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Nov. 8, 2021, 5:37 p.m. EST

10-Q: PACWEST BANCORP

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

lower than expected dividends paid from the Bank to the holding company;

At September 30, 2021, the Company had total liabilities of $32.0 billion, including total deposits of $30.6 billion and subordinated debt of $862.4 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 $6.1 billion increase in total liabilities since year-end was due mainly to increases of $5.9 billion in core deposits and $396.6 million in subordinated debt. The increase in core deposits was due primarily to continued strong deposit growth from our venture banking and community banking clients. At September 30, 2021, core deposits totaled $28.1 billion, or 92% of total deposits, including $12.9 billion of noninterest-bearing demand deposits, or 42% 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 September 30, 2021, the Company had total stockholders' equity of $3.9 billion compared to $3.6 billion at December 31, 2020. The $323.5 million increase in stockholders' equity since year-end was due mainly to $470.9 million in net earnings, offset partially by a $73.7 million decrease in accumulated other comprehensive income and $89.5 million of cash dividends paid. Consolidated capital ratios remained strong with Tier 1 capital and total capital ratios of 10.65% and 14.36% at September 30, 2021. Recent Events

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 macro-economic indicators such as unemployment and GDP and we will continue to closely monitor our loan portfolio. In the early stages of the COVID-19 pandemic, we experienced an increase in customers seeking loan modifications through payment deferrals and extension of terms. Most of the modifications were for payment deferrals for three months, while some deferrals were up to six months. Some loans were subsequently modified with deferrals of three to twelve months. As of September 30, 2021, there were 17 loans with a balance of $50.2 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.







                                                                                        September 30, 2021
                                                                                                                                        % of
                                                                        Special                                                     Total Loans
        Loan and Lease Portfolio                   Classified           Mention               Pass                Total              and Leases
                                                                                      (Dollars in thousands)
        Hotel                                    $    16,141          $ 199,346          $   841,934          $ 1,057,421                  5.2  %
        Retail CRE                                       224              1,433              422,757              424,414                  2.1  %
        Commercial aviation                                -             65,370               84,661              150,031                  0.7  %
        Restaurant                                     4,885             26,325              118,101              149,311                  0.7  %
        Total                                    $    21,250          $ 292,474          $ 1,467,453          $ 1,781,177                  8.7  %
                                                                                       September 30, 2020
                                                                                                                                       % of
                                                                       Special                                                     Total Loans
        Loan and Lease Portfolio                  Classified           Mention               Pass                Total              and Leases
                                                                                     (Dollars in thousands)
        Hotel                                    $   57,635          $ 281,044          $   847,960          $ 1,186,639                  6.2  %
        Retail CRE                                   27,678                497              417,311              445,486                  2.3  %
        Commercial aviation                          19,397            140,246               96,335              255,978                  1.3  %
        Restaurant                                    8,379              8,920              131,497              148,796                  0.8  %
        Oil services                             $   12,883          $   5,438          $    74,305          $    92,626                  0.5  %
        Total                                    $  125,972          $ 436,145          $ 1,567,408          $ 2,129,525                 11.2  %
        


From a credit perspective, most of our credit metrics improved during the third quarter of 2021 as economic conditions and economic forecasts continued to improve. This improvement led to a provision for credit losses benefit of $20.0 million for the third quarter of 2021, compared to a provision for credit losses benefit of $88.0 million for the second quarter of 2021 and compared to a provision for credit losses of $97.0 million for the third quarter of 2020. For further details on CECL and the impacts to our process, see "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" contained herein.

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







                                                                          Three Months Ended                                   Nine Months Ended
                                                       September 30,           June 30,          September 30,                   September 30,
        Efficiency Ratio                                    2021                 2021                 2020                 2021                2020
                                                                                            (Dollars in thousands)
        Noninterest expense                           $     159,421          $ 151,750          $     133,402          $ 461,307          $ 1,848,337
        Less:        Intangible asset amortization            2,890              2,889                  3,751              8,858               11,581
                     Foreclosed assets expense
                     (income), net                              165               (119)                   335                 47                  255
                     Goodwill impairment                          -                  -                      -                  -            1,470,000
                     Acquisition, integration and
                     reorganization costs                       200                200                      -              3,825                    -
                     Noninterest expense used for
                     efficiency ratio                 $     156,166          $ 148,780          $     129,316          $ 448,577          $   366,501
        Net interest income (tax equivalent)          $     279,777          $ 270,083          $     253,632          $ 814,495          $   761,354
        Noninterest income                                   51,345             40,371                 38,252            136,545              106,210
                     Net revenues                           331,122            310,454                291,884            951,040              867,564
        Less:        Gain on sale of securities                 515                  -                  5,270                616               13,167
                     Net revenues used for efficiency
                     ratio                            $     330,607          $ 310,454          $     286,614          $ 950,424          $   854,397
        . . .
        


Nov 08, 2021

COMTEX_396534665/2041/2021-11-08T17:36:58

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