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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K


ý

 

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

For the fiscal year ended December 31, 2010

OR

o

 

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

Commission file number 00-30747



PACWEST BANCORP
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  33-0885320
(I.R.S. Employer
Identification No.)

10250 Constellation Blvd., Suite 1640

 

 
Los Angeles, California   90067
(Address of Principal Executive Offices)   (Zip Code)

Registrant's telephone number, including area code: (310) 286-1144



         Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class   Name of Each Exchange on Which Registered
Common stock, $.01 par value per share   The Nasdaq Stock Market, LLC

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o

  Accelerated filer ý   Non-Accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

         As of June 30, 2010, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the average high and low sales prices on The Nasdaq Global Select Market as of the close of business on June 30, 2010, was approximately $562.8 million. Registrant does not have any nonvoting common equities.

         As of March 2, 2011, there were 35,461,610 shares of registrant's common stock outstanding, excluding 1,426,687 shares of unvested restricted stock.

DOCUMENTS INCORPORATED BY REFERENCE

         The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive proxy statement for its 2011 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and such information is incorporated herein by this reference.


Table of Contents


PACWEST BANCORP

2010 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

       
 

ITEM 1.

 

Business

  3

 

General

  3

 

Recent Transactions

  3

 

Banking Business

  4

 

Strategic Evolution and Acquisition Strategy

  8

 

Competition

  9

 

Employees

  10

 

Financial and Statistical Disclosure

  10

 

Supervision and Regulation

  10

 

Available Information

  20

 

Forward-Looking Information

  21
 

ITEM 1A.

 

Risk Factors

  22
 

ITEM 1B.

 

Unresolved Staff Comments

  31
 

ITEM 2.

 

Properties

  31
 

ITEM 3.

 

Legal Proceedings

  31
 

ITEM 4.

 

Reserved

  31

PART II

       
 

ITEM 5.

 

Market For Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

  32

 

Marketplace Designation, Sales Price Information and Holders

  32

 

Dividends

  32

 

Securities Authorized for Issuance under Equity Compensation Plans

  34

 

Recent Sales of Unregistered Securities and Use of Proceeds

  34

 

Repurchases of Common Stock

  34

 

Five-Year Stock Performance Graph

  36
 

ITEM 6.

 

Selected Financial Data

  37
 

ITEM 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  39

 

Overview

  39

 

Key Performance Indicators

  42

 

Critical Accounting Policies

  44

 

Results of Operations

  50

 

Financial Condition

  59

 

Borrowings

  76

 

Capital Resources

  77

 

Liquidity

  79

 

Contractual Obligations

  80

 

Off-Balance Sheet Arrangements

  81

 

Recent Accounting Pronouncements

  81
 

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  81

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PACWEST BANCORP

2010 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS (Continued)

    

       
 

ITEM 8.

 

Financial Statements and Supplementary Data

  88

 

Contents

  88

 

Management's Report on Internal Control Over Financial Reporting

  89

 

Report of Independent Registered Public Accounting Firm

  90

 

Consolidated Balance Sheets as of December 31, 2010 and 2009

  91

 

Consolidated Statements of Earnings (Loss) for the Years Ended December 31, 2010, 2009, and 2008

  92

 

Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2010, 2009, and 2008

  93

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009, and 2008

  94

 

Notes to Consolidated Financial Statements

  95
 

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  157
 

ITEM 9A.

 

Controls and Procedures

  157
 

ITEM 9B.

 

Other Information

  157

PART III

       
 

ITEM 10.

 

Directors, Executive Officers and Corporate Governance

  158
 

ITEM 11.

 

Executive Compensation

  158
 

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  158
 

ITEM 13.

 

Certain Relationships and Related Transactions, and Director Independence

  158
 

ITEM 14.

 

Principal Accountant Fees and Services

  158

PART IV

       
 

ITEM 15.

 

Exhibits and Financial Statement Schedules

  158

SIGNATURES

 
162

CERTIFICATIONS

   

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PART I

ITEM 1.    BUSINESS

General

        PacWest Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our banking subsidiary, Pacific Western Bank, which we refer to as Pacific Western or the Bank. When we say "we", "our" or the "Company", we mean the Company on a consolidated basis with the Bank. When we refer to "PacWest" or to the holding company, we are referring to the parent company on a stand-alone basis.

        PacWest Bancorp was formerly known as First Community Bancorp. At a special meeting of the Company's shareholders held on April 23, 2008, the shareholders approved the reincorporation of the Company in Delaware from California and the change of the Company's name to PacWest Bancorp from First Community Bancorp. The reincorporation became effective on May 14, 2008. In connection with the reincorporation and name change, the Company also changed its ticker symbol on the NASDAQ Global Select Market to "PACW." Other than the name change, change in ticker symbol and change in corporate domicile, the reincorporation did not result in any change in the business, physical location, management, assets, liabilities or total stockholders' equity of the Company, nor did it result in any change in location of the Company's employees, including the Company's management. Additionally, the reincorporation did not alter any shareholder's percentage ownership interest or number of shares owned in the Company. The stockholders' equity section of the accompanying consolidated financial statements has been restated retroactively to give effect to the reincorporation. Such reclassification had no effect on the results of operations or the total amount of stockholders' equity.

Recent Transactions

        During 2010, we completed the following transactions:

        During 2009, we completed the following transactions:

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        See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview" and Notes 3, 4, 6 and 18 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for further information regarding recent transactions.

Banking Business

        Pacific Western is a full-service commercial bank offering a broad range of banking products and services including: accepting time and demand deposits; originating loans, including commercial, real estate construction, real estate miniperm, SBA guaranteed and consumer loans; and providing other business-oriented products. We have 77 full-service community banking branches. Our operations are primarily located in Southern California and the Bank focuses on conducting business with small to medium size businesses and the owners and employees of those businesses. The majority of our loans are secured by the real estate collateral of such businesses. We extend credit to customers located primarily in counties we serve. We also provide asset-based lending and factoring of accounts receivable to small businesses located throughout Arizona, California, and the Pacific Northwest through BFI Business Finance, or BFI, based in San Jose, California and First Community Financial, or FCF, based in Phoenix, Arizona. Special services, including international banking services, multi-state deposit services and investment services, or requests beyond the lending limits of the Bank can be arranged through correspondent banks. The Bank also issues ATM and debit cards, has a network of branded ATMs and offers access to ATM networks through other major service providers. We provide access to customer accounts via a 24-hour seven day a week toll-free automated telephone customer service and a secure online banking service.

        At December 31, 2010 our assets totaled $5.5 billion, of which gross non-covered loans totaled $3.2 billion, or 57% of assets, and covered loans totaled $908.6 million, or 16% of assets. At this date, the non-covered loans were composed of approximately 22% in commercial loans, 64% in commercial real estate loans, 8% in residential real estate loans, 3% in commercial real estate construction loans, 2% in residential real estate construction loans, and 1% in consumer and other loans. These percentages include some foreign loans, primarily to entities, and on a limited basis to individuals, with business in Mexico, representing 1% of non-covered loans.

        We are committed to maintaining premier, relationship-based community banking in Southern California serving the needs of those businesses in our marketplace, as well as serving the needs of growing businesses that may not yet meet the credit standards of the Bank through tightly controlled asset-based lending and factoring of accounts receivable. We compete actively for deposits, and emphasize solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on making quality loans and gathering low-cost deposits to maximize our net interest margin, as

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net interest income accounted for 84% of our net revenues (net interest income plus noninterest income) in 2010. The strategy for serving our target markets is the delivery of a finely-focused set of value-added products and services that satisfy the primary needs of our customers, emphasizing superior service and relationships over transaction volume or low pricing.

        We generate our revenue primarily from the interest received on the various loan products and investment securities and fees from providing deposit services, foreign exchange services and extending credit. Our major operating expenses are the interest paid by the Bank on deposits and borrowings, employee compensation and general operating expenses. The Bank relies on a foundation of locally generated deposits to fund loans. Our Bank has a relatively low cost of funds due to a high percentage of noninterest-bearing and low cost deposits to total deposits. Our operations, similar to other financial institutions with operations predominately focused in Southern California, are significantly influenced by economic conditions in Southern California, including the strength of the real estate market, the fiscal and regulatory policies of the federal and state government and the regulatory authorities that govern financial institutions. See "—Supervision and Regulation." Through our offices located in Northern California and our asset-based lending operations with production and marketing offices located in Arizona, Northern California, and the Pacific Northwest, we are also subject to the economic conditions affecting these markets.

        Through the Bank, the Company concentrates its lending activities in four principal areas:

        (1)    Real Estate Loans.    Real estate loans are comprised of construction loans, miniperm loans collateralized by first or junior deeds of trust on specific commercial properties and equity lines of credit. The properties collateralizing real estate loans are principally located in our primary market areas of Los Angeles, Orange, San Bernardino, Riverside, San Diego, Ventura, Santa Barbara and San Luis Obispo counties in California and the neighboring communities. Construction loans are comprised of loans on commercial, residential and income producing properties that generally have terms of less than two years and typically bear an interest rate that floats with the Bank's base rate or another established index. Miniperm loans finance the purchase and/or ownership of commercial properties, including owner-occupied and income producing properties. Miniperm loans are generally made with an amortization schedule ranging from 15 to 25 years with a lump sum balloon payment due in one to ten years. Equity lines of credit are revolving lines of credit collateralized by junior deeds of trust on residential real properties. They generally bear a rate of interest that floats with the Bank's base rate or the prime rate and have maturities of ten years. From time to time, we purchase participation interests in loans originated by other financial institutions. These loans are subject generally to the same underwriting criteria and approval process as loans originated directly by us.

        The Bank's real estate portfolio is subject to certain risks, including, but not limited to: (i) the effects of economic downturns in the Southern California economy and in general; (ii) interest rate increases; (iii) reduction in real estate values in Southern California and in general; (iv) increased competition in pricing and loan structure; (v) the borrower's ability to refinance or payoff the balloon or line of credit at maturity; and (vi) environmental risks, including natural disasters. In addition to the foregoing, construction loans are also subject to project specific risks including, but not limited to: (a) construction costs being more than anticipated; (b) construction taking longer than anticipated; (c) failure by developers and contractors to meet project specifications; (d) disagreement between contractors, subcontractors and developers; (e) demand for completed projects being less than anticipated; (f) buyers being unable to secure financing; and (g) loss through foreclosure.

        When underwriting loans, we strive to reduce the exposure to such risks by (i) reviewing each loan request and renewal individually, (ii) using a dual signature approval system for the approval of each loan request for loans over a certain dollar amount, (iii) adhering to written loan policies, including,

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among other factors, minimum collateral requirements, maximum loan-to-value ratio requirements, cash flow requirements and personal guarantees, (iv) obtaining independent third party appraisals which are reviewed by the Bank's appraisal department, (v) obtaining external independent credit reviews, (vi) evaluating concentrations as a percentage of capital and loans, and (vii) conducting environmental reviews, where appropriate. With respect to construction loans, in addition to the foregoing, we attempt to mitigate project specific risks by: (a) implementing a controlled disbursement process for loan proceeds in accordance with an agreed upon schedule; (b) conducting project site visits; and (c) adhering to release-price schedules to ensure the prices for which newly-built units to be sold are sufficient to repay the Bank. The risks related to buyer inability to secure financing and loss through foreclosure are not controllable. We review each loan request on the basis of our ability to recover both principal and interest in view of the inherent risks.

        (2)    Commercial Loans.    Commercial loans, both domestic and foreign, are made to finance operations, to provide working capital, or for specific purposes such as to finance the purchase of assets, equipment or inventory. Since a borrower's cash flow from operations is generally the primary source of repayment, our policies provide specific guidelines regarding required debt coverage and other important financial ratios. Commercial loans include lines of credit and commercial term loans. Lines of credit are extended to businesses or individuals based on the financial strength and integrity of the borrower and guarantor(s) and generally (with some exceptions) are collateralized by short-term assets such as accounts receivable, inventory, equipment or real estate and have a maturity of one year or less. Such lines of credit bear an interest rate that floats with the Bank's base rate, LIBOR or another established index. Commercial term loans are typically made to finance the acquisition of fixed assets, refinance short-term debt originally used to purchase fixed assets or, in rare cases, to finance the purchase of businesses. Commercial term loans generally have terms from one to five years. They may be collateralized by the asset being acquired or other available assets and bear interest rates which either float with the Bank's base rate, LIBOR or another established index or remain fixed for the term of the loan.

        The Bank's portfolio of commercial loans is subject to certain risks, including, but not limited to: (i) the effects of economic downturns in the Southern California economy; (ii) interest rate increases; (iii) deterioration of the value of the underlying collateral; and (iv) the deterioration of a borrower's or guarantor's financial capabilities. We strive to reduce the exposure to such risks through: (a) reviewing each loan request and renewal individually; (b) using a dual signature approval system; (c) adhering to written loan policies; (d) obtaining external independent credit reviews, and (e) in the case of certain commercial loans to Mexican or foreign entities, third party insurance which limits our exposure to anywhere from 20 to 30 percent of the underlying loan. In addition, loans based on short-term asset values and factoring arrangements are monitored on a daily, weekly, monthly or quarterly basis and may include lockbox or control account arrangements. In general, the Bank receives and reviews financial statements and other documents of borrowing customers on an ongoing basis during the term of the relationship and responds to any deterioration noted.

        (3)    SBA Loans.    SBA loans are made through programs designed by the federal government to assist the small business community in obtaining financing from financial institutions that are given government guarantees as an incentive to make the loans. Our SBA loans fall into two categories, loans originated under the SBA's 7a Program ("7a Loans") and loans originated under the SBA's 504 Program ("504 Loans"). SBA 7a Loans are commercial business loans generally made for the purpose of purchasing real estate to be occupied by the business owner, providing working capital, and/or purchasing equipment, accounts receivable or inventory. SBA 504 Loans are collateralized by commercial real estate and are generally made to business owners for the purpose of purchasing or improving real estate for their use and for equipment used in their business. Due to declining SBA loan origination and loan sale opportunities, we suspended our loan sale operation during 2008 and reduced staff accordingly.

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        SBA lending is subject to federal legislation that can affect the availability and funding of the program. From time to time, this dependence on legislative funding causes limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an adverse financial impact on our business.

        The Bank's portfolio of SBA loans is subject to certain risks, including, but not limited to: (i) the effects of economic downturns in the Southern California economy; (ii) interest rate increases; (iii) deterioration of the value of the underlying collateral; and (iv) the deterioration of a borrower's or guarantor's financial capabilities. We strive to reduce the exposure of such risks through: (a) reviewing each loan request and renewal individually; (b) using a dual signature approval system; (c) adhering to written loan policies; (d) adhering to SBA written policies and regulations; (e) obtaining independent third party appraisals which are reviewed by the Bank's appraisal department; and (f) obtaining independent credit reviews. In addition, SBA loans normally require monthly installment payments of principal and interest and therefore are continually monitored for past due conditions. In general, the Bank receives and reviews financial statements and other documents of borrowing customers on an ongoing basis during the term of the relationship and responds to any deterioration noted.

        (4)    Consumer Loans.    Consumer loans include personal loans, auto loans, boat loans, home improvement loans, revolving lines of credit and other loans typically made by banks to individual borrowers. The Bank's consumer loan portfolio is subject to certain risks, including: (i) amount of credit offered to consumers in the market; (ii) interest rate increases; and (iii) consumer bankruptcy laws which allow consumers to discharge certain debts. We strive to reduce the exposure to such risks through the direct approval of all consumer loans by: (a) reviewing each loan request and renewal individually; (b) using a dual signature approval system; (c) adhering to written credit policies; and (d) obtaining external independent credit reviews.

        As part of our efforts to achieve long-term stable profitability and respond to a changing economic environment in Southern California and in other areas where we operate, we constantly evaluate a variety of options to augment our traditional focus by broadening the services and products we provide. Possible avenues of growth include more branch locations, expanded days and hours of operation and new types of loan and deposit products. To date, we have not expanded into areas of brokerage, annuity, insurance or similar investment products and services and have concentrated primarily on the core businesses of accepting deposits, making loans and extending credit.

        No individual or single group of related accounts is considered material in relation to our total assets or deposits of the Bank, or in relation to the overall business of the Company. However, approximately 77% of our non-covered loan portfolio at December 31, 2010 consisted of real estate-related loans, including construction loans, miniperm loans, commercial real estate mortgage loans and commercial loans secured by commercial real estate. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Non-covered Loans." Since our business activities are currently focused primarily in Southern California, with the majority of our business concentrated in Los Angeles, Orange, Riverside, San Bernardino, San Diego, Ventura, Santa Barbara and San Luis Obispo Counties, our results of operations and financial condition are dependent upon the general trends in the Southern California economies and, in particular, the residential and commercial real estate markets. The concentration of our operations in Southern California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region. We conduct foreign lending activities including commercial and real estate lending, consisting predominantly of loans to individuals or entities located in Mexico. At December 31, 2010, our foreign loans consisted of approximately 1% of our non-covered loan portfolio. Such foreign loans are denominated in U.S. dollars and most are collateralized by assets located in the United States or are guaranteed or insured by businesses located

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in the United States. We have continued to allow our foreign loan portfolio to repay in the ordinary course of business without making any new privately-insured foreign loans other than those under existing commitments.

Strategic Evolution and Acquisition Strategy

        The Company was organized on October 22, 1999 as a California corporation for the purpose of becoming a bank holding company and to acquire all the outstanding capital stock of Rancho Santa Fe National Bank. Since that time, we have grown through a series of business acquisitions. Most recently, in August 2010 we purchased certain assets and assumed certain liabilities of Los Padres Bank from the FDIC, as receiver of Los Padres Bank.

        The following chart summarizes the acquisitions completed since our inception, some of which are described in more detail below. See also Note 3 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" in Part II of this Annual Report on Form 10-K for further details regarding our acquisitions.

 
 
Date
  Institution/Company Acquired
(1)   May 2000   Rancho Santa Fe National Bank
(2)   May 2000   First Community Bank of the Desert
(3)   January 2001   Professional Bancorp, Inc.
(4)   October 2001   First Charter Bank
(5)   January 2002   Pacific Western National Bank
(6)   March 2002   W.H.E.C., Inc.
(7)   August 2002   Upland Bank
(8)   August 2002   Marathon Bancorp
(9)   September 2002   First National Bank
(10)   January 2003   Bank of Coronado
(11)   August 2003   Verdugo Banking Company
(12)   March 2004   First Community Financial Corporation
(13)   April 2004   Harbor National Bank
(14)   August 2005   First American Bank
(15)   October 2005   Pacific Liberty Bank
(16)   January 2006   Cedars Bank
(17)   May 2006   Foothill Independent Bancorp
(18)   October 2006   Community Bancorp Inc.
(19)   June 2007   Business Finance Capital Corporation
(20)   November 2008   Security Pacific Bank (deposits only)
(21)   August 2009   Affinity Bank
(22)   August 2010   Los Padres Bank

        On November 7, 2008, we assumed $427.5 million in deposits from the FDIC as receiver of Security Pacific Bank, or SPB, formerly a Los Angeles-based bank. We assumed all insured and uninsured deposits and paid a 2% premium of approximately $5.1 million related to the non-brokered deposit base of $258 million. The estimated brokered deposits as of the assumption date totaled $169 million. Such deposit assumption was net of acquiring cash, certificates of deposit in other financial institutions, federal funds sold, securities, and loans secured by assumed deposits. As part of the SPB deposit acquisition we also purchased an additional $31 million in loans. The Security Pacific Bank acquisition was made to expand our presence in the Los Angeles area and to gain experience with FDIC-assisted transactions.

