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



FORM 10-Q


ý

 

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

For the quarterly period ended March 31, 2011

OR

o

 

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

For the transition period from                                    to                                   

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 Number)

10250 Constellation Blvd., Suite 1640

 

 
Los Angeles, California   90067
(Address of principal executive offices)   (Zip Code)

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



        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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions 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 in Rule 12b-2 of the Exchange Act). Yes o    No ý

        As of May 4, 2011, there were 35,461,802 shares of the registrant's common stock outstanding, excluding 1,756,104 shares of unvested restricted stock.


Table of Contents

PACWEST BANCORP AND SUBSIDIARIES

MARCH 31, 2011 FORM 10-Q

TABLE OF CONTENTS

 
   
  Page  

PART I—FINANCIAL INFORMATION

    3  
 

ITEM 1.

 

Condensed Consolidated Financial Statements (Unaudited)

    3  

 

Condensed Consolidated Balance Sheets (Unaudited)

    3  

 

Condensed Consolidated Statements of Earnings (Loss) (Unaudited)

    4  

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

    5  

 

Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited)

    6  

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

    7  

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

    8  
 

ITEM 2.

 

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

    41  
 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    75  
 

ITEM 4.

 

Controls and Procedures

    75  

PART II—OTHER INFORMATION

   
75
 
 

ITEM 1.

 

Legal Proceedings

    75  
 

ITEM 1A.

 

Risk Factors

    75  
 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    76  
 

ITEM 6.

 

Exhibits

    76  

SIGNATURES

   
77
 

2


Table of Contents


PART I—FINANCIAL INFORMATION

ITEM 1.    Condensed Consolidated Financial Statements (Unaudited)

        


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Par Value Data)

(Unaudited)

 
  March 31,
2011
  December 31,
2010
 

ASSETS

             

Cash and due from banks

  $ 88,634   $ 82,170  

Interest-earning deposits in financial institutions

    104,925     26,382  
           
 

Total cash and cash equivalents

    193,559     108,552  
           

Securities available-for-sale, at fair value ($52,132 and $50,437 covered by FDIC loss share at March 31, 2011 and December 31, 2010, respectively)

    887,154     874,016  

Federal Home Loan Bank stock, at cost

    52,857     55,040  
           
 

Total investment securities

    940,011     929,056  
           

Non-covered loans, net of unearned income

    3,057,654     3,161,055  

Allowance for loan losses

    (98,564 )   (98,653 )
           
 

Total non-covered loans, net

    2,959,090     3,062,402  

Covered loans, net

    859,433     908,576  
           
 

Total loans

    3,818,523     3,970,978  
           

Other real estate owned ($42,117 and $55,816 covered by FDIC loss share at March 31, 2011

             
 

and December 31, 2010, respectively)

    90,484     81,414  

Premises and equipment, net

    22,343     22,578  

FDIC loss sharing asset

    116,081     116,352  

Cash surrender value of life insurance

    66,560     66,182  

Core deposit and customer relationship intangibles

    23,536     25,843  

Goodwill

    46,751     47,301  

Other assets

    152,669     160,765  
           
   

Total assets

  $ 5,470,517   $ 5,529,021  
           

LIABILITIES

             

Noninterest-bearing deposits

  $ 1,606,182   $ 1,465,562  

Interest-bearing deposits

    2,978,557     3,184,136  
           
 

Total deposits

    4,584,739     4,649,698  

Borrowings

    225,000     225,000  

Subordinated debentures

    129,498     129,572  

Accrued interest payable and other liabilities

    39,920     45,954  
           
   

Total liabilities

    4,979,157     5,050,224  
           

STOCKHOLDERS' EQUITY

             

Preferred stock, $0.01 par value; authorized 5,000,000 shares; none issued and outstanding

         

Common stock, $0.01 par value; authorized 75,000,000 shares; 37,438,009 shares issued at March 31, 2011 and 36,880,225 at December 31, 2010 (includes 1,756,437 and 1,230,582 shares of unvested restricted stock, respectively)

    374     369  

Additional paid-in capital

    1,086,810     1,085,364  

Accumulated deficit

    (596,366 )   (607,042 )

Treasury stock, at cost—219,962 and 207,796 shares at March 31, 2011 and December 31, 2010, respectively

    (4,111 )   (3,863 )

Accumulated other comprehensive income

    4,653     3,969  
           
   

Total stockholders' equity

    491,360     478,797  
           
   

Total liabilities and stockholders' equity

  $ 5,470,517   $ 5,529,021  
           

See "Notes to Condensed Consolidated Financial Statements."

3


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

 
  Three Months Ended  
 
  March 31,
2011
  December 31,
2010
  March 31,
2010
 

Interest income:

                   
 

Loans

  $ 66,781   $ 70,597   $ 63,745  
 

Investment securities

    7,819     7,222     5,121  
 

Deposits in financial institutions

    57     79     129  
               
   

Total interest income

    74,657     77,898     68,995  
               

Interest expense:

                   
 

Deposits

    5,956     6,028     6,889  
 

Borrowings

    1,744     2,113     2,668  
 

Subordinated debentures

    1,219     1,237     1,415  
               
   

Total interest expense

    8,919     9,378     10,972  
               
   

Net interest income

    65,738     68,520     58,023  
               

Provision for credit losses:

                   
 

Non-covered loans

    7,800     35,315     112,527  
 

Covered loans

    5,747     2,096     20,700  
               
   

Total provision for credit losses

    13,547     37,411     133,227  
               
   

Net interest income (loss) after provision for credit losses

    52,191     31,109     (75,204 )
               

Noninterest income:

                   
 

Service charges on deposit accounts

    3,558     3,305     2,729  
 

Other commissions and fees

    1,720     1,896     1,790  
 

Increase in cash surrender value of life insurance

    379     320     398  
 

FDIC loss sharing income (expense), net

    1,667     (1,277 )   16,172  
 

Other income

    302     404     180  
               
   

Total noninterest income

    7,626     4,648     21,269  
               

Noninterest expense:

                   
 

Compensation

    21,929     23,944     19,411  
 

Occupancy

    6,983     7,233     6,958  
 

Data processing

    2,475     2,556     1,969  
 

Other professional services

    2,296     1,833     1,998  
 

Business development

    569     570     667  
 

Communications

    859     919     804  
 

Insurance and assessments

    2,337     2,369     2,274  
 

Non-covered other real estate owned, net

    703     1,093     8,441  
 

Covered other real estate owned, net

    (2,578 )   699     2,169  
 

Intangible asset amortization

    2,307     2,360     2,424  
 

Other expense

    3,519     5,710     3,455  
               
   

Total noninterest expense

    41,399     49,286     50,570  
               

Earnings (loss) before income taxes

    18,418     (13,529 )   (104,505 )

Income tax (expense) benefit

    (7,742 )   5,841     43,972  
               
 

Net earnings (loss)

  $ 10,676   $ (7,688 ) $ (60,533 )
               

Earnings (loss) per share:

                   
 

Basic

  $ 0.29   $ (0.22 ) $ (1.76 )
 

Diluted

  $ 0.29   $ (0.22 ) $ (1.76 )

Dividends declared per share

  $ 0.01   $ 0.01   $ 0.01  

See "Notes to Condensed Consolidated Financial Statements."

4


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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

(Unaudited)

 
  Three Months Ended  
 
  March 31,
2011
  December 31,
2010
  March 31,
2010
 

Net earnings (loss)

  $ 10,676   $ (7,688 ) $ (60,533 )

Other comprehensive income (loss), net of related income taxes:

                   
 

Unrealized holding gains (losses) on securities available-for-sale arising during the period

    684     (7,441 )   1,225  
               

Comprehensive income (loss)

  $ 11,360   $ (15,129 ) $ (59,308 )
               

See "Notes to Condensed Consolidated Financial Statements."

5


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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in Thousands, Except Share Data)

(Unaudited)

 
  Common Stock    
   
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Income (Loss)
   
 
 
  Shares   Par
Value
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Treasury
Stock
  Total  

Balance, January 1, 2011

    36,672,429   $ 369   $ 1,085,364   $ (607,042 ) $ (3,863 ) $ 3,969   $ 478,797  
 

Net earnings

                10,676             10,676  
 

Tax effect from vesting of restricted stock

            (188 )               (188 )
 

Restricted stock awarded and earned stock compensation, net of shares forfeited

    557,784     5     1,995                 2,000  
 

Restricted stock surrendered

    (12,166 )               (248 )       (248 )
 

Cash dividends paid ($0.01 per share)

            (361 )               (361 )
 

Other comprehensive income—increase in net unrealized gain on securities available-for-sale, net of tax effect of $496 thousand

                        684     684  
                               

Balance, March 31, 2011

    37,218,047   $ 374   $ 1,086,810   $ (596,366 ) $ (4,111 ) $ 4,653   $ 491,360  
                               

See "Notes to Condensed Consolidated Financial Statements."

