $ | 30,817 | | | $ | — | | | $ | 30,817 | | | $ | 43,656 | | | $ | — | | | $ | 43,656 | |
Real estate construction and land | 10,421 | | | — | | | 10,421 | | | 1,766 | | | — | | | 1,766 | |
Commercial | — | | | 7,586 | | | 7,586 | | | — | | | 31,100 | | | 31,100 | |
Total | $ | 41,238 | | | $ | 7,586 | | | $ | 48,824 | | | $ | 45,422 | | | $ | 31,100 | | | $ | 76,522 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Allowance for | | Reserve for | | Total |
| Loan and | | Unfunded Loan | | Allowance for |
| Lease Losses | | Commitments | | Credit Losses |
| (In thousands) |
Balance, beginning of year | $ | 348,181 | | | $ | 85,571 | | | $ | 433,752 | |
| | | | | |
| | | | | |
| | | | | |
Charge-offs | (10,715) | | | — | | | (10,715) | |
Recoveries | 12,598 | | | — | | | 12,598 | |
Net recoveries | 1,883 | | | — | | | 1,883 | |
Provision | (149,500) | | | (12,500) | | | (162,000) | |
Balance, end of year | $ | 200,564 | | | $ | 73,071 | | | $ | 273,635 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Allowance for | | Reserve for | | Total |
| Loan and | | Unfunded Loan | | Allowance for |
| Lease Losses | | Commitments | | Credit Losses |
| (In thousands) |
Balance, beginning of year | $ | 138,785 | | | $ | 35,861 | | | $ | 174,646 | |
Cumulative effect of change in accounting | | | | | |
principle - CECL | 3,617 | | | 3,710 | | | 7,327 | |
Balance, January 1, 2020 | 142,402 | | | 39,571 | | | 181,973 | |
Charge-offs | (93,589) | | | — | | | (93,589) | |
Recoveries | 6,368 | | | — | | | 6,368 | |
Net charge-offs | (87,221) | | | — | | | (87,221) | |
Provision | 293,000 | | | 46,000 | | | 339,000 | |
Balance, end of year | $ | 348,181 | | | $ | 85,571 | | | $ | 433,752 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6. FORECLOSED ASSETS, NET
The following table summarizes foreclosed assets as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
Property Type | 2021 | | 2020 |
| (In thousands) |
Commercial real estate | $ | 12,594 | | | $ | 12,979 | |
Construction and land development | — | | | 219 | |
| | | |
| | | |
Total other real estate owned, net | 12,594 | | | 13,198 | |
Other foreclosed assets | 249 | | | 829 | |
Total foreclosed assets, net | $ | 12,843 | | | $ | 14,027 | |
The following table presents the changes in foreclosed assets, net of the valuation allowance, for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Foreclosed Assets | 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance, beginning of year | $ | 14,027 | | | $ | 440 | | | $ | 5,299 | |
| | | | | |
Transfers to foreclosed assets from loans | 1,062 | | | 14,755 | | | 120 | |
| | | | | |
Provision for losses | (14) | | | (267) | | | (78) | |
Reductions related to sales | (2,232) | | | (901) | | | (4,901) | |
Balance, end of year | $ | 12,843 | | | $ | 14,027 | | | $ | 440 | |
The following table presents the changes in the foreclosed assets valuation allowance for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Foreclosed Assets Valuation Allowance | 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance, beginning of year | $ | 354 | | | $ | 87 | | | $ | 88 | |
Provision for losses | 14 | | | 267 | | | 78 | |
Reductions related to sales | (176) | | | — | | | (79) | |
Balance, end of year | $ | 192 | | | $ | 354 | | | $ | 87 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7. PREMISES AND EQUIPMENT, NET
The following table presents the components of premises and equipment as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Land | $ | 1,243 | | | $ | 1,243 | |
Buildings | 9,488 | | | 8,459 | |
Furniture, fixtures and equipment | 50,509 | | | 50,892 | |
Leasehold improvements | 66,143 | | | 60,622 | |
Other assets | 6,882 | | | — | |
Premises and equipment, gross | 134,265 | | | 121,216 | |
Less: accumulated depreciation and amortization | (87,525) | | | (81,982) | |
Premises and equipment, net | $ | 46,740 | | | $ | 39,234 | |
Depreciation and amortization expense was $11.1 million, $11.5 million, and $10.5 million for the years ended December 31, 2021, 2020, and 2019.
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The unprecedented decline in economic conditions triggered by the COVID-19 pandemic caused a significant decline in stock market valuations in March 2020, including our stock price. These triggering events indicated that goodwill related to our single reporting unit may be impaired and resulted in us performing a goodwill impairment assessment in the first quarter of 2020. We applied the market approach using an average share price of the Company's stock and a control premium to determine the fair value of the reporting unit. The control premium was based upon management judgment using historical information of control premiums for completed bank acquisitions. As a result, we recorded a goodwill impairment charge of $1.47 billion in the first quarter of 2020 as the estimated fair value of equity was less than book value. This was a non-cash charge to earnings and had no impact on our regulatory capital ratios, cash flows, or liquidity position.
In performing our annual goodwill assessment in the fourth quarter of 2020, we considered relevant events and circumstances that may affect the fair value or carrying amount of our reporting unit. The events and circumstances we considered included macroeconomic conditions, industry conditions, and our financial performance. Based on our qualitative assessment, we concluded that there were no conditions, changes in operations, or results that indicated a triggering event had occurred in the fourth quarter of 2020. Thus, a quantitative assessment was not required and we determined that it was more likely than not that the fair value of the reporting unit was greater than its carrying value and there was no evidence of impairment.
We performed our annual goodwill impairment testing in the fourth quarter of 2021. We evaluated the carrying value of our goodwill and determined that it was not impaired. The following table presents the changes in the carrying amount of goodwill for the years indicated:
| | | | | |
| Goodwill |
| (In thousands) |
Balance, December 31, 2019 | $ | 2,548,670 | |
Impairment | (1,470,000) | |
Balance, December 31, 2020 | 1,078,670 | |
Addition from the Civic acquisition | 125,448 | |
Addition from the HOA Business acquisition | 201,618 | |
Balance, December 31, 2021 | $ | 1,405,736 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Our other intangible assets with definite lives are CDI and CRI. CDI and CRI are amortized over their respective estimated useful lives and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or customer relationships acquired.
The following table presents the changes in CDI and CRI and the related accumulated amortization for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Gross Amount of CDI and CRI: | | | | | |
Balance, beginning of year | $ | 109,646 | | | $ | 117,573 | | | $ | 119,497 | |
Addition from the Civic acquisition | 750 | | | — | | | — | |
Addition from the HOA Business acquisition | 33,300 | | | — | | | — | |
Fully amortized portion | (9,846) | | | (7,927) | | | (1,924) | |
| | | | | |
Balance, end of year | 133,850 | | | 109,646 | | | 117,573 | |
Accumulated Amortization: | | | | | |
Balance, beginning of year | (86,005) | | | (79,179) | | | (62,377) | |
Amortization expense | (12,734) | | | (14,753) | | | (18,726) | |
Fully amortized portion | 9,846 | | | 7,927 | | | 1,924 | |
| | | | | |
Balance, end of year | (88,893) | | | (86,005) | | | (79,179) | |
Net CDI and CRI, end of year | $ | 44,957 | | | $ | 23,641 | | | $ | 38,394 | |
The following table presents the estimated aggregate future amortization expense for our current intangible assets as of the date indicated:
| | | | | |
| December 31, 2021 |
| (In thousands) |
Year Ending December 31, | |
2022 | $ | 13,575 | |
2023 | 9,085 | |
2024 | 6,404 | |
2025 | 4,087 | |
2026 | 3,482 | |
Thereafter | 8,324 | |
Net CDI and CRI | $ | 44,957 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9. OTHER ASSETS
The following table presents the detail of our other assets as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
Other Assets | 2021 | | 2020 |
| (In thousands) |
LIHTC investments | $ | 297,746 | | | $ | 213,034 | |
Cash surrender value of BOLI | 203,836 | | | 203,031 | |
Operating lease ROU assets, net (1) | 123,225 | | | 119,787 | |
Interest receivable | 120,329 | | | 101,596 | |
Equity investments without readily determinable fair values | 62,975 | | | 34,304 | |
SBIC investments | 46,861 | | | 32,327 | |
Taxes receivable | 36,011 | | | 59,565 | |
Equity investments with readily determinable fair values | 28,578 | | | 6,147 | |
Prepaid expenses | 27,632 | | | 22,999 | |
Equity warrants (2) | 3,555 | | | 4,520 | |
| | | |
Other receivables/assets | 133,244 | | | 63,016 | |
Total other assets | $ | 1,083,992 | | | $ | 860,326 | |
____________________
(1) See Note 10. Leases for further details regarding the operating lease ROU assets.