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        On August 28, 2009, we acquired substantially all of the assets of Affinity Bank, including all loans, and assumed substantially all of its liabilities, including the insured and uninsured deposits and excluding certain brokered deposits, from the FDIC in an FDIC-assisted transaction, which we refer to as the Affinity acquisition. Pacific Western (i) acquired $675.6 million in loans, $22.9 million in foreclosed assets, $175.4 million in investments and $371.5 million in cash and other assets, and (ii) assumed $868.2 million in deposits, $305.8 million in borrowings, and $32.6 million in other liabilities. In connection with the Affinity acquisition, the FDIC made a cash payment to Pacific Western of $87.2 million. We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on acquired loans, other real estate owned and certain investment securities. Under the terms of such loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the first $234 million of losses on covered assets and absorb 95% of losses and receive 95% of loss recoveries on covered assets exceeding $234 million. The loss sharing agreement is in effect for 5 years for commercial assets (non-residential loans, OREO and certain securities) and 10 years for residential loans from the August 28, 2009 acquisition date. The loss recovery provisions are in effect for 8 years for commercial assets and 10 years for residential loans from the acquisition date. We refer to the acquired assets subject to the loss sharing agreement collectively as "covered assets." Affinity was a full service commercial bank headquartered in Ventura, California that operated 10 branch locations in California. We made this acquisition to expand our presence in California.

        On August 20, 2010, we acquired certain assets of Los Padres Bank, including all loans, and assumed substantially all of its liabilities, including all deposits, from the FDIC in an FDIC-assisted acquisition, which we refer to as the Los Padres acquisition. Pacific Western (i) acquired $437.1 million in loans, $33.9 million in other real estate owned, $44.3 million in investments, and $261.5 million in cash and other assets and (ii) assumed $752.2 million in deposits, $70.0 million in borrowings, and $1.9 million in other liabilities. In connection with the Los Padres acquisition, the FDIC made a cash payment to Pacific Western of $144.0 million. Other than a deposit premium of $3.4 million, we paid no cash or other consideration to acquire Los Padres. We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on acquired loans, with the exception of consumer loans, and other real estate owned. Under the terms of such loss sharing agreement, the FDIC is obligated to reimburse the Bank for 80% of losses with respect to the covered assets. The Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid the Bank 80% reimbursement under the loss sharing agreement. The loss sharing arrangement for single family covered assets and commercial (non-single family) covered assets is in effect for 10 years and 5 years, respectively, from the acquisition date, and the loss recovery provisions are in effect for 10 years and 8 years, respectively, from the acquisition date. We refer to the acquired assets subject to the loss sharing agreement collectively as "covered assets." Los Padres was a federally chartered savings bank headquartered in Solvang, California that operated 14 branches, including 11 branches in California (three in Ventura County, four in Santa Barbara County, and four in San Luis Obispo County) and three branches in Arizona (Maricopa County). After office consolidations in February 2011, there are nine remaining former Los Padres offices with eight in California and one in Arizona. We made this acquisition to expand our presence in the Central Coast of California.

Competition

        The banking business in California, and specifically in the Bank's primary service areas, is highly competitive with respect to originating loans, acquiring deposits and providing other banking services. The market is dominated by commercial banks in Southern California with assets between $500 million

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and $25 billion, including ourselves, and a few banking giants with a large number of offices and full-service operations over a wide geographic area. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and bank holding companies. Those competitors include savings and loan associations, brokerage houses, insurance companies, mortgage companies, credit unions, credit card companies, and other financial and non-financial institutions and entities.

        Economic factors, along with legislative and technological changes, will have an ongoing impact on the competitive environment within the financial services industry. We work to anticipate and adapt to dynamic competitive conditions whether it may be developing and marketing innovative products and services, adopting or developing new technologies that differentiate our products and services, cross marketing, or providing highly personalized banking services. We strive to distinguish ourselves from other community banks and financial services providers in our marketplace by providing an extremely high level of service to enhance customer loyalty and to attract and retain business. However, we can provide no assurance as to the effectiveness of these efforts on our future business or results of operations, as to our continued ability to anticipate and adapt to changing conditions, and as to sufficiently improving our services and/or banking products in order to successfully compete in our primary service areas.

Employees

        As of February 28, 2011, the Company had 929 full time equivalent employees.

Financial and Statistical Disclosure

        Certain of our statistical information is presented within "Item 6. Selected Financial Data," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 7A. Qualitative and Quantitative Disclosure About Market Risk." This information should be read in conjunction with the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data."

Supervision and Regulation

        The banking and financial services business in which we engage is highly regulated. Such regulation is intended, among other things, to protect the interests of customers, including depositors. These regulations are not, however, generally charged with protecting the interests of our shareholders or creditors. Described below are the material elements of selected laws and regulations applicable to PacWest and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law or regulations, and in their application by regulatory agencies, cannot be predicted, but they may have a material effect on the business and results of PacWest and its subsidiaries. The commercial banking business is also influenced by the monetary and fiscal policies of the federal government and the policies of the Federal Reserve Bank, or FRB. The FRB implements national monetary policies (with the dual mandate of price stability and maximum employment) by its open-market operations in United States Government securities, by adjusting the required level of and paying interest on reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. Indirectly, such actions may also impact the ability of non-bank financial institutions to compete with the Bank. The nature and impact of any future changes in monetary policies cannot be predicted.

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        The events of the past few years have led to numerous new laws in the United States and internationally for financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act" or "Dodd-Frank"), which was enacted in July 2010, significantly restructures the financial regulatory regime in the United States, including through the creation of a new systemic risk oversight body, the Financial Stability Oversight Council ("FSOC"). The FSOC will oversee and coordinate the efforts of the primary U.S. financial regulatory agencies (including the FRB, the SEC, the Commodity Futures Trading Commission and the FDIC) in establishing regulations to address financial stability concerns. In addition to the framework for systemic risk oversight implemented through the FSOC, the Dodd-Frank Act broadly affects the financial services industry by creating a resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies, and through numerous other provisions aimed at strengthening the sound operation of the financial services sector. As discussed further throughout this section, many aspects of Dodd-Frank are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on PacWest or across the industry.

        As a bank holding company, PacWest is registered with and subject to regulation by the FRB under the Bank Holding Company Act of 1956, as amended, or the BHCA. FRB policy historically has required bank holding companies to act as a source of financial strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries in circumstances where it might not otherwise do so. The Dodd-Frank Act codifies this policy as a statutory requirement. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to such a commonly controlled institution. Under the BHCA, we are subject to periodic examination by the FRB. We are also required to file with the FRB periodic reports of our operations and such additional information regarding the Company and its subsidiaries as the FRB may require. Pursuant to the BHCA, we are required to obtain the prior approval of the FRB before we acquire all or substantially all of the assets of any bank or ownership or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than 5 percent of such bank.

        Under the BHCA, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries that the FRB deems to be so closely related to banking as "to be a proper incident thereto." We are also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the company is engaged in banking activities or the FRB determines that the activity is so closely related to banking as to be a proper incident to banking. The FRB's approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.

        The BHCA and regulations of the FRB also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock.

        Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the FRB, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, we do not operate as a financial holding company.

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        Our earnings and activities are affected by legislation, by regulations and by local legislative and administrative bodies and decisions of courts in the jurisdictions in which we and the Bank conduct business. For example, these include limitations on the ability of the Bank to pay dividends to us and our ability to pay dividends to our shareholders. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Various federal and state statutory provisions limit the amount of dividends that subsidiary banks and savings associations can pay to their holding companies without regulatory approval. In addition to these explicit limitations, the federal regulatory agencies have general authority to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. Further, as discussed below under "—Regulation of the Bank", a bank holding company such as the Company is required to maintain minimum ratios of Tier 1 capital and total capital to total risk-weighted assets, and a minimum ratio of Tier 1 capital to total adjusted quarterly average assets as defined in such regulations. The level of our capital ratios may affect our ability to pay dividends. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters—Dividends" and Note 19 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates. Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral for a loan or extension of credit to any person or company, issue a guarantee or accept letters of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary's capital stock and surplus on an individual basis or 20 percent of such subsidiary's capital stock and surplus on an aggregate basis. Such transactions must be on terms and conditions that are consistent with safe and sound banking practices. A bank holding company and its subsidiaries generally may not purchase a "low-quality asset," as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral. The Dodd-Frank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization.

        The FRB has cease and desist powers over parent bank holding companies and non-banking subsidiaries where the action of a parent bank holding company or its non-financial institutions represent an unsafe or unsound practice or violation of law. The FRB has the authority to regulate debt obligations, other than commercial paper, issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations.

        The Bank is extensively regulated under both federal and state law.

        Various requirements and restrictions under federal and state law affect the operations of the Bank. Federal and state statutes and regulations relate to many aspects of the Bank's operations, including standards for safety and soundness, reserves against deposits, interest payable on certain deposit products, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, fair lending requirements, Community Reinvestment Act activities and loans to affiliates.

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        Further, each of the Company and the Bank is required to maintain certain levels of capital. The FRB and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the guidelines, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization's assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution's or holding company's capital, in turn, is classified in one of three tiers, depending on type:

        The following are the regulatory capital guidelines and the actual capitalization levels for Pacific Western and the Company as of December 31, 2010. 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 deducted from regulatory capital. At December 31, 2010, such amount was $51.0 million. No assurance can be given that the regulatory capital deferred tax asset limitation will not increase in the future. There was no limitation on the Bank's regulatory capital due to deferred tax assets.

 
  December 31, 2010  
 
  Adequately
Capitalized
  Well
Capitalized
  Pacific
Western
Bank
  PacWest
Bancorp
Consolidated
 

Tier 1 leverage capital ratio

    4.00 %   5.00 %   8.51 %   8.54 %

Tier 1 risk-based capital ratio

    4.00 %   6.00 %   12.71 %   12.68 %

Total risk-based capital ratio

    8.00 %   10.00 %   13.99 %   13.96 %

        The Company issued subordinated debentures to trusts that were established by us or entities we have acquired, which, in turn, issued trust preferred securities, which totaled $123.0 million at December 31, 2010. These securities are currently included in our Tier I capital for purposes of determining the Company's Tier I and total risk-based capital ratios. The Board of Governors of the Federal Reserve System, which is the holding company's banking regulator, has promulgated a modification of the capital regulations affecting trust preferred securities. Although this modification was scheduled to be effective on March 31, 2009, the Federal Reserve postponed the effective date to March 31, 2011. At that time, the Company will be allowed to include in Tier I capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders' equity less goodwill, net of any related deferred income tax liability. The regulations currently in effect through December 31, 2010, limit the amount of trust preferred securities that can be included in Tier I capital to 25% of the sum of core capital elements without a deduction for goodwill. We have determined that our Tier I capital ratios would remain above the well-capitalized level had the modification of the capital regulations been in effect at December 31, 2010. We expect that our Tier I capital ratios will be at or above the existing well-capitalized levels on

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March 31, 2011, the first date on which the modified capital regulations must be applied. While our existing trust preferred securities are grandfathered, Dodd-Frank precludes new issuances from qualifying as Tier 1 capital.

        The FDIC and FRB risk-based capital guidelines are based upon the 1988 Capital Accord ("Basel I") of the Basel Committee on Banking Supervision (the "Basel Committee"). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines that each country's supervisors can use to determine the supervisory policies they apply. After working on revisions for a number of years, in June 2004, the Basel Committee released the final version of its proposed new capital framework, with an update in November 2005 ("Basel II). Basel II proposes two approaches for setting capital standards for credit risk—an internal ratings-based approach tailored to individual institutions' circumstances (which for many asset classes is itself broken into a "foundation" approach and an "advanced" or "A-IRB" approach, the availability of which is subject to additional restrictions) and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also would set capital requirements for operational risk and refine the existing capital requirements for market risk exposures.

        The U.S. banking and thrift agencies are developing proposed revisions to their existing capital adequacy regulations and standards based on Basel II. In December 2006, the agencies issued a notice of proposed rulemaking setting forth a definitive proposal for implementing Basel II in the United States that would apply only to internationally active banking organizations—defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more—but that other U.S. banking organizations could elect but would not be required to apply. In November 2007, the agencies adopted a definitive final rule for implementing Basel II in the United States that would apply only to internationally active banking organizations, or "core banks"—defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more. The final rule was effective on April 1, 2008.

        The Company is not required to comply with Basel II and we have not adopted the Basel II approach.

        In June 2008, the U.S. banking and thrift agencies announced a proposed rule that would provide all non-core banking organizations (that is, banking organizations not required to adopt the advanced approaches) with the option to adopt a way to determine required regulatory capital that is more risk sensitive than the current Basel I-based rules, yet is less complex than the advanced approaches in the final rule. The proposed standardized framework addresses (i) expanding the number of risk-weight categories to which credit exposures may be assigned; (ii) using loan-to-value ratios to risk weight most residential mortgages to enhance the risk sensitivity of the capital requirement; (iii) providing a capital charge for operational risk using the Basic Indicator Approach under the international Basel II capital accord; (iv) emphasizing the importance of a bank's assessment of its overall risk profile and capital adequacy; and (v) providing for comprehensive disclosure requirements to complement the minimum capital requirements and supervisory process through market discipline. This new proposal will replace the agencies' earlier Basel I-A proposal, issued in December 2006.

        In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as "Basel III". Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

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        The Basel III final capital framework, among other things:

        The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the short fall.

        The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios:

        The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

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        Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

        The U.S. banking agencies have indicated informally that they expect to propose regulations implementing Basel III in mid-2011 with final adoption of implementing regulations in mid-2012. Given that the Basel III rules are subject to change, and the scope and content of capital regulations that the U.S. banking agencies may adopt under Dodd-Frank is uncertain, we cannot be certain of the impact new capital regulations will have on our capital ratios.

        Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, both in the U.S. and internationally, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward will be required by regulation. One test, referred to as the liquidity coverage ratio ("LCR"), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity's expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The LCR would be implemented subject to an observation period beginning in 2011, but would not be introduced as a requirement until January 1, 2015, and the NSFR would not be introduced as a requirement until January 1, 2018. These new standards are subject to further rulemaking and their terms may well change before implementation.

        The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Pursuant to FDICIA, the FDIC promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the prompt corrective action provisions of FDICIA, an insured depository institution generally will be classified as undercapitalized if its total risk-based capital is less than 8% or its Tier 1 risk-based capital or leverage ratio is less than 4%. An institution that, based upon its capital levels, is classified as "well capitalized", "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if a bank is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the federal bank regulator, and the holding company must guarantee the performance of that plan.

        In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal or state banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule,

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regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance for deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties. The enforcement of such actions through injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.

        Pacific Western is a state-chartered, "non-member" bank and therefore is regulated by the California Department of Financial Institutions, or DFI, and the FDIC. Pacific Western is also an FDIC insured financial institution whereby the FDIC provides deposit insurance for a certain maximum dollar amount per customer.

        The Bank, as is the case with all FDIC insured banks, is subject to deposit insurance assessments as determined by the FDIC. Historically, the FDIC imposed insurance premiums based on the amount of deposits held and a risk matrix that takes into account, among other factors, a bank's capital level and supervisory rating. The Dodd-Frank Act requires the FDIC to amend its regulations to determine insurance assessments based on the average consolidated assets less the average tangible equity of the insured depository institution during the assessment period. The proposed regulations could increase the assessments paid by the Bank.

        In late 2008, in an effort to strengthen confidence and encourage liquidity in the banking system, the FDIC temporarily increased the maximum amount of deposit insurance to $250,000 per customer and adopted a number of programs, including the Transaction Account Guarantee Program. The Transaction Account Guarantee Program guaranteed the entire balance of non-interest bearing deposit transaction accounts through December 31, 2010. Institutions participating in the Transaction Account Guarantee Program were charged a 10-basis point fee on the balance of non-interest bearing deposit transaction accounts exceeding the existing deposit insurance limit of $250,000. The cost to the Bank for participating in this program was $794,000 for 2010 and $452,000 for 2009. Under Dodd-Frank, the $250,000 maximum amount was made permanent, and the unlimited protection for noninterest-bearing transaction accounts was extended to December 31, 2012 and to all insured depository institutions.

        On November 12, 2009, the FDIC required insured depository institutions to prepay, on December 30, 2009, their estimated quarterly assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. The amount of Pacific Western's FDIC assessment prepayment was $19.5 million, which we paid on December 30, 2009. In addition, the FDIC imposed a special assessment on all depository institutions in the second quarter of 2009; such assessment was $2.0 million for the Bank.

        The 2009 prepayments and special assessment for FDIC insurance are in contrast to the lower FDIC insurance assessment expense for Pacific Western in 2008 and 2007. Because of favorable loss experience and a healthy reserve ratio in the deposit insurance fund of the FDIC, well-capitalized and well-managed banks, including Pacific Western, paid minimal premiums for FDIC insurance during 2008 and 2007. A deposit premium refund, in the form of credit offsets, was given to banks that were in existence on December 31, 1996 and paid deposit insurance premiums prior to that date. Pacific Western utilized its credit offset to eliminate a portion of its 2008 and nearly all of its 2007 FDIC insurance assessments.

        Based on the current FDIC insurance assessment methodology and including our participation in the Transaction Account Guarantee Program, our FDIC insurance assessment was $8.1 million for 2010.

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        The Federal Deposit Insurance Act provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

        As a publicly traded company, we are subject to the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"). The principal provisions of the Sarbanes-Oxley Act, many of which have been implemented or interpreted through regulations, provide for and include, among other things: (i) the creation of an independent accounting oversight board; (ii) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (iii) additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements; (iv) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; (v) an increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the Company's independent auditors; (vi) requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; (vii) requirements that companies disclose whether at least one member of the audit committee is a "financial expert" (as such term is defined by the SEC) and if not discussed, why the audit committee does not have a financial expert; (viii) expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; (ix) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on nonpreferential terms and in compliance with other bank regulatory requirements; (x) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; (xi) a range of enhanced penalties for fraud and other violations; and (xii) expanded disclosure and certification relating to an issuer's disclosure controls and procedures and internal controls over financial reporting.

        As a result of the Sarbanes-Oxley Act, and its implementing regulations, we have incurred substantial costs to interpret and ensure ongoing compliance with the law and its regulations. Future changes in the laws, regulation, or policies that impact us cannot necessarily be predicted and may have a material effect on our business and earnings.

        The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the PATRIOT Act, designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The PATRIOT Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Company, to establish and implement policies and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers. The PATRIOT Act and its underlying regulations permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB, the FDIC and

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other federal banking agencies to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHCA or the Bank Merger Act. We regularly evaluate and continue to augment our systems and procedures to continue to comply with the PATRIOT Act and other anti-money laundering initiatives. We believe that the ongoing cost of compliance with the PATRIOT Act is not likely to be material to the Company. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

        The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the "OFAC" rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control ("OFAC"). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

        The Community Reinvestment Act of 1977, or the CRA, generally requires insured depository institutions to identify the communities they serve and to make loans and investments, offer products, and provide services designed to meet the credit needs of these communities. The CRA also requires banks to maintain comprehensive records of its CRA activities to demonstrate how it is meeting the credit needs of their communities; these documents are subject to periodic examination by the FDIC. During these examinations, the FDIC rates such institutions' compliance with CRA as "Outstanding," "Satisfactory," "Needs to Improve" or "Substantial Noncompliance." The CRA requires the FDIC to take into account the record of a bank in meeting the credit needs of the entire communities served, including low-and moderate income neighborhoods, in determining such rating. Failure of an institution to receive at least a "Satisfactory" rating could inhibit such institution or its holding company from undertaking certain activities, including acquisitions. The Bank received a CRA rating of "Satisfactory" as of its most recent examination.