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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Three Months Ended
March 31,
 
 
  2011   2010  

Cash flows from operating activities:

             
 

Net earnings (loss)

  $ 10,676   $ (60,533 )
   

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

             
     

Depreciation and amortization

    4,482     2,317  
     

Provision for credit losses

    13,547     133,227  
     

Gain on sale of other real estate owned

    (3,944 )   (1,047 )
     

Provision for losses on other real estate owned

    1,272     10,458  
     

(Gain) loss on sale of premises and equipment

    (17 )   (4 )
     

Restricted stock amortization

    2,000     2,254  
     

Tax effect included in stockholders' equity of restricted stock vesting

    188     664  
     

Increase (decrease) in accrued and deferred income taxes, net

    7,741     (43,983 )
     

Decrease in FDIC loss sharing asset

    271     25,677  
     

Increase in other assets

    (117 )   (3,995 )
     

Decrease in accrued interest payable and other liabilities

    (6,983 )   (11,513 )
           
       

Net cash provided by operating activities

    29,116     53,522  
           

Cash flows from investing activities:

             
   

Net cash and cash equivalents acquired in acquisitions

    26      
   

Net decrease in net loans outstanding

    108,562     94,001  
   

Proceeds from sale of loans

    1,168     200,609  
   

Securities available-for-sale:

             
     

Proceeds from maturities and paydowns

    58,172     53,465  
     

Purchases

    (71,060 )   (66,856 )
   

Net redemptions of FHLB stock

    2,183      
   

Proceeds from sales of other real estate owned

    23,663     24,528  
   

Capitalized costs to complete other real estate owned

        (545 )
   

Purchases of premises and equipment, net

    (1,087 )   (850 )
   

Proceeds from sales of premises and equipment

    20     6  
           
     

Net cash provided by investing activities

    121,647     304,358  
           

Cash flows from financing activities:

             
   

Net increase (decrease) in deposits:

             
     

Noninterest-bearing

    140,620     85,672  
     

Interest-bearing

    (205,579 )   (26,004 )
   

Net proceeds from issuance of common stock

        26,587  
   

Restricted stock surrendered

    (248 )   (437 )
   

Tax effect included in stockholders' equity of restricted stock vesting

    (188 )   (664 )
   

Net decrease in borrowings

        (135,000 )
   

Cash dividends paid

    (361 )   (361 )
           
     

Net cash used in financing activities

    (65,756 )   (50,207 )
           

Net increase in cash and cash equivalents

    85,007     307,673  

Cash and cash equivalents, beginning of period

    108,552     211,048  
           

Cash and cash equivalents, end of period

  $ 193,559   $ 518,721  
           

Supplemental disclosures of cash flow information:

             
 

Cash paid for interest

  $ 9,322   $ 12,041  
 

Cash paid for income taxes

    (9 )    
 

Loans transferred to other real estate owned

    29,112     17,826  

See "Notes to Condensed Consolidated Financial Statements."

7


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

        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 a 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. Although our operations are primarily located in Southern California, we expanded our presence in California's Central Coast with the FDIC-assisted acquisition of Los Padres Bank on August 20, 2010. The Bank focuses on conducting business with small to medium-sized businesses in our marketplace and the owners and employees of those businesses. The majority of our loans are secured by the real estate collateral of such businesses. We acquired through FDIC-assisted acquisitions three banking offices in the San Francisco Bay area and one office in Arizona. Our asset-based lending function operates in Arizona, California, Texas, and the Pacific Northwest.

        We generate our revenue primarily from interest received on loans and, to a lesser extent, from interest received on investment securities, and fees received in connection with deposit services, extending credit and other services offered, including foreign exchange services. Our major operating expenses are the interest paid by the Bank on deposits and borrowings, compensation and general operating expenses. The Bank relies on a foundation of locally generated deposits. The Bank has a relatively low cost of funds due to a high percentage of noninterest-bearing and low cost deposits.

        We have completed 22 acquisitions since May 2000.

        The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles, which we may refer to as U.S. GAAP. All significant intercompany balances and transactions have been eliminated.

        Our financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The interim operating results are not necessarily indicative of operating results for the full year.

        Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowances for credit losses, the carrying value of other real estate

8


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION (Continued)

owned, the carrying value of intangible assets, the carrying value of the FDIC loss sharing asset and the realization of deferred tax assets.

        In August 2010, Pacific Western acquired assets and assumed liabilities of the former Los Padres Bank ("Los Padres") in an FDIC-assisted transaction, which we refer to as the Los Padres acquisition. The acquired assets and assumed liabilities were measured at their estimated fair values. Management made significant estimates and exercised significant judgment in estimating fair values and accounting for the acquisition of Los Padres.

        Certain prior period amounts have been reclassified to conform to the current year's presentation.

NOTE 2—GOODWILL AND OTHER INTANGIBLE ASSETS

        Goodwill arises from business combinations and represents the excess of the purchase price over the fair value of the net assets and other identifiable intangible assets acquired. Goodwill and other intangible assets deemed to have indefinite lives generated from purchase business combinations are not subject to amortization and are instead tested for impairment no less than annually. Impairment is determined in accordance with ASC 350, "Intangibles—Goodwill and Other" and is based on the reporting unit. Impairment exists when the carrying value of goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in noninterest expense in the consolidated statement of earnings (loss).

        Goodwill in the amount of $46.8 million was recorded in the Los Padres acquisition. Such 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 process of negotiating with the FDIC to resolve this matter. A successful resolution in any amount would result in goodwill being reduced by that amount. No assurance can be given, however, that we will be successful in our efforts.

        Our intangible assets with definite lives are core deposit intangibles, or CDI, and customer relationship intangibles, or CRI. These intangible assets are amortized over their useful lives to their estimated residual values and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits or loan customers acquired.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

        The following table presents the changes in CDI and CRI and the related accumulated amortization for the periods indicated:

 
  Three Months Ended  
 
  March 31,
2011
  December 31,
2010
  March 31,
2010
 
 
  (In thousands)
 

Gross amount of CDI and CRI:

                   
 

Balance, beginning of period

  $ 76,319   $ 78,338   $ 75,911  
 

Adjustment to Los Padres Bank CDI

        (238 )    
 

Fully amortized

        (1,781 )    
               
   

Balance, end of period

    76,319     76,319     75,911  
               

Accumulated amortization:

                   
 

Balance, beginning of period

    (50,476 )   (49,897 )   (42,615 )
 

Amortization

    (2,307 )   (2,360 )   (2,424 )
 

Fully amortized

        1,781      
               
   

Balance, end of period

    (52,783 )   (50,476 )   (45,039 )
               

Net CDI and CRI, end of period

  $ 23,536   $ 25,843   $ 30,872  
               

        The aggregate amortization expense related to the intangible assets is expected to be $8.4 million for 2011. The estimated aggregate amortization expense related to these intangible assets for each of the subsequent four years is $6.1 million for 2012, $4.5 million for 2013, $2.9 million for 2014, and $2.7 million for 2015.

NOTE 3—INVESTMENT SECURITIES

        The amortized cost, gross unrealized gains and losses and estimated fair values of securities available-for-sale are presented in the tables below as of the dates indicated. The private label collateralized mortgage obligations were acquired in the FDIC-assisted acquisition of Affinity Bank ("Affinity") in August 2009 and are covered by a FDIC loss sharing agreement. Other securities include

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—INVESTMENT SECURITIES (Continued)

an investment in overnight money market funds at a financial institution. See Note 9 for information on fair value measurements and methodology.