(2) See Note 13. Derivatives for information regarding equity warrants.
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 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 Company's equity investments without readily determinable fair values include investments in privately held companies, limited partnerships, entities from which we issued trust preferred securities, CRA-related loan pool investments, and CRA-related equity investments. The CRA-related loan pool and 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. We 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. Unrealized and realized gains and losses on equity investments without readily determinable fair values are recorded in "Noninterest income - other" on the consolidated statements of earnings (loss).
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. Unrealized and realized gains and losses on equity investments with readily determinable fair values are recorded in "Noninterest income - other" on the consolidated statements of earnings (loss).
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10. LEASES
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.
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. We amortize the operating lease ROU assets and record interest expense on the operating lease liabilities over the lease terms.
Operating leases with a term of more than one year are included in operating lease ROU assets and operating lease liabilities, which are reported in "Other assets" and "Accrued interest payable and other liabilities" on the Company's consolidated balance sheets. 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 (loss). The following table presents the components of lease expense for the period indicated:
| | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | | |
| (In thousands) | | |
Operating lease expense: | | | | | |
Fixed costs | $ | 34,541 | | | $ | 34,393 | | | |
Variable costs | 59 | | | 51 | | | |
Short-term lease costs | 1,347 | | | 385 | | | |
Sublease income | (4,474) | | | (4,171) | | | |
Net lease expense | $ | 31,473 | | | $ | 30,658 | | | |
The following table presents supplemental cash flow information related to leases for the period indicated:
| | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | | |
| (In thousands) | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 36,212 | | | $ | 33,889 | | | |
ROU assets obtained in exchange for lease obligations: | | | | | |
Operating leases | $ | 35,820 | | | $ | 24,309 | | | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents supplemental balance sheet and other information related to operating leases as of the date indicated:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (Dollars in thousands) |
Operating leases: | | | |
Operating lease right-of-use assets, net | $ | 123,225 | | | $ | 119,787 | |
Operating lease liabilities | $ | 142,117 | | | $ | 139,501 | |
| | | |
Weighted average remaining lease term (in years) | 5.6 | | 5.8 |
Weighted average discount rate | 2.23 | % | | 2.54 | % |
The following table presents the maturities of operating lease liabilities as of the date indicated:
| | | | | |
| December 31, 2021 |
| (In thousands) |
Year Ending December 31, | |
2022 | $ | 35,102 | |
2023 | 32,945 | |
2024 | 25,816 | |
2025 | 18,900 | |
2026 | 13,706 | |
Thereafter | 25,715 | |
Total operating lease liabilities | 152,184 | |
Less: Imputed interest | (10,067) | |
Present value of operating lease liabilities | $ | 142,117 | |
Operating Leases as a Lessor
We provide equipment financing to our customers through operating leases where we facilitate the purchase of equipment leased to our customers. The equipment is shown on 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 (loss), according to our fixed asset accounting policy. We receive periodic rental income payments under the leases, which are recorded as "Leased equipment income" in the consolidated statements of earnings (loss). The equipment is tested periodically for impairment. No impairment was recorded on "Equipment leased to others under operating leases" for the years ended December 31, 2021 and 2020.
The following table presents the contractual rental payments to be received on operating leases as of the date indicated:
| | | | | |
| December 31, 2021 |
| (In thousands) |
Year Ending December 31, | |
2022 | $ | 49,300 | |
2023 | 40,825 | |
2024 | 35,186 | |
2025 | 25,008 | |
2026 | 19,245 | |
Thereafter | 35,172 | |
Total undiscounted cash flows | $ | 204,736 | |
| |
| |
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:
| | | | | | | | | | | |
| December 31, |
Deposit Composition | 2021 | | 2020 |
| (In thousands) |
Interest checking | $ | 7,386,269 | | | $ | 5,999,245 | |
Money market | 11,064,870 | | | 7,658,049 | |
Savings | 630,653 | | | 562,826 | |
Time deposits $250,000 and under | 885,938 | | | 994,197 | |
Time deposits over $250,000 | 486,894 | | | 532,573 | |
Total interest-bearing deposits | $ | 20,454,624 | | | $ | 15,746,890 | |
Brokered time deposits totaled $195.7 million at both December 31, 2021 and 2020. Brokered non-maturity deposits totaled $0.9 billion and $1.1 billion at December 31, 2021 and 2020.
The following table summarizes the maturities of time deposits as of the date indicated:
| | | | | | | | | | | | | | | | | |
| Time Deposits |
| $250,000 | | Over | | |
December 31, 2021 | and Under | | $250,000 | | Total |
| (In thousands) |
Year of Maturity: | | | | | |
2022 | $ | 663,169 | | | $ | 473,700 | | | $ | 1,136,869 | |
2023 | 110,917 | | | 10,824 | | | 121,741 | |
2024 | 52,897 | | | 505 | | | 53,402 | |
2025 | 56,067 | | | 546 | | | 56,613 | |
2026 | 2,859 | | | 1,319 | | | 4,178 | |
Thereafter | 29 | | | — | | | 29 | |
Total | $ | 885,938 | | | $ | 486,894 | | | $ | 1,372,832 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 12. BORROWINGS AND SUBORDINATED DEBT
Borrowings
The following table summarizes our borrowings as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| | | Weighted | | | | Weighted |
| | | Average | | | | Average |
Borrowing Type | Balance | | Rate | | Balance | | Rate |
| (Dollars in thousands) |
FHLB secured advances | $ | — | | | — | % | | $ | 5,000 | | | — | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total borrowings | $ | — | | | — | % | | $ | 5,000 | | | — | % |
The Bank has established secured and unsecured lines of credit under which it may borrow funds from time to time on a term or overnight basis from the FHLB, the FRBSF, and other financial institutions.
FHLB Secured Line of Credit. The Bank had secured borrowing capacity with the FHLB of $4.0 billion as of December 31, 2021, collateralized by a blanket lien on $6.2 billion of qualifying loans.
The following table presents the interest rates and maturity dates of FHLB secured advances as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | | | 2020 |
| | | | | Maturity | | | | | | Maturity |
| Balance | | Rate | | Date | | Balance | | Rate | | Date |
| (Dollars in thousands) |
| | | | | | | | | | | |
Term advance | — | | | — | % | | | | 5,000 | | | — | % | | 5/6/2021 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total FHLB secured advances | $ | — | | | — | % | | | | $ | 5,000 | | | — | % | | |
FRBSF Secured Line of Credit. The Bank had secured borrowing capacity with the FRBSF of $1.4 billion as of December 31, 2021, collateralized by liens on $1.8 billion of qualifying loans. As of December 31, 2021 and 2020, there was no balances outstanding.
FHLB Unsecured Line of Credit. As of December 31, 2021, the Bank had a $112.0 million unsecured line of credit with the FHLB for the borrowing of overnight funds. As of December 31, 2021 and 2020, there was no balance outstanding.