        The FRB and other bank regulatory agencies have adopted final guidelines for safeguarding confidential, personal customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. We have adopted a customer information security program to comply with such requirements.

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        The Gramm-Leach-Bliley Act of 1999 and the California Financial Information Privacy Act require financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statutes require explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibit disclosing such information except as provided in the Bank's policies and procedures. Pacific Western has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of the Bank.

        From time to time, various legislative and regulatory initiatives are introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial condition, results of operations or cash flows. A change in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries could have a material effect on our business.

        Our primary exposure to environmental laws is through our lending activities and through properties or businesses we may own, lease or acquire since we are not involved in any business that manufactures, uses or transports chemicals, waste, pollutants or toxins that might have a material adverse effect on the environment. Based on a general survey of the Bank's loan portfolio, conversations with local appraisers and the type of lending currently and historically done by the Bank, we are not aware of any potential liability for hazardous waste contamination that would be reasonably likely to have a material adverse effect on the Company as of February 16, 2010. In addition, we are not aware of any physical or regulatory consequence resulting from climate change that would have a material adverse effect upon the Company.

Available Information

        We maintain an Internet website at www.pacwestbancorp.com, and a website for Pacific Western at www.pacificwesternbank.com. At www.pacwestbancorp.com and via the "Investor Relations" link at the Bank's website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You may obtain copies of the Company's filings on the SEC site. These documents may also be obtained in print upon request by our stockholders to our Investor Relations Department.

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        We have adopted a written code of ethics that applies to all directors, officers and employees of the Company, including our principal executive officer and senior financial officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission promulgated thereunder. The code of ethics, which we call our Code of Business Conduct and Ethics, is available on our corporate website, www.pacwestbancorp.com in the section entitled "Corporate Governance." In the event that we make changes in, or provide waivers from, the provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose these events on our corporate website in such section. In the Corporate Governance section of our corporate website, we have also posted the charters for our Audit Committee and our Compensation, Nominating and Governance Committee, as well as our Corporate Governance Guidelines. In addition, information concerning purchases and sales of our equity securities by our executive officers and directors is posted on our website.

        Our Investor Relations Department can be contacted at PacWest Bancorp, 275 N. Brea Blvd., Brea, CA 92821, Attention: Investor Relations, telephone (714) 671-6800, or via e-mail to investor-relations@pacwestbancorp.com.

        All website addresses given in this document are for information only and are not intended to be an active link or to incorporate any website information into this document.

Forward-Looking Information

        This Annual Report on Form 10-K contains certain forward-looking information about the Company, which statements are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to:

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        If any of these risks or uncertainties materializes or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. Therefore, readers should be mindful that forward-looking statements are not guarantees of future performance and that they are subject to known and unknown risks and uncertainties that are difficult to predict. Except as required by law, we undertake no, and hereby disclaim any, obligation to update any forward-looking statements, whether as a result of new information, changed circumstances or otherwise. For additional information concerning risks and uncertainties related to us and our operations, please refer to Items 1 through 7A of this Annual Report on Form 10-K.

ITEM 1A.    RISK FACTORS

        Ownership of our common stock involves risk. You should carefully consider, in addition to the other information set forth herein, the following risk factors.

Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally.

        From December 2007 through June 2009, the U.S. economy was in recession and economic recovery through 2010 has been sluggish. As a result, the global financial markets have undergone and may continue to experience pervasive and fundamental disruptions. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength. While economic conditions have recently shown signs of improvement, the sustainability of an economic recovery is uncertain as business activity across a wide range of industries continues to face difficulties due to the lack of consumer spending and sustained high levels of unemployment.

        A sustained weakness or further weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business:

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        Overall, the economic downturn has had an adverse effect on our business, and there can be no assurance that an economic recovery will be sustainable in the near term. Until conditions improve, we expect our business, financial condition and results of operations to be adversely affected.

Changes in economic conditions, in particular a worsening of the economic slowdown in Southern California, could materially and adversely affect our business.

        Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, and changes in government monetary and fiscal policies and inflation, all of which are beyond our control. The current economic conditions have caused a lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. These circumstances may lead to a renewed increase in nonaccrual and classified loans, which generally results in a provision for credit losses and in turn reduces the Company's net earnings. The State of California continues to face fiscal challenges, the long-term effects of which on the State's economy cannot be predicted. A further deterioration in the economic conditions, whether caused by national or local concerns, could materially and adversely affect our business. In particular, further deterioration of the economic conditions in Southern California could result in the following consequences, any of which could materially and adversely affect our business: loan delinquencies may increase; problem assets and foreclosures may increase; demand for our products and services may decrease; low cost or noninterest bearing deposits may decrease; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers' borrowing power, and reducing the value of assets and collateral associated with our existing loans. Until conditions provide for sustainable improvement, we expect our business, financial condition and results of operations to be adversely affected.

Further disruptions in the real estate market could materially and adversely affect our business.

        There has been a slow-down in the real estate market due to negative economic trends and credit market disruption, the impacts of which are not yet completely known or quantified. At December 31, 2010, 64% of our non-covered loans were secured by commercial real estate, 3% were secured by commercial real estate construction projects, 2% were secured by residential real estate construction projects and 8% were secured by residential real estate. We have observed in the marketplace tighter credit underwriting and higher premiums on liquidity, both of which may continue to place downward pressure on real estate values. Any further downturn in the real estate market could materially and adversely affect our business because a significant portion of our non-covered loans are secured by real estate. Our ability to recover on defaulted non-covered loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted non-covered loans. Substantially all of our real property collateral is located in Southern California. If there is a further decline in real estate values, especially in Southern California, the collateral for our non-covered loans would provide less security. Real estate values could be affected by, among other things, a worsening of the economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates, high levels of unemployment, earthquakes and other natural disasters particular to California.

Our business is subject to interest rate risk, and variations in interest rates may materially and adversely affect our financial performance.

        Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or "spread" between the interest earned on loans, securities and other interest earning assets, and interest paid on deposits, borrowings and other interest bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest bearing liabilities. Changes in market

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interest rates generally affect loan volume, loan yields, funding sources and funding costs. Our net interest spread depends on many factors that are partly or completely out of our control, including competition, federal economic monetary and fiscal policies, and general economic conditions.

        While an increase in the general level of interest rates may increase our loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the interest on and principal of their obligations. In addition, an increase in market interest rates on loans is generally associated with a lower volume of loan originations, which may reduce earnings. Following an increase in the general level of interest rates, our ability to maintain a positive net interest spreads is dependent on our ability to increase our loan offering rates, replace loan maturities with new originations, minimize increases on our deposit rates, and maintain an acceptable level and mix of funding. We cannot provide assurances that we will be able to increase our loan offering rates and continue to originate loans due to the competitive landscape in which we operate. Additionally, we cannot provide assurances that we can minimize the increases in our deposit rates while maintaining an acceptable level of deposits. Finally, we cannot provide any assurances that we can maintain our current levels of noninterest bearing deposits as customers may seek higher yielding products when rates increase.

        Following a decline in the general level of interest rates, our ability to maintain a positive net interest spread is dependent on our ability to reduce the interest paid on deposits, borrowings, and other interest bearing liabilities. We cannot provide assurance that we would be able to lower the rates paid on deposit accounts to support our liquidity requirements as lower rates may result in deposit outflows.

        Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume, liquidity, and overall profitability. We cannot assure you that we can minimize our interest rate risk.

We face strong competition from financial services companies and other companies that offer banking services which could materially and adversely affect our business.

        We conduct our banking operations primarily in Southern California. Increased competition in our market may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that we offer in our service area. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.

        Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened production offices or that solicit deposits in our market areas. Should competition in the financial services industry intensify, our ability to market our products and services may be adversely affected. If we are unable to attract and retain banking customers, we may be unable to grow or maintain the levels of our loans and deposits and our results of operations and financial condition may be adversely affected.

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        Competition from financial institutions seeking to maintain adequate liquidity places upward pressure on the rates paid on certain deposit accounts relative to the level of market interest rates during times of both decreasing and increasing market liquidity. To maintain both attractive and adequate levels of liquidity, without exhausting secondary sources of liquidity, we may incur increased deposit costs.

        Several rating agencies publish unsolicited ratings of the financial performance and relative financial health of many banks, including Pacific Western, based on publicly available data. As these ratings are publicly available, a decline in the Bank's ratings may result in deposit outflows or the inability of the Bank to raise deposits in the secondary market as broker-dealers and depositors may use such ratings in deciding where to deposit their funds.

We may need to raise additional capital in the future and such capital may not be available when needed or at all.

        We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. As a publicly traded company, a likely source of additional funds is the capital markets, accomplished generally through the issuance of equity, both common and preferred stock, and the issuance of subordinated debentures. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance. The current economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit our access to some of our customary sources of liquidity, including, but not limited to, the capital markets, inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve.

        We cannot assure you that access to such capital and liquidity will be available to us on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, or depositors of the Bank or counterparties participating in the capital markets may materially and adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business.

We are subject to extensive regulation which could materially and adversely affect our business.

        Our operations are subject to extensive regulation by federal and state governmental authorities, and we are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Regulations affecting banks and other financial institutions, such as the Dodd-Frank Act, are undergoing continuous review and change frequently; the ultimate effect of such changes cannot be predicted. Because our business is highly regulated, compliance with such regulations and laws may increase our costs and limit our ability to pursue business opportunities. Also, participation in specific government stabilization programs may subject us to additional restrictions. There can be no assurance that proposed laws, rules and regulations will not be adopted in the future, which could (i) make compliance much more difficult or expensive, (ii) restrict our ability to originate, broker or sell loans or accept certain deposits, (iii) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (iv) otherwise materially and adversely affect our business or prospects for business.

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        The recently enacted Dodd-Frank Act will have material implications for the Company and the entire financial services industry. Among other things it will or potentially could:

        As the Dodd-Frank Act requires that many studies be conducted and that hundreds of regulations be written in order to fully implement it, the full impact of this legislation on us, our business strategies, and financial performance cannot be known at this time, and may not be known for a number of years. However, these impacts are expected to be substantial and some of them are likely to adversely affect us and our financial performance. The Dodd-Frank Act and related regulations may also require us to invest significant management attention and resources to make any necessary changes, and could therefore also adversely affect our business, financial condition and results of operations.

        Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us. For more information, please see the section entitled "Item 1. Business—Supervision and Regulation" above.

The recent repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.

        All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions could commence offering interest on demand deposits to compete for clients. We do not yet know what interest rates other institutions may offer. Our interest expense will increase and our net interest margin will decrease if the Bank begins offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition and results of operations.

Emergency measures designed to stabilize the U.S. financial system are beginning to wind down.

        Since the middle of 2008, in addition to the programs initiated under the Emergency Economic Stabilization Act of 2008, other regulators have taken steps to attempt to stabilize and add liquidity to the financial markets. Some of these programs have begun to expire and the impact of the expiration of these programs on the financial industry and the economic recovery is unknown. A slowdown in or reversal of the economic recovery could have a material adverse effect on our business, financial condition and results of operations.

Increases in or required prepayments of FDIC insurance premiums may adversely affect our earnings.

        Since 2008, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. In addition, the FDIC instituted temporary programs, some of

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which were made permanent by the Dodd-Frank Act, to further insure customer deposits at FDIC insured banks, which have placed additional stress on the deposit insurance fund.

        In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC has increased assessment rates of insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years' worth of premiums to replenish the depleted insurance fund.

        Historically, the FDIC utilized a risk-based assessment system that imposed insurance premiums based upon a risk matrix that takes into account several components including but not limited to the bank's capital level and supervisory rating. The Dodd-Frank Act requires the FDIC to amend its regulations to base insurance assessments on the average consolidated assets less the average tangible equity of the insured depository institution during the assessment period. The FDIC has proposed implementing regulations which could increase the assessments paid by the Bank. In addition, the FDIC has proposed regulations that would change the way the deposit insurance assessment rate is applied to banks to a system that is risk-based.

        We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. Any future increases in or required prepayments of FDIC insurance premiums may adversely affect our financial condition or results of operations.

We are exposed to transactional, country and legal risk related to our foreign loans that is in addition to risks we face on loans to U.S. based borrowers.

        Approximately 1% of our non-covered loan portfolio is represented by credit we extend and loans we make to business located outside the United States, predominantly in Mexico. These loans, which include commercial loans, real estate loans and credit extensions for the financing of international trade, are subject to risks in addition to risks we face with our loans to businesses located in the United States including, but not limited to transaction risk, country risk and legal risk. While these loans are denominated in U.S. dollars, the ability of the borrower to repay may be affected by fluctuations in the borrower's home country currency relative to the U.S. dollar. Additionally, while most of our foreign loans are insured by U.S.-based institutions, guaranteed by a U.S.-based entity, or collateralized with U.S.-based assets or real property, our ability to collect in the event of default is subject to a number of conditions, as well as deductibles and co-payments with respect to insurance, and we may not be successful in obtaining partial or full repayment or reimbursement from the insurers. Furthermore, foreign laws may restrict our ability to foreclose on, take a security interest in, or seize collateral located in the foreign country.

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

        In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

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We may not pay dividends on common stock.

        Our stockholders are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. Our ability to pay dividends to our stockholders is subject to the restrictions set forth in Delaware law, by our federal regulator, and by certain covenants contained in the indentures governing the trust preferred securities issued by us or entities we have acquired. Notification to the FRB is also required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly net earnings are insufficient to fund the dividend amount. We may not pay a dividend should the FRB object until such time as we receive approval from the FRB or no longer need to provide notice under applicable regulations. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters—Dividends" of this Annual Report on Form 10-K for more information on these restrictions. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, or as a result of our participation in any specific government stabilization programs, now or in the future, from paying dividends to our stockholders. Accordingly, we cannot assure you that we will continue paying dividends on our common stock at current levels or at all.

The primary source of our income from which we pay dividends is the receipt of dividends from the Bank.

        The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the FRB, the FDIC and/or the DFI could assert that payment of dividends or other payments is an unsafe or unsound practice, or that such regulatory authority may impose restrictions on the Bank's ability to pay dividends as a condition to the Bank's participation in any stabilization program. In the event the Bank is unable to pay dividends to us, it is likely that we, in turn, would have to stop paying dividends on our common stock. Our failure to pay dividends on our common stock could have a material adverse effect on the market price of our common stock. See "Item 1. Business—Supervision and Regulation" above for additional information on the regulatory restrictions to which we and the Bank are subject.

Only a limited trading market exists for our common stock which could lead to price volatility.

        Our common stock trades on The NASDAQ Global Select Stock Market under the symbol "PACW" and our trading volume is modest. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock. In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue or that stockholders will be able to sell their shares.

Our allowance for credit losses may not be adequate to cover actual losses.

        In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for loan defaults and non-performance and a reserve for unfunded loan commitments which, when combined, we refer to as the allowance for credit losses. Our allowance for credit losses may not be adequate to address actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results. Our allowance for credit losses is based on prior experience and an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Our federal and state regulators, as an integral part of their examination process, review our loans and allowance for credit losses. While we believe our allowance for credit losses is appropriate for the risk identified in the Company's loan portfolio, we cannot assure you that we will not further increase the

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allowance for credit losses, that it will be sufficient to address losses, or that regulators will not require us to increase this allowance. Any of these occurrences could materially and adversely affect our earnings. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K for more information.

Our acquisitions may subject us to unknown risks.

        We have completed 22 acquisitions since May 2000, including the FDIC-assisted acquisitions of Los Padres Bank in August 2010 and Affinity Bank in August 2009. Certain events may arise after the date of an acquisition, or we may learn of certain facts, events or circumstances after the closing of an acquisition, that may affect our financial condition or performance or subject us to risk of loss. These events include, but are not limited to: litigation resulting from circumstances occurring at the acquired entity prior to the date of acquisition; loan downgrades and credit loss provisions resulting from underwriting of certain acquired loans determined not to meet our credit standards; personnel changes that cause instability within a department; delays in implementing new policies or procedures or the failure to apply new policies or procedures; and other events relating to the performance of our business. Acquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstances that could result in loss or give assurances that our investigation or mitigation efforts will be sufficient to protect against any such loss.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

        We currently depend heavily on the services of our chairman, John Eggemeyer, our chief executive officer, Matthew Wagner, and a number of other key management personnel. The loss of Mr. Eggemeyer's or Mr. Wagner's services or that of other key personnel could materially and adversely affect our results of operations and financial condition. Our success also depends, in part, on our ability to attract and retain additional qualified management personnel. Competition for such personnel is strong in the banking industry, and we may not be successful in attracting or retaining the personnel we require.

Concentrated ownership of our common stock creates a risk of sudden changes in our share price.

        As of March 4, 2011, directors and members of our executive management team owned or controlled approximately 3.7% of our common stock, excluding shares that may be issued to executive officers upon vesting of restricted stock awards. Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large stockholders of a significant portion of that stockholder's holdings could have a material adverse effect on the market price of our common stock. In addition, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly.

Our largest stockholder is a registered bank holding company, and the activities and regulation of such stockholder may materially and adversely affect the permissible activities of the Company.

        CapGen Capital Group II LP, which we refer to as CapGen, beneficially owned approximately 10.9% of the Company as of March 4, 2011. CapGen is a registered bank holding company under the BHCA and is regulated by the FRB. Under FRB guidelines, bank holding companies must be a "source of strength" for their subsidiaries. See "Item 1. Business—Supervision and Regulation—Bank Holding Company Regulation" above for more information. Regulation of CapGen by the FRB may materially and adversely affect the activities and strategic plans of the Company should the FRB determine that CapGen or any other company in which either has invested has engaged in any unsafe

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or unsound banking practices or activities. While we have no reason to believe that the FRB is proposing to take any action with respect to CapGen that would adversely affect the Company, we remain subject to such risk.

A natural disaster could harm the Company's business.

        Historically, California, in which a substantial portion of the Company's business is located, has been susceptible to natural disasters, such as earthquakes, floods and wild fires. The nature and level of natural disasters cannot be predicted and may be exacerbated by global climate change. These natural disasters could harm the Company's operations through interference with communications, including the interruption or loss of the Company's computer systems, which could prevent or impede the Company from gathering deposits, originating loans and processing and controlling its flow of business, as well as through the destruction of facilities and the Company's operational, financial and management information systems. Additionally, natural disasters could negatively impact the values of collateral securing the Company's loans and interrupt our borrowers' abilities to conduct their business in a manner to support their debt obligations, either of which could result in losses and increased provisions for credit losses.

Our decisions regarding the fair value of assets acquired, including the FDIC loss sharing asset, could be inaccurate which could materially and adversely affect our business, financial condition, results of operations, and future prospects.

        Management makes various assumptions and judgments about the collectibility of the acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions that include loss sharing agreements, we may record a loss sharing asset that we consider adequate to absorb future losses which may occur in the acquired loan portfolio. In determining the size of the loss sharing asset, we analyze the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and nonaccruals, local economic conditions, and other pertinent information. If our assumptions are incorrect, the balance of the FDIC loss sharing asset may at any time be insufficient to cover future loan losses, and credit loss provisions may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future losses on loan and other assets covered by loss sharing agreements could have a negative effect on our operating results.

Our ability to obtain reimbursement under the loss sharing agreements on covered assets depends on our compliance with the terms of the loss sharing agreements.