 
  March 31, 2011  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 
 
  (In thousands)
 

Municipal securities

  $ 7,435   $ 124   $ (1 ) $ 7,558  

Residental mortgage-backed securities:

                         
 

Government and government-sponsored entity pass through securities

    787,815     9,338     (8,816 )   788,337  
 

Government and government-sponsored entity collateralized mortgage obligations

    37,216     329     (705 )   36,840  
 

Covered private label collateralized mortgage obligations

    44,378     8,697     (943 )   52,132  

Other securities

    2,287             2,287  
                   
   

Total securities available-for-sale

  $ 879,131   $ 18,488   $ (10,465 ) $ 887,154  
                   

 

 
  December 31, 2010  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 
 
   
  (In thousands)
   
 

Government-sponsored entity debt securities

  $ 10,014   $ 15   $   $ 10,029  

Municipal securities

    7,437     129         7,566  

Residental mortgage-backed securities:

                         
 

Government and government-sponsored entity pass through securities

    754,149     9,282     (7,366 )   756,065  
 

Government and government-sponsored entity collateralized mortgage obligations

    47,416     565     (352 )   47,629  
 

Covered private label collateralized mortgage obligations

    45,867     6,653     (2,083 )   50,437  

Other securities

    2,290             2,290  
                   
   

Total securities available-for-sale

  $ 867,173   $ 16,644   $ (9,801 ) $ 874,016  
                   

        Mortgage-backed securities have contractual terms to maturity and require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—INVESTMENT SECURITIES (Continued)

        The following table presents the contractual maturity distribution of our available-for-sale securities portfolio based on amortized cost and fair value as of the date indicated:

 
  March 31, 2011  
 
  Amortized
Cost
  Estimated
Fair
Value
 
 
  (In thousands)
 

Due in one year or less

  $ 4,723   $ 4,744  

Due after one year through five years

    10,160     10,600  

Due after five years through ten years

    44,219     45,384  

Due after ten years

    820,029     826,426  
           
 

Total securities available-for-sale

  $ 879,131   $ 887,154  
           

        At March 31, 2011, the estimated fair value of debt securities and residential mortgage-backed debt securities issued by the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") was approximately $740.4 million. We do not own any equity securities issued by Fannie Mae or Freddie Mac.

        As of March 31, 2011, securities available-for-sale with an estimated fair value of $97.4 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

        The following table presents the estimated fair values and the gross unrealized losses on securities by length of time the securities have been in an unrealized loss position at the dates indicated:

 
  March 31, 2011  
 
  Less Than 12 Months   12 months or Longer   Total  
 
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
 
 
  (In thousands)
 

Municipal securities

  $ 684   $ (1 ) $   $   $ 684   $ (1 )

Residential mortgage-backed securities:

                                     
 

Government and government-sponsored entity pass through securities

    331,455     (8,816 )           331,455     (8,816 )
 

Government and government-sponsored entity collateralized mortgage obligations

    15,516     (519 )   1,412     (186 )   16,928     (705 )
 

Covered private label collateralized mortgage obligations

    1,666     (51 )   4,913     (892 )   6,579     (943 )
                           
   

Total

  $ 349,321   $ (9,387 ) $ 6,325   $ (1,078 ) $ 355,646   $ (10,465 )
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—INVESTMENT SECURITIES (Continued)

 

 
  December 31, 2010  
 
  Less Than 12 Months   12 months or Longer   Total  
 
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                                     
 

Government and government-sponsored entity pass through securities

  $ 321,537   $ (7,366 ) $   $   $ 321,537   $ (7,366 )
 

Government and government-sponsored entity collateralized mortgage obligations

    15,690     (327 )   1,553     (25 )   17,243     (352 )
 

Covered private label collateralized mortgage obligations

    1,579     (472 )   4,980     (1,611 )   6,559     (2,083 )
                           
   

Total

  $ 338,806   $ (8,165 ) $ 6,533   $ (1,636 ) $ 345,339   $ (9,801 )
                           

        We reviewed the securities that were in a continuous loss position less than 12 months and longer than 12 months at March 31, 2011, and concluded that their losses were a result of the level of market interest rates relative to the types of securities and not a result of the underlying issuers' abilities to repay. Accordingly, we determined that the securities were temporarily impaired. Additionally, we have no plans to sell these securities and believe that it is more likely than not we would not be required to sell these securities before recovery of their amortized cost. Therefore, we did not recognize the temporary impairment in the consolidated statements of earnings (loss).

        At March 31, 2011, the Company had a $52.9 million investment in Federal Home Loan Bank of San Francisco (FHLB) stock carried at cost. In January 2009, the FHLB announced that it suspended excess FHLB stock redemptions and dividend payments. Since this announcement, the FHLB has declared and paid cash dividends in 2010 and 2011, though at rates less than that paid in the past, and repurchased certain amounts of our excess stock. We evaluated the carrying value of our FHLB stock investment at March 31, 2011 and determined that it was not impaired. Our evaluation considered the long-term nature of the investment, the liquidity position of the FHLB, the actions being taken by the FHLB to address its regulatory situation, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

NOTE 4—LOANS

        When we refer to non-covered loans we are referring to loans not covered by our FDIC loss sharing agreements.

13


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

        The following table presents the composition of non-covered loans as of the dates indicated:

Loan Category
  March 31,
2011
  December 31,
2010
 
 
  (In thousands)
 

Real estate mortgage

  $ 2,172,923   $ 2,274,733  

Commercial

    667,401     663,557  

Real estate construction

    176,758     179,479  

Consumer

    21,815     25,058  

Foreign

    23,296     22,608  
           
 

Total gross non-covered loans

    3,062,193     3,165,435  

Less:

             
 

Unearned income

    (4,539 )   (4,380 )
 

Allowance for loan losses

    (98,564 )   (98,653 )
           
   

Total net non-covered loans

  $ 2,959,090   $ 3,062,402  
           

        The following table presents a summary of the activity in the allowance for credit losses on non-covered loans for the periods indicated:

 
  Components    
 
 
  Total
Allowance
for
Credit
Losses
 
 
  Allowance
for
Loan
Losses
  Reserve for
Unfunded
Loan
Commitments
 
 
  (In thousands)
 

Balance, January 1, 2011

  $ 98,653   $ 5,675   $ 104,328  
 

Loans charged-off

    (9,138 )       (9,138 )
 

Recoveries on loans charged-off

    1,249         1,249  
 

Provision

    7,800         7,800  
               

Balance, March 31, 2011

  $ 98,564   $ 5,675   $ 104,239  
               

 

 
  Components    
 
 
  Total
Allowance
for
Credit
Losses
 
 
  Allowance
for
Loan
Losses
  Reserve for
Unfunded
Loan
Commitments
 
 
  (In thousands)
 

Balance, January 1, 2010

  $ 118,717   $ 5,561   $ 124,278  
 

Loans charged-off

    (203,222 )       (203,222 )
 

Recoveries on loans charged-off

    4,280         4,280  
 

Provision

    178,878     114     178,992  
               

Balance, December 31, 2010

  $ 98,653   $ 5,675   $ 104,328  
               

14


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

        The following tables present a summary of the activity in the allowance for loan losses on non-covered loans by portfolio segment for the periods indicated:

 
  Three Months Ended March 31, 2011  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Consumer   Foreign   Total  
 
  (In thousands)
 

Allowance for Loan Losses on Non-Covered Loans:

                                     

Beginning balance

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

Charge-offs

    (1,212 )   (4,645 )   (3,121 )   (160 )       (9,138 )
 

Recoveries

    97     92     617     411     32     1,249  
 

Provision (reversal)

    1,316     6,840     839     (1,448 )   253     7,800  
                           

Ending balance

  $ 51,858   $ 11,053   $ 31,564   $ 3,455   $ 634   $ 98,564  
                           

The ending balance of the allowance is composed of amounts applicable to loans:

                                     
 

Individually evaluated for impairment

  $ 4,913   $ 3,113   $ 9,524   $ 1,049   $   $ 18,599  
                           
 

Collectively evaluated for impairment

  $ 46,945   $ 7,940   $ 22,040   $ 2,406   $ 634   $ 79,965  
                           

Non-Covered Loan Balances:

                                     

Ending balance

  $ 2,172,923   $ 176,758   $ 667,401   $ 21,815   $ 23,296   $ 3,062,193  
                           

The ending balance of the non-covered loan portfolio is composed of loans:

                                     
 

Individually evaluated for impairment

  $ 90,394   $ 32,757   $ 23,573   $ 1,794   $   $ 148,518  
                           
 

Collectively evaluated for impairment

  $ 2,082,529   $ 144,001   $ 643,828   $ 20,021   $ 23,296   $ 2,913,675  
                           

15


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

 

 
  Year Ended December 31, 2010  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Consumer   Foreign   Total  
 
  (In thousands)
 

Allowance for Loan Losses on Non-Covered Loans:

                                     

Beginning balance

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

Charge-offs

    (117,029 )   (63,590 )   (18,548 )   (3,749 )   (306 )   (203,222 )
 

Recoveries

    1,222     708     1,652     565     133     4,280  
 

Provision (reversal)