Federal Funds Arrangements with Commercial Banks. As of December 31, 2021, 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, 2021 and 2020, there were no balances outstanding. The Bank is a member of the AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of pre-approved commercial banks. The availability of funds changes daily. As of December 31, 2021 and 2020, there was no borrowing.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Subordinated Debt
The following table summarizes the terms of each issuance of subordinated debt outstanding as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | | | | | |
| 2021 | | 2020 | | Issue | | Maturity | | Rate Index |
Series | Balance | | Rate (1) | | Balance | | Rate (1) | | Date | | Date | | (Quarterly Reset) (6) |
| (Dollars in thousands) | | | | | | |
Subordinated notes, net (2) | $ | 394,634 | | | 3.25 | % | | $ | — | | | — | % | | 4/30/2021 | | 5/1/2031 | | Fixed rate (3) |
Trust V | 10,310 | | | 3.32 | % | | 10,310 | | | 3.33 | % | | 8/15/2003 | | 9/17/2033 | | 3-month LIBOR + 3.10 |
Trust VI | 10,310 | | | 3.25 | % | | 10,310 | | | 3.27 | % | | 9/3/2003 | | 9/15/2033 | | 3-month LIBOR + 3.05 |
Trust CII | 5,155 | | | 3.17 | % | | 5,155 | | | 3.18 | % | | 9/17/2003 | | 9/17/2033 | | 3-month LIBOR + 2.95 |
Trust VII | 61,856 | | | 2.88 | % | | 61,856 | | | 2.96 | % | | 2/5/2004 | | 4/23/2034 | | 3-month LIBOR + 2.75 |
Trust CIII | 20,619 | | | 1.89 | % | | 20,619 | | | 1.91 | % | | 8/15/2005 | | 9/15/2035 | | 3-month LIBOR + 1.69 |
Trust FCCI | 16,495 | | | 1.80 | % | | 16,495 | | | 1.82 | % | | 1/25/2007 | | 3/15/2037 | | 3-month LIBOR + 1.60 |
Trust FCBI | 10,310 | | | 1.75 | % | | 10,310 | | | 1.77 | % | | 9/30/2005 | | 12/15/2035 | | 3-month LIBOR + 1.55 |
Trust CS 2005-1 | 82,475 | | | 2.15 | % | | 82,475 | | | 2.17 | % | | 11/21/2005 | | 12/15/2035 | | 3-month LIBOR + 1.95 |
Trust CS 2005-2 | 128,866 | | | 2.08 | % | | 128,866 | | | 2.16 | % | | 12/14/2005 | | 1/30/2036 | | 3-month LIBOR + 1.95 |
Trust CS 2006-1 | 51,545 | | | 2.08 | % | | 51,545 | | | 2.16 | % | | 2/22/2006 | | 4/30/2036 | | 3-month LIBOR + 1.95 |
Trust CS 2006-2 | 51,550 | | | 2.08 | % | | 51,550 | | | 2.16 | % | | 9/27/2006 | | 10/30/2036 | | 3-month LIBOR + 1.95 |
Trust CS 2006-3 (4) | 29,306 | | | 1.49 | % | | 31,487 | | | 1.54 | % | | 9/29/2006 | | 10/30/2036 | | 3-month EURIBOR + 2.05 |
Trust CS 2006-4 | 16,470 | | | 2.08 | % | | 16,470 | | | 2.16 | % | | 12/5/2006 | | 1/30/2037 | | 3-month LIBOR + 1.95 |
Trust CS 2006-5 | 6,650 | | | 2.08 | % | | 6,650 | | | 2.16 | % | | 12/19/2006 | | 1/30/2037 | | 3-month LIBOR + 1.95 |
Trust CS 2007-2 | 39,177 | | | 2.08 | % | | 39,177 | | | 2.16 | % | | 6/13/2007 | | 7/30/2037 | | 3-month LIBOR + 1.95 |
Total subordinated debt | 935,728 | | | 2.64 | % | | 543,275 | | | 2.24 | % | | | | | | |
Acquisition discount (5) | (72,445) | | | | | (77,463) | | | | | | | | | |
Net subordinated debt | $ | 863,283 | | | | | $ | 465,812 | | | | | | | | | |
___________________
(1) Rates do not include the effects of discounts and issuance costs.
(2) Net of unamortized issuance costs of $5.4 million.
(3) Interest rate is fixed until May 1, 2026, when it changes to a floating rate and resets quarterly at a benchmark rate plus 252 basis points.
(4) Denomination is in Euros with a value of €25.8 million.
(5) Amount represents the fair value adjustment on trust preferred securities assumed in acquisitions.
(6) Interest rate will default to the last published or determined rate of LIBOR, and for Trust CS 2006-4, the Base Rate, defined as the greater of Prime and the federal funds rate, upon cessation of LIBOR and effectively converting these instruments to fixed rate, if not modified prior to June 30, 2023.
Subordinated Notes Offering
On April 30, 2021, the Bank completed the sale of $400 million aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes (the "Notes") due May 1, 2031 (the “Maturity Date”). Subject to any redemption prior to the Maturity Date, the Notes will bear interest from and including the original issue date to, but excluding, May 1, 2026 (the “Reset Date”), at a fixed rate of 3.25% per annum and from and including the Reset Date, but excluding the Maturity Date, the Notes will bear interest at a floating per annum rate equal to a benchmark rate (which is expected to be the Three-Month Term SOFR) plus 252 basis points.
Interest on the Notes will be payable on May 1 and November 1 of each year through, but not including, the Reset Date, and quarterly thereafter on February 1, May 1, August 1, and November 1 of each year to, but not including, the Maturity Date or earlier redemption date. The first interest payment will be made on November 1, 2021. The Bank may, at its option, beginning with the interest payment date of May 1, 2026, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, from time to time, subject to any required regulatory approval to the extent such approval is then required, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption, subject to certain conditions. The costs incurred in connection with the Notes offering amortize to interest expense over the term of the Notes. The Notes qualify as Tier 2 capital for regulatory capital purposes.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13. DERIVATIVES
The Company uses derivatives to manage exposure to market risk, primarily foreign currency risk and interest rate risk, and to assist customers with their risk management objectives. Our derivatives are carried at fair value and recorded in "Other assets" or "Accrued interest payable and other liabilities," as appropriate, in the consolidated balance sheets. The changes in fair value of our derivatives and the related fees are recognized in "Noninterest income - other" in the consolidated statements of earnings (loss). For the year ended December 31, 2021, changes in fair value and fees recorded to noninterest income in the consolidated statements of earnings (loss) were immaterial. See Note 9. Other Assets for additional information regarding equity warrant assets.
The following table presents the U.S. dollar notional amounts and fair values of our derivative instruments included in the consolidated balance sheets as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Notional | | Fair | | Notional | | Fair |
Derivatives Not Designated As Hedging Instruments | Amount | | Value | | Amount | | Value |
| (In thousands) |
Derivative Assets: | | | | | | | |
Interest rate contracts | $ | 87,470 | | | $ | 992 | | | $ | 59,867 | | | $ | 1,028 | |
Foreign exchange contracts | 28,463 | | | 1,517 | | | 73,108 | | | 3,202 | |
Interest rate and economic contracts | 115,933 | | | 2,509 | | | 132,975 | | | 4,230 | |
Equity warrant assets | 18,539 | | | 3,555 | | | 24,081 | | | 4,520 | |
Total | $ | 134,472 | | | $ | 6,064 | | | $ | 157,056 | | | $ | 8,750 | |
| | | | | | | |
Derivative Liabilities: | | | | | | | |
Interest rate contracts | $ | 87,470 | | | $ | 931 | | | $ | 59,867 | | | $ | 1,004 | |
Foreign exchange contracts | 28,463 | | | — | | | 73,108 | | | 146 | |
Total | $ | 115,933 | | | $ | 931 | | | $ | 132,975 | | | $ | 1,150 | |
| | | | | | | |
NOTE 14. COMMITMENTS AND CONTINGENCIES
The following table presents a summary of commitments described below as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Loan commitments to extend credit | $ | 9,006,350 | | | $ | 7,601,390 | |
Standby letters of credit | 345,769 | | | 337,336 | |
| | | |
| | | |
Total | $ | 9,352,119 | | | $ | 7,938,726 | |
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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Commitments to extend credit are contractual agreements to lend to our customers when customers are in compliance with their contractual credit agreements and when customers have contractual availability to borrow under such agreements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. We provide standby letters of credit in conjunction with several of our lending arrangements and property lease obligations. Most guarantees expire within one year from the date of issuance. If a borrower defaults on its commitments subject to any letter of credit issued under these arrangements, we would be required to meet the borrower's financial obligation but would seek repayment of that financial obligation from the borrower. In some cases, borrowers have pledged cash and investment securities as collateral under these arrangements.
Additionally, we have commitments to invest in SBICs that call for capital contributions up to an amount specified in the partnership agreements, and in CRA-related loan pools. As of December 31, 2021 and 2020, such commitments totaled $85.9 million and $55.5 million.
The following table presents the years in which commitments are expected to be paid for our commitments to contribute capital to SBICs and CRA-related loan pools as of the date indicated:
| | | | | |
| December 31, 2021 |
| (In thousands) |
Year Ending December 31, | |
2022 | $ | 38,950 | |
2023 | 41,417 | |
2024 | 5,557 | |
| |
| |
| |
Total | $ | 85,924 | |
Legal Matters
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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 15. 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 residential CMOs, non-rated private label commercial MBS, 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 individually evaluated loans and leases and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long-lived assets.