        Management must certify to the FDIC on a quarterly basis our compliance with the terms of the FDIC loss sharing agreements as a prerequisite to obtaining reimbursement from the FDIC for realized losses on covered assets. The required terms of the agreements are extensive and failure to comply with any of the guidelines could result in a specific asset or group of assets temporarily or permanently losing their loss sharing coverage. Additionally, management may decide to forgo loss share coverage on certain assets to allow greater flexibility over the management of certain assets. As of December 31, 2010, $1.0 billion, or 18.4%, of the Company's assets were covered by the FDIC loss sharing agreements.

        Under the terms of the FDIC loss sharing agreements, the assignment or transfer of the loss sharing agreement to another entity generally requires the written consent of the FDIC. Based on the manner in which assignment is defined in the agreements, each of the following requires the prior written consent of the FDIC:

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        No assurances can be given that we will manage the covered assets in such a way as to always maintain loss share coverage on all such assets.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        As of March 1, 2011, we had a total of 95 properties consisting of 77 operating branch offices, 1 annex office, 3 operations centers, 8 loan offices, and 6 other properties of which 2 are subleased. We own 8 locations and the remaining properties are leased. Almost all properties are located in Southern California. Pacific Western's principal office is located at 10250 Constellation Blvd., Suite 1640, Los Angeles, CA 90067.

        For additional information regarding properties of the Company and Pacific Western, see Note 9 of Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

ITEM 3.    LEGAL PROCEEDINGS

        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. Because of these factors, the Company cannot provide a meaningful estimate of the range of reasonably possible outcomes of claims in the aggregate or by individual claim. In the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

ITEM 4.    RESERVED

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Marketplace Designation, Sales Price Information and Holders

        Our common stock is listed on The Nasdaq Global Select Market and is traded under the symbol "PACW." The following table summarizes the high and low sale prices for each quarterly period ended since January 1, 2009 for our common stock, as quoted and reported by The Nasdaq Stock Market, or Nasdaq:

 
  Stock Sales Prices   Dividends
Declared
During
Quarter
 
 
  High   Low  

2009

                   
 

First quarter

  $ 27.09   $ 9.36   $ 0.32  
 

Second quarter

  $ 19.82   $ 11.64   $ 0.01  
 

Third quarter

  $ 21.42   $ 11.66   $ 0.01  
 

Fourth quarter

  $ 21.19   $ 15.43   $ 0.01  

2010

                   
 

First quarter

  $ 23.70   $ 19.03   $ 0.01  
 

Second quarter

  $ 24.98   $ 18.25   $ 0.01  
 

Third quarter

  $ 21.81   $ 16.85   $ 0.01  
 

Fourth quarter

  $ 22.07   $ 16.56   $ 0.01  

        As of March 2, 2011, the closing price of our common stock on Nasdaq was $20.20 per share. As of that date, based on the records of our transfer agent, there were approximately 2,001 record holders of our common stock.

Dividends

        Our ability to pay dividends to our stockholders is subject to the restrictions set forth in the Delaware General Corporation Law, or the DGCL. The DGCL provides that a corporation, unless otherwise restricted by its certificate of incorporation, may declare and pay dividends out of its surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year, as long as the amount of capital of the corporation is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. Surplus is defined as the excess of a corporation's net assets (i.e., its total assets minus its total liabilities) over the capital associated with issuances of its common stock. Moreover, DGCL permits a board of directors to reduce its capital and transfer such amount to its surplus. In determining the amount of surplus of a Delaware corporation, the assets of the corporation, including stock of subsidiaries owned by the corporation, must be valued at their fair market value as determined by the board of directors, regardless of their historical book value. Our ability to pay dividends is also subject to certain other limitations. See "Item 1. Business—Supervision and Regulation" in Part I of this Annual Report on Form 10-K and Note 19 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        Set forth in the table above are the dividends declared and paid by the Company during the two most recent fiscal years. Our ability to pay cash dividends to our stockholders is also limited by certain covenants contained in the indentures governing trust preferred securities issued by us or entities that we have acquired, and the debentures underlying the trust preferred securities. Generally the

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indentures provide that if an Event of Default (as defined in the indentures) has occurred and is continuing, or if we are in default with respect to any obligations under our guarantee agreement which covers payments of the obligations on the trust preferred securities, or if we give notice of any intention to defer payments of interest on the debentures underlying the trust preferred securities, then we may not, among other restrictions, declare or pay any dividends (other than a dividend payable by the Bank to the holding company) with respect to our common stock. Notification to the FRB is also required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly net earnings are insufficient to fund the dividend amount. Under such circumstances, we may not pay a dividend should the FRB object until such time as we receive approval from the FRB or no longer need to provide notice under applicable regulations.

        Holders of Company common stock are entitled to receive dividends declared by the Board of Directors out of funds legally available under state law governing the Company and certain federal laws and regulations governing the banking and financial services business. During 2010, 2009, and 2008, the Company paid $1.4 million, $11.1 million, and $35.4 million, respectively, in cash dividends on common stock.

        We can provide no assurance that we will continue to declare dividends on a quarterly basis or otherwise. The declaration of dividends by the Company is subject to the discretion of our Board of Directors. Our Board of Directors will take into account such matters as general business conditions, our financial results, projected cash flows, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by us to our stockholders or by our subsidiary to the holding company, and such other factors as our Board of Directors may deem relevant.

        PacWest's primary source of income is the receipt of cash dividends from the Bank. The availability of cash dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the bank in question, and other factors, that the FRB, the FDIC or the DFI could assert that payment of dividends or other payments is an unsafe or unsound practice. Pacific Western 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 state banks, such as Pacific Western, are regulated by the DFI under its general supervisory authority as it relates to a bank's capital requirements. A state bank may declare a dividend without the approval of the DFI as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for three previous fiscal years less any dividend paid during such period. During 2010, no dividends were paid to PacWest from the Bank. As of this date and for the foreseeable future, any further cash dividends from the Bank to the Company will require DFI approval. See "Item 1. Business—Supervision and Regulation," in Part I of this Annual Report on Form 10-K for further discussion of potential regulatory limitations on the holding company's receipt of funds from the Bank, as well as "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity" and Note 19 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for a discussion of other factors affecting the availability of dividends and limitations on the ability to declare dividends.

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Securities Authorized for Issuance Under Equity Compensation Plans

        The following table provides information as of December 31, 2010, regarding securities issued and to be issued under our equity compensation plans that were in effect during fiscal 2010:

Plan Category
  Plan Name   Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
  Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
  Number of Securities
Remaining Available for
Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
 
 
   
  (a)
  (b)
  (c)
 

Equity compensation plans approved by security holders

  The PacWest Bancorp 2003 Stock Incentive Plan(1)     (2) $     1,176,427 (3)

Equity compensation plans not approved by security holders

  None              

(1)
The PacWest Bancorp 2003 Stock Incentive Plan (the "Incentive Plan") was last approved by the stockholders of the Company at our 2009 Annual Meeting of Stockholders.

(2)
Amount does not include the 1,230,582 shares of unvested time-based and performance-based restricted stock outstanding as of December 31, 2010 with an exercise price of zero.

(3)
The Incentive Plan permits these remaining shares to be issued in the form of options, restricted stock or SARs.

Recent Sales of Unregistered Securities and Use of Proceeds

        None.

Repurchases of Common Stock

        In January 2009, all participants in the Company's Directors Deferred Compensation Plan, or the DDCP, received distributions of amounts previously deferred and the DDCP was terminated. Upon termination of the DDCP 184,395 common shares were distributed to the participants.

        Prior to 2009, participants in the DDCP were able to invest deferred amounts in the Company's common stock. The Company had the discretion whether to track purchases of common stock as if made, or to fully fund the DDCP via purchases of stock with deferred amounts. Purchases of Company common stock by the rabbi trust of the DDCP were considered repurchases of common stock by the Company since the rabbi trust was an asset of the Company. Actual purchases of Company common stock via the DDCP were made through open market purchases pursuant to the terms of the DDCP, which include a predetermined formula and schedule for the purchase of such stock in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. Pursuant to the terms of the DDCP, generally purchases were actually made or deemed to be made in the open market on the 15th of the month (or the next trading day) following the day on which deferred amounts were contributed to the DDCP, beginning March 15 of each year.

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        The following table presents stock purchases made during the fourth quarter of 2010:

 
  Total
Shares
Purchased(1)
  Average
Price Per
Share
 

October 1 - October 31, 2010

      $  

November 1 - November 30, 2010

    53,081     18.75  

December 1 - December 31, 2010

         
             
 

Total

    53,081   $ 18.75  
             

(1)
Shares repurchased pursuant to net settlement by employees, in satisfaction of financial obligations incurred through the vesting of the Company's restricted stock.

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Five-Year Stock Performance Graph

        The following chart compares the yearly percentage change in the cumulative shareholder return on our common stock based on the closing price during the five years ended December 31, 2010, with (1) the Total Return Index for U.S. companies traded on The Nasdaq Stock Market (the "NASDAQ Composite"), (2) the Total Return Index for NASDAQ Bank Stocks (the "NASDAQ Bank Index") and (3) the Total Return Index for the KBW Regional Bank Stocks (the "KBW Regional Banking Index"). This comparison assumes $100 was invested on December 31, 2005, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. PacWest's total cumulative loss was 55.6% over the five year period ending December 31, 2010 compared to a gain of 25.9% and losses of 24.7% and 44.0% for the NASDAQ Composite, NASDAQ Bank Index, and KBW Regional Banking Index, respectively.


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among PacWest Bancorp, the NASDAQ Composite Index,
the NASDAQ Bank Index and the KBW Regional Banking Index

GRAPHIC


*
$100 invested on December 31, 2005 in stock or index, including reinvestment of dividends.

 
  Year Ended December 31,  
Index
  2005   2006   2007   2008   2009   2010  

PacWest Bancorp

  $ 100.00   $ 98.22   $ 79.44   $ 54.65   $ 41.81   $ 44.45  

NASDAQ Composite

    100.00     111.74     124.67     73.77     107.12     125.93  

NASDAQ Bank

    100.00     114.45     88.71     71.34     62.32     75.34  

KBW Regional Banking

    100.00     105.62     79.81     62.53     47.38     56.01  

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ITEM 6.    SELECTED FINANCIAL DATA

        The following table sets forth certain of our financial and statistical information for each of the years in the five-year period ended December 31, 2010. This data should be read in conjunction with our audited consolidated financial statements as of December 31, 2010 and 2009, and for each of the years in the three-year period ended December 31, 2010 and related Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

 
  At or For the Year Ended December 31,  
 
  2010   2009   2008   2007   2006  
 
  (In thousands, except per share amounts and percentages)
 

Results of Operations(a):

                               
 

Interest income

  $ 290,284   $ 269,874   $ 287,828   $ 350,981   $ 301,597  
 

Interest expense

    (40,957 )   (53,828 )   (68,496 )   (85,866 )   (59,640 )
                       
   

Net interest income

    249,327     216,046     219,332     265,115     241,957  
                       
 

Provision for credit losses:

                               
   

Non-covered loans

    (178,992 )   (141,900 )   (45,800 )   (3,000 )   (9,600 )
   

Covered loans

    (39,046 )   (18,000 )            
                       
     

Total provision for credit losses

    (218,038 )   (159,900 )   (45,800 )   (3,000 )   (9,600 )
                       
   

Net interest income after provision for credit losses

    31,289     56,146     173,532     262,115     232,357  
 

FDIC loss sharing income, net

    28,330     16,314              
 

Other noninterest income

    20,454     22,604     24,427     32,920     16,466  
 

Gain from Affinity acquisition

        66,989              
 

Goodwill write-off

            (761,701 )        
 

Noninterest expense

    (188,803 )   (179,204 )   (144,234 )   (142,265 )   (121,455 )
                       
   

Net earnings (loss) before income tax benefit (expense) and effect of accounting change

    (108,730 )   (17,151 )   (707,976 )   152,770     127,368  
 

Income tax benefit (expense)

    46,714     7,801     (20,089 )   (62,444 )   (51,512 )
                       
   

Earnings (loss) before cumulative effect of accounting change

    (62,016 )   (9,350 )   (728,065 )   90,326     75,856  
 

Cumulative effect on prior years (to December 31, 2005) of changing the method of accounting for stock-based compensation forfeitures

                    142  
                       
     

Net earnings (loss)

  $ (62,016 ) $ (9,350 ) $ (728,065 ) $ 90,326   $ 75,998  
                       

Per Common Share Data:

                               
 

Earnings (loss) per share (EPS):

                               
   

Basic

  $ (1.77 ) $ (0.30 ) $ (26.81 ) $ 3.08   $ 3.17  
   

Diluted

  $ (1.77 ) $ (0.30 ) $ (26.81 ) $ 3.08   $ 3.16  
 

Dividends declared during year

  $ 0.04   $ 0.35   $ 1.28   $ 1.28   $ 1.21  
 

Book value per share(b)

  $ 13.06   $ 14.47   $ 13.17   $ 40.65   $ 39.42  
 

Tangible book value per share(b)

  $ 11.06   $ 13.52   $ 11.77   $ 11.88   $ 12.82  
 

Shares outstanding at year-end(b)

    36,672     35,015     28,528     28,002     29,636  
 

Average shares outstanding:

                               
   

Basic EPS

    35,108     31,899     27,177     28,572     23,476  
   

Diluted EPS

    35,108     31,899     27,177     28,591     23,588  

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  At or For the Year Ended December 31,  
 
  2010   2009   2008   2007   2006  
 
  (In thousands, except per share amounts and percentages)
 

Balance Sheet Data:

                               
 

Total assets

  $ 5,529,021   $ 5,324,079   $ 4,495,502   $ 5,179,040   $ 5,553,323  
 

Cash and cash equivalents

    108,552     211,048     159,870     101,783     151,411  
 

Investment securities

    929,056     474,129     155,359     133,537     120,128  
 

Loans held for sale

                63,565     173,319  
 

Non-covered loans, net of unearned income(c)

    3,161,055     3,707,383     3,987,891     3,949,218     4,189,543  
 

Allowance for credit losses, non-covered loans(c)

    104,328     124,278     68,790     61,028     61,179  
 

Covered loans, net

    908,576     621,686              
 

FDIC loss sharing asset

    116,352     112,817              
 

Goodwill

    47,301             761,990     738,083  
 

Core deposit and customer relationship intangibles

    25,843     33,296     39,922     43,785     50,427  
 

Deposits

    4,649,698     4,094,569     3,475,215     3,245,146     3,685,733  
 

Borrowings

    225,000     542,763     450,000     612,000     499,000  
 

Subordinated debentures

    129,572     129,798     129,994     138,488     149,219  
 

Stockholders' equity

    478,797     506,773     375,726     1,138,352     1,168,328  

Performance Ratios:

                               
 

Stockholders' equity to total assets ratio

    8.66 %   9.52 %   8.36 %   21.98 %   21.04 %
 

Tangible common equity ratio

    7.44 %   8.95 %   7.54 %   7.60 %   7.97 %
 

Loans to deposits ratio

    87.52 %   105.73 %   114.75 %   121.70 %   113.67 %
 

Net interest margin

    5.02 %   4.79 %   5.30 %   6.34 %   6.67 %
 

Efficiency ratio(d)

    63.33 %   55.66 %   59.17 %   47.73 %   47.00 %
 

Return on average assets

    (1.14 )%   (0.19 )%   (15.43 )%   1.73 %   1.72 %
 

Return on average equity

    (12.56 )%   (1.93 )%   (106.28 )%   7.66 %   9.13 %
 

Average equity to average assets

    9.10 %   10.06 %   14.52 %   22.55 %   18.88 %
 

Dividend payout ratio

    (e)     (e)     (e)     41.56 %   38.29 %

Asset Quality:

                               
 

Non-covered nonaccrual loans(c)

  $ 94,183   $ 240,167   $ 63,470   $ 22,473   $ 22,095  
 

Non-covered OREO

    25,598     43,255     41,310     2,736      
                       
   

Non-covered nonperforming assets

  $ 119,781   $ 283,422   $ 104,780   $ 25,209   $ 22,095  
                       

Asset Quality Ratios:

                               
 

Non-covered nonaccrual loans to non-covered loans, net of unearned income(c)

    2.98 %   6.48 %   1.59 %   0.57 %   0.53 %
 

Non-covered nonperforming assets to non-covered loans, net of unearned income, and OREO(c)

    3.76 %   7.56 %   2.60 %   0.64 %   0.53 %
 

Allowance for credit losses to non-covered nonaccrual loans

    110.8 %   51.8 %   108.4 %   271.6 %   276.9 %
 

Allowance for credit losses to non-covered loans, net of unearned income

    3.30 %   3.35 %   1.72 %   1.55 %   1.46 %

(a)
Operating results of acquired companies are included from the respective acquisition dates. See Note 3 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

(b)
Includes 1,230,582 shares, 1,095,417 shares, 1,309,586 shares, 861,269 shares, and 750,014 shares of unvested restricted stock outstanding at December 31, 2010, 2009, 2008, 2007, and 2006, respectively.

(c)
During 2010, the Bank executed two sales of non-covered adversely classified loans totaling $398.5 million that included a total of $128.1 million in nonaccrual loans. For further information about the 2010 loan sales and non-covered loan portfolio concentrations as of December 31, 2010, see "—Overview—Non-Covered Classified Loan Sales" included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

(d)
The 2009 efficiency ratio includes the gain from the Affinity acquisition. Excluding this gain, the efficiency ratio would be 70.29%. The 2008 efficiency ratio excludes the goodwill write-off. Including the goodwill write-off, the efficiency ratio would be 371.65%.

(e)
Not meaningful.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        This section should be read in conjunction with the disclosure regarding "Forward-Looking Statements" set forth in "Item 1. Business—Forward-Looking Statements", as well as the discussion set forth in "Item 1. Business—Certain Business Risks" and "Item 8. Financial Statements and Supplementary Data," including the notes to consolidated financial statements.

Overview

        We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our banking subsidiary, Pacific Western Bank, which we refer to as Pacific Western or the Bank. When we say "we", "our" or the "Company", we mean the Company on a consolidated basis with the Bank. When we refer to "PacWest" or to the holding company, we are referring to the parent company on a stand-alone basis.

        Pacific Western is a full-service commercial bank offering a broad range of banking products and services including: accepting time, money market, and demand deposits; originating loans, including commercial, real estate construction, SBA guaranteed and consumer loans; and providing other business-oriented products. Our operations are primarily located in Southern California and the Bank focuses on conducting business with small to medium size businesses in our marketplace, the owners and employees of those businesses and households in and around the communities we serve. The majority of our loans are secured by the real estate collateral of such businesses. Through our asset-based lending offices we also operate in Arizona, Northern California, and the Pacific Northwest.

        Over the last year, the Company's assets have grown $204.9 million, or 3.8%, and totaled $5.5 billion at December 31, 2010. The growth was due primarily to increases of $450.3 million in securities available-for-sale attributable to purchases using excess liquidity and $286.9 million in covered loans due to the FDIC-assisted acquisition of Los Padres Bank on August 20, 2010. This was offset by a $547.9 million decline in our gross non-covered loan portfolio due mostly to the $395.8 million sales of classified loans during 2010. At December 31, 2010, securities available-for-sale, gross non-covered loans, and covered loans totaled $874.0 million, $3.2 billion, and $908.6 million, respectively, or 15.8%, 57.3%, and 16.4% of assets, respectively.

        Pacific Western competes actively for deposits and emphasizes solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin, as net interest income accounted for 84% of our net revenues (net interest income plus noninterest income) for 2010.