    109,223     31,714     32,415     5,815     (289 )   178,878  
                           

Ending balance

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

The ending balance of the allowance is composed of amounts applicable to loans:

                                     
 

Individually evaluated for impairment

  $ 3,893   $ 1,125   $ 8,911   $ 1,049   $   $ 14,978  
                           
 

Collectively evaluated for impairment

  $ 47,764   $ 7,641   $ 24,318   $ 3,603   $ 349   $ 83,675  
                           

Non-Covered Loan Balances:

                                     

Ending balance

  $ 2,274,733   $ 179,479   $ 663,557   $ 25,058   $ 22,608   $ 3,165,435  
                           

The ending balance of the non-covered loan portfolio is composed of loans:

                                     
 

Individually evaluated for impairment

  $ 94,171   $ 47,350   $ 39,820   $ 1,951   $ 163   $ 183,455  
                           
 

Collectively evaluated for impairment

  $ 2,180,562   $ 132,129   $ 623,737   $ 23,107   $ 22,445   $ 2,981,980  
                           

16


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

        The following tables present the credit risk rating categories for non-covered loans by portfolio segment and class as of the dates indicated. Nonclassified loans are those with a credit risk rating of either pass or special mention, while classified loans are those with a credit risk rating of either substandard or doubtful.

        Our federal and state banking regulators, as an integral part of their examination process, periodically review the Company's loan risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations. Risk rating downgrades generally result in higher provisions for credit losses.

 
  March 31, 2011  
 
  Nonclassified   Classified   Total  
 
  (In thousands)
 

Real estate mortgage:

                   
 

Hospitality

  $ 129,715   $ 20,213   $ 149,928  
 

SBA 504

    55,436     9,279     64,715  
 

Other

    1,860,361     97,919     1,958,280  
               
   

Total real estate mortgage

    2,045,512     127,411     2,172,923  
               

Real estate construction:

                   
 

Residential

    36,048     5,980     42,028  
 

Commercial

    106,187     28,543     134,730  
               
   

Total real estate construction

    142,235     34,523     176,758  
               

Commercial:

                   
 

Collateralized

    348,195     20,057     368,252  
 

Unsecured

    104,993     10,273     115,266  
 

Asset-based

    149,850     2,658     152,508  
 

SBA 7(a)

    21,185     10,190     31,375  
               
   

Total commercial

    624,223     43,178     667,401  
               

Consumer

    19,915     1,900     21,815  

Foreign

    23,296         23,296  
               
   

Total non-covered loans

  $ 2,855,181   $ 207,012   $ 3,062,193  
               

17


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

 

 
  December 31, 2010  
 
  Nonclassified   Classified   Total  
 
  (In thousands)
 

Real estate mortgage:

                   
 

Hospitality

  $ 137,952   $ 18,700   $ 156,652  
 

SBA 504

    55,774     13,513     69,287  
 

Other

    1,956,905     91,889     2,048,794  
               
   

Total real estate mortgage

    2,150,631     124,102     2,274,733  
               

Real estate construction:

                   
 

Residential

    39,644     25,399     65,043  
 

Commercial

    82,291     32,145     114,436  
               
   

Total real estate construction

    121,935     57,544     179,479  
               

Commercial:

                   
 

Collateralized

    342,607     15,820     358,427  
 

Unsecured

    119,326     10,417     129,743  
 

Asset-based

    141,813     1,354     143,167  
 

SBA 7(a)

    29,557     2,663     32,220  
               
   

Total commercial

    633,303     30,254     663,557  
               

Consumer

    22,949     2,109     25,058  

Foreign

    22,608         22,608  
               
   

Total non-covered loans

  $ 2,951,426   $ 214,009   $ 3,165,435  
               

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

        The following table presents an aging analysis of our non-covered loans by portfolio segment and class as of the date indicated:

 
  March 31, 2011  
 
  30-59 Days
Past Due
  60-89 Days
Past Due
  Greater
Than
90 Days
Past Due
  Total
Past Due
  Current   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     
 

Hospitality

  $ 865   $   $   $ 865   $ 149,063   $ 149,928  
 

SBA 504

    188         2,328     2,516     62,199     64,715  
 

Other

    4,111     677     17,129     21,917     1,936,363     1,958,280  
                           
   

Total real estate mortgage

    5,164     677     19,457     25,298     2,147,625     2,172,923  
                           

Real estate construction:

                                     
 

Residential

            3,966     3,966     38,062     42,028  
 

Commercial

    1,484         666     2,150     132,580     134,730  
                           
   

Total real estate construction

    1,484         4,632     6,116     170,642     176,758  
                           

Commercial:

                                     
 

Collateralized

    753     1,217     1,049     3,019     365,233     368,252  
 

Unsecured

    400         6,444     6,844     108,422     115,266  
 

Asset-based

                    152,508     152,508  
 

SBA 7(a)

    815     1,196     732     2,743     28,632     31,375  
                           
   

Total commercial

    1,968     2,413     8,225     12,606     654,795     667,401  
                           

Consumer

    327     32     1,048     1,407     20,408     21,815  

Foreign

                    23,296     23,296  
                           
   

Total non-covered loans

  $ 8,943   $ 3,122   $ 33,362   $ 45,427   $ 3,016,766   $ 3,062,193  
                           

19


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

 

 
  December 31, 2010  
 
  30-59 Days
Past Due
  60-89 Days
Past Due
  Greater
Than
90 Days
Past Due
  Total
Past Due
  Current   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     
 

Hospitality

  $   $   $   $   $ 156,652   $ 156,652  
 

SBA 504

    799     462     6,235     7,496     61,791     69,287  
 

Other

    426     2,566     13,936     16,928     2,031,866     2,048,794  
                           
   

Total real estate mortgage

    1,225     3,028     20,171     24,424     2,250,309     2,274,733  
                           

Real estate construction:

                                     
 

Residential

            24,004     24,004     41,039     65,043  
 

Commercial

        667     2,145     2,812     111,624     114,436  
                           
   

Total real estate construction

        667     26,149     26,816     152,663     179,479  
                           

Commercial:

                                     
 

Collateralized

    725     883     1,457     3,065     355,362     358,427  
 

Unsecured

        5,966     600     6,566     123,177     129,743  
 

Asset-based

                    143,167     143,167  
 

SBA 7(a)

    1,254     494     751     2,499     29,721     32,220  
                           
   

Total commercial

    1,979     7,343     2,808     12,130     651,427     663,557  
                           

Consumer

    407     1,048         1,455     23,603     25,058  

Foreign

            163     163     22,445     22,608  
                           
   

Total non-covered loans

  $ 3,611   $ 12,086   $ 49,291   $ 64,988   $ 3,100,447   $ 3,165,435  
                           

        At March 31, 2011 and December 31, 2010, the Company had no loans that were greater than 90 days past due and still accruing interest. It is the Company's policy to discontinue accruing interest when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectibility of a loan in the normal course of business. At March 31, 2011, nonaccrual loans totaled $76.8 million. Nonaccrual loans include $5.5 million of loans 30 to 89 days past due and $38.0 million of current loans which have been placed on nonaccrual status based on management's judgment regarding the collectibility of such loans. Nonaccrual loans totaled $94.2 million at December 31, 2010, of which $12.0 million were 30 to 89 days past due and $32.9 million were current.