The Company also holds SBIC investments measured at fair value using the NAV per share practical expedient that are not required to be classified in the fair value hierarchy. At December 31, 2021, the fair value of these investments was $46.9 million.
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of |
| December 31, 2021 |
Measured on a Recurring Basis | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Securities available‑for‑sale: | | | | | | | |
Agency residential MBS | $ | 2,898,210 | | | $ | — | | | $ | 2,898,210 | | | $ | — | |
Municipal securities | 2,315,968 | | | — | | | 2,315,968 | | | — | |
Agency commercial MBS | 1,688,967 | | | — | | | 1,688,967 | | | — | |
Agency residential CMOs | 1,038,134 | | | — | | | 1,038,134 | | | — | |
U.S. Treasury securities | 966,898 | | | 966,898 | | | — | | | — | |
Corporate debt securities | 527,094 | | | — | | | 527,094 | | | — | |
Private label commercial MBS | 450,217 | | | — | | | 435,216 | | | 15,001 | |
Collateralized loan obligations | 385,362 | | | — | | | 385,362 | | | — | |
Private label residential CMOs | 264,417 | | | — | | | 264,417 | | | — | |
Asset-backed securities | 129,547 | | | — | | | 129,547 | | | — | |
SBA securities | 29,644 | | | — | | | 29,644 | | | — | |
Total securities available-for-sale | $ | 10,694,458 | | | $ | 966,898 | | | $ | 9,712,559 | | | $ | 15,001 | |
Equity investments with readily determinable fair values | $ | 28,578 | | | $ | 28,578 | | | $ | — | | | $ | — | |
Derivatives (1): | | | | | | | |
Equity warrants | 3,555 | | | — | | | — | | | 3,555 | |
Interest rate and economic contracts | 2,509 | | | — | | | 2,509 | | | — | |
Derivative liabilities | 931 | | | — | | | 931 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of |
| December 31, 2020 |
Measured on a Recurring Basis | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Securities available‑for‑sale: | | | | | | | |
Municipal securities | $ | 1,531,617 | | | $ | — | | | $ | 1,531,617 | | | $ | — | |
Agency commercial MBS | 1,281,877 | | | — | | | 1,281,877 | | | — | |
Agency residential CMOs | 1,219,880 | | | — | | | 1,219,880 | | | — | |
Agency residential MBS | 341,074 | | | — | | | 341,074 | | | — | |
Corporate debt securities | 311,889 | | | — | | | 311,889 | | | — | |
Asset-backed securities | 166,546 | | | — | | | 166,546 | | | — | |
Collateralized loan obligations | 135,876 | | | — | | | 135,876 | | | — | |
Private label residential CMOs | 116,946 | | | — | | | 112,299 | | | 4,647 | |
Private label commercial MBS | 82,957 | | | — | | | 57,232 | | | 25,725 | |
SBA securities | 41,627 | | | — | | | 41,627 | | | — | |
U.S. Treasury securities | 5,302 | | | 5,302 | | | — | | | — | |
Total securities available-for-sale | $ | 5,235,591 | | | $ | 5,302 | | | $ | 5,199,917 | | | $ | 30,372 | |
Equity investments with readily determinable fair values | $ | 6,147 | | | $ | 6,147 | | | $ | — | | | $ | — | |
Derivatives (1): | | | | | | | |
Equity warrants | 4,520 | | | — | | | — | | | 4,520 | |
Interest rate and economic contracts | 4,230 | | | — | | | 4,230 | | | — | |
Derivative liabilities | 1,150 | | | — | | | 1,150 | | | — | |
| | | | | | | |
| | | | | | | |
____________________
(1) For information regarding derivative instruments, see Note 13. Derivatives.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the year ended December 31, 2021, there was a $646,000 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, 2020, there was a $119,000 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 commercial MBS available-for-sale measured at fair value on a recurring basis as of the date indicated:
| | | | | | | | | | | | | | | |
| | | | | December 31, 2021 |
| | | Private Label Commercial MBS |
| | | | | Input or | | Weighted |
| | | | | Range of | | Average |
Unobservable Inputs | | | | | Inputs | | Input (1) |
Voluntary annual prepayment speeds | | | | | 10.0% - 15.0% | | 12.1% |
Annual default rates (2) | | | | | 2.0% | | 2.0% |
Loss severity rates (2) | | | | | 60.0% | | 60.0% |
Discount rates | | | | | 3.0% - 3.4% | | 3.3% |
____________________
(1) Voluntary annual prepayment speeds and discount rates for private label commercial MBS were weighted by the relative fair values of the instruments.
(2) Annual default rates and loss severity rates were the same for all of the private label commercial MBS.
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:
| | | | | | | | | | | |
| December 31, 2021 |
| Equity Warrants |
| | | Weighted |
| Range | | Average |
Unobservable Inputs | of Inputs | | Input |
Volatility | 21.0% - 139.9% | | 28.6% |
Risk-free interest rate | 0.1% - 1.3% | | 0.9% |
Remaining life assumption (in years) | 0.08 - 4.99 | | 3.00 |
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:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Level 3 Private Label Residential CMOs | 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance, beginning of year | $ | 4,647 | | | $ | 6,264 | | | $ | 7,288 | |
Total included in earnings | 2,287 | | | 485 | | | 432 | |
Total unrealized loss in comprehensive income | (1,094) | | | (592) | | | (265) | |
Sales | (2,903) | | | — | | | — | |
| | | | | |
| | | | | |
Net settlements | (2,937) | | | (1,510) | | | (1,191) | |
| | | | | |
Balance, end of year | $ | — | | | $ | 4,647 | | | $ | 6,264 | |
| | | | | |
Unrealized net gains (losses) for the period included in other | | | | | |
comprehensive income for securities held at year-end | $ | — | | | | | |
| | | | | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes activity for our Level 3 private label commercial MBS measured at fair value on a recurring basis for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Level 3 Private Label Commercial MBS | 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance, beginning of year | $ | 25,725 | | | $ | 16,435 | | | $ | 39,945 | |
Total included in earnings | (77) | | | 5 | | | (77) | |
Total unrealized gain (loss) in comprehensive income | (115) | | | (41) | | | 463 | |
| | | | | |
Purchases | — | | | 20,100 | | | — | |
Net settlements | (10,532) | | | (10,774) | | | (23,896) | |
| | | | | |
Balance, end of year | $ | 15,001 | | | $ | 25,725 | | | $ | 16,435 | |
| | | | | |
Unrealized net gains (losses) for the period included in other | | | | | |
comprehensive income for securities held at year-end | $ | 41 | | | | | |
The following table summarizes activity for our Level 3 equity warrants measured at fair value on a recurring basis for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Level 3 Equity Warrants | 2021 | | 2020 | | 2019 |
| (In thousands) |
Balance, beginning of year | $ | 4,520 | | | $ | 3,434 | | | $ | 4,793 | |
Total included in earnings | 49,341 | | | 10,609 | | | 8,669 | |
| | | | | |
Exercises and settlements (1) | (50,092) | | | (9,828) | | | (10,239) | |
Issuances | 432 | | | 424 | | | 324 | |
Transfers to Level 1 (equity investments with readily | | | | | |
determinable fair values) | (646) | | | (119) | | | (113) | |
Balance, end of year | $ | 3,555 | | | $ | 4,520 | | | $ | 3,434 | |
______________________
(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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement as of |
| December 31, 2021 |
Measured on a Non‑Recurring Basis | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Individually evaluated loans and leases | $ | 30,882 | | | $ | — | | | $ | 2,915 | | | $ | 27,967 | |
| | | | | | | |
| | | | | | | |
Total non-recurring | $ | 30,882 | | | $ | — | | | $ | 2,915 | | | $ | 27,967 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement as of |
| December 31, 2020 |
Measured on a Non‑Recurring Basis | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Individually evaluated loans and leases | $ | 102,274 | | | $ | — | | | $ | 4,160 | | | $ | 98,114 | |
| | | | | | | |
| | | | | | | |
Total non-recurring | $ | 102,274 | | | $ | — | | | $ | 4,160 | | | $ | 98,114 | |
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:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Loss on Assets Measured on a Non‑Recurring Basis | 2021 | | 2020 | | 2019 |
| (In thousands) |
Individually evaluated loans and leases (1) | $ | 5,772 | | | $ | 24,607 | | | $ | 6,797 | |
| | | | | |
OREO | 14 | | | 267 | | | 78 | |
Total net loss | $ | 5,786 | | | $ | 24,874 | | | $ | 6,875 | |
_____________________
(1) For 2021 and 2020, losses were based on individually evaluated loans and leases. For 2019, losses were based on impaired loans and leases.
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | Valuation | | Unobservable | | Input or | | Weighted |
Asset | Fair Value | | Technique | | Inputs | | Range | | Average |
| (In thousands) | | | | | | | | |
Individually evaluated | | | | | | | | | |
loans and leases | $ | 15,426 | | Discounted cash flows | | Discount rates | | 0.00% - 9.25% | | 6.46% |
| | | | | | | | | |
| | | | | | | | | |
Individually evaluated | | | | | | | | | |
loans and leases | 12,541 | | Third party appraisals | | No discounts | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total non-recurring Level 3 | $ | 27,967 | | | | | | | | |
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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Carrying | | Estimated Fair Value |
| Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Financial Assets: | | | | | | | | | |
Cash and due from banks | $ | 112,548 | | | $ | 112,548 | | | $ | 112,548 | | | $ | — | | | $ | — | |
Interest‑earning deposits in financial institutions | 3,944,686 | | | 3,944,686 | | | 3,944,686 | | | — | | | — | |
Securities available‑for‑sale | 10,694,458 | | | 10,694,458 | | | 966,898 | | | 9,712,559 | | | 15,001 | |
Investment in FHLB stock | 17,250 | | | 17,250 | | | — | | | 17,250 | | | — | |
Loans and leases held for investment, net | 22,740,984 | | | 23,461,156 | | | — | | | 2,915 | | | 23,458,241 | |
Equity investments with readily determinable fair values | 28,578 | | | 28,578 | | | 28,578 | | | — | | | — | |
Equity warrants | 3,555 | | | 3,555 | | | — | | | — | | | 3,555 | |
Interest rate and economic contracts | 2,509 | | | 2,509 | | | — | | | 2,509 | | | — | |
Servicing rights | 1,228 | | | 1,228 | | | — | | | — | | | 1,228 | |
| | | | | | | | | |
Financial Liabilities: | | | | | | | | | |
Core deposits | 32,734,949 | | | 32,734,949 | | | — | | | 32,734,949 | | | — | |
Non-core non-maturity deposits | 889,976 | | | 889,976 | | | — | | | 889,976 | | | — | |
Time deposits | 1,372,832 | | | 1,371,527 | | | — | | | 1,371,527 | | | — | |
Borrowings | — | | | — | | | — | | | — | | | — | |
Subordinated debt | 863,283 | | | 917,342 | | | — | | | 917,342 | | | — | |
Derivative liabilities | 931 | | | 931 | | | — | | | 931 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Carrying | | Estimated Fair Value |
| Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Financial Assets: | | | | | | | | | |
Cash and due from banks | $ | 150,464 | | | $ | 150,464 | | | $ | 150,464 | | | $ | — | | | $ | — | |
Interest‑earning deposits in financial institutions | 3,010,197 | | | 3,010,197 | | | 3,010,197 | | | — | | | — | |
Securities available‑for‑sale | 5,235,591 | | | 5,235,591 | | | 5,302 | | | 5,199,917 | | | 30,372 | |
Investment in FHLB stock | 17,250 | | | 17,250 | | | — | | | 17,250 | | | — | |
Loans and leases held for investment, net | 18,735,196 | | | 19,305,998 | | | — | | | 4,160 | | | 19,301,838 | |
Equity investments with readily determinable fair values | 6,147 | | | 6,147 | | | 6,147 | | | — | | | — | |
Equity warrants | 4,520 | | | 4,520 | | | — | | | — | | | 4,520 | |
Interest rate and economic contracts | 4,230 | | | 4,230 | | | — | | | 4,230 | | | — | |
| | | | | | | | | |
Financial Liabilities: | | | | | | | | | |
Core deposits | 22,264,480 | | | 22,264,480 | | | — | | | 22,264,480 | | | — | |
Non-core non-maturity deposits | 1,149,467 | | | 1,149,467 | | | — | | | 1,149,467 | | | — | |
Time deposits | 1,526,770 | | | 1,527,639 | | | — | | | 1,527,639 | | | — | |
Borrowings | 5,000 | | | 4,995 | | | — | | | 4,995 | | | — | |
Subordinated debt | 465,812 | | | 448,036 | | | — | | | 448,036 | | | — | |
Derivative liabilities | 1,150 | | | 1,150 | | | — | | | 1,150 | | | — | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to 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 residential CMOs and non-rated private label commercial MBS (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, 2021.
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 measured using the exit price and 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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Individually evaluated loans and leases. Defaulted loans and leases with outstanding balances over $250,000 are reviewed individually for expected credit loss, if any, and are recorded at fair value on a non-recurring basis. These defaulted loans and leases are excluded from the loan pools used within the collective evaluation of estimated credit losses. The criteria for default may include any one of the following: (1) on nonaccrual status, (2) modified under a TDR, (3) payment delinquency of 90 days or more, (4) partial charge-off recognized, (5) risk rated doubtful or loss, or (6) reasonably expected to be modified under a TDR.
To the extent a defaulted loan or lease is collateral dependent, we measure expected credit loss 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, 2021.
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 individually evaluated loans and leases 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 individually evaluated loan and lease balances shown above as measured on a non-recurring basis represent those defaulted loans and leases for which expected credit loss was recognized during the year ended December 31, 2021. The amounts shown as net losses include the expected credit loss recognized during the year ended December 31, 2021, 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, 2021.
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.
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 debt. Subordinated debt is carried at amortized cost. The fair value of subordinated debt is determined using a market discount rate on the expected cash flows and is 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 reasonable judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of December 31, 2021, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
NOTE 16. INCOME TAXES
The following table presents the components of income tax expense for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Current Income Tax Expense: | | | | | |
Federal | $ | 131,559 | | | $ | 78,161 | | | $ | 113,807 | |
State | 54,744 | | | 27,530 | | | 34,575 | |
Total current income tax expense | 186,303 | | | 105,691 | | | 148,382 | |
Deferred Income Tax Expense (Benefit): | | | | | |
Federal | 15,799 | | | (28,740) | | | 5,062 | |
State | 13,273 | | | (1,778) | | | 10,860 | |
Total deferred income tax expense (benefit) | 29,072 | | | (30,518) | | | 15,922 | |
Total income tax expense | $ | 215,375 | | | $ | 75,173 | | | $ | 164,304 | |
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 2021, 2020, and 2019 to earnings before income taxes:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Computed expected income tax (benefit) expense at federal statutory rate | $ | 172,690 | | | $ | (244,104) | | | $ | 132,917 | |
State tax (benefit) expense, net of federal tax benefit | 55,682 | | | (77,934) | | | 43,575 | |
Goodwill impairment | — | | | 407,232 | | | — | |
Tax‑exempt interest benefit | (12,312) | | | (5,202) | | | (8,092) | |
Increase in cash surrender value of life insurance | (1,367) | | | (1,309) | | | (1,298) | |
Low income housing tax credits, net of amortization | (6,430) | | | (4,605) | | | (3,217) | |
Nondeductible employee compensation | 4,660 | | | 2,830 | | | 4,430 | |
| | | | | |
Nondeductible FDIC premiums | 2,535 | | | 2,383 | | | 1,302 | |
Change in unrecognized tax benefits | (860) | | | (187) | | | 941 | |
Valuation allowance change | (16,201) | | | (5,288) | | | (32,036) | |
Expired capital loss carryforward | — | | | — | | | 3,136 | |
| | | | | |
State tax refunds | — | | | (2,554) | | | — | |
State rate and apportionment changes | 16,330 | | | 4,217 | | | 19,138 | |
Other, net | 648 | | | (306) | | | 3,508 | |
Recorded income tax expense | $ | 215,375 | | | $ | 75,173 | | | $ | 164,304 | |
The Company recognized $33.6 million, $28.1 million, and $20.0 million of tax credits and other tax benefits associated with its investments in LIHTC partnerships for the years ended December 31, 2021, 2020, and 2019. The amount of amortization of such investments reported in income tax expense under the proportional amortization method of accounting was $27.1 million for 2021, $23.5 million for 2020, and $16.7 million for 2019.
At December 31, 2021, we had no federal net operating loss carryforwards and approximately $314.4 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 from 2022 through 2040. 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 Tax Cuts and Jobs Act.
As of December 31, 2021, for federal tax purposes, we had no foreign tax credit carryforwards. The foreign tax credit carryforward was fully utilized in 2021.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Deferred Tax Assets: | | | |
Book allowance for loan losses in excess of tax specific charge-offs | $ | 76,384 | | | $ | 122,753 | |
Interest on nonaccrual loans | 3,150 | | | 3,335 | |
Deferred compensation | 5,209 | | | 5,298 | |
| | | |
Foreclosed assets valuation allowance | 289 | | | 334 | |
State tax benefit | 6,768 | | | 3,108 | |
Net operating losses | 19,646 | | | 34,658 | |
| | | |
Accrued liabilities | 29,057 | | | 20,477 | |
Unrealized loss from FDIC‑assisted acquisitions | 886 | | | 1,310 | |
| | | |
Tax mark-to-market on loans | 6,543 | | | 2,155 | |
Equity investments | — | | | 2,115 | |
Goodwill | — | | | 451 | |
Tax credits | — | | | 2,232 | |
Lease liability | 39,095 | | | 38,521 | |
| | | |
Gross deferred tax assets | 187,027 | | | 236,747 | |
Valuation allowance | (24,882) | | | (41,083) | |
Deferred tax assets, net of valuation allowance | 162,145 | | | 195,664 | |
Deferred Tax Liabilities: | | | |
Core deposit and customer relationship intangibles | 1,746 | | | 5,877 | |
Deferred loan fees and costs | 2,337 | | | 3,763 | |
Unrealized gain on securities available‑for‑sale | 24,972 | | | 66,098 | |
Premises and equipment, principally due to differences in depreciation | 1,466 | | | 3,120 | |
FHLB stock | 613 | | | 637 | |
| | | |
Subordinated debt | 17,110 | | | 18,639 | |
Equity investments | 5,475 | | | — | |
Goodwill | 6,166 | | | — | |
Operating leases | 86,000 | | | 95,026 | |
ROU assets | 34,129 | | | 33,345 | |
Other | 1,712 | | | 794 | |
Gross deferred tax liabilities | 181,726 | | | 227,299 | |
Total net deferred tax liabilities | $ | (19,581) | | | $ | (31,635) | |
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.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company had net income taxes receivable of $36.3 million and $59.3 million at December 31, 2021 and December 31, 2020.
As of December 31, 2021 and 2020, the Company had a valuation allowance of $24.9 million and $41.1 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, 2021 was $16.2 million. Of this amount, $14.3 million consisted principally of adjustments to state net operating loss DTAs. The adjustment to the state operating loss DTAs at December 31, 2021, 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 $14.3 million of deferred tax assets had no impact on the Company's effective tax rate for the year ended December 31, 2021. The remaining $1.9 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 deferred tax assets.
The following table summarizes the activity related to the Company's unrecognized tax benefits for the years indicated:
| | | | | | | | | | | |
| Year Ended December 31, |
Unrecognized Tax Benefits | 2021 | | 2020 |
| (In thousands) |
Balance, beginning of year | $ | 3,376 | | | $ | 10,748 | |
Increase based on tax positions related to prior years | — | | | 879 | |
Reductions for tax positions related to prior years | (698) | | | (7,813) | |
| | | |
Reductions for tax positions as a result of a lapse of the applicable statute of limitations | (123) | | | (438) | |
Balance, end of year | $ | 2,555 | | | $ | 3,376 | |
| | | |
Unrecognized tax benefits that would affect the effective tax rate if recognized | $ | 2,555 | | | $ | 3,376 | |
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 $2.1 million.
We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2021 and December 31, 2020, we reduced our accrual for interest expense and penalties and recognized tax benefits of $0.2 million for 2021 and $0.2 million for 2020. For the year ended December 31, 2019, we recognized $0.7 million in expense for interest expense and penalties. We had $1.1 million and $1.3 million accrued for the payment of interest and penalties as of December 31, 2021 and 2020.
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 2017 through 2020. We are currently under examination by certain state jurisdictions for tax years 2015 through 2018.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17. EARNINGS (LOSS) PER SHARE
The following table presents the computation of basic and diluted net earnings (loss) per share for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in thousands, except per share data) |
Basic Earnings (Loss) Per Share: | | | | | |
Net earnings (loss) | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
Less: earnings allocated to unvested restricted stock(1) | (10,248) | | | (1,782) | | | (5,182) | |
Net earnings (loss) allocated to common shares | $ | 596,711 | | | $ | (1,239,356) | | | $ | 463,454 | |
| | | | | |
Weighted-average basic shares and unvested restricted stock outstanding | 119,349 | | | 118,463 | | | 120,468 | |
Less: weighted-average unvested restricted stock outstanding | (2,255) | | | (1,610) | | | (1,502) | |
Weighted-average basic shares outstanding | 117,094 | | | 116,853 | | | 118,966 | |
| | | | | |
Basic earnings (loss) per share | $ | 5.10 | | | $ | (10.61) | | | $ | 3.90 | |
| | | | | |
Diluted Earnings (Loss) Per Share: | | | | | |
Net earnings (loss) allocated to common shares | $ | 596,711 | | | $ | (1,239,356) | | | $ | 463,454 | |
| | | | | |
Weighted-average diluted shares outstanding | 117,094 | | | 116,853 | | | 118,966 | |
| | | | | |
Diluted earnings (loss) per share | $ | 5.10 | | | $ | (10.61) | | | $ | 3.90 | |
________________________
(1) Represents cash dividends paid to holders of unvested restricted stock, net of forfeitures, plus undistributed earnings amounts available to holders of unvested restricted stock, if any.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 18. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers 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. Such 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, 2021.
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.
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 (loss) 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, |
| 2021 | | 2020 | | 2019 |
| Total | | Revenue from | | Total | | Revenue from | | Total | | Revenue from |
| Recorded | | Contracts with | | Recorded | | Contracts with | | Recorded | | Contracts with |
| Revenue | | Customers | | Revenue | | Customers | | Revenue | | Customers |
| (In thousands) |
Total interest income | $ | 1,158,729 | | | $ | — | | | $ | 1,103,491 | | | $ | — | | | $ | 1,219,893 | | | $ | — | |
Noninterest income: | | | | | | | | | | | |
Other commissions and fees | 42,287 | | | 11,018 | | | 40,347 | | | 13,412 | | | 43,623 | | | 19,216 | |
Leased equipment income | 45,746 | | | — | | | 43,628 | | | — | | | 38,727 | | | — | |
Service charges on deposit accounts | 13,269 | | | 13,269 | | | 10,351 | | | 10,351 | | | 14,637 | | | 14,637 | |
Gain on sale of loans | 1,733 | | | — | | | 2,139 | | | — | | | 1,114 | | | — | |
Gain on sale of securities | 1,615 | | | — | | | 13,171 | | | — | | | 25,445 | | | — | |
Dividends and gains (losses) on | | | | | | | | | | | |
equity investments | 23,115 | | | — | | | 14,984 | | | — | | | (567) | | | — | |
Warrant income | 49,341 | | | — | | | 10,609 | | | — | | | 8,669 | | | — | |
Other income | 16,821 | | | 556 | | | 10,831 | | | 2,000 | | | 10,914 | | | 1,617 | |
Total noninterest income | 193,927 | | | 24,843 | | | 146,060 | | | 25,763 | | | 142,562 | | | 35,470 | |
Total revenue | $ | 1,352,656 | | | $ | 24,843 | | | $ | 1,249,551 | | | $ | 25,763 | | | $ | 1,362,455 | | | $ | 35,470 | |
The following table presents revenue from contracts with customers based on the timing of revenue recognition for the period indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (In thousands) |
Products and services transferred at a point in time | $ | 11,713 | | | $ | 14,190 | | | $ | 19,253 | |
Products and services transferred over time | 13,130 | | | 11,573 | | | 16,217 | |
Total revenue from contracts with customers | $ | 24,843 | | | $ | 25,763 | | | $ | 35,470 | |
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers as of the dates indicated:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (In thousands) |
Receivables, which are included in "Other assets" | $ | 1,066 | | | $ | 1,046 | |
Contract assets, which are included in "Other assets" | $ | — | | | $ | — | |
Contract liabilities, which are included in "Accrued interest payable and other liabilities" | $ | 229 | | | $ | 359 | |
Contract liabilities relate to advance consideration received from customers for which revenue is recognized over the life of the contract. The change in contract liabilities for the year ended December 31, 2021 due to revenue recognized that was included in the contract liability balance at the beginning of the year was $130,000.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 19. STOCK-BASED COMPENSATION
At the annual meeting of stockholders held on May 11, 2021, the Company's stockholders approved the Amended and Restated PacWest Bancorp 2017 Stock Incentive Plan (the “Amended and Restated 2017 Plan”). The Company’s Amended and Restated 2017 Plan permits stock-based compensation awards to officers, directors, employees, and consultants and will remain in effect until December 31, 2026.
The Amended and Restated 2017 Plan authorizes grants of stock-based compensation instruments to purchase or issue up to 6,650,000 shares, representing 4,000,000 shares originally approved for grant under the Original 2017 Stock Incentive Plan plus 2,650,000 shares added as result of the approval of the Amended and Restated 2017 Plan. As of December 31, 2021, there were 3,014,995 shares available for grant under the Amended and Restated 2017 Plan.
Restricted Stock
Restricted stock amortization totaled $31.4 million, $23.7 million, and $26.2 million for the years ended December 31, 2021, 2020, and 2019. Such amounts are included in compensation expense on the accompanying consolidated statements of earnings (loss) and exclude $859,000, $627,000, and $598,000 of stock-based compensation expense for the years ended December 31, 2021, 2020, and 2019 related to our directors, which is included in other expense on the accompanying consolidated statement of earnings (loss). The income tax benefit recognized in the consolidated statements of earnings (loss) related to this expense was $6.0 million, $5.8 million, and $6.8 million for the years ended December 31, 2021, 2020, and 2019. The amount of unrecognized compensation expense related to all unvested TRSAs and PRSUs as of December 31, 2021 totaled $69.0 million. Such expense is expected to be recognized over a weighted average period of 1.5 years.
The following table presents a summary of restricted stock transactions during the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| TRSAs | | PRSUs |
| | | Weighted | | | | Weighted |
| | | Average | | | | Average |
| Number | | Grant Date | | Number | | Grant Date |
| of | | Fair Value | | of | | Fair Value |
Year Ended December 31, 2021 | Shares | | (Per Share) | | Units | | (Per Unit) |
Unvested restricted stock, beginning of year | 1,608,126 | | | $32.83 | | 315,008 | | | $42.77 |
Granted | 1,433,698 | | | $37.65 | | 324,351 | | | $32.19 |
Vested | 622,572 | | | $37.96 | | 22,320 | | | $54.07 |
Forfeited | 107,172 | | | $37.80 | | 104,176 | | | $49.00 |
Unvested restricted stock, end of year | 2,312,080 | | | $34.21 | | 512,863 | | | $34.32 |
The table above excludes 20,173 of immediately vested shares awarded to our directors at a weighted average price of $42.59.
Time-Based Restricted Stock Awards
At December 31, 2021, there were 2,312,080 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 or four years from the date of the grant or immediately upon death of an employee. Compensation expense related to TRSAs is based on the fair value of the underlying 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 2021, 2020, and 2019 were $37.65, $20.84, and $38.66. The vesting date fair value of TRSAs that vested during 2021, 2020, and 2019 were $26.7 million, $13.1 million, and $18.1 million.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Performance-Based Restricted Stock Units
At December 31, 2021, there were 512,863 units of unvested PRSUs that have been granted. The PRSUs will vest only if performance goals with respect to certain financial metrics are met over a three-year performance period. The 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 2021, 2020, and 2019 was $32.19, $36.20 and $40.39. The vesting date fair value of PRSUs that vested during 2021 and 2020 was $0.8 million, $2.7 million, and $5.6 million.
NOTE 20. 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. Plan participants are immediately vested in matching contributions received from the Company. During 2021, the Company matched 50% of the first 6% contributed by plan participants. Effective January 1, 2022, the Company matches 50% of the first 8% contributed by plan participants. Expense related to 401(k) employer matching contributions was $5.7 million, $4.6 million and $4.1 million for the years ended December 31, 2021, 2020, and 2019.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 21. 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.
The following table shows the dollar amount of shares surrendered, shares surrendered, and weighted average price per share for restricted stock surrendered as treasury shares for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Restricted Stock Surrendered as Treasury Shares | 2021 | | 2020 | | 2019 |
Dollar amount of shares surrendered (in thousands) | $ | 8,505 | | | $ | 5,369 | | | $ | 8,449 | |
Number of shares surrendered | 199,018 | | | 213,578 | | | 218,531 | |
Weighted average price per share | $ | 42.73 | | | $ | 25.14 | | | $ | 38.66 | |
Stock Repurchase Programs
The Stock Repurchase Program was initially authorized by PacWest's Board of Directors on October 17, 2016. 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, effective February 29, 2020. No shares were repurchased under the new Stock Repurchase Program prior to expiration on February 28, 2021.
The following table shows the repurchase amounts, shares repurchased, and weighted average price per share for stock repurchases under the various Stock Repurchase Programs for the years indicated:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Stock Repurchases Under Stock Repurchase Programs | 2021 | | 2020 | | 2019 |
Dollar amount of repurchases (in thousands) | $ | — | | | $ | 70,000 | | | $ | 154,516 | |
Number of shares repurchased | — | | | 1,953,711 | | | 3,987,945 | |
Weighted average price per share | $ | — | | | $ | 35.83 | | | $ | 38.75 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 22. 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 debt 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 DFPI, 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 DFPI 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 DFPI and FDIC as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for the three previous fiscal years less any dividend paid during such period. The Bank had a cumulative net loss of $155.3 million during the three fiscal years of 2021, 2020, and 2019, compared to dividends of $776.0 million paid by the Bank during that same period. During 2021, PacWest received $182.0 million in dividends from the Bank. Since the Bank had an accumulated deficit of $1.5 billion at December 31, 2021, for the foreseeable future, dividends from the Bank to PacWest will continue to require DFPI 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, 2021, such disallowed amounts were $10,000 for the Company and $41.0 million 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.
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, 2021, 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, 2021, 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 is fully phased-in at 2.5%, such that the common equity Tier 1, Tier 1 and total capital ratio minimums inclusive of the capital conservation buffers were 7%, 8.5%, and 10.5%. At December 31, 2021, the Company and Bank were in compliance with the capital conservation buffer requirements.
The Company and Bank elected the CECL 5-year regulatory transition guidance for calculating regulatory capital ratios and the December 31, 2021 ratios include this election. This guidance allows an entity to add back to capital 100% of the capital impact from the day one CECL transition adjustment and 25% of subsequent increases to the allowance for credit losses through December 31, 2022. This cumulative amount will then be phased out of regulatory capital over the next three years.
The following tables present actual capital amounts and ratios for the Company and the Bank as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Well Capitalized | | Capital |
| | | | | Minimum | | Conservation |
| Actual | | Requirement | | Buffer |
| Balance | | Ratio | | Balance | | Ratio | | Requirement |
| (Dollars in thousands) |
December 31, 2021 | | | | | | | | | |
Tier I leverage capital (to average assets): | | | | | | | | | |
PacWest Bancorp Consolidated | $ | 2,657,575 | | | 6.84% | | $ | 1,942,017 | | | 5.00% | | N/A |
Pacific Western Bank | $ | 2,717,374 | | | 7.00% | | $ | 1,940,510 | | | 5.00% | | N/A |
CET1 capital (to risk-weighted assets): | | | | | | | | | |
PacWest Bancorp Consolidated | $ | 2,526,575 | | | 8.86% | | $ | 1,853,073 | | | 6.50% | | 7.00% |
Pacific Western Bank | $ | 2,717,374 | | | 9.56% | | $ | 1,847,853 | | | 6.50% | | 7.00% |
Tier I capital (to risk-weighted assets) | | | | | | | | | |
PacWest Bancorp Consolidated | $ | 2,657,575 | | | 9.32% | | $ | 2,280,705 | | | 8.00% | | 8.50% |
Pacific Western Bank | $ | 2,717,374 | | | 9.56% | | $ | 2,274,281 | | | 8.00% | | 8.50% |
Total capital (to risk-weighted assets): | | | | | | | | | |
PacWest Bancorp Consolidated | $ | 3,619,190 | | | 12.69% | | $ | 2,850,881 | | | 10.00% | | 10.50% |
Pacific Western Bank | $ | 3,355,403 | | | 11.80% | | $ | 2,842,851 | | | 10.00% | | 10.50% |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Well Capitalized | | Capital |
| | | | | Minimum | | Conservation |
| Actual | | Requirement | | Buffer |
| Balance | | Ratio | | Balance | | Ratio | | Requirement |
| (Dollars in thousands) |
December 31, 2020 | | | | | | | | | |
Tier I leverage capital (to average assets): | | | | | | | | | |
PacWest Bancorp Consolidated | $ | 2,403,721 | | | 8.55% | | $ | 1,404,880 | | | 5.00% | | N/A |
Pacific Western Bank | $ | 2,673,960 | | | 9.53% | | $ | 1,403,208 | | | 5.00% | | N/A |
CET1 capital (to risk-weighted assets): | | | | | | | | | |
PacWest Bancorp Consolidated | $ | 2,403,721 | | | 10.53% | | $ | 1,484,450 | | | 6.50% | | 7.00% |
Pacific Western Bank | $ | 2,673,960 | | | 11.73% | | $ | 1,481,599 | | | 6.50% | | 7.00% |
Tier I capital (to risk-weighted assets) | | | | | | | | | |
PacWest Bancorp Consolidated | $ | 2,403,721 | | | 10.53% | | $ | 1,827,015 | | | 8.00% | | 8.50% |
Pacific Western Bank | $ | 2,673,960 | | | 11.73% | | $ | 1,823,506 | | | 8.00% | | 8.50% |
Total capital (to risk-weighted assets): | | | | | | | | | |
PacWest Bancorp Consolidated | $ | 3,141,992 | | | 13.76% | | $ | 2,283,769 | | | 10.00% | | 10.50% |
Pacific Western Bank | $ | 2,959,853 | | | 12.99% | | $ | 2,279,383 | | | 10.00% | | 10.50% |
We issued or assumed through mergers subordinated debt to trusts that were established by us or entities we acquired, which, in turn, issued trust preferred securities. On April 30, 2021, the Bank completed the sale of $400 million aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due May 1, 2031. For further information, see Note 12. Borrowings and Subordinated Debt.
The carrying value of subordinated debt totaled $863.3 million at December 31, 2021. At December 31, 2021, $131.0 million of the trust preferred securities were included in the Company's Tier I capital under the phase-out limitations of Basel III, and $718.2 million was included in Tier II capital.
Interest payments on subordinated debt are considered dividend payments under the FRB regulations and subject to the same notification requirements for declaring and paying dividends on common stock.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 23. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following tables present the parent company only condensed balance sheets and the related condensed statements of earnings (loss) and condensed statements of cash flows as of and for the years indicated:
| | | | | | | | | | | |
Parent Company Only | December 31, |
Condensed Balance Sheets | 2021 | | 2020 |
| (In thousands) |
Assets: | | | |
Cash and cash equivalents | $ | 176,923 | | | $ | 127,849 | |
Investments in subsidiaries | 3,845,653 | | | 3,530,823 | |
Other assets | 122,324 | | | 75,835 | |
Total assets | $ | 4,144,900 | | | $ | 3,734,507 | |
Liabilities: | | | |
Subordinated debt | $ | 135,055 | | | $ | 135,055 | |
Other liabilities | 10,215 | | | 4,501 | |
Total liabilities | 145,270 | | | 139,556 | |
Stockholders’ equity | 3,999,630 | | | 3,594,951 | |
Total liabilities and stockholders’ equity | $ | 4,144,900 | | | $ | 3,734,507 | |
| | | | | | | | | | | | | | | | | |
Parent Company Only | Year Ended December 31, |
Condensed Statements of Earnings (Loss) | 2021 | | 2020 | | 2019 |
| (In thousands) |
Miscellaneous income | $ | 52,955 | | | $ | 14,276 | | | $ | 9,739 | |
Dividends from Bank subsidiary | 182,000 | | | 258,000 | | | 336,000 | |
Total income | 234,955 | | | 272,276 | | | 345,739 | |
Interest expense | 3,527 | | | 4,394 | | | 6,637 | |
Operating expenses | 18,913 | | | 11,184 | | | 9,833 | |
Total expenses | 22,440 | | | 15,578 | | | 16,470 | |
Earnings before income taxes and equity in undistributed earnings of | | | | | |
subsidiaries | 212,515 | | | 256,698 | | | 329,269 | |
Income tax (expense) benefit | (6,188) | | | (3,268) | | | 2,202 | |
Earnings before equity in undistributed earnings of subsidiaries | 206,327 | | | 253,430 | | | 331,471 | |
Equity in (distributions in excess of) undistributed earnings or loss | | | | | |
of subsidiaries | 400,632 | | | (1,491,004) | | | 137,165 | |
Net earnings (loss) | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | |
Parent Company Only | Year Ended December 31, |
Condensed Statements of Cash Flows | 2021 | | 2020 | | 2019 |
| (In thousands) |
Cash flows from operating activities: | | | | | |
Net earnings (loss) | $ | 606,959 | | | $ | (1,237,574) | | | $ | 468,636 | |
Adjustments to reconcile net earnings (loss) to net cash provided | | | | | |
by operating activities: | | | | | |
Change in other assets | (67,242) | | | (29,568) | | | (35,510) | |
Change in liabilities | 5,714 | | | 780 | | | (1,661) | |
| | | | | |
Earned stock compensation | 32,223 | | | 24,363 | | | 26,815 | |
(Equity in) distributions in excess of undistributed earnings | | | | | |
or loss of subsidiaries | (400,632) | | | 1,491,004 | | | (137,165) | |
Net cash provided by operating activities | 177,022 | | | 249,005 | | | 321,115 | |
| | | | | |
Cash flows from investing activities: | | | | | |
| | | | | |
| | | | | |
Net cash used in investing activities | — | | | — | | | — | |
| | | | | |
Cash flows from financing activities: | | | | | |
Common stock repurchased and restricted stock surrendered | (8,505) | | | (75,369) | | | (162,965) | |
Cash dividends paid, net | (119,443) | | | (159,748) | | | (289,048) | |
Net cash used in financing activities | (127,948) | | | (235,117) | | | (452,013) | |
Net increase (decrease) in cash and cash equivalents | 49,074 | | | 13,888 | | | (130,898) | |
Cash and cash equivalents, beginning of year | 127,849 | | | 113,961 | | | 244,859 | |
Cash and cash equivalents, end of year | $ | 176,923 | | | $ | 127,849 | | | $ | 113,961 | |
| | | | | |
| | | | | |
| | | | | |
NOTE 24. RELATED PARTY TRANSACTIONS
On December 30, 2021, the Company purchased in a private placement 1,000,000 depository shares each representing an ownership interest in a share of non-voting Fixed-Rate, Non-Cumulative Perpetual Preferred Stock of a privately owned non-affiliated bank holding company for the purchase price of $25 per depository share for a total of $25.0 million for investment purposes. The Company’s Chairman of the Board of Directors (the "Chairman") is also a director of the non-affiliated bank holding company.
In the normal course of business, the Bank purchases corporate securities for investment purposes. At December 31, 2021, one senior debt security with a par value of $25.0 million and three subordinated debt securities with par values totaling $24.5 million were in our securities portfolio. These four securities were issued by non-affiliated bank holding companies of which the Chairman is also a board member.
The transactions described above were approved by the Audit Committee of the Board of Directors in accordance with our related party transactions policy.
PACWEST BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 25. SUBSEQUENT EVENTS
Stock Repurchase Program
On February 15, 2022, PacWest's Board of Directors authorized a new Stock Repurchase Program, effective March 1, 2022, to repurchase shares of its common stock for an aggregate purchase price not to exceed $100 million with a program maturity date of February 28, 2023.
Common Stock Dividend
On February 1, 2022, the Company announced that the Board of Directors had declared a quarterly cash dividend of $0.25 per common share. The cash dividend is payable on February 28, 2022 to stockholders of record at the close of business on February 15, 2022.
We have evaluated events that have occurred subsequent to December 31, 2021 and have concluded there are no subsequent events that would require recognition in the accompanying consolidated financial statements.