        We have completed 22 business acquisitions since the Company's inception in 1999, including the FDIC-assisted acquisitions of Los Padres Bank and Affinity Bank in August 2010 and 2009, respectively. These acquisitions affect the comparability of our reported financial information as the operating results of the acquired entities are included in our operating results only from their respective acquisition dates. For further information on our acquisitions, see Notes 3 and 4 in Notes to Consolidated Financial Statements included in "Item 8. Financial Statement and Supplementary Data."

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        During 2010, we made strategic decisions to sell $398.5 million of non-covered classified loans to reduce credit risk, thereby strengthening the Bank's balance sheet and enhancing its ability to continue to participate in bidding on FDIC-assisted acquisitions. Such sales resulted in immediate reductions of classified loans and improved credit quality metrics. The improvement in credit quality metrics for the non-covered portfolio is shown in the following table:

 
  December 31,
2010
  September 30,
2010
  June 30,
2010
  March 31,
2010
  December 31,
2009
 
 
  (Dollars in thousands)
 

Nonaccrual loans

  $ 94,183   $ 105,539   $ 108,283   $ 99,920   $ 240,167  

New nonaccrual loans in the quarter

    21,413 (1)   26,543     25,136     18,096     120,446  

Nonperforming assets

    119,781     130,137     132,806     129,563     283,422  

Performing restructured loans

    89,272     143,407     76,367     51,896     181,454  

Allowance for credit losses to nonaccrual loans

    110.8 %   95.9 %   86.3 %   91.5 %   51.8 %

Allowance for credit losses to
loans, net of unearned income

    3.30 %   3.05 %   2.93 %   2.81 %   3.35 %

(1)
Includes two loans to one borrower with a balance of $13.9 million

        In December 2010, we sold non-covered classified loans totaling $74.9 million for $54.0 million in cash. Such sale resulted in a charge-off to the allowance for credit losses of $20.9 million, of which $6.6 million had been previously allocated to the loans sold through our allowance methodology and $14.3 million represented the market discount necessary for the loans to be sold to the buyer. The sale was on a servicing-released basis and without recourse to Pacific Western Bank. All of the loans sold were originated by Pacific Western Bank and none were covered loans acquired in the Los Padres Bank or Affinity Bank acquisitions. The loans sold included $17.6 million in nonaccrual loans and $43.7 million in performing restructured loans as of September 30, 2010.

        In February 2010, the Bank sold non-covered classified loans totaling $323.6 million to an institutional buyer for $200.6 million in cash. Such sale resulted in a charge-off to the allowance for credit losses of $123.0 million, of which $51.6 million had been previously allocated to the loans sold through our allowance methodology and $71.4 million represented the market discount necessary for the loans to be sold to the buyer. The sale was on a servicing-released basis and without recourse to Pacific Western Bank. All loans sold were originated by Pacific Western Bank and none were covered loans acquired in the Affinity Bank acquisition. The loans sold included $110.5 million in nonaccrual loans and $105.1 million in restructured loans.

        On August 20, 2010, we acquired certain assets of Los Padres Bank, including all loans, and assumed substantially all of its liabilities, including all deposits, from the FDIC in an FDIC-assisted acquisition, which we refer to as the Los Padres acquisition. Pacific Western (i) acquired $437.1 million in loans, $33.9 million in other real estate owned, $44.3 million in investments, and $261.5 million in cash and other assets, and (ii) assumed $752.2 million in deposits, $70.0 million in borrowings, and $1.9 million in other liabilities. In connection with the Los Padres acquisition, the FDIC made a cash payment to Pacific Western of $144.0 million. Other than a deposit premium of $3.4 million, we paid no cash or other consideration to acquire Los Padres. The estimated fair value of the liabilities assumed exceeded the estimated fair value of the assets acquired and we recorded $47.3 million of goodwill. We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on the acquired loans, with the exception of consumer loans, and other real estate owned. We refer to the acquired assets subject to the loss sharing agreement collectively as "covered assets." Under the terms of such loss sharing agreement, the FDIC is obligated

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to reimburse the Bank for 80% of losses with respect to the covered assets. The Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid the Bank 80% reimbursement under the loss sharing agreement. The loss sharing arrangement for single family covered assets and commercial (non-single family) covered assets is in effect for 10 years and 5 years, respectively, from the acquisition date, and the loss recovery provisions are in effect for 10 years and 8 years, respectively, from the acquisition date. Los Padres was a federally chartered savings bank headquartered in Solvang, California that operated 14 branches, including 11 branches in California (three in Ventura County, four in Santa Barbara County, and four in San Luis Obispo County) and three branches in Arizona (Maricopa County). After office consolidations in February 2011, there are nine remaining former Los Padres offices with eight in California and one in Arizona. We made this acquisition to expand our presence in the Central Coast of California. The Los Padres operation added $3.7 million in net earnings since its acquisition in August 2010, with $3.3 million of such amount in the fourth quarter of 2010.

        The acquisition has been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 20, 2010 acquisition date. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date. The application of the acquisition method of accounting resulted in $47.3 million of goodwill. Such goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is tax-deductible. The goodwill includes $9.5 million related to the FDIC's settlement accounting for a wholly-owned subsidiary of Los Padres. We disagree with the FDIC's accounting for this item and are in the process of negotiating with the FDIC for resolution of this matter. Should we be successful in our negotiations, goodwill would be reduced by a cash payment to us from the FDIC of $9.5 million. No assurance can be given, however, that we will be successful in our efforts. See Notes 3 and 4 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Los Padres acquisition.

        On July 1, 2010, we purchased a $234.1 million portfolio of 225 performing loans secured by Southern California real estate for a cash price of $228.3 million. Such loans had a weighted average coupon interest rate of 6.15% and a weighted average maturity of 4.6 years. These loans were part of the Foothill Independent Bank loan portfolio that we acquired when we completed the Foothill Independent Bancorp acquisition in May 2006. In March 2007, we sold a 95% participating interest in these loans for cash and continued to service them and maintain the borrower relationships. When the opportunity to purchase this loan portfolio presented itself, we concluded it would be in the best interests of the Company and the Bank to make this purchase as we are familiar with the credit risk and it would deploy excess liquidity in a manner that would increase interest income and expand the net interest margin.

        On August 28, 2009, we acquired substantially all of the assets of Affinity Bank, including all loans, and assumed substantially all of its liabilities, including the insured and uninsured deposits and excluding certain brokered deposits, from the FDIC in an FDIC-assisted transaction, which we refer to as the Affinity acquisition. Pacific Western (i) acquired $675.6 million in loans, $22.9 million in foreclosed assets, $175.4 million in investments and $371.5 million in cash and other assets, and (ii) assumed $868.2 million in deposits, $305.8 million in borrowings, and $32.6 million in other liabilities. In connection with the Affinity acquisition, the FDIC made a cash payment to Pacific Western of $87.2 million. We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on acquired loans, other real estate owned and certain investment securities. We refer to the acquired assets subject to the loss sharing agreement

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collectively as "covered assets." Under the terms of such loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the first $234 million of losses on covered assets and absorb 95% of losses and receive 95% of loss recoveries on covered assets exceeding $234 million. The loss sharing agreement is in effect for 5 years for commercial assets (non-residential loans, OREO and certain securities) and 10 years for residential loans from the August 28, 2009 acquisition date. The loss recovery provisions are in effect for 8 years for commercial assets and 10 years for residential loans from the acquisition date. Affinity was a full service commercial bank headquartered in Ventura, California that operated 10 branch locations in California. We made this acquisition to expand our presence in California.

        The acquisition has been accounted for under the acquisition method of accounting. Accordingly the acquired assets, including the FDIC loss sharing asset and identifiable intangible asset, and the assumed liabilities were recorded at their estimated fair values as of the August 28, 2009 acquisition date. The application of the acquisition method of accounting resulted in a gain of $67.0 million ($38.9 million after-tax). Such gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed. See Notes 3 and 4 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Affinity acquisition.

Key Performance Indicators

        Among other factors, our operating results depend generally on the following:

        Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. The low market interest rate environment throughout 2009 and continuing in 2010 has reduced our net interest margin relative to our historical performance. A sustained low interest rate environment combined with low loan growth and high levels of marketplace liquidity may further lower both our net interest income and net interest margin going forward.

        Our primary interest-earning asset is loans. Our primary interest-bearing liabilities include deposits, borrowings, and subordinated debentures. We attribute our high net interest margin to our loans-to-deposits ratio, which was approximately 88% at the end of 2010 and exceeded 100% in the prior four years, and a high level of noninterest-bearing deposits. While our deposit balances will fluctuate depending on deposit holders' perceptions of alternative yields available in the market, we attempt to minimize these variances by attracting a high percentage of noninterest-bearing deposits, which have no expectation of yield. At December 31, 2010, approximately 32% of our total deposits were noninterest-bearing. In addition to deposits, we have borrowing capacity under various credit lines which we use for liquidity needs such as funding loan demand, managing deposit flows and interim acquisition financing. This borrowing capacity is relatively flexible and has become one of the least expensive sources of funds. However, our borrowing lines are considered a secondary source of liquidity as we serve our local markets and customers with our deposit products.

        We generally seek new lending opportunities in the $500,000 to $10 million range, try to limit loan maturities for commercial loans to one year, for construction loans up to 18 months, and for commercial real estate loans up to ten years, and to price lending products so as to preserve our interest spread and net interest margin. We sometimes encounter strong competition in pursuing lending opportunities such that potential borrowers obtain loans elsewhere at lower rates than those we offer. We have continued to reduce our exposure to residential construction and foreign loans, including limiting the amount of new loans in these categories. Our ability to make new loans is dependent on economic factors in our market area, borrower qualifications, competition, and liquidity,

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among other items. Considering the current state of the economy in our Southern California marketplace, loan growth was not a focus area for us in 2010 and we expect this to continue in 2011.

        During 2010, we executed two classified loan sales which reduced non-covered loans by $398.5 million. This reduction, combined with repayments, resolution activities and low loan demand resulted in a decrease of $547.9 million during 2010 in our non-covered loan portfolio. The covered loan portfolio increased $286.9 million during 2010 due to the Los Padres acquisition and included a $130.7 million decrease in the acquired Affinity loans.

        We stress credit quality in originating and monitoring the loans we make and measure our success by the levels of our nonperforming assets, net charge-offs and allowance for credit losses. Our allowance for credit losses is the sum of our allowance for loan losses and our reserve for unfunded loan commitments and relates only to our non-covered loans. Provisions for credit losses are charged to operations as and when needed for both on and off balance sheet credit exposure. Loans which are deemed uncollectible are charged off and deducted from the allowance for loan losses. Recoveries on loans previously charged off are added to the allowance for loan losses. During the year ended December 31, 2010, we made a provision for credit losses totaling $218.0 million composed of $179.0 million on non-covered loans and $39.0 million on covered loans. The provision for credit losses on the non-covered portfolio was based on our allowance methodology and reflected net charge-offs, the levels of nonaccrual and classified loans, classified loan sales, and the migration of loans into various risk classifications. The provision for credit losses on the covered loan portfolio reflects an increase in the covered loan allowance for credit losses resulting from credit deterioration since the acquisition dates.

        We regularly review our loans to determine whether there has been any deterioration in credit quality stemming from economic conditions or other factors which may affect collectibility of our loans. Changes in economic conditions, such as inflation, unemployment, increases in the general level of interest rates, declines in real estate values and negative conditions in borrowers' businesses could negatively impact our customers and cause us to adversely classify loans and increase portfolio loss factors. An increase in classified loans generally results in increased provisions for credit losses. Any deterioration in the real estate market may lead to increased provisions for credit losses because of our concentration in real estate loans.

        Our noninterest expense includes fixed and controllable overhead, the major components of which are compensation, occupancy, data processing, other professional service fees and communications expense. We measure success in controlling such costs through monitoring of the efficiency ratio. We calculate the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. Accordingly, a lower percentage reflects lower expenses relative to income. The consolidated efficiency ratios have been as follows:

Quarterly Period in 2010
  Efficiency
Ratio
 

First

    63.8 %

Second

    61.4 %

Third

    60.8 %

Fourth

    67.4 %

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        The increase in the efficiency ratio for the fourth quarter of 2010 was due mostly to lower FDIC loss sharing income as covered loan credit costs declined and certain covered loans, which are carried at a discount, were resolved at amounts above their carrying values.

Critical Accounting Policies

        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 accounting principles generally accepted in the United States. 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 differ significantly from these estimates and assumptions which could have a material impact 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 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. We have identified our policies for the allowances for credit losses, the carrying values of intangible assets, and deferred income tax assets as critical accounting policies.

        The allowance for credit losses on non-covered loans is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for credit losses on non-covered loans relates only to loans which are not subject to loss sharing agreements with the FDIC. The allowance for loan losses is reported as a reduction of outstanding loan balances and the reserve for unfunded loan commitments is included within other liabilities. Generally, as loans are funded, the amount of the commitment reserve applicable to such funded loans is transferred from the reserve for unfunded loan commitments to the allowance for loan losses based on our allowance methodology. At December 31, 2010, the allowance for credit losses on non-covered loans totaled $104.3 million and was comprised of the allowance for loan losses of $98.6 million and the reserve for unfunded loan commitments of $5.7 million. The following discussion is for non-covered loans and the allowance for credit losses thereon. Refer to "—Allowance for Credit Losses on Covered Loans" for the policy on covered loans.

        The provision for credit losses increased $58.1 million to $218.0 million for 2010 compared to 2009, while the allowance for credit losses declined $20.0 million to $104.3 million at December 31, 2010 compared to $124.3 million at December 31, 2009. The increase in the provision reflects the growth of $112.5 million in net charge-offs to $198.9 million, attributed mostly to $144.6 million in charge-offs from the classified loans sold during 2010. The decline in the allowance for credit losses reflected, in part, the lower level of nonaccrual loans, which decreased $146.0 million in 2010 to $94.2 million at December 31, 2010. This was due mostly to the sales of $128.1 million in nonaccrual loans included in the $398.5 million of classified loans sold in 2010.

        An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio and other extensions of credit at the balance sheet date. The allowance is based upon a continuing review of the portfolio, past loan loss experience, current economic conditions which may affect the borrowers' ability to pay, and the underlying collateral value of the loans. Loans which are deemed to be uncollectible are charged off

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and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged off are added to the allowance.

        The methodology we use to estimate the amount of our allowance for credit losses is based on both objective and subjective criteria. While some criteria are formula driven, other criteria are subjective inputs included to capture environmental and general economic risk elements which may trigger losses in the loan portfolio, and to account for the varying levels of credit quality in the loan portfolios of the entities we have acquired that have not yet been captured in our objective loss factors.

        Specifically, our allowance methodology contains three key elements: (i) amounts based on specific evaluations of impaired loans; (ii) amounts of estimated losses on several pools of loans categorized by risk rating and loan type; and (iii) amounts for environmental and general economic factors that indicate probable losses were incurred but were not captured through the other elements of our allowance process.

        Impaired loans are identified at each reporting date based on certain criteria and individually reviewed for impairment. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the original contractual terms of the loan agreement. We measure impairment of a loan based upon the fair value of the loan's collateral if the loan is collateral dependent or the present value of cash flows, discounted at the loan's effective interest rate, if the loan is not collateral-dependent. The impairment amount on a collateral-dependent loan is charged-off to the allowance and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve. Increased charge-offs generally result in increased provisions for credit losses.

        Our loan portfolio, excluding impaired loans which are evaluated individually, is categorized into several pools for purposes of determining allowance amounts by loan pool. The loan pools we currently evaluate are: commercial real estate construction, residential real estate construction, SBA real estate, hospitality real estate, real estate other, commercial collateralized, commercial unsecured, SBA commercial, consumer, foreign, and asset-based. Within these loan pools, we then evaluate loans not adversely classified, which we refer to as "pass" credits, separately from adversely classified loans. The adversely classified loans are further grouped into three credit risk rating categories: "special mention," "substandard" and "doubtful," which we define as follows:

        For further information on classified loans, see Note 6 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        The allowance amounts for "pass" rated loans and those loans adversely classified, which are not reviewed individually, are determined using historical loss rates developed through migration analysis. The migration analysis is updated quarterly based on historic losses and movement of loans between ratings. As a result of this migration analysis and its quarterly updating, the increases we experienced in both charge-offs and adverse classifications resulted in increased loss factors. In addition, beginning with the third quarter of 2008, we shortened the allowance methodology's accumulated net charge-off

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look-back data from 32 quarters to 16 quarters to allow greater emphasis on current charge-off activity. Such shortening also increased the loss factors.

        Finally, in order to ensure our allowance methodology is incorporating recent trends and economic conditions, we apply environmental and general economic factors to our allowance methodology including: credit concentrations; delinquency trends; economic and business conditions; the quality of lending management and staff; lending policies and procedures; loss and recovery trends; nature and volume of the portfolio; nonaccrual and problem loan trends; usage trends of unfunded commitments; and other adjustments for items not covered by other factors.

        We recognize the determination of the allowance for loan losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time. Therefore, we perform sensitivity analyses to provide insight regarding the impact adverse changes in credit risk ratings may have on our allowance for loan losses. The sensitivity analyses have inherent limitations and is based on various assumptions as of a point in time and, accordingly, it is not necessarily representative of the impact loan risk rating changes may have on the allowance for loan losses. At December 31, 2010, in the event that 1% of our non-covered loans were downgraded one credit risk rating category for each category (e.g., 1% of the "pass" category moved to the "special mention" category, 1% of the "special mention" category moved to "substandard" category, and 1% of the "substandard" category moved to the "doubtful" category within our current allowance methodology), the allowance for credit losses would have increased by approximately $2.0 million. In the event that 5% of our non-covered loans were downgraded one credit risk category, the allowance for credit losses would increase by approximately $10.0 million. Given current processes employed by the Company, management believes the credit risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different conclusions that could be significant to the Company's financial statements. In addition, current credit risk ratings are subject to change as we continue to review loans within our portfolio and as our borrowers are impacted by economic trends within their market areas.

        Management believes that the allowance for loan losses is adequate and appropriate for the known and inherent risks in our non-covered loan portfolio. In making its evaluation, management considers certain quantitative and qualitative factors including the Company's historical loss experience, the volume and type of lending conducted by the Company, the results of our credit review process, the levels of classified, criticized and nonperforming assets, regulatory policies, general economic conditions, underlying collateral values, and other factors regarding collectibility and impairment. To the extent we experience, for example, increased levels of documentation deficiencies, adverse changes in collateral values, or negative changes in economic and business conditions which adversely affect our borrowers, our classified loans may increase. Higher levels of classified loans generally result in higher allowances for loan losses.

        Although we have established an allowance for loan losses that we consider adequate, there can be no assurance that the established allowance for loan losses will be sufficient to offset losses on loans in the future. Management also believes that the reserve for unfunded loan commitments is adequate. In making this determination, we use the same methodology for the reserve for unfunded loan commitments as we do for the allowance for loan losses and consider the same quantitative and qualitative factors, as well as an estimate of the probability of advances of the commitments correlated to their credit risk rating.

        The loans acquired in the Los Padres and Affinity acquisitions are covered by loss sharing agreements with the FDIC and we will be reimbursed for a substantial portion of any future losses. Under the terms of the Los Padres loss sharing agreement, the FDIC will absorb 80% of losses and

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receive 80% of loss recoveries on the covered assets. The loss sharing agreement is in effect for 10 years for single family covered assets and 5 years for commercial (non-single family) covered assets from the August 20, 2010 acquisition date. The loss recovery provisions are in effect for 10 years for single family assets and 8 years for commercial (non-single family) assets from the acquisition date. Under the terms of the Affinity loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the first $234 million of losses on covered assets and absorb 95% of losses and receive 95% of loss recoveries on covered assets exceeding $234 million. The loss sharing agreement is in effect for 5 years for commercial assets (non-residential loans, OREO and certain securities) and 10 years for residential loans from the August 28, 2009 acquisition date. The loss recovery provisions are in effect for 8 years for commercial assets and 10 years for residential loans from the acquisition date.

        We evaluated the acquired covered loans and elected to account for them under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), which we refer to as impaired loan accounting.

        The covered loans are subject to our internal and external credit review. If deterioration in the expected cash flows results in a reserve requirement, a provision for credit losses is charged to earnings without regard to the FDIC loss sharing agreement. The portion of the estimated loss reimbursable from the FDIC will be recorded in FDIC loss sharing income and will increase the FDIC loss sharing asset. For acquired impaired loans, the allowance for loan losses is measured at the end of each financial reporting period based on expected cash flows. Decreases in the amount and changes in the timing of expected cash flows on the acquired impaired loans as of the financial reporting date compared to those previously estimated are usually recognized by recording a provision for credit losses on such covered loans. Acquired covered loans not accounted for as impaired loans totaled $29.1 million at December 31, 2010 and are subject to our allowance for credit loss methodology. Although we estimate the required allowance for credit losses similarly to the methodology used for originated loans, we record a provision for such loan losses only when the reserve requirement exceeds any remaining credit discount on these covered loans. Please see "—Financial Condition—Allowance for Credit Losses on Covered Loans" and Notes 1(h) and 6 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for more information.

        Goodwill and intangible assets arise from purchase business combinations. Goodwill and other intangible assets generated from purchase business combinations and deemed to have indefinite lives are not subject to amortization and are instead tested for impairment at least annually. Intangible assets with definite lives arising from business combinations are tested for impairment quarterly.

        At December 31, 2010, we had goodwill of $47.3 million, all of which is tax-deductible, related entirely to the Los Padres acquisition. In 2008 we determined that all of our then existing goodwill was impaired and we recorded a $761.7 million charge to earnings to write it off. Such charge had no effect on the Company's or the Bank's cash balances or liquidity. In addition, because goodwill and other intangible assets are not included in the calculation of regulatory capital, the Company's and the Bank's well-capitalized regulatory ratios were not affected by this non-cash expense.

        Our other intangible assets with definite lives include core deposit and customer relationship intangibles. The establishment and subsequent amortization of these intangible assets requires several assumptions including, among other things, the estimated cost to service deposits acquired, discount rates, estimated attrition rates and useful lives. These intangibles are being amortized over their estimated useful lives up to 10 years and tested for impairment quarterly. If the value of the core deposit intangible or the customer relationship intangible is determined to be less than the carrying value in future periods, a write-down would be taken through a charge to our earnings. The most

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significant element in evaluation of these intangibles is the attrition rate of the acquired deposits or loan relationships. If such attrition rate were to accelerate from that which we expected, the intangible may have to be reduced by a charge to earnings. The attrition rate related to deposit flows or loan flows is influenced by many factors, the most significant of which are alternative yields for loans and deposits available to customers and the level of competition from other financial institutions and financial services companies.

        Our deferred income tax assets arise from differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured and then established only for those items that are deemed to be realizable based on our judgment. From an accounting standpoint, we determine whether a deferred tax asset is realizable based on facts and circumstances, including the Company's 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 that they will be realized. In such an instance, we could be required to record a valuation allowance on our deferred tax assets by charging earnings.

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Non-GAAP Measurements

        The Company uses 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 discussion in this Annual Report on Form 10-K contains non-GAAP financial disclosures for tangible common equity. Tangible common equity is a non-GAAP financial measure used by investors, analysts, and bank regulatory agencies. Tangible common equity represents total equity, less any preferred equity, goodwill and intangible assets. The methodology of determining tangible common equity may differ among companies. Management reviews tangible common equity along with other measures of capital adequacy on a regular basis and has included this non-GAAP financial information, and the corresponding reconciliation to total equity, because of current interest in such information on the part of market participants.

        These non-GAAP financial measures are presented for supplemental informational purposes only for understanding the Company's financial condition and operating results and should not be considered a substitute for financial information presented in accordance with United States generally accepted accounting principles (GAAP). The following table presents performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measurements to the GAAP financial measurements.

 
  Year Ended December 31,  
GAAP to Non-GAAP Reconciliations (Unaudited)
  2010   2009   2008  
 
  (Dollars in thousands)
 

PacWest Bancorp Consolidated:

                   
 

Stockholders' equity

  $ 478,797   $ 506,773   $ 375,726  
 

Less: intangible assets

    73,144     33,296     39,922  
               
   

Tangible common equity

  $ 405,653   $ 473,477   $ 335,804  
               
 

Total assets

  $ 5,529,021   $ 5,324,079   $ 4,495,502  
 

Less: intangible assets

    73,144     33,296     39,922  
               
   

Tangible assets

  $ 5,455,877   $ 5,290,783   $ 4,455,580  
               
 

Equity to assets ratio

    8.66 %   9.52 %   8.36 %
 

Tangible common equity ratio(1)

    7.44 %   8.95 %   7.54 %

Pacific Western Bank:

                   
 

Stockholder's equity

  $ 570,118   $ 585,940   $ 494,858  
 

Less: intangible assets

    73,144     33,296     39,922  
               
   

Tangible common equity

  $ 496,974   $ 552,644   $ 454,936  
               
 

Total assets

  $ 5,513,601   $ 5,313,750   $ 4,488,680  
 

Less: intangible assets

    73,144     33,296     39,922  
               
   

Tangible assets

  $ 5,440,457   $ 5,280,454   $ 4,448,758  
               
 

Equity to assets ratio

    10.34 %   11.03 %   11.02 %
 

Tangible common equity ratio(1)

    9.13 %   10.47 %   10.23 %

(1)
Calculated as tangible common equity divided by tangible assets.

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Results of Operations

        The comparability of financial information is affected by our acquisitions. Our results include the operations of acquired entities from the dates of acquisition. Security Pacific Bank deposits ($441 million in assets) were acquired in November 2008, Affinity Bank ($1.2 billion in assets) was acquired in August 2009, and Los Padres Bank ($824.1 million in assets) was acquired in August 2010.

        The following table sets forth our unaudited, quarterly results for the three months ended December 31, 2010 and September 30, 2010:

 
  Three Months Ended  
 
  December 31,
2010
  September 30,
2010
 
 
  (Dollars in thousands, except
per share data)

 

Interest income

  $ 77,898   $ 75,130  

Interest expense

    (9,378 )   (9,963 )
           
 

Net interest income

    68,520     65,167  
           

Provision for credit losses:

             
 

Non-covered loans

    (35,315 )   (17,050 )
 

Covered loans

    (2,096 )   (7,400 )
           
   

Total provision for credit losses

    (37,411 )   (24,450 )
           
 

Net interest income after provision for credit losses

    31,109     40,717  

FDIC loss sharing income (expense), net

    (1,277 )   6,406  

Other noninterest income

    5,925     4,379  

Noninterest expense

    (49,286 )   (46,174 )

Income tax benefit (expense)

    5,841     (1,828 )
           
 

Net earnings (loss)

  $ (7,688 ) $ 3,500  
           

Earnings (loss) per share:

             
 

Basic

  $ (0.22 ) $ 0.10  
 

Diluted

  $ (0.22 ) $ 0.10  

Net interest margin

    5.21 %   5.08 %

Efficiency ratio

    67.4 %   60.8 %

        We recorded a net loss of $7.7 million for the fourth quarter of 2010 compared to net earnings of $3.5 million for the third quarter of 2010. The fourth quarter included a $35.3 million ($20.5 million after-tax) credit loss provision for non-covered loans, of which $14.3 million ($8.3 million after-tax) was attributed to the Company's December sale of classified loans, and a $1.9 million ($1.1 million after tax) penalty for the early repayment of $50 million in FHLB advances. Los Padres, which was acquired on August 20, 2010, added $3.3 million in net earnings during the fourth quarter of 2010.

        Net interest income was $68.5 million for the fourth quarter of 2010 compared to $65.2 million for the third quarter of 2010. The $3.3 million increase was due mostly to a $2.8 million increase in interest income attributable to higher average loans from the Los Padres acquisition, the accelerated accretion of purchase discount on the disposal of certain covered loans, and the higher average balance of investments due to securities purchases. Contributing to the increase in net interest income was a

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reduction in interest expense of $585,000 due mainly to rate reductions on our money market and time deposit accounts and maturities of higher cost brokered deposits.

        Our net interest margin for the fourth quarter of 2010 was 5.21%, an increase of 13 basis points from the 5.08% posted for the third quarter of 2010. Such improvement reflects a higher yield on average loans during the fourth quarter. The yield on average loans was 6.64% for the fourth quarter of 2010 compared to 6.59% for the prior quarter. The loan yield, earning asset yield and net interest margin are all affected by loans being placed on or removed from nonaccrual status and the acceleration of purchase discounts on covered loan pay-offs; the loan yield and net interest margin for the fourth quarter were positively impacted by 20 basis points and 16 basis points, respectively, from the combination of these items. The loan yield and net interest margin for the third quarter were positively impacted by 12 basis points and 10 basis points, respectively, from these items. The cost of interest-bearing deposits and all-in deposit cost decreased 8 basis points and 5 basis points to 0.73% and 0.50%, respectively; such decreases resulted primarily from lower rates on our deposit products and maturities of higher cost brokered deposits.

        The fourth quarter provision for credit losses totaled $37.4 million and was composed of $35.3 million on the non-covered loan portfolio, including $14.3 million related to the December classified loan sale, and $2.1 million on the covered loan portfolio. The third quarter provision for credit losses totaled $24.5 million and was composed of $17.1 million on the non-covered loan portfolio and $7.4 million on the covered loan portfolio. The provision on the non-covered portfolio is generated by our allowance methodology and reflects net charge-offs, the levels of nonaccrual and classified loans, loan sales activity, and the migration of loans into various risk classifications. The covered loan credit loss provision increases the covered loan allowance for credit losses and results from credit deterioration on covered loans since the acquisition dates.

        The fourth quarter classified loan sale completed in December resulted in a charge-off of $20.9 million to the allowance for loan losses, of which $6.6 million had been previously provided through the Company's allowance methodology. The additional $14.3 million charge-off represents the market discount in excess of the Company's allocated allowance necessary for the loans to be sold to a third party.

        Noninterest income for the fourth quarter of 2010 totaled $4.6 million compared to $10.8 million for the third quarter of 2010. The $6.2 million decline was due mostly to lower FDIC loss sharing income stemming from lower credit-related costs on covered loans, OREO, and a third quarter other-than-temporary impairment ("OTTI") charge on one covered investment security. There was no OTTI charge in the fourth quarter. Loss sharing income also declined due to higher FDIC loss sharing asset write-offs as covered loans, which are carried at a discount, were resolved at amounts above their carrying values. Service charges and fee income increased quarter over quarter due mostly to a full quarter of operations with Los Padres and an increase in rates charged for certain deposit services.

        Noninterest expense totaled $49.3 million for the fourth quarter of 2010 compared to $46.2 million for the third quarter of 2010. The $3.1 million increase was due mostly to a penalty of $1.9 million for the early repayment of $50 million in FHLB advances and an increase in other expense categories related to a full quarter of the Los Padres operations. Los Padres noninterest expense totaled $4.4 million for the fourth quarter compared to $2.1 million for the third quarter. Other professional services declined $861,000 during the fourth quarter as the third quarter included higher consulting, legal, and due diligence costs related to acquisition activity and ongoing loan workouts.

        Noninterest expense includes amortization of time-based restricted stock, which is included in compensation, and intangible asset amortization. Amortization of restricted stock totaled $1.9 million for the fourth quarter of 2010, $2.1 million for the third quarter of 2010 and $8.5 million for the year ended December 31, 2010. Intangible asset amortization totaled $2.4 million for each of the fourth and third quarters of 2010 and $9.6 million for the year ended December 31, 2010.

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        Net interest income, which is our principal source of income, represents the difference between interest earned on assets and interest paid on liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. The following table presents, for the periods indicated, 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.

 
  Year Ended December 31,  
 
  2010   2009   2008  
 
  Average
Balance
  Interest
Income/
Expense
  Yields
and
Rates
  Average
Balance
  Interest
Income/
Expense
  Yields
and
Rates
  Average
Balance
  Interest
Income/
Expense
  Yields
and
Rates
 
 
  (Dollars in thousands)
 

ASSETS

                                                       

Loans, net of unearned income(1)(2)

  $ 4,068,450   $ 265,136     6.52 % $ 4,111,379   $ 258,499     6.29 % $ 3,958,963   $ 280,408     7.08 %

Investment securities(2)

    675,979     24,564     3.63 %   258,160     10,969     4.25 %   142,258     7,077     4.97 %

Deposits in financial institutions

    226,276     584     0.26 %   144,216     406     0.28 %   26,564     182     0.69 %

Federal funds sold

                135             11,064     161     1.46 %
                                             
 

Total interest-earning assets

    4,970,705   $ 290,284     5.84 %   4,513,890   $ 269,874     5.98 %   4,138,849   $ 287,828     6.95 %
                                                   

Other assets

    455,005                 309,827                 578,463              
                                                   
 

Total assets

  $ 5,425,710               $ 4,823,717               $ 4,717,312              
                                                   

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                       

Interest checking deposits

  $ 458,703   $ 1,265     0.28 % $ 390,605   $ 1,754     0.45 % $ 358,308   $ 2,915     0.81 %

Money market deposits

    1,230,924     9,629     0.78 %   981,901     11,767     1.20 %   1,007,112     19,735     1.96 %

Savings deposits

    121,793     249     0.20 %   114,933     270     0.23 %   105,938     253     0.24 %

Time deposits

    1,181,735     15,094     1.28 %   874,786     18,125     2.07 %   561,288     18,254     3.25 %
                                             
 

Total interest-bearing deposits

    2,993,155     26,237     0.88 %   2,362,225     31,916     1.35 %   2,032,646     41,157     2.02 %

Borrowings

    324,150     9,126     2.82 %   550,888     15,497     2.81 %   578,783     18,742     3.24 %

Subordinated debentures

    129,703     5,594     4.31 %   129,901     6,415     4.94 %   132,010     8,597     6.51 %
                                             
 

Total interest-bearing liabilities

    3,447,008   $ 40,957     1.19 %   3,043,014   $ 53,828     1.77 %   2,743,439   $ 68,496     2.50 %
                                                   

Noninterest-bearing demand deposits

    1,437,493                 1,245,512                 1,242,557              

Other liabilities

    47,586                 50,043                 46,270              
                                                   
 

Total liabilities

    4,932,087                 4,338,569                 4,032,266              

Stockholders' equity

    493,623                 485,148                 685,046              
                                                   
 

Total liabilities and stockholders' equity

  $ 5,425,710               $ 4,823,717               $ 4,717,312              
                                                   

Net interest income

        $ 249,327               $ 216,046               $ 219,332        
                                                   

Net interest rate spread

                4.65 %               4.21 %               4.45 %

Net interest margin

                5.02 %               4.79 %               5.30 %

(1)
Includes nonaccrual loans and loan fees.

(2)
Yields on loans and securities have not been adjusted to a tax-equivalent basis because the impact is not material.

        Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities. The changes in the amount and mix of average interest-earning assets and interest-bearing liabilities is referred to as a "volume change". The changes in the yields earned on average interest-earning assets and rates paid on average interest-bearing liabilities is referred to as a "rate change." The change in interest income/expense attributable to volume reflects the change in volume multiplied by the prior year's rate and the change in interest income/expense attributable to rate reflects the change in rates multiplied by the prior year's volume. The changes in interest income and expense which are not attributable specifically to either volume or

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rate are allocated ratably between the two categories. The following table presents, for the years indicated, changes in interest income and expense and the amount of change attributable to changes in volume and rates:

 
  2010 Compared to 2009   2009 Compared to 2008  
 
   
  Increase (Decrease)
Due to
   
  Increase (Decrease)
Due to
 
 
  Total
Increase
(Decrease)
  Total
Increase
(Decrease)
 
 
  Volume   Rate   Volume   Rate  
 
  (In thousands)
 

Interest Income:

                                     
 

Loans

  $ 6,637   $ (2,721 ) $ 9,358   $ (21,909 ) $ 10,486   $ (32,395 )
 

Investment securities

    13,595     15,394     (1,799 )   3,892     5,052     (1,160 )
 

Deposits in financial institutions

    178     214     (36 )   224     387     (163 )
 

Federal funds sold

                (161 )   (80 )   (81 )
                           
   

Total interest income

    20,410     12,887     7,523     (17,954 )   15,845     (33,799 )
                           

Interest Expense:

                                     
 

Interest checking deposits

    (489 )   269     (758 )   (1,161 )   243     (1,404 )
 

Money market deposits

    (2,138 )   2,547     (4,685 )   (7,968 )   (482 )   (7,486 )
 

Savings deposits

    (21 )   15     (36 )   17     21     (4 )
 

Time deposits

    (3,031 )   5,194     (8,225 )   (129 )   7,953     (8,082 )
                           
   

Total interest-bearing deposits

    (5,679 )   8,025     (13,704 )   (9,241 )   7,735     (16,976 )
 

Borrowings

    (6,371 )   (6,383 )   12     (3,245 )   (871 )   (2,374 )
 

Subordinated debentures

    (821 )   (10 )   (811 )   (2,182 )   (135 )   (2,047 )
                           
   

Total interest expense

    (12,871 )   1,632     (14,503 )   (14,668 )   6,729     (21,397 )
                           
   

Net interest income

  $ 33,281   $ 11,255   $ 22,026   $ (3,286 ) $ 9,116   $ (12,402 )
                           

        Our net interest income and net interest margin are driven by the combination of our loan and securities volume, asset yield, high proportion of demand deposit balances to total deposits, and disciplined deposit pricing. There was no change in the Federal Funds market rate or the Bank's 4.00% lending rate during 2010.

        The $33.3 million growth in net interest income for 2010 compared to 2009 was due to a $20.4 million increase in interest income and a $12.9 million decline in interest expense. The increase in interest income was due to higher average balances of investment securities from the purchase of $627.9 million of government-sponsored entity pass through securities during 2010, the interest-earning assets from the Los Padres and Affinity acquisitions, and a higher average yield on loans. The loan yield, earning asset yield and net interest margin are all affected by loans being placed on or removed from nonaccrual status and the acceleration of purchase discounts on covered loan pay-offs; the combination of these items increased interest income $4.1 million and positively impacted the net interest margin 8 basis points in 2010. For 2009, these items reduced interest income $4.1 million and decreased the net interest margin 9 basis points.

        The decline in interest expense was due mainly to lower rates paid on deposits and borrowings and lower average borrowings. Our overall cost of average deposits was 0.59% for 2010 compared to 0.88% for 2009. Noninterest-bearing demand deposits averaged $1.4 billion, or 32% of total average deposits for 2010 compared to $1.2 billion, or 35% of total average deposits for 2009. For 2008, our overall cost of average deposits was 1.26% and noninterest-bearing demand deposits averaged $1.2 billion, or 38% of total average deposits.

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        The net interest margin for 2010 was 5.02%, an increase of 23 basis points when compared to 2009. The increase is due mostly to a higher yield on average loans and lower funding costs, due principally to lower rates paid on deposits and lower average borrowings.

        The $3.3 million decrease in net interest income for 2009 compared to 2008 is due mostly to reduced loan interest income offset by lower funding costs. The net interest margin fell 51 basis points year over year to 4.79% for 2009 when compared to 2008. The declines are driven largely by the lower level of market interest rates.

        Loan interest income decreased $21.9 million from lower loan yields as a result of the lower level of market interest rates. Market interest rates declined during 2008 and then remained at historically low levels throughout 2009. Our base lending rate was lowered to 4.00% in December 2008 and remained at this level for 2009. The sustained lower interest rates contributed to our loan yields averaging 6.29% for 2009 compared to 7.08% for 2008. The higher level of nonaccrual loans also lowered loan interest income and loan yields. Of the $21.9 million decline in loan interest income, net reversals of interest income on nonaccrual loans contributed $2.4 million to this decrease; net reversals of interest income on nonaccrual loans reduced loan interest income $4.1 million for 2009 and $1.7 million for 2008. These reversals reduced the net interest margin 9 basis points for 2009 and 4 basis points for 2008.

        We reduced interest expense $14.7 million by lowering the rates paid on money market and time deposit products. The effect of rate reductions on time deposits was offset somewhat by higher average balances from the Security Pacific Bank and Affinity Bank acquisitions. Borrowing costs declined from lower market interest rates and lower average FHLB borrowings.

        The following table sets forth the details of the provision for credit losses and presents allowance for credit losses data for the years indicated. The columns titled "Increase (Decrease)" set forth the year-over-year changes between 2010 and 2009 and between 2009 and 2008.

 
  Year Ended December 31,  
 
  2010   Increase
(Decrease)
  2009   Increase
(Decrease)
  2008  
 
  (In thousands)
 

Provision For Credit Losses:

                               
 

Addition to allowance for loan losses

  $ 178,878   $ 37,268   $ 141,610   $ 92,610   $ 49,000  
 

Addition (reduction) to reserve for unfunded loan commitments

    114     (176 )   290     3,490     (3,200 )
                       
     

Total provision for non-covered loans

    178,992     37,092     141,900     96,100     45,800  
 

Provision for covered loans

    39,046     21,046     18,000     18,000      
                       
   

Total provision for credit losses

  $ 218,038   $ 58,138   $ 159,900   $ 114,100   $ 45,800  
                       

Allowance for Credit Losses Data:

                               
 

Net charge-offs on non-covered loans

  $ 198,942   $ 112,530   $ 86,412   $ 48,374   $ 38,038  
 

Charge-offs on non-covered loans sold

    144,647     144,647         (16,248 )   16,248  
 

Allowance for loan losses (year-end)

    98,653     (20,064 )   118,717     55,198     63,519  
 

Allowance for credit losses (year-end)

    104,328     (19,950 )   124,278     55,488     68,790  
 

Allowance for credit losses to non-covered nonaccrual loans (year-end)

    110.8 %         51.8 %         108.4 %
 

Allowance for credit losses to non-covered loans, net of unearned income (year-end)

    3.30 %         3.35 %         1.72 %

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        The amount of the provision for credit losses in each year is a charge against earnings in that year. The provisions for credit losses are based on our allowance methodology and reflect our judgments about the adequacy of the allowance for loan losses and the reserve for unfunded loan commitments. In determining the amount of the provision, we consider certain quantitative and qualitative factors including our historical loan loss experience, the volume and type of lending we conduct, the results of our credit review process, the level and trends of classified, criticized, past due and nonaccrual loans, regulatory policies, usage trends of unfunded loan commitments, portfolio concentrations, general economic conditions, underlying collateral values, off-balance sheet exposures, and other factors regarding collectability and impairment. To the extent we experience, for example, increased levels of documentation deficiencies, adverse changes in collateral values, or negative changes in economic and business conditions which adversely affect our borrowers, our classified loans may increase. Increases in our classified loans generally result in provisions for credit losses.

        We made provisions for credit losses totaling $218.0 million during 2010, $159.9 million during 2009, and $45.8 million during 2008. The 2010 provision for credit losses was comprised of a $179.0 million addition to the allowance for loan losses on the non-covered loan portfolio, a $39.0 million addition to the covered loan allowance for credit losses, and a $114,000 addition to the reserve for unfunded loan commitments. The 2010 provision for credit losses on non-covered loans includes $85.7 million related to $398.5 million of classified loans sold in 2010.

        The 2009 provision for credit losses was composed of a $141.6 million addition to the allowance for loan losses on the non-covered loan portfolio, an $18.0 million addition to the covered loan allowance for credit losses and a $290,000 addition to the reserve for unfunded loan commitments. The 2008 provision for credit losses was composed of a $49.0 million addition to the allowance for loan losses and a $3.2 million reduction to the reserve for unfunded loan commitments.

        Net non-covered loans charged-off in 2010 increased by $112.5 million to $198.9 million when compared to 2009. Our 2010 net charge-offs are higher due primarily to $144.6 million in charge-offs that we recorded in connection with the sales of $398.5 million in classified loans during the year. The economic downturn has negatively impacted our borrowers and the collateral values underlying our loans. A protracted economic down cycle will increase the stress on our loan portfolio and we may continue to experience increased levels of charge-offs and provisions.

        The allowance for credit losses on the non-covered loan portfolio totaled $104.3 million, or 3.30% of non-covered loans, net of unearned income, at December 31, 2010. The allowance for credit losses totaled $124.3 million, or 3.35% of non-covered loans, net of unearned income, at December 31, 2009. Of these amounts, the allowance for loan losses totaled $98.6 million at December 31, 2010 and $118.7 million at December 31, 2009.

        The $39.0 million provision for credit losses on the covered loan portfolio for 2010 reflects credit deterioration on covered loans subsequent to the acquisition dates. This provision was based on an ongoing analysis of acquired loans, which indicated a decrease in expected cash flows compared to previous estimates. Under the terms of the FDIC loss sharing agreement, the FDIC absorbs 80% of the losses reflected by the provision. As a result, $31.2 million is included in the noninterest income caption "FDIC loss sharing income, net" and represents 80% of the credit loss provision for covered loans.

        Increased provisions for credit losses may be required in the future based on loan and unfunded commitment growth, the effect changes in economic conditions, such as inflation, unemployment, market interest rate levels, and real estate values may have on the ability of our borrowers to repay their loans, and other negative conditions specific to our borrowers' businesses. See "—Critical Accounting Policies," "—Financial Condition—Allowance for Credit Losses on Non-Covered Loans," "—Financial Condition—Allowance for Credit Losses on Covered Loans," and Notes 1(h) and 6 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

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        The following table sets forth the details of noninterest income for the years indicated. The columns titled "Increase (Decrease)" set forth the year-over-year changes between 2010 and 2009 and between 2009 and 2008.

 
  Year Ended December 31,  
 
  2010   Increase
(Decrease)
  2009   Increase
(Decrease)
  2008  
 
  (In thousands)
 

Noninterest Income:

                               
 

Service charges on deposit accounts

  $ 11,561   $ (447 ) $ 12,008   $ (1,006 ) $ 13,014  
 

Other commissions and fees

    7,291     340     6,951     (326 )   7,277  
 

Other-than-temporary-impairment loss on securities

    (874 )   (874 )            
 

FDIC loss sharing income, net

    28,330     12,016     16,314     16,314      
 

Increase in cash surrender value of life insurance

    1,440     (139 )   1,579     (841 )   2,420  
 

Gain from Affinity acquisition

        (66,989 )   66,989     66,989      
 

Loss on sale of loans

                303     (303 )
 

Other income

    1,036     (1,030 )   2,066     47     2,019  
                       
   

Total noninterest income

  $ 48,784   $ (57,123 ) $ 105,907   $ 81,480   $ 24,427  
                       

        Noninterest income declined in 2010 to $48.8 million from the $105.9 million earned in 2009. The $57.1 million decrease was due mainly to the $67.0 million gain on the Affinity acquisition recorded in August 2009; there was no similar gain in 2010. The 2010 overall decline compared to 2009 was offset partially by an increase of $12.0 million in FDIC loss sharing income to $28.3 million. The increase in FDIC loss sharing income for 2010 was attributable mostly to the FDIC's share of the $21.0 million increase in the provision for credit losses on covered loans. Another factor contributing to the decline in noninerest income was an $874,000 other-than-temporary impairment loss that we recorded in 2010 on one covered investment security due to deteriorating cash flows and significant delinquency of the underlying loan collateral. This impairment loss was offset partially by related FDIC loss sharing income of $699,000. Service charges on deposit accounts decreased $447,000 due mostly to a decrease in NSF handling fees because fewer checks were drawn against accounts with insufficient funds. The decline in other income is attributed to the receipt of a death benefit in 2009; there were no such benefits received in 2010.

        Income from the cash surrender value of bank owned life insurance (BOLI) policies was lower for 2010 compared to 2009 and for 2009 when compared to 2008 due mostly to lower yields for our life insurance policies, which is in line with lower market interest rates. As of December 31, 2010, we owned $22.1 million in separate account BOLI policies and $44.1 million in general account BOLI policies. Our crediting rate, or yield for our life insurance policies, changes quarterly and is determined by the performance of the underlying investments. The income is recognized as an appreciation of the cash surrender value of life insurance policies. It is noncash income and not subject to income tax. The tax-equivalent yield for our life insurance policies was 3.76% during 2010, 4.07% during 2009, and 6.03% during 2008.

        Noninterest income increased $81.5 million for the year ended December 31, 2009 to $105.9 million from the $24.4 million earned during 2008. The increase is due mostly to the $67.0 million gain from the Affinity acquisition that occurred on August 28, 2009 coupled with FDIC loss sharing income of $16.3 million.

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        The following table sets forth the details of noninterest expense for the years indicated. The columns titled "Increase (Decrease)" set forth the year-over-year changes between 2010 and 2009 and between 2009 and 2008.

 
  Year Ended December 31,  
 
  2010   Increase
(Decrease)
  2009   Increase
(Decrease)
  2008  
 
  (Dollars in thousands)
 

Noninterest Expense:

                               
 

Compensation

  $ 87,483   $ 9,310   $ 78,173   $ 5,988   $ 72,185  
 

Occupancy

    27,639     1,256     26,383     1,852     24,531  
 

Data processing

    8,538     1,592     6,946     714     6,232  
 

Other professional services

    8,567     1,653     6,914     374     6,540  
 

Business development

    2,463     (78 )   2,541     (503 )   3,044  
 

Communications

    3,329     397     2,932     (219 )   3,151  
 

Insurance and assessments

    9,685     380     9,305     5,782     3,523  
 

Other real estate owned, net

    14,770     (8,552 )   23,322     21,104     2,218  
 

Intangible asset amortization

    9,642     95     9,547     (73 )   9,620  
 

Goodwill write-off

                (761,701 )   761,701  
 

Other expense

    16,687     3,546     13,141     (49 )   13,190  
                       
   

Total noninterest expense

  $ 188,803   $ 9,599   $ 179,204   $ (726,731 ) $ 905,935  
                       

        Noninterest expense increased $9.6 million year-over-year to $188.8 million for 2010. The growth in most expense categories was due primarily to higher overhead costs related to the Affinity and Los Padres acquisitions. Compensation increased $9.3 million due to the acquisitions and severance costs. Excluding employees gained in the Los Padres acquisition, we reduced our workforce by approximately 5% and paid $1.0 million in severance at the end of the third quarter of 2010; the annual pre-tax savings from these departures is approximately $3.6 million. Occupancy costs increased $1.3 million due mostly to the 10 branches added in the Affinity acquisition and 14 branches added in the Los Padres acquisition. Other professional services increased $1.7 million due mostly to higher legal costs related to loan workout activity and consulting fees for acquisitions. For acquisitions completed after January 1, 2009, acquisition related costs, such as legal, accounting valuation and other professional fees, necessary to effect a business combination, are charged to earnings in periods in which the costs are incurred. We incurred and charged to expense approximately $900,000 and $600,000 of such costs in 2010 and 2009, respectively, which are included in other professional fees. Other expense increased $3.5 million due mostly to a $1.2 million increase in loan-related costs, $2.7 million in penalties for early repayment of $175 million in FHLB advances in 2010, and lower reorganization charges of $1.2 million. There were no FHLB prepayment penalties in 2009. The elevated loan-related costs were attributed to ongoing workout efforts. The 2009 reorganization charges totaled $1.2 million and related to a first quarter staff reduction, premises costs for the closing of two banking offices in the second quarter, and additional rent for a discontinued acquired office. OREO costs declined $8.6 million due mostly to higher net gains on sales and lower write-downs and costs in 2010.

        Noninterest expense includes (i) amortization of time-based restricted stock, which vests either in increments over a three to five year period or at the end of such period and is included in compensation expense and (ii) intangible asset amortization, which is related to customer deposit and customer relationship intangible assets. Amortization of restricted stock totaled $8.5 million and

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$8.2 million for the years ended December 31, 2010 and 2009, respectively. Intangible asset amortization was $9.6 million and $9.5 million for 2010 and 2009, respectively.

        Noninterest expense for the year ended December 31, 2009 totaled $179.2 million compared to $905.9 million for the same period in 2008. The $726.7 million decrease is due mostly to the $761.7 million goodwill write-off in 2008. The remaining $35.0 million increase in noninterest expense is due to higher OREO costs of $21.1 million, higher deposit insurance costs of $5.8 million and higher compensation costs of $6.0 million. OREO costs reflect higher levels of writedowns on the portfolio, which totaled $17.8 million, due to the declining real estate market and increased holding costs during the year. The increased deposit insurance costs relate to higher FDIC deposit insurance premiums generally, plus the cost to participate in the Transaction Account Guarantee Program and the second quarter of 2009 special FDIC deposit insurance assessment of $2.0 million. Compensation costs increased year-over-year due to increased staff levels from our acquisitions and higher compensation expense from restricted stock awards.

        Compensation expense included $8.2 million for 2009 and $930,000 for 2008 in amortization expense for shares of time-based and performance-based restricted stock awarded to employees. Time-based restricted stock vests either in increments over a three to five year period. Performance-based restricted stock vests when the Company attains specific long-term financial targets. Beginning with the fourth quarter of 2007, the amortization of certain performance-based restricted stock awards was suspended. During the fourth quarter of 2008 we concluded it was improbable that the financial targets would be met for the performance-based stock awards. Accordingly, we reversed the accumulated amortization on those awards through a credit of $4.5 million to compensation expense. If and when the attainment of such performance targets is deemed probable in future periods, a catch-up adjustment will be recorded and amortization of such performance-based restricted stock will begin again. The total amount of unrecognized compensation expense related to the performance-based restricted stock for which amortization was suspended and reversed totaled $26.6 million.

        Effective income tax rates were 43.0%, 45.5%, and 2.8% for the years ended December 31, 2010, 2009, and 2008, respectively. The difference in the effective tax rates between the annual periods relates mainly to the level of tax credits and tax deductions and the amount of tax exempt income recorded in each of the years. The 2008 effective rate was lowered by the goodwill write-off, the majority of which was not deductible for tax purposes. For further information on income taxes, see Note 14 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

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Financial Condition

        The following table presents the balance of each major category of non-covered loans as of the dates indicated:

 
  December 31,  
 
  2010   2009   2008   2007   2006  
Loan Category
  Amount   % of
Loans
  Amount   % of
Loans
  Amount   % of
Loans
  Amount   % of
Loans
  Amount   % of
Loans
 
 
  (Dollars in thousands)
 

Domestic:

                                                             
 

Real estate mortgage

  $ 2,274,733     72 % $ 2,423,712     65 % $ 2,473,089     62 % $ 2,280,963     58 % $ 2,374,010     57 %
 

Commercial

    663,557     21 %   781,003     21 %   845,410     21 %   852,279     22 %   752,817     18 %
 

Real estate construction

    179,479     5 %   440,286     12 %   579,884     15 %   717,419     18 %   939,463     22 %
 

Consumer

    25,058     1 %   32,138     1 %   44,938     1 %   49,943     1 %   45,984     1 %

Foreign:

                                                             
 

Commercial

    21,057     1 %   34,524     1 %   50,918     1 %   56,916     1 %   83,359     2 %
 

Other

    1,551         1,719         2,245         1,206         6,778      
                                           

Total gross non-covered loans

    3,165,435     100 %   3,713,382     100 %   3,996,484     100 %   3,958,726     100 %   4,202,411     100 %
                                                     

Less: unearned income

    (4,380 )         (5,999 )         (8,593 )         (9,508 )         (12,868 )      
                                                     

Loans, net of unearned income

    3,161,055           3,707,383           3,987,891           3,949,218           4,189,543        

Less: allowance for loan losses

    (98,653 )         (118,717 )         (63,519 )         (52,557 )         (52,908 )      
                                                     

Total net non-covered loans

  $ 3,062,402         $ 3,588,666         $ 3,924,372         $ 3,896,661         $ 4,136,635        
                                                     

Loans held for sale(1)

  $         $         $         $ 63,565         $ 173,319        

(1)
Loans held for sale, consisting of SBA 504 and 7(a) loans, were transferred into the regular portfolio during the second quarter of 2008, when the SBA loan sale operations was suspended. Loans held for sale at December 31, 2007 include $54.1 million of SBA 504 loans, which are real estate mortgage loans, and $9.4 million of SBA 7(a) loans, which are commercial loans.

        During 2010 our gross non-covered loans declined $547.9 million due primarily to $398.5 million in classified loans sold during the year. The decline was offset partially by the $234.1 million purchase of performing loans in July 2010. The non-covered portfolio continues to decline as a result of repayments, foreclosures, charge-offs and the stagnant economy which causes both a low demand for loans and fewer acceptable lending opportunities. Real estate construction loans declined $260.8 million, real estate mortgage loans declined $149.0 million, and commercial loans declined $130.9 million. We continued to reduce our exposure to real estate construction. The real estate construction category at December 31, 2010 includes commercial real estate construction loans totaling $107.1 million compared to $265.6 million at the end of 2009 and residential real estate construction loans totaling $72.4 million at the end of 2010 compared to $174.7 million at December 31, 2009.

        Our non-covered foreign loans totaled $22.6 million at December 31, 2010 and were primarily to individuals and entities located in Mexico. All of our non-covered foreign loans are denominated in U.S. dollars and the majority is collateralized by assets located in the United States or guaranteed or insured by businesses located in the United States. In addition to our outstanding non-covered foreign loans, our non-covered foreign loan commitments totaled $17.2 million at December 31, 2010. We continued to allow our non-covered foreign loan portfolio to repay in the ordinary course of business without making any new privately-insured non-covered foreign loans other than those under existing commitments.