20


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

        The following tables present our nonaccrual and performing non-covered loans by portfolio segment and class as of the dates indicated:

 
  March 31, 2011  
 
  Nonaccrual   Performing   Total  
 
  (In thousands)
 

Real estate mortgage:

                   
 

Hospitality

  $ 4,109   $ 145,819   $ 149,928  
 

SBA 504

    5,138     59,577     64,715  
 

Other

    31,596     1,926,684     1,958,280  
               
   

Total real estate mortgage

    40,843     2,132,080     2,172,923  
               

Real estate construction:

                   
 

Residential

    4,586     37,442     42,028  
 

Commercial

    8,620     126,110     134,730  
               
   

Total real estate construction

    13,206     163,552     176,758  
               

Commercial:

                   
 

Collateralized

    5,748     362,504     368,252  
 

Unsecured

    9,009     106,257     115,266  
 

Asset-based

    15     152,493     152,508  
 

SBA 7(a)

    6,234     25,141     31,375  
               
   

Total commercial

    21,006     646,395     667,401  
               

Consumer

    1,794     20,021     21,815  

Foreign

        23,296     23,296  
               
   

Total non-covered loans

  $ 76,849   $ 2,985,344   $ 3,062,193  
               

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

 

 
  December 31, 2010  
 
  Nonaccrual   Performing   Total  
 
  (In thousands)
 

Real estate mortgage:

                   
 

Hospitality

  $ 4,151   $ 152,501   $ 156,652  
 

SBA 504

    9,346     59,941     69,287  
 

Other

    27,452     2,021,342     2,048,794  
               
   

Total real estate mortgage

    40,949     2,233,784     2,274,733  
               

Real estate construction:

                   
 

Residential

    24,004     41,039     65,043  
 

Commercial

    5,238     109,198     114,436  
               
   

Total real estate construction

    29,242     150,237     179,479  
               

Commercial:

                   
 

Collateralized

    6,241     352,186     358,427  
 

Unsecured

    9,104     120,639     129,743  
 

Asset-based

    15     143,152     143,167  
 

SBA 7(a)

    6,518     25,702     32,220  
               
   

Total commercial

    21,878     641,679     663,557  
               

Consumer

    1,951     23,107     25,058  

Foreign

    163     22,445     22,608  
               
   

Total non-covered loans

  $ 94,183   $ 3,071,252   $ 3,165,435  
               

22


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

        The following tables present information regarding our non-covered impaired loans by portfolio segment and class as of the dates indicated:

 
  March 31, 2011  
 
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
 
 
  (In thousands)
 

With An Allowance Recorded:

                               

Real estate mortgage:

                               
 

Hospitality

  $ 17,776   $ 17,875   $ 901   $ 17,173   $ 198  
 

SBA 504

    5,138     6,387     156     5,138      
 

Other

    66,279     73,493     3,856     49,829     334  

Real estate construction:

                               
 

Residential

    5,980     7,941     243     5,980     (21 )
 

Other

    26,766     30,525     2,870     18,147     144  
                       
   

Total real estate

    121,939     136,221     8,026     96,267     655  
                       

Commercial:

                               
 

Collateralized

    5,849     7,651     1,602     5,196     21  
 

Unsecured

    9,390     15,406     7,661     9,331     6  
 

SBA 7(a)

    6,408     7,200     261     6,177     20  

Consumer

    1,357     2,418     1,049     1,356      
                       
 

Total other

    23,004     32,675     10,573     22,060     47  
                       

With No Related Allowance Recorded:

                               

Real estate mortgage:

                               
 

Hospitality

  $   $   $   $   $  
 

Other

    1,201     1,320         1,118     (4 )

Real estate construction:

                               
 

Residential

    11     12         11      
 

Other

                     
                       
   

Total real estate

    1,212     1,332         1,129     (4 )
                       

Commercial:

                               
 

Collateralized

    913     966         777     4  
 

Unsecured

    98     107         98      
 

Asset-based

    15     15         15      
 

SBA 7(a)

    900     1,583         828     (2 )

Consumer

    437     482         371      

Foreign

                     
                       
 

Total other

    2,363     3,153         2,089     2  
                       

Total:

                               
 

Real estate mortgage

  $ 90,394   $ 99,075   $ 4,913   $ 73,258   $ 528  
 

Real estate construction

    32,757     38,478     3,113     24,138     123  
 

Commercial

    23,573     32,928     9,524     22,422     49  
 

Consumer

    1,794     2,900     1,049     1,727      
 

Foreign

                     
                       
   

Total non-covered loans

  $ 148,518   $ 173,381   $ 18,599   $ 121,545   $ 700  
                       

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)


 
  December 31, 2010  
 
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
 

With An Allowance Recorded:

                   

Real estate mortgage:

                   
 

Hospitality

  $ 15,081   $ 15,138   $ 564  
 

SBA 504

    9,346     12,500     280  
 

Other

    67,923     74,884     3,049  

Real estate construction:

                   
 

Residential

    30,965     35,152     673  
 

Other

    16,213     18,130     452  
               
   

Total real estate

    139,528     155,804     5,018  
               

Commercial:

                   
 

Collateralized

    20,038     20,270     1,174  
 

Unsecured

    9,427     9,512     7,696  
 

SBA 7(a)

    4,081     4,786     41  

Consumer

    1,361     1,372     1,049  
               
 

Total other

    34,907     35,940     9,960  
               

With No Related Allowance Recorded:

                   

Real estate mortgage:

                   
 

Hospitality

  $ 667   $ 667   $  
 

Other

    1,154     1,650      

Real estate construction:

                   
 

Residential

    12     12      
 

Other

    160     174      
               
   

Total real estate

    1,993     2,503      
               

Commercial:

                   
 

Collateralized

    2,673     2,761      
 

Unsecured

    157     169      
 

Asset-based

    15     15      
 

SBA 7(a)

    3,429     4,576      

Consumer

    590     631      

Foreign

    163     238      
               
 

Total other

    7,027     8,390      
               

Total:

                   
 

Real estate mortgage

  $ 94,171   $ 104,839   $ 3,893  
 

Real estate construction

    47,350     53,468     1,125  
 

Commercial

    39,820     42,089     8,911  
 

Consumer

    1,951     2,003     1,049  
 

Foreign

    163     238      
               
   

Total non-covered loans

  $ 183,455   $ 202,637   $ 14,978  
               

24


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

        We refer to the loans acquired in the Los Padres and Affinity acquisitions subject to loss sharing agreements with the FDIC as "covered loans" as we will be reimbursed for a substantial portion of any future losses on them under the terms of the agreements.

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

Loan Category
  March 31,
2011
  December 31,
2010
 
 
  (In thousands)
 

Multi-family

  $ 299,832   $ 321,650  

Commercial real estate

    430,160     444,244  

Single family

    151,281     157,424  

Construction and land

    82,992     87,301  

Commercial and industrial

    24,583     34,828  

Home equity lines of credit

    5,811     5,916  

Consumer

    724     1,378  
           
 

Total gross covered loans

    995,383     1,052,741  

Less: discount

    (106,512 )   (110,901 )
           
 

Covered loans, net of discount

    888,871     941,840  

Less: allowance for loan losses

    (29,438 )   (33,264 )
           
 

Covered loans, net

  $ 859,433   $ 908,576  
           

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

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

Balance, January 1, 2011

  $ 879,486   $ (290,665 )
 

Accretion

    17,344     17,344  
 

Payments received

    (59,721 )    
 

Increase in expected cash flows

        (11,190 )
 

Provision for credit losses

    (5,747 )    
           

Balance, March 31, 2011

  $ 831,362   $ (284,511 )
           

        The table above excludes the covered loans from the Los Padres acquisition which are accounted for as non-impaired loans and total $28.1 million at March 31, 2011.

        The following table presents the credit risk rating categories for covered loans by portfolio segment as of the dates indicated. Nonclassified loans are those with a credit risk rating of either pass or special

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)


mention, while classified loans are those with a credit risk rating of either substandard or doubtful. It should be noted, however, that these loans are covered by loss sharing agreements with the FDIC.

 
  March 31, 2011  
 
  Nonclassified   Classified   Total  
 
  (In thousands)
 

Real estate mortgage

  $ 580,237   $ 185,833   $ 766,070  

Real estate construction

    19,393     46,998     66,391  

Commercial

    12,415     13,681     26,096  

Consumer

    340     536     876  
               
 

Total covered loans

  $ 612,385   $ 247,048   $ 859,433  
               

 

 
  December 31, 2010  
 
  Nonclassified   Classified   Total  
 
  (In thousands)
 

Real estate mortgage

  $ 622,837   $ 180,944   $ 803,781  

Real estate construction

    21,370     51,729     73,099  

Commercial

    14,630     16,219     30,849  

Consumer

    722     125     847  
               
 

Total covered loans

  $ 659,559   $ 249,017   $ 908,576  
               

        Our federal and state banking regulators, as an integral part of their examination process, periodically review the Company's loan risk rating classifications. Our regulators may require the Company to recognize rating downgrades based on their judgments related to information available to them at the time of their examinations.

NOTE 5—OTHER REAL ESTATE OWNED (OREO)

        The following tables summarize OREO by property type at the dates indicated:

 
  March 31, 2011  
Property Type
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Commercial real estate

  $ 18,674   $ 8,397   $ 27,071  

Construction and land development

    27,191     19,036     46,227  

Multi-family

        4,343     4,343  

Single family residence

    2,502     10,341     12,843  
               
 

Total OREO, net

  $ 48,367   $ 42,117   $ 90,484  
               

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—OTHER REAL ESTATE OWNED (OREO) (Continued)

 

 
  December 31, 2010  
Property Type
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Commercial real estate

  $ 18,205   $ 21,658   $ 39,863  

Construction and land development

    4,650     19,205     23,855  

Multi-family

        10,393     10,393  

Single family residence

    2,743     4,560     7,303  
               
 

Total OREO, net

  $ 25,598   $ 55,816   $ 81,414  
               

        The following table presents a rollforward of OREO, net of the valuation allowance, for the period indicated:

OREO Activity:
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Balance, January 1, 2011

  $ 25,598   $ 55,816   $ 81,414  
 

Foreclosures

    25,931     4,130     30,061  
 

Provision for losses

    (382 )   (890 )   (1,272 )
 

Reductions related to sales

    (2,780 )   (16,939 )   (19,719 )
               

Balance, March 31, 2011

  $ 48,367   $ 42,117   $ 90,484  
               

        The following table presents a rollforward of our OREO valuation allowance for the period indicated:

OREO Valuation Allowance Activity:
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Balance, January 1, 2011

  $ 13,831   $ 3,982   $ 17,813  
 

Provision for losses

    382     890     1,272  
 

Due from the SBA

    108         108  
 

Reductions due to sales

    (2,511 )   (1,080 )   (3,591 )
               

Balance, March 31, 2011

  $ 11,810   $ 3,792   $ 15,602  
               

        The following tables present the components of OREO expense (income), net for the periods indicated:

 
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Provision for losses

  $ 382   $ 890   $ 1,272  

Maintenance costs

    473     324     797  

(Gain) loss on sale

    (152 )   (3,792 )   (3,944 )
               
 

Total OREO expense (income), net

  $ 703   $ (2,578 ) $ (1,875 )
               

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—OTHER REAL ESTATE OWNED (OREO) (Continued)

 

 
  Three Months Ended
December 31, 2010
 
 
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Provision for losses

  $ 910   $ 1,973   $ 2,883  

Maintenance costs

    182     208     390  

(Gain) loss on sale

    1     (1,482 )   (1,481 )
               
 

Total OREO expense, net

  $ 1,093   $ 699   $ 1,792  
               

 

 
  Three Months Ended
March 31, 2010
 
 
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Provision for losses

  $ 8,312   $ 2,145   $ 10,457  

Maintenance costs

    1,075     125     1,200  

(Gain) loss on sale

    (946 )   (101 )   (1,047 )
               
 

Total OREO expense, net

  $ 8,441   $ 2,169   $ 10,610  
               

NOTE 6—FDIC LOSS SHARING ASSET

        The FDIC loss sharing asset was initially recorded at fair value, which represented the present value of the estimated cash payments from the FDIC for future losses on covered assets. The ultimate collectibility of this asset is dependent upon the performance of the underlying covered assets, the passage of time and claims paid by the FDIC. The following table presents the changes in the FDIC loss sharing asset for the period indicated:

 
  FDIC
Loss Sharing
Asset
 
 
  (In thousands)
 

Balance, January 1, 2011

  $ 116,352  
 

FDIC share of additional losses

    4,841  
 

FDIC share of recoveries

    (5,803 )
 

Net accretion

    251  
 

Reclassification to claims receivable

    (8,761 )
       
   

Subtotal

    106,880  
 

Filed claims receivable(1)

    9,201  
       

Balance, March 31, 2011

  $ 116,081  
       

(1)
Represents fourth quarter 2010 claim filed with the FDIC for losses on covered assets related to the Affinity acquisition. We received payment from the FDIC in April 2011.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 7—BORROWINGS, SUBORDINATED DEBENTURES AND BROKERED DEPOSITS

        The following table summarizes our FHLB advances by their maturity dates outstanding as of the date indicated:

 
  March 31, 2011    
 
Maturity Date
  Amount   Interest
Rate
  Next Date
Callable
by FHLB
 
 
  (In thousands)
   
   
 

December 11, 2017

  $ 200,000     3.16 %   June 11, 2011 (1)

January 11, 2018

    25,000     2.61 %   July 11, 2011 (1)
                   
 

Total FHLB advances

  $ 225,000     3.10 %      
                   

(1)
Callable quarterly thereafter by FHLB.

        The FHLB advances outstanding at March 31, 2011 are both term and callable advances. The maturities shown are the contractual maturities for the advances. The callable advances have all passed their initial call dates and are currently callable on a quarterly basis by the FHLB. While the FHLB may call the advances to be repaid for any reason, they are likely to be called if market interest rates, for borrowings of similar remaining term, are higher than the advances' stated rates on the call dates. We may repay the advances at any time with a prepayment penalty. Our aggregate remaining borrowing capacity under the FHLB secured lines of credit was $1.2 billion at March 31, 2011. As of March 31, 2011, approximately $3.0 billion of real estate and commercial loans and securities with a carrying value of $48.9 million were pledged to secure our FHLB advances. Additionally, the Bank had secured borrowing capacity from the Federal Reserve discount window of $380.3 million at March 31, 2011. The Bank also maintains unsecured lines of credit of $92.0 million with correspondent banks for the purchase of overnight funds; these lines are subject to availability of funds.

        The Company had an aggregate amount of $129.5 million in subordinated debentures outstanding at March 31, 2011. These subordinated debentures were issued in seven separate series. Each issuance had a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by us or entities we have acquired, which in turn issued trust preferred securities, which totaled $123.0 million at March 31, 2011. These trust preferred securities are considered Tier 1 capital for regulatory purposes.

        With the exception of Trust I and Trust CI, the subordinated debentures are callable at par, only by the issuer, five years from the date of issuance, subject to certain exceptions. We were permitted to call the debentures in the first five years if the prepayment election related to one of the following three events: (i) a change in the tax treatment of the debentures stemming from a change in the IRS laws; (ii) a change in the regulatory treatment of the underlying trust preferred securities as Tier 1 capital; and (iii) a requirement to register the underlying trust as a registered investment company. However, redemption in the first five years was subject to a prepayment penalty. Trust I and Trust CI may not be called for 10 years from the date of issuance unless one of the three events described above has occurred and then a prepayment penalty applies. In addition, there is a prepayment penalty if

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 7—BORROWINGS, SUBORDINATED DEBENTURES AND BROKERED DEPOSITS (Continued)


either of these debentures is called 10 to 20 years from the date of their issuance and they may be called at par after 20 years.

        The proceeds of the subordinated debentures we originated were used primarily to fund several of our acquisitions and to augment regulatory capital. Interest payments made by the Company on subordinated debentures are considered dividend payments by the Federal Reserve Bank, or FRB. As such, notification to the FRB is required prior to our intent to pay such interest during any period in which our cumulative net earnings for previous four quarters are not sufficient to fund the interest payments due for those periods and the current period. Should the FRB object to payment of interest on the subordinated debentures, we would not be able to make the payments until approval is received.

        The following table summarizes the terms of each issuance of the subordinated debentures outstanding as of March 31, 2011:

Series
  Date
Issued
  March 31,
2011
Amount
  Maturity
Date
  Earliest
Call Date
by Company
Without
Penalty
  Fixed
or
Variable
Rate
  Rate Index   Current
Rate(2)
  Next
Reset
Date
 
 
   
  (In thousands)
   
   
   
   
   
   
 

Trust CI

    3/23/00   $ 10,310     3/8/30     3/8/20   Fixed   N/A     11.00 %   N/A  

Trust I

    9/7/00     8,248     9/7/30     9/7/20   Fixed   N/A     10.60 %   N/A  

Trust V

    8/15/03     10,310     9/17/33       (1) Variable   3 month LIBOR + 3.10     3.41 %   6/15/11  

Trust VI

    9/3/03     10,310     9/15/33       (1) Variable   3 month LIBOR + 3.05     3.36 %   6/13/11  

Trust CII

    9/17/03     5,155     9/17/33       (1) Variable   3 month LIBOR + 2.95     3.26 %   6/15/11  

Trust VII

    2/5/04     61,856     4/23/34       (1) Variable   3 month LIBOR + 2.75     3.02 %   7/28/11  

Trust CIII

    8/15/05     20,619     9/15/35       (1) Variable   3 month LIBOR + 1.69     2.00 %   6/13/11  
                                             

Gross subordinated debentures

          126,808                                  

Unamortized premium(3)

          2,690                                  
                                             

Net subordinated debentures

        $ 129,498                                  
                                             

(1)
These debentures may be called without prepayment penalty.

(2)
As of April 28, 2011; excludes debt issuance costs.

(3)
This amount represents the fair value adjustment on trusts of acquired companies.