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        The following table presents the details of the non-covered real estate construction category, which includes loans secured by commercial and residential real estate, as of the dates indicated:

 
  December 31,  
 
  2010   2009  
Loan Category
  Balance   % of
Total
  Balance   % of
Total
 
 
  (Dollars in thousands)
 

Commercial real estate construction:

                         
 

Unimproved land

  $ 26,032     14.5 % $ 39,377     8.9 %
 

Retail

    20,378     11.4 %   46,742     10.6 %
 

Land acquisition/development

    16,983     9.5 %   16,652     3.8 %
 

Self storage

    13,191     7.3 %   17,569     4.0 %
 

Industrial/warehouse

    11,329     6.3 %   57,714     13.1 %
 

Healthcare

    4,305     2.4 %   9,773     2.2 %
 

Office buildings

    3,805     2.1 %   37,300     8.5 %
 

Owner-occupied

    2,000     1.1 %   3,082     0.7 %
 

Other

    9,062     5.0 %   24,454     5.6 %
 

Gas station

        0.0 %   12,939     2.9 %
                       
   

Total commercial real estate construction

    107,085     59.7 %   265,602     60.3 %
                       

Residential real estate construction:

                         
 

Unimproved land

    43,412     24.2 %   58,949     13.4 %
 

Multi-family

    26,474     14.8 %   38,826     8.8 %
 

Land acquisition/development

    1,482     0.8 %   33,501     7.6 %
 

Single family nonowner-occupied

    1,026     0.6 %   32,209     7.3 %
 

Single family owner-occupied

        0.0 %   11,199     2.5 %
                       
   

Total residential real estate construction

    72,394     40.3 %   174,684     39.7 %
                       
 

Total gross non-covered real estate construction loans

  $ 179,479     100.0 % $ 440,286     100.0 %
                       

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        Our largest loan portfolio concentration is the non-covered real estate mortgage category, which includes loans secured by commercial and residential real estate. The following table presents our non-covered real estate mortgage loan portfolio, excluding foreign loans, as of the dates indicated:

 
  December 31,  
 
  2010   2009  
Loan Category
  Balance   % of
Total
  Balance   % of
Total
 
 
  (Dollars in thousands)
 

Commercial real estate mortgage:

                         
 

Industrial/warehouse

  $ 432,263     19.0 % $ 328,709     13.6 %
 

Retail

    374,027     16.4 %   434,902     17.9 %
 

Office buildings

    350,192     15.4 %   319,912     13.2 %
 

Owner-occupied

    263,603     11.6 %   291,198     12.0 %
 

Hotel

    156,614     6.9 %   262,556     10.8 %
 

Healthcare

    102,227     4.5 %   91,740     3.8 %
 

Gas station

    38,502     1.7 %   39,260     1.6 %
 

Self storage

    26,432     1.2 %   30,038     1.2 %
 

Restaurant

    26,463     1.2 %   26,723     1.1 %
 

Land acquisition/development

    9,649     0.4 %   9,819     0.4 %
 

Unimproved land

    1,494     0.1 %   5,485     0.2 %
 

Other

    250,068     11.0 %   268,269     11.1 %
                       
   

Total commercial real estate mortgage

    2,031,534     89.3 %   2,108,611     87.0 %
                       

Residential real estate mortgage:

                         
 

Multi-family

    81,880     3.6 %   98,137     4.0 %
 

Mixed use

    57,230     2.5 %   90,119     3.7 %
 

Single family owner-occupied

    38,025     1.7 %   53,521     2.2 %
 

Single family nonowner-occupied

    26,618     1.2 %   35,586     1.5 %
 

Home equity lines of credit

    38,823     1.7 %   37,738     1.6 %
 

Unimproved land

    623     0.0 %       0.0 %
                       
   

Total residential real estate mortgage

    243,199     10.7 %   315,101     13.0 %
                       
 

Total gross non-covered real estate mortgage loans

  $ 2,274,733     100.0 % $ 2,423,712     100.0 %
                       

        The largest subset of the "Other" commercial real estate mortgage category is for fixed base operators at airports with a balance of $38.4 million, or 15.4%, of the total.

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        During 2010, we made strategic decisions to sell $398.5 million of non-covered classified loans to reduce credit risk, thereby strengthening the Bank's balance sheet and enhancing its ability to continue to participate in bidding on FDIC-assisted acquisitions. Such sales resulted in immediate reductions of classified loans and improved credit quality metrics. The improvement in credit quality metrics for the non-covered portfolio is shown in the following table:

 
  December 31,
2010
  September 30,
2010
  June 30,
2010
  March 31,
2010
  December 31,
2009
 
 
  (Dollars in thousands)
 

Nonaccrual loans

  $ 94,183   $ 105,539   $ 108,283   $ 99,920   $ 240,167  

New nonaccrual loans in the quarter

  $ 21,413 (1) $ 26,543   $ 25,136   $ 18,096   $ 120,446  

Nonperforming assets

  $ 119,781   $ 130,137   $ 132,806   $ 129,563   $ 283,422  

Performing restructured loans

  $ 89,272   $ 143,407   $ 76,367   $ 51,896   $ 181,454  

Allowance for credit losses to
nonaccrual loans

    110.8 %   95.9 %   86.3 %   91.5 %   51.8 %

Allowance for credit losses to
loans, net of unearned income

    3.30 %   3.05 %   2.93 %   2.81 %   3.35 %

(1)
Includes two loans to one borrower with a balance of $13.9 million, of which $6.9 million was subsequently charged off and a 100% specific reserve was established for the remaining amount.

        In December 2010, we sold non-covered classified loans totaling $74.9 million for $54.0 million in cash. Such sale resulted in a charge-off to the allowance for credit losses of $20.9 million, of which $6.6 million had been previously allocated to the loans sold through our allowance methodology and $14.3 million represented the market discount necessary for the loans to be sold to the buyer. The sale was on a servicing-released basis and without recourse to Pacific Western Bank. All loans sold were originated by Pacific Western Bank and none were covered loans acquired in the Los Padres Bank or Affinity Bank acquisitions. The loans sold included $17.6 million in nonaccrual loans and $43.7 million in performing restructured loans as of September 30, 2010.

        In February 2010, the Bank sold non-covered classified loans totaling $323.6 million to an institutional buyer for $200.6 million in cash. Such sale resulted in a charge-off to the allowance for credit losses of $123.0 million, of which $51.6 million had been previously allocated to the loans sold through our allowance methodology and $71.4 million represented the market discount necessary for the loans to be sold to the buyer. The sale was on a servicing-released basis and without recourse to Pacific Western Bank. All loans sold were originated by Pacific Western Bank and none were acquired in the Affinity Bank acquisition. The loans sold included $110.5 million in nonaccrual loans and $105.1 million in restructured loans.

        The decisions to enter into these transactions were made shortly before the sale dates and after the immediately preceding reporting periods. Therefore, the loans were not accounted for as being held for sale prior to the transaction.

        On July 1, 2010, we purchased a $234.1 million portfolio of 225 performing loans secured by Southern California real estate for a cash price of $228.3 million. Such loans had a weighted average coupon interest rate of 6.15% and a weighted average maturity of 4.6 years. These loans were part of the Foothill Independent Bank loan portfolio that we acquired when we completed the Foothill Independent Bancorp acquisition in May 2006. In March 2007, we sold a 95% participating interest in these loans for cash and continued to service them and maintain the borrower relationships. When the opportunity to purchase this loan portfolio presented itself, we concluded it would be in the best interests of the Company and the Bank to make this purchase as we are familiar with the credit risk and it would deploy excess liquidity in a manner that would increase interest income and expand the net interest margin.

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        On August 20, 2010, we acquired certain assets of Los Padres Bank, including all loans, and assumed substantially all of its liabilities, including all deposits, from the FDIC in an FDIC-assisted acquisition, which we refer to as the Los Padres acquisition. We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on acquired loans, with the exception of consumer loans, and other real estate owned. Under the terms of such loss sharing agreement, the FDIC is obligated to reimburse the Bank for 80% of losses with respect to the covered assets. The Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid the Bank 80% reimbursement under the loss sharing agreement. The loss sharing arrangement for single family covered assets and commercial (non-single family) covered assets is in effect for 10 years and 5 years, respectively, from the acquisition date, and the loss recovery provisions are in effect for 10 years and 8 years, respectively, from the acquisition date. We refer to the loans acquired in the Los Padres acquisition and subject to the loss sharing agreement as "covered loans." We refer to the acquired assets subject to the loss sharing agreement collectively as "covered assets."

        On August 28, 2009, Pacific Western Bank acquired certain assets and liabilities of Affinity Bank from the FDIC in an FDIC-assisted transaction. We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on acquired loans, other real estate owned and certain investment securities. Under the terms of such loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the first $234 million of losses on covered assets and absorb 95% of losses and receive 95% of loss recoveries on covered assets exceeding $234 million. The loss sharing agreement is in effect for 5 years for commercial assets (non-residential loans, OREO and certain securities) and 10 years for residential loans from the August 28, 2009 acquisition date. The loss recovery provisions are in effect for 8 years for commercial assets and 10 years for residential loans from the acquisition date. We refer to the loans acquired in the Affinity acquisition and subject to the loss sharing agreement as "covered loans". We refer to the acquired assets subject to the loss sharing agreement collectively as "covered assets."

        At the acquisition dates, we estimated the fair values of the Los Padres and Affinity covered loans to be $436.3 million and $675.6 million, respectively. Fair value of acquired loans is determined using a discounted cash flow model based on assumptions about the amount and timing of principal and interest payments, estimated prepayments, estimated default rates, estimated loss severity in the event of defaults, and current market rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date.

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        The following table reflects the net carrying value of the covered loans as of the dates indicated:

 
  December 31,  
Loan Category
  2010   2009  
 
  (In thousands)
 

Multi-family

  $ 417,277   $ 263,944  

Commercial real estate

    342,642     311,298  

Single family

    151,874     17,078  

Construction and land

    91,740     121,735  

Commercial and industrial

    40,013     21,340  

Home equity lines of credit

    8,248     6,565  

Consumer

    947     575  
           
 

Total gross covered loans

    1,052,741     742,535  

Less: discount

    (110,901 )   (102,849 )
           
 

Covered loans, net of discount

    941,840     639,686  

Less: allowance for loan losses

    (33,264 )   (18,000 )
           
 

Covered loans, net

  $ 908,576   $ 621,686  
           

        We account for loans under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("acquired impaired loan accounting") when (i) we acquire loans deemed to be impaired when there is evidence of credit deterioration since the origination and it is probable at the date of acquisition that we would be unable to collect all contractually required payments and (ii) as a general policy election for non-impaired loans that we acquire in a distressed bank acquisition. We may refer to acquired loans accounted for under ASC 310-30 as "acquired impaired loans." In connection with the Affinity acquisition, we applied acquired impaired loan accounting to all of the covered loans. In connection with the Los Padres acquisition, we applied acquired impaired loan accounting to $405.6 million of the covered loans. We also acquired in the Los Padres acquisition $31.5 million of revolving credit agreements, mainly home equity loans and commercial asset-based lines of credit, where the borrower had revolving privileges; we accounted for such loans in accordance with accounting requirements for purchased non-impaired loans. GAAP excludes revolving credit agreements, such as home equity lines and credit card loans, from acquired impaired loan accounting requirements.

        For acquired impaired loans, we (i) calculated the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (ii) estimated the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). Under acquired impaired loan accounting, the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represents an estimate of the loss exposure of principal and interest related to the covered acquired impaired loans portfolio and such amount is subject to change over time based on the performance of such covered loans. The carrying value of covered acquired impaired loans is reduced by payments received, both principal and interest, and increased by the portion of the accretable yield recognized as interest income.

        The excess of undiscounted expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the "accretable yield" and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. The accretable yield changes over time due to both accretion and as actual and expected cash flows vary from the acquisition date estimated cash flows. The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. The remaining

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undiscounted expected cash flows are calculated at each financial reporting date based on information then currently available. Subsequent to acquisition, the Company aggregates loans into pools of loans with common credit risk characteristics such as loan type and risk rating. Increases in expected cash flows over those previously estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those previously estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses.

        Under acquired impaired loan accounting, purchased loans are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when expected cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans as long as there is an expectation that the estimated cash flows will be received. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income may be recognized on a cash basis or as a reduction of the principal amount outstanding.

        The following table summarizes the changes in the carrying amount of covered acquired impaired loans and accretable yield on those loans for the periods indicated:

 
  Covered Acquired
Impaired Loans
 
 
  Carrying
Amount
  Accretable
Yield
 
 
  (In thousands)
 

Balance, January 1, 2009

  $   $  
 

Addition from the Affinity acquisition

    675,616     (248,174 )
 

Accretion

    17,622     17,622  
 

Payments received

    (53,552 )    
 

Decrease in expected cash flows

        4,106  
 

Provision for credit losses

    (18,000 )    
           

Balance, December 31, 2009

    621,686     (226,446 )
 

Addition from the Los Padres acquisition

    405,619     (144,168 )
 

Accretion

    52,539     52,539  
 

Payments received

    (161,312 )    
 

Decrease in expected cash flows

        27,410  
 

Provision for credit losses

    (39,046 )    
           

Balance, December 31, 2010

  $ 879,486   $ (290,665 )
           

        The table above excludes the purchased non-impaired loans from the Los Padres acquisition, which totaled $29.1 million at December 31, 2010.

        The undiscounted contractual cash flows, undiscounted cash flows expected to be collected, and the estimated fair value of the Los Padres covered acquired impaired loan portfolio as of the acquisition date were $694.5 million, $549.8 million, and $405.6 million, respectively.

        At December 31, 2010, the weighted average remaining contractual life of the covered loan portfolio was 9 years.

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        The following table presents contractual maturity and repricing information for the indicated covered and non-covered loans at December 31, 2010:

 
  Repricing or Maturing In  
Loan Category
  One Year
Or Less
  Over
One to
Five Years
  Over
Five Years
  Total  
 
  (In thousands)
 

Non-covered domestic:

                         
 

Real estate mortgage

  $ 482,368   $ 858,541   $ 933,824   $ 2,274,733  
 

Commercial

    399,878     206,409     57,270     663,557  
 

Real estate construction

    124,653     50,521     4,305     179,479  
 

Consumer

    17,437     4,327     3,294     25,058  

Non-covered foreign

    19,402     1,732     1,474     22,608  
                   
 

Total non-covered

    1,043,738     1,121,530     1,000,167     3,165,435  

Covered

    435,024     340,493     166,323     941,840  
                   
 

Total

  $ 1,478,762   $ 1,462,023   $ 1,166,490   $ 4,107,275  
                   

        The following table presents the interest rate profile of covered and non-covered loans due after one year for the indicated non-covered loan categories at December 31, 2010:

 
  Due After One Year  
Loan Category
  Fixed
Rate
  Floating
Rate
  Total  
 
  (In thousands)
 

Non-covered domestic:

                   
 

Real estate mortgage

  $ 1,273,328   $ 519,037   $ 1,792,365  
 

Commercial

    131,811     131,868     263,679  
 

Real estate construction

    15,620     39,206     54,826  
 

Consumer

    5,717     1,904     7,621  

Non-covered foreign

    3,040     166     3,206  
               
 

Total non-covered

    1,429,516     692,181     2,121,697  

Covered

    210,021     296,795     506,816  
               
 

Total

  $ 1,639,537   $ 988,976   $ 2,628,513  
               

        For a discussion of our policy and methodology on the allowance for credit losses on non-covered loans, see "—Critical Accounting Policies—Allowance for Credit Losses on Non-Covered Loans." For further information on the allowance for credit losses on non-covered loans, see Note 6 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

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        The following table presents the balance of our allowance for credit losses and certain credit quality measures as of the dates indicated:

 
  December 31,  
 
  2010   2009   2008   2007   2006  
 
  (Dollars in thousands)
 

Allowance for loan losses(1)

  $ 98,653   $ 118,717   $ 63,519   $ 52,557   $ 52,908  

Reserve for unfunded loan commitments(1)

    5,675     5,561     5,271     8,471     8,271  
                       
 

Allowance for credit losses

  $ 104,328   $ 124,278   $ 68,790   $ 61,028   $ 61,179  
                       

Allowance for credit losses to non-covered loans, net of unearned income

    3.30 %   3.35 %   1.72 %   1.55 %   1.46 %

Allowance for credit losses to non-covered nonaccrual loans

    110.8 %   51.8 %   108.4 %   271.6 %   276.9 %

Allowance for credit losses to non-covered nonperforming assets

    87.10 %   43.85 %   65.65 %   242.10 %   276.90 %

(1)
Applies only to non-covered loans.

        The following table presents the changes in our allowance for loan losses for the years indicated:

 
  Year Ended December 31,  
 
  2010   2009   2008   2007   2006  
 
  (Dollars in thousands)
 

Allowance for loan losses, beginning of year

  $ 118,717   $ 63,519   $ 52,557   $ 52,908   $ 27,303  
 

Loans charged off:

                               
 

Domestic:

                               
   

Real estate mortgage

    (117,029 )   (46,047 )   (2,617 )   (454 )    
   

Real estate construction

    (63,590 )   (28,542 )   (24,998 )   (660 )   (144 )
   

Commercial

    (18,548 )   (11,982 )   (7,664 )   (2,091 )   (1,083 )
   

Consumer

    (3,749 )   (1,180 )   (3,947 )   (166 )   (189 )
 

Foreign

    (306 )   (368 )   (349 )   (1,414 )   (1,691 )
                       
   

Total loans charged off(1)

    (203,222 )   (88,119 )   (39,575 )   (4,785 )   (3,107 )
                       
 

Recoveries on loans charged off:

                               
 

Domestic:

                               
   

Real estate mortgage

    1,222     503     412     163      
   

Real estate construction

    708     461     88          
   

Commercial

    1,652     548     971     1,591     1,361  
   

Consumer

    565     151     47     122     171  
 

Foreign

    133     44     19     73     187  
                       
   

Total recoveries on loans charged off

    4,280     1,707     1,537     1,949     1,719  
                       
 

Net loans charged off

    (198,942 )   (86,412 )   (38,038 )   (2,836 )   (1,388 )
 

Provision for loan losses

    178,878     141,610     49,000     2,800     7,977  
 

Reduction for loans sold

                (2,461 )    
 

Additions due to acquisitions

                2,146     19,016  
                       

Allowance for loan losses, end of year

  $ 98,653   $ 118,717   $ 63,519   $ 52,557   $ 52,908  
                       

Allowance for loan losses as a percentage of non-covered loans, net of unearned income

    3.12 %   3.20 %   1.59 %   1.33 %   1.26 %

(1)
2010 includes $144.6 million of charge-offs related to the sales of $398.5 million in non-covered classified loans. The charge-offs were composed of $85.7 million for real estate mortgage loans, $55.1 million for real estate construction loans, and $3.8 million for commercial loans. 2008 includes $16.2 million of charge-offs related to the sale of $34.1 million in nonaccrual residential construction loans.

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Table of Contents

        The following table presents the changes in our reserve for unfunded loan commitments for the years indicated:

 
  Year Ended December 31,  
 
  2010   2009   2008   2007   2006  
 
  (In thousands)
 

Reserve for unfunded loan commitments, beginning of year

  $ 5,561   $ 5,271   $ 8,471   $ 8,271   $ 5,668  
 

Provision

    114     290     (3,200 )   200     1,623  
 

Additions due to acquisitions

                    980  
                       

Reserve for unfunded loan commitments, end of year

  $ 5,675   $ 5,561   $ 5,271   $ 8,471   $ 8,271  
                       

        The following table allocates the allowance for loan losses based on our judgment of inherent losses in the respective loan portfolio categories. At December 31, 2010, the portion of the allowance allocated to individual portfolio categories includes an amount for both imprecision and uncertainty to better reflect our view of risk. Nonetheless, the allowance for loan losses is available to absorb any losses without restriction.

 
  Allocation of Allowance for Loan Losses  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Consumer   Foreign   Total  
 
  (Dollars in thousands)
 

December 31, 2010(1)

                                     
 

Allowance for loan losses

  $ 51,657   $ 8,766   $ 33,229   $ 4,652   $ 349   $ 98,653  
 

% of loans to total loans

    72 %   5 %   21 %   1 %   1 %   100 %

December 31, 2009

                                     
 

Allowance for loan losses

  $ 58,241   $ 39,934   $ 17,710   $ 2,021   $ 811   $ 118,717  
 

% of loans to total loans

    65 %   12 %   21 %   1 %   1 %   100 %

December 31, 2008

                                     
 

Allowance for loan losses

  $ 21,732   $ 22,166   $ 16,868   $ 1,672   $ 1,081   $ 63,519  
 

% of loans to total loans

    62 %   15 %   21 %   1 %   1 %   100