        As previously mentioned, the subordinated debentures were issued to trusts established by us, or entities we acquired, which in turn issued $123.0 million of trust preferred securities. These securities are 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, promulgated a modification of the capital regulations affecting trust preferred securities that was effective March 31, 2011. According to the modification, the Company was

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 7—BORROWINGS, SUBORDINATED DEBENTURES AND BROKERED DEPOSITS (Continued)


allowed to include in Tier 1 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 in effect through December 31, 2010 limited the amount of trust preferred securities that could be included in Tier I capital to 25% of the sum of core capital elements, without a deduction for permitted intangibles. As of March 31, 2011, all of the Company's capital ratios remained above the well-capitalized level after application of this regulatory change.

        Brokered deposits totaled $43.7 million at March 31, 2011 and are included in the interest-bearing deposits balance on the accompanying condensed consolidated balance sheets. Such amount represented customer deposits that were subsequently participated with other FDIC-insured financial institutions through the CDARS program as a means to provide FDIC deposit insurance coverage for the full amount of our customers' deposits.

NOTE 8—COMMITMENTS AND CONTINGENCES

        The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

        Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to extend credit totaled $690.0 million and $723.1 million at March 31, 2011 and December 31, 2010, respectively.

        Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most guarantees expire within one year from the date of issuance. The Company generally requires collateral or other security to support financial instruments with credit risk. Standby letters of credit totaled $26.9 million and $23.7 million at March 31, 2011 and December 31, 2010, respectively.

        The Company has investments in low income housing project partnerships which provide the Company income tax credits, and in several small business investment companies. As of March 31, 2011, the Company had commitments to contribute capital to these entities totaling $7.4 million.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 8—COMMITMENTS AND CONTINGENCES (Continued)

        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.

NOTE 9—FAIR VALUE MEASUREMENTS

        ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

        We use fair value to measure certain assets on a recurring basis, primarily securities available-for-sale; we have no liabilities being measured at fair value. For assets and liabilities measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered "nonrecurring" for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain assets, such as goodwill, core deposit intangibles and other long-lived assets.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The following tables present information on the assets measured and recorded at fair value on a recurring and nonrecurring basis as of the date indicated:

 
  Fair Value Measurement as of March 31, 2011  
 
  Total   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
 
  (In thousands)
 

Measured on a Recurring Basis:

                         

Securities available-for-sale:

                         
 

Municipal securities

  $ 7,558   $   $ 7,558   $  
 

Government and government-sponsored entity residential mortgage-backed securities

    825,177         825,177      
 

Covered private label CMOs

    52,132             52,132  
 

Other securities

    2,287         2,287      
                   

  $ 887,154   $   $ 835,022   $ 52,132  
                   

Measured on a Nonrecurring Basis:

                         
 

Non-covered impaired loans

  $ 99,644   $   $ 9,043   $ 90,601  
 

Non-covered other real estate owned

    1,801         198     1,603  
 

Covered other real estate owned

    5,184         3,878     1,306  
 

SBA loan servicing asset

    1,432             1,432  
                   

  $ 108,061   $   $ 13,119   $ 94,942  
                   

        There were no significant transfers of assets between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2011.

        The following table presents gains and (losses) on assets measured on a nonrecurring basis for the period indicated:

 
  Three Months
Ended
March 31,
2011
 
 
  (In thousands)
 

Non-covered impaired loans

  $ (10,694 )

Non-covered other real estate owned

    (382 )

Covered other real estate owned

    (777 )

SBA loan servicing asset

    (70 )
       
 

Total gain (loss) on assets measured on a nonrecurring basis

  $ (11,923 )
       

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The following table summarizes activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period indicated:

 
  Covered Private Label CMOs (Level 3)  
 
  (In thousands)
 

Beginning as of January 1, 2011

  $ 50,437  
 

Total realized in earnings

    610  
 

Total unrealized in comprehensive income

    3,185  
 

Net settlements subsequent to acquisition

    (2,100 )
       

Balance as of March 31, 2011

  $ 52,132  
       

        ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements. The following table is a summary of the carrying values and estimated fair values of certain financial instruments as of the dates indicated:

 
  March 31, 2011   December 31, 2010  
 
  Carrying or
Contract
Amount
  Estimated
Fair
Value
  Carrying or
Contract
Amount
  Estimated
Fair
Value
 
 
  (In thousands)
 

Financial Assets:

                         
 

Cash and due from banks

  $ 88,634   $ 88,634   $ 82,170   $ 82,170  
 

Interest-earning deposits in financial institutions

    104,925     104,925     26,382     26,382  
 

Securities available-for-sale

    887,154     887,154     874,016     874,016  
 

Investment in FHLB stock

    52,857     52,857     55,040     55,040  
 

Loans, net

    3,818,523     3,806,968     3,970,978     3,960,244  

Financial Liabilities:

                         
 

Deposits

    4,584,739     4,594,751     4,649,698     4,664,575  
 

Borrowings

    225,000     241,838     225,000     243,273  
 

Subordinated debentures

    129,498     134,782     129,572     135,876  

        The following is a description of the valuation methodologies used to measure our assets recorded at fair value (under ASC Topic 820) and for estimating fair value for financial instruments not recorded at fair value (under ASC Topic 825).

        Cash and due from banks.    The carrying amount is assumed to be the fair value because of the liquidity of these instruments.

        Interest-earning deposits in financial institutions.    The carrying amount is assumed to be the fair value given the short-term nature of these deposits.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        Securities available-for-sale.    Securities available-for-sale are measured and carried at fair value on a recurring basis. Unrealized gains and losses on available-for-sale securities are reported as a component of accumulated other comprehensive income on the condensed consolidated balance sheets. See Note 4 for further information on unrealized gains and losses on securities available-for-sale.

        In determining the fair value of the securities categorized as Level 2, we obtain a report from a nationally recognized broker-dealer detailing the fair value of each investment security we hold as of each reporting date. The broker-dealer uses observable market information to value our fixed income securities, with the primary source being a nationally recognized pricing service. The fair value of the municipal securities is based on a proprietary model maintained by the broker-dealer. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the marketplace and we consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

        Our covered private label collateralized mortgage obligation securities, which we refer to as private label CMOs, are categorized as Level 3 due in part to the inactive market for such securities. There is a wide range of prices quoted for private label CMOs among independent third party pricing services and this range reflects the significant judgment being exercised over the assumptions and variables that determine the pricing of such securities. We consider this subjectivity to be a significant unobservable input and have concluded the private label CMOs should be categorized as a Level 3 measured asset. While the private label CMOs may be based on significant unobservable inputs, our fair value was based on prices provided to us by a nationally recognized pricing service which we also use to determine the fair value of the majority of our securities portfolio. We determined the reasonableness of the fair values by reviewing assumptions at the individual security level about prepayment, default expectations, estimated severity loss factors, projected cash flows and estimated collateral performance, all of which are not directly observable in the market.

        FHLB stock.    The fair value of FHLB stock is based on our recorded investment. In January 2009, the FHLB announced that it had suspended excess FHLB stock redemptions and dividend payments. Since this announcement, the FHLB has declared and paid cash dividends in 2010 and 2011, though at rates less than that paid in the past, and repurchased certain amounts of our excess stock. As a result of these actions, we evaluated the carrying value of our FHLB stock investment. Based on the FHLB's most recent publicly available financial results, its capital position and its bond ratings, we concluded such investment was not impaired at either March 31, 2011 or December 31, 2010.

        Non-covered loans.    As non-covered loans are not measured at fair value, the following discussion relates to estimating the fair value disclosures under ASC Topic 825. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type and further segmented into fixed and adjustable rate interest terms and by credit risk categories. The fair value estimates do not take into consideration the value of the loan portfolio in the event the loans are sold outside the parameters of normal operating activities. The fair value of performing fixed rate loans is estimated by discounting scheduled cash flows through the estimated maturity using estimated market prepayment speeds and estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. The estimated market discount rates used for performing fixed rate loans are the

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)


Company's current offering rates for comparable instruments with similar terms. The fair value of performing adjustable rate loans is estimated by discounting scheduled cash flows through the next repricing date. As these loans reprice frequently at market rates and the credit risk is not considered to be greater than normal, the market value is typically close to the carrying amount of these loans.

        Non-covered impaired loans.    Non-covered impaired loans are measured and recorded at fair value on a non-recurring basis. All of our non-covered nonaccrual loans and restructured loans are considered impaired and are reviewed individually for the amount of impairment, if any. To the extent a loan is collateral dependent we measure such impaired loan based on the estimated fair value of the underlying collateral. The fair value of each loan's collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The impaired loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, including an SBA government guarantee, cash flows discounted at the effective loan rate, and management's judgment. The loan balances shown in the above tables represent those nonaccrual and restructured loans for which impairment was recognized during the three months ended March 31, 2011. The amounts shown as losses represent, for the loan balances shown, the impairment recognized during the three months ended March 31, 2011. Of the $76.8 million of nonaccrual loans at March 31, 2011, loans totaling $7.6 million were written down to their fair values through charge-offs during the quarter. We recorded $1.3 million in losses on impaired loans for the three months ended March 31, 2011 for loans with a fair value of zero as of March 31, 2011. At March 31, 2011, the recorded investment in non-covered impaired loans with a related allowance was $144.9 million and the related allowance is $18.6 million.

        Other real estate owned.    The fair value of foreclosed real estate, both non-covered and covered, is generally based on estimated market prices from independently prepared current appraisals or negotiated sales prices with potential buyers, less estimated costs to sell; such valuation inputs result in a fair value measurement that is categorized as a Level 2 measurement on a nonrecurring basis. As a matter of policy, appraisals are required annually and may be updated more frequently as circumstances require in the opinion of management. With the deterioration of real estate values during this economic downturn, appraisals have been obtained more regularly and as a result our Level 2 measurement is based on appraisals that are generally less than nine months old. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement that is categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement. The OREO losses shown above are write-downs based on either a recent appraisal obtained after foreclosure or an accepted purchase offer by an independent third party received after foreclosure.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        SBA servicing asset.    In accordance with ASC Topic 860, Accounting for Servicing of Financial Assets, the SBA servicing asset, included in other assets in the condensed consolidated balance sheets, is carried at its implied fair value of $1.4 million. The fair value of the servicing asset is estimated by discounting future cash flows using market-based discount rates and prepayment speeds. The discount rate is based on the current US Treasury yield curve, as published by the Department of the Treasury, plus a spread for the marketplace risk associated with these assets. We utilize estimated prepayment vectors using SBA prepayment information provided by Bloomberg for pools of similar assets to determine the timing of the cash flows. These nonrecurring valuation inputs are considered to be Level 3 inputs.

        Deposits.    Deposits are carried at historical cost. The fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, savings and checking accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. No value has been separately assigned to the Company's long-term relationships with its deposit customers, such as a core deposit intangible.

        Borrowings.    Borrowings are carried at amortized cost. The fair value of fixed rate borrowings is calculated by discounting scheduled cash flows through the estimated maturity dates or call dates, if applicable, using estimated market discount rates that reflect current rates offered for borrowings with similar remaining maturities and characteristics.

        Subordinated debentures.    Subordinated debentures are carried at amortized cost. The fair value of the subordinated debentures is based on the discounted value of contractual cash flows for fixed rate securities. The discount rate is estimated using the rates currently offered for similar securities of similar maturity. The fair value of subordinated debentures with variable rates is deemed to be the carrying value.

        Commitments to extend credit and standby letters of credit.    The majority of our commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the borrower or us, they only have value to the borrower and us. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the table above because it is not material.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on what management believes to be conservative judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of March 31, 2011, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.

NOTE 10—NET EARNINGS (LOSS) PER SHARE

        The following is a summary of the calculation of basic and diluted net earnings (loss) per share for the periods indicated:

 
  Three Months Ended  
 
  March 31,
2011
  December 31,
2010
  March 31,
2010
 
 
  (In thousands, except per share data)
 

Basic Earnings (Loss) Per Share:

                   
 

Net earnings (loss)

  $ 10,676   $ (7,688 ) $ (60,533 )
 

Less: earnings allocated to unvested restricted stock(1)

    (386 )   (7 )   (8 )
               
     

Net earnings (loss) allocated to common shares

  $ 10,290   $ (7,695 ) $ (60,541 )
               
 

Weighted-average basic shares and unvested restricted stock outstanding

    36,801.7     36,686.7     35,607.8  
 

Less: weighted-average unvested restricted stock outstanding

    (1,347.6 )   (1,280.2 )   (1,245.7 )
               
     

Weighted-average basic shares outstanding

    35,454.1     35,406.5     34,362.1  
               
 

Basic earnings (loss) per share

  $ 0.29   $ (0.22 ) $ (1.76 )
               

Diluted Earnings (Loss) Per Share:

                   
 

Net earnings (loss) allocated to common shares

  $ 10,290   $ (7,695 ) $ (60,541 )
               
 

Weighted-average basic shares outstanding

    35,454.1     35,406.5     34,362.1  
 

Add: warrants outstanding

             
               
   

Weighted-average diluted shares outstanding

    35,454.1     35,406.5     34,362.1  
               
 

Diluted earnings (loss) per share

  $ 0.29   $ (0.22 ) $ (1.76 )
               

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 11—STOCK COMPENSATION PLANS

        At March 31, 2011, there were outstanding 906,437 shares of unvested time-based restricted common stock and 850,000 shares of unvested performance-based restricted common stock. The awarded shares of time-based restricted common stock vest over a service period of three to five years from date of the grant. The awarded shares of performance-based restricted common stock vest in full on the date the Compensation, Nominating and Governance, or CNG, Committee of the Board of Directors, as Administrator of the Company's 2003 Stock Incentive Plan, or the 2003 Plan, determines that the Company achieved certain financial goals established by the CNG Committee as set forth in the grant documents. Both time-based and performance-based restricted common stock vest immediately upon a change in control of the Company as defined in the 2003 Plan and upon death of the employee.

        In March 2011, the CNG awarded 350,000 shares of performance-based restricted common stock, which will expire on March 31, 2016 if the net earnings performance target is not met. Such restricted stock will vest upon a change in control, however, as defined in the 2003 Incentive Plan. We have determined that it is not probable at the present time that the net earnings performance target will be achieved. Accordingly, no expense is being recognized for these shares. If and when it becomes probable that the net earnings target will be achieved, a catch-up adjustment will be recorded and amortization will begin. The unearned compensation expense related to these shares is $7.2 million.

        Compensation expense related to awards of restricted stock is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using the straight-line method. The vesting of performance-based restricted stock awards and recognition of related compensation expense may occur over a shorter vesting period if financial performance targets are achieved earlier than anticipated. In 2007, the amortization of certain performance-based restricted stock awards was suspended. In 2008 we concluded it was improbable that the financial targets would be met for the performance-based stock awards and we reversed the accumulated amortization on those awards. 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 all performance-based restricted stock for which amortization was suspended or never started totaled $33.8 million at March 31, 2011. The unvested performance-based restricted stock awarded in 2006 expires in 2013. The unvested performance-based restricted stock awarded in 2007 and 2008 expires in 2017. The unvested performance-based restricted stock awarded in 2011 expires in 2016. Restricted stock amortization totaled $2.0 million, $1.9 million and $2.3 million for the three months ended March 31, 2011, December 31, 2010, and March 31, 2010, respectively. Such amounts are included in compensation expense on the accompanying condensed consolidated statements of earnings (loss).

        The Company's 2003 Plan permits stock based compensation awards to officers, directors, key employees and consultants. The 2003 Plan authorizes grants of stock-based compensation instruments to purchase or issue up to 5,000,000 shares of authorized but unissued Company common stock, subject to adjustments provided by the 2003 Plan. As of March 31, 2011, there were 618,643 shares available for grant under the 2003 Plan.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS

        In January 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-01, "Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20." ASU 2011-01 temporarily deferred the effective date for disclosures related to troubled debt restructurings in paragraphs 310-10-50-31 through 50-34 of ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses," to be concurrent with the effective date of proposed guidance to be issued at a later date in identifying a troubled debt restructuring. This guidance was issued by the FASB in April 2011 as ASU 2011-02, "A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring." ASU 2011-02 clarifies the guidance in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a debt restructuring constitutes a troubled debt restructuring. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The troubled debt restructuring disclosure information required by paragraphs 310-10-50-33 through 50-34 of ASU 2010-20 is effective for the interim and annual period beginning on or after June 15, 2011. We have not as yet determined what effect, if any, adoption of this standard will have on our financial statements and related disclosures.

NOTE 13—SUBSEQUENT EVENTS

        We have evaluated events that have occurred subsequent to March 31, 2011 and have concluded there are no subsequent events that would require recognition or disclosure in the accompanying condensed consolidated financial statements.

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ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

        This Quarterly Report on Form 10-Q contains certain forward-looking information about the Company and its subsidiaries, 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: