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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 June 30, 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

(Address of principal executive offices)

 

90067
(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 August 1, 2011, there were 35,480,603 shares of the registrant's common stock outstanding, excluding 1,770,420 shares of unvested restricted stock.


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

JUNE 30, 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

  40
 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  76
 

ITEM 4.

 

Controls and Procedures

  76

PART II—OTHER INFORMATION

 
76
 

ITEM 1.

 

Legal Proceedings

  76
 

ITEM 1A.

 

Risk Factors

  76
 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  77
 

ITEM 6.

 

Exhibits

  77

SIGNATURES

 
78

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)

 
  June 30,
2011
  December 31,
2010
 

ASSETS

             

Cash and due from banks

  $ 91,405   $ 82,170  

Interest-earning deposits in financial institutions

    59,100     26,382  
           
 

Total cash and cash equivalents

    150,505     108,552  
           

Securities available-for-sale, at fair value ($49,501 and $50,437 covered by FDIC loss share at June 30, 2011 and December 31, 2010, respectively)

    1,057,992     874,016  

Federal Home Loan Bank stock, at cost

    50,591     55,040  
           
 

Total investment securities

    1,108,583     929,056  
           

Non-covered loans, net of unearned income

    2,913,136     3,161,055  

Allowance for loan losses

    (96,427 )   (98,653 )
           
 

Total non-covered loans, net

    2,816,709     3,062,402  

Covered loans, net

    805,952     908,576  
           
 

Total loans

    3,622,661     3,970,978  
           

Other real estate owned, net ($40,949 and $55,816 covered by FDIC loss share at June 30, 2011 and December 31, 2010, respectively)

    93,143     81,414  

Premises and equipment, net

    23,295     22,578  

FDIC loss sharing asset

    110,516     116,352  

Cash surrender value of life insurance

    66,645     66,182  

Core deposit and customer relationship intangibles

    21,228     25,843  

Goodwill

    39,141     47,301  

Other assets

    159,008     160,765  
           
   

Total assets

  $ 5,394,725   $ 5,529,021  
           

LIABILITIES

             

Noninterest-bearing deposits

  $ 1,599,410   $ 1,465,562  

Interest-bearing deposits

    2,887,085     3,184,136  
           
 

Total deposits

    4,486,495     4,649,698  

Borrowings

    225,000     225,000  

Subordinated debentures

    129,423     129,572  

Accrued interest payable and other liabilities

    41,843     45,954  
           
   

Total liabilities

    4,882,761     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; 37,473,861 shares issued at June 30, 2011 and 36,880,225 at December 31, 2010 (includes 1,770,664 and 1,230,582 shares of unvested restricted stock, respectively)

    375     369  

Additional paid-in capital

    1,088,841     1,085,364  

Accumulated deficit

    (583,525 )   (607,042 )

Treasury stock, at cost—222,594 and 207,796 shares at June 30, 2011 and December 31, 2010, respectively

    (4,165 )   (3,863 )

Accumulated other comprehensive income

    10,438     3,969  
           
   

Total stockholders' equity

    511,964     478,797  
           
   

Total liabilities and stockholders' equity

  $ 5,394,725   $ 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   Six Months Ended
June 30,
 
 
  June 30,
2011
  March 31,
2011
  June 30,
2010
 
 
  2011   2010  

Interest income:

                               
 

Loans

  $ 68,331   $ 66,781   $ 62,314   $ 135,112   $ 126,059  
 

Investment securities

    8,782     7,819     5,702     16,601     10,823  
 

Deposits in financial institutions

    83     57     245     140     374  
                       
   

Total interest income

    77,196     74,657     68,261     151,853     137,256  
                       

Interest expense:

                               
 

Deposits

    5,518     5,956     6,945     11,474     13,834  
 

Borrowings

    1,763     1,744     2,216     3,507     4,884  
 

Subordinated debentures

    1,226     1,219     1,483     2,445     2,898  
                       
   

Total interest expense

    8,507     8,919     10,644     17,426     21,616  
                       
   

Net interest income

    68,689     65,738     57,617     134,427     115,640  
                       

Provision for credit losses:

                               
 

Non-covered loans

    5,500     7,800     14,100     13,300     126,627  
 

Covered loans

    5,890     2,910     7,825     8,800     28,100  
                       
   

Total provision for credit losses

    11,390     10,710     21,925     22,100     154,727  
                       
   

Net interest income (loss) after provision for credit losses

    57,299     55,028     35,692     112,327     (39,087 )
                       

Noninterest income:

                               
 

Service charges on deposit accounts

    3,400     3,558     2,666     6,958     5,395  
 

Other commissions and fees

    1,980     1,720     1,845     3,700     3,635  
 

Increase in cash surrender value of life insurance

    368     379     369     747     767  
 

FDIC loss sharing income (expense), net

    5,316     (1,170 )   6,004     4,146     21,751  
 

Other income

    176     302     173     478     353  
                       
   

Total noninterest income

    11,240     4,789     11,057     16,029     31,901  
                       

Noninterest expense:

                               
 

Compensation

    21,717     21,929     21,068     43,646     40,479  
 

Occupancy

    7,142     6,983     6,576     14,125     13,534  
 

Data processing

    2,129     2,475     1,892     4,604     3,861  
 

Other professional services

    2,505     2,296     2,042     4,801     4,040  
 

Business development

    595     569     655     1,164     1,322  
 

Communications

    834     859     795     1,693     1,599  
 

Insurance and assessments

    1,603     2,337     2,611     3,940     4,885  
 

Non-covered other real estate owned, net

    2,300     703     625     3,003     9,066  
 

Covered other real estate owned expense (income), net

    1,205     (2,578 )   (89 )   (1,373 )   2,080  
 

Intangible asset amortization

    2,308     2,307     2,424     4,615     4,848  
 

Other expense

    4,200     3,519     4,174     7,719     7,629  
                       
   

Total noninterest expense

    46,538     41,399     42,773     87,937     93,343  
                       

Earnings (loss) before income taxes

    22,001     18,418     3,976     40,419     (100,529 )

Income tax (expense) benefit

    (9,160 )   (7,742 )   (1,271 )   (16,902 )   42,701  
                       
 

Net earnings (loss)

  $ 12,841   $ 10,676   $ 2,705   $ 23,517   $ (57,828 )
                       

Earnings (loss) per share:

                               
 

Basic

  $ 0.35   $ 0.29   $ 0.07   $ 0.64   $ (1.66 )
 

Diluted

  $ 0.35   $ 0.29   $ 0.07   $ 0.64   $ (1.66 )

Dividends declared per share

  $ 0.01   $ 0.01   $ 0.01   $ 0.02   $ 0.02  

See "Notes to Condensed Consolidated Financial Statements."

4


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

(Unaudited)

 
  Three Months Ended   Six Months Ended
June 30,
 
 
  June 30,
2011
  March 31,
2011
  June 30,
2010
 
 
  2011   2010  

Net earnings (loss)

  $ 12,841   $ 10,676   $ 2,705   $ 23,517   $ (57,828 )

Other comprehensive income, net of related income taxes:

                               
 

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

    5,785     684     7,420     6,469     8,645  
                       

Comprehensive income (loss)

  $ 18,626   $ 11,360   $ 10,125   $ 29,986   $ (49,183 )
                       

See "Notes to Condensed Consolidated Financial Statements."

5


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in Thousands, Except Share Data)

(Unaudited)

 
  Six Months Ended June 30, 2011  
 
  Common Stock    
   
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Income
   
 
 
  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

                23,517             23,517  
 

Tax effect from vesting of restricted stock

            (183 )               (183 )
 

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

    593,636     6     4,386                 4,392  
 

Restricted stock surrendered

    (14,798 )               (302 )       (302 )
 

Cash dividends paid ($0.02 per share)

            (726 )               (726 )
 

Other comprehensive income—increase in net unrealized gain on securities available-for-sale, net of tax effect of $4.7 million

                        6,469     6,469  
                               

Balance, June 30, 2011

    37,251,267   $ 375   $ 1,088,841   $ (583,525 ) $ (4,165 ) $ 10,438   $ 511,964  
                               

See "Notes to Condensed Consolidated Financial Statements."

6


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Six Months Ended
June 30,
 
 
  2011   2010  

Cash flows from operating activities:

             
 

Net earnings (loss)

  $ 23,517   $ (57,828 )
   

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

             
     

Depreciation and amortization

    8,732     (268 )
     

Provision for credit losses

    22,100     154,727  
     

Gain on sale of other real estate owned

    (4,387 )   (2,081 )
     

Provision for losses on other real estate owned

    4,734     11,675  
     

Gain on sale of premises and equipment

    (18 )   (11 )
     

Restricted stock amortization

    4,392     4,421  
     

Tax effect included in stockholders' equity of restricted stock vesting

    183     772  
     

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

    (5,428 )   (42,753 )
     

Decrease in FDIC loss sharing asset

    13,446     46,749  
     

Decrease in other assets

    2,498     16,947  
     

Decrease in accrued interest payable and other liabilities

    (5,683 )   (10,592 )
           
       

Net cash provided by operating activities

    64,086     121,758  
           

Cash flows from investing activities:

             
   

Net decrease in loans

    275,593     164,729  
   

Proceeds from sale of loans

    2,495     202,289  
   

Securities available-for-sale:

             
     

Proceeds from maturities and paydowns

    87,735     82,161  
     

Purchases

    (262,173 )   (304,249 )
   

Net redemptions of FHLB stock

    4,449     1,874  
   

Proceeds from sales of other real estate owned

    37,559     44,128  
   

Capitalized costs to complete other real estate owned

        (545 )
   

Purchases of premises and equipment, net

    (3,398 )   (1,764 )
   

Proceeds from sales of premises and equipment

    21     13  
           
     

Net cash provided by investing activities

    142,281     188,636  
           

Cash flows from financing activities:

             
   

Net increase (decrease) in deposits:

             
     

Noninterest-bearing

    133,848     92,536  
     

Interest-bearing

    (297,051 )   34,834  
   

Net proceeds from issuance of common stock

        26,587  
   

Restricted stock surrendered

    (302 )   (518 )
   

Tax effect included in stockholders' equity of restricted stock vesting

    (183 )   (772 )
   

Net decrease in borrowings

        (260,000 )
   

Cash dividends paid

    (726 )   (723 )
           
     

Net cash used in financing activities

    (164,414 )   (108,056 )
           

Net increase in cash and cash equivalents

    41,953     202,338  

Cash and cash equivalents, beginning of period

    108,552     211,048  
           

Cash and cash equivalents, end of period

  $ 150,505   $ 413,386  
           

Supplemental disclosures of cash flow information:

             
 

Cash paid for interest

  $ 17,623   $ 21,884  
 

Cash paid for income taxes

    22,315     36  
 

Loans transferred to other real estate owned

    48,513     32,928  
 

Goodwill resolution included in FDIC loss sharing asset

    7,636      

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 also operate three banking offices in the San Francisco Bay area and one office in Arizona, all of which were acquired through FDIC-assisted acquisitions. 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 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 GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include,

8


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION (Continued)

among other items, the allowances for credit losses, the carrying value of other real estate 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 acquired assets and assumed liabilities in the Los Padres acquisition.

        Certain prior period amounts have been reclassified to conform to the current period's presentation format. During the current quarter, we reclassified recoveries on covered loans such that recoveries now reduce the credit loss provision for covered loans rather than increase FDIC loss sharing income. Such reclassifications had no effect on reported net earnings or losses.

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). Our annual impairment test of goodwill resulted in no impact on our results of operations and financial condition.

        Goodwill in the amount of $46.8 million was recorded in the Los Padres acquisition. During the second quarter of 2011, we reduced goodwill by $7.6 million as the matter with the FDIC regarding the settlement accounting for a wholly-owned subsidiary in the Los Padres acquisition was resolved. A receivable for such amount was included in the FDIC loss sharing asset at June 30, 2011 and is expected to be received during the third quarter.

        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   Six Months Ended
June 30,
 
 
  June 30,
2011
  March 31,
2011
  June 30,
2010
 
 
  2011   2010  
 
  (In thousands)
 

Gross amount of CDI and CRI:

                               
 

Balance, beginning of period

  $ 76,319   $ 76,319   $ 75,911   $ 76,319   $ 75,911  
 

Fully amortized portion

    (2,690 )           (2,690 )    
                       
   

Balance, end of period

    73,629     76,319     75,911     73,629     75,911  
                       

Accumulated amortization:

                               
 

Balance, beginning of period

    (52,783 )   (50,476 )   (45,039 )   (50,476 )   (42,615 )
 

Amortization

    (2,308 )   (2,307 )   (2,424 )   (4,615 )   (4,848 )
 

Fully amortized portion

    2,690             2,690      
                       
   

Balance, end of period

    (52,401 )   (52,783 )   (47,463 )   (52,401 )   (47,463 )
                       

Net CDI and CRI, end of period

  $ 21,228   $ 23,536   $ 28,448   $ 21,228   $ 28,448  
                       

        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.

 
  June 30, 2011  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 
 
  (In thousands)
 

Municipal securities

  $ 24,119   $ 138   $ (198 ) $ 24,059  

Residental mortgage-backed securities:

                         
 

Government and government-sponsored entity pass through securities

    936,459     16,655     (4,369 )   948,745  
 

Government and government-sponsored entity collateralized mortgage obligations

    33,760     417     (785 )   33,392  
 

Covered private label collateralized mortgage obligations

    43,362     7,708     (1,569 )   49,501  

Other securities

    2,295             2,295  
                   
   

Total securities available-for-sale

  $ 1,039,995   $ 24,918   $ (6,921 ) $ 1,057,992  
                   

 

 
  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:

 
  June 30, 2011  
 
  Amortized
Cost
  Estimated
Fair
Value
 
 
  (In thousands)
 

Due in one year or less

  $ 4,345   $ 4,345  

Due after one year through five years

    9,920     10,279  

Due after five years through ten years

    41,904     43,579  

Due after ten years

    983,826     999,789  
           
 

Total securities available-for-sale

  $ 1,039,995   $ 1,057,992  
           

        At June 30, 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 $900.6 million. We do not own any equity securities issued by Fannie Mae or Freddie Mac.

        As of June 30, 2011, securities available-for-sale with an estimated fair value of $91.9 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

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

 
  June 30, 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

  $ 15,141   $ (198 ) $   $   $ 15,141   $ (198 )

Residential mortgage-backed securities:

                                     
 

Government and government-sponsored entity pass through securities

    341,054     (4,368 )   25     (1 )   341,079     (4,369 )
 

Government and government-sponsored entity collateralized mortgage obligations

    14,366     (696 )   1,530     (89 )   15,896     (785 )
 

Covered private label collateralized mortgage obligations

    4,238     (259 )   4,566     (1,310 )   8,804     (1,569 )
                           
   

Total

  $ 374,799   $ (5,521 ) $ 6,121   $ (1,400 ) $ 380,920   $ (6,921 )
                           

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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 June 30, 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 June 30, 2011, the Company had a $50.6 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 June 30, 2011 and determined that it was not impaired. Our evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, 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.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS

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

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

Loan Category
  June 30,
2011
  December 31,
2010
 
 
  (In thousands)
 

Real estate mortgage

  $ 2,073,868   $ 2,274,733  

Real estate construction

    160,254     179,479  

Commercial

    640,805     663,557  

Consumer

    22,248     25,058  

Foreign

    20,075     22,608  
           
 

Total gross non-covered loans

    2,917,250     3,165,435  

Less:

             
 

Unearned income

    (4,114 )   (4,380 )
 

Allowance for loan losses

    (96,427 )   (98,653 )
           
   

Total net non-covered loans

  $ 2,816,709   $ 3,062,402  
           

        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 June 30, 2011  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Consumer   Foreign   Total  
 
  (In thousands)
 

Allowance for Loan Losses on Non-Covered Loans:

                                     

Balance, April 1, 2011

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

Charge-offs

    (4,354 )   (1,193 )   (2,609 )   (1,165 )       (9,321 )
 

Recoveries

    27     896     308     890     13     2,134  
 

Provision

    6,009     429     (1,004 )   (270 )   (114 )   5,050  
                           

Balance, June 30, 2011

  $ 53,540   $ 11,185   $ 28,259   $ 2,910   $ 533   $ 96,427  
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

 

 
  Six Months Ended June 30, 2011  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Consumer   Foreign   Total  
 
  (In thousands)
 

Allowance for Loan Losses on Non-Covered Loans:

                                     

Balance, January 1, 2011

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

Charge-offs

    (5,566 )   (5,838 )   (5,730 )   (1,325 )       (18,459 )
 

Recoveries

    124     988     925     1,301     45     3,383  
 

Provision

    7,325     7,269     (165 )   (1,718 )   139     12,850  
                           

Balance, June 30, 2011

  $ 53,540   $ 11,185   $ 28,259   $ 2,910   $ 533   $ 96,427  
                           

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

                                     
 

Individually evaluated for impairment

  $ 4,659   $ 2,484   $ 8,657   $   $   $ 15,800  
                           
 

Collectively evaluated for impairment

  $ 48,881   $ 8,701   $ 19,602   $ 2,910   $ 533   $ 80,627  
                           

Non-Covered Loan Balances:

                                     

Ending balance

  $ 2,073,868   $ 160,254   $ 640,805   $ 22,248   $ 20,075   $ 2,917,250  
                           

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

                                     
 

Individually evaluated for impairment

  $ 98,860   $ 26,069   $ 22,113   $ 745   $   $ 147,787  
                           
 

Collectively evaluated for impairment

  $ 1,975,008   $ 134,185   $ 618,692   $ 21,503   $ 20,075   $ 2,769,463  
                           

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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:

                                     

Balance, January 1, 2010

  $ 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

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

Balance, December 31, 2010

  $ 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  
                           

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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 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.

 
  June 30, 2011   December 31, 2010  
 
  Nonclassified   Classified   Total   Nonclassified   Classified   Total  
 
  (In thousands)
  (In thousands)
 

Real estate mortgage:

                                     
 

Hospitality

  $ 127,463   $ 21,580   $ 149,043   $ 137,952   $ 18,700   $ 156,652  
 

SBA 504

    55,269     7,417     62,686     55,774     13,513     69,287  
 

Other

    1,747,117     115,022     1,862,139     1,956,905     91,889     2,048,794  
                           
   

Total real estate mortgage

    1,929,849     144,019     2,073,868     2,150,631     124,102     2,274,733  
                           

Real estate construction:

                                     
 

Residential

    30,749     3,044     33,793     39,644     25,399     65,043  
 

Commercial

    96,406     30,055     126,461     82,291     32,145     114,436  
                           
   

Total real estate construction

    127,155     33,099     160,254     121,935     57,544     179,479  
                           

Commercial:

                                     
 

Collateralized

    355,557     17,597     373,154     342,607     15,820     358,427  
 

Unsecured

    74,390     7,616     82,006     119,326     10,417     129,743  
 

Asset-based

    152,765     2,154     154,919     141,813     1,354     143,167  
 

SBA 7(a)

    20,639     10,087     30,726     29,557     2,663     32,220  
                           
   

Total commercial

    603,351     37,454     640,805     633,303     30,254     663,557  
                           

Consumer

    21,383     865     22,248     22,949     2,109     25,058  

Foreign

    20,075         20,075     22,608         22,608  
                           
   

Total non-covered loans

  $ 2,701,813   $ 215,437   $ 2,917,250   $ 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 tables present an aging analysis of our non-covered loans by portfolio segment and class as of the dates indicated:

 
  June 30, 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   $ 148,178   $ 149,043  
 

SBA 504

                    62,686     62,686  
 

Other

    18,458     2,402     5,697     26,557     1,835,582     1,862,139  
                           
   

Total real estate mortgage

    19,323     2,402     5,697     27,422     2,046,446     2,073,868  
                           

Real estate construction:

                                     
 

Residential

                    33,793     33,793  
 

Commercial

        2,136         2,136     124,325     126,461  
                           
   

Total real estate construction

        2,136         2,136     158,118     160,254  
                           

Commercial:

                                     
 

Collateralized

    231     590     2,701     3,522     369,632     373,154  
 

Unsecured

    158         3,474     3,632     78,374     82,006  
 

Asset-based

                    154,919     154,919  
 

SBA 7(a)

    780     446     322     1,548     29,178     30,726  
                           
   

Total commercial

    1,169     1,036     6,497     8,702     632,103     640,805  
                           

Consumer

    85     52     14     151     22,097     22,248  

Foreign

                    20,075     20,075  
                           
   

Total non-covered loans

  $ 20,577   $ 5,626   $ 12,208   $ 38,411   $ 2,878,839   $ 2,917,250  
                           

        At June 30, 2011 and December 31, 2010, the Company had no non-covered 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 June 30, 2011, nonaccrual loans totaled $65.3 million. Nonaccrual loans include $14.2 million of loans 30 to 89 days past due and $38.9 million of current loans which have been placed on nonaccrual status based on management's judgment regarding the collectibility of such loans.

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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  
                           

        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.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

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

 
  June 30, 2011   December 31, 2010  
 
  Nonaccrual   Performing   Total   Nonaccrual   Performing   Total  
 
  (In thousands)
  (In thousands)
 

Real estate mortgage:

                                     
 

Hospitality

  $ 7,451   $ 141,592   $ 149,043   $ 4,151   $ 152,501   $ 156,652  
 

SBA 504

    3,304     59,382     62,686     9,346     59,941     69,287  
 

Other

    28,736     1,833,403     1,862,139     27,452     2,021,342     2,048,794  
                           
   

Total real estate mortgage

    39,491     2,034,377     2,073,868     40,949     2,233,784     2,274,733  
                           

Real estate construction:

                                     
 

Residential

    1,099     32,694     33,793     24,004     41,039     65,043  
 

Commercial

    5,976     120,485     126,461     5,238     109,198     114,436  
                           
   

Total real estate construction

    7,075     153,179     160,254     29,242     150,237     179,479  
                           

Commercial:

                                     
 

Collateralized

    5,294     367,860     373,154     6,241     352,186     358,427  
 

Unsecured

    6,558     75,448     82,006     9,104     120,639     129,743  
 

Asset-based

    15     154,904     154,919     15     143,152     143,167  
 

SBA 7(a)

    6,122     24,604     30,726     6,518     25,702     32,220  
                           
   

Total commercial

    17,989     622,816     640,805     21,878     641,679     663,557  
                           

Consumer

    745     21,503     22,248     1,951     23,107     25,058  

Foreign

        20,075     20,075     163     22,445     22,608  
                           
   

Total non-covered loans

  $ 65,300   $ 2,851,950   $ 2,917,250   $ 94,183   $ 3,071,252   $ 3,165,435  
                           

        Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes. Impaired loans by portfolio segment are as follows as of the dates indicated:

 
  June 30, 2011   December 31, 2010  
Loan Category
  Nonaccrual
Loans
  Performing
Restructured
Loans
  Total
Impaired
Loans
  Nonaccrual
Loans
  Performing
Restructured
Loans
  Total
Impaired
Loans
 
 
  (In thousands)
 

Real estate mortgage

  $ 39,491   $ 59,369   $ 98,860   $ 40,949   $ 53,222   $ 94,171  

Real estate construction

    7,075     18,994     26,069     29,242     18,108     47,350  

Commercial

    17,989     4,124     22,113     21,878     17,942     39,820  

Consumer

    745         745     1,951         1,951  

Foreign

                163         163  
                           
 

Total

  $ 65,300   $ 82,487   $ 147,787   $ 94,183   $ 89,272   $ 183,455  
                           

        The decrease in the real estate construction impaired loan segment is due to the foreclosure on undeveloped land located in Ventura County which secured two non-covered loans with an aggregate balance of $23.0 million. The decrease in the commercial impaired loan segment is due to two loans that have performed in accordance with their restructured terms for at least 12 months and have been removed from this category.

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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 and for the dates indicated:

 
  June 30, 2011   December 31, 2010  
 
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
 
 
  (In thousands)
 

With An Allowance Recorded:

                                     

Real estate mortgage:

                                     
 

Hospitality

  $ 17,749   $ 17,891   $ 1,284   $ 15,081   $ 15,138   $ 564  
 

SBA 504

    617     617     20     4,161     6,180     280  
 

Other

    47,252     49,904     3,355     47,188     47,343     3,049  

Real estate construction:

                                     
 

Residential

    2,076     2,079     7     8,301     11,956     673  
 

Other

    14,555     17,981     2,477     5,341     5,701     452  
                           
   

Total real estate

    82,249     88,472     7,143     80,072     86,318     5,018  
                           

Commercial:

                                     
 

Collateralized

    4,871     6,510     3,737     2,192     2,363     1,174  
 

Unsecured

    6,312     14,766     4,673     9,361     9,445     7,696  
 

SBA 7(a)

    3,063     3,182     247     1,999     2,123     41  

Consumer

    34     37         1,125     1,127     1,049  
                           
 

Total other

    14,280     24,495     8,657     14,677     15,058     9,960  
                           

With No Related Allowance Recorded:

                                     

Real estate mortgage:

                                     
 

Hospitality

  $   $   $   $ 667   $ 667   $  
 

SBA 504

    3,304     4,652           5,185     6,320      
 

Other

    29,938     32,805         21,889     29,191      

Real estate construction:

                                     
 

Residential

    617     617         22,676     23,208      
 

Other

    8,821     9,896         11,032     12,603      
                           
   

Total real estate

    42,680     47,970         61,449     71,989      
                           

Commercial:

                                     
 

Collateralized

    1,997     2,133         20,519     20,668      
 

Unsecured

    714     777         224     236      
 

Asset-based

    15     15         15     15      
 

SBA 7(a)

    5,141     6,588         5,510     7,239      

Consumer

    711     782         826     876      

Foreign

                163     238      
                           
 

Total other

    8,578     10,295         27,257     29,272      
                           

Total:

                                     
 

Real estate mortgage

  $ 98,860   $ 105,869   $ 4,659   $ 94,171   $ 104,839   $ 3,893  
 

Real estate construction

    26,069     30,573     2,484     47,350     53,468     1,125  
 

Commercial

    22,113     33,971     8,657     39,820     42,089     8,911  
 

Consumer

    745     819         1,951     2,003     1,049  
 

Foreign

                163     238      
                           
   

Total non-covered loans

  $ 147,787   $ 171,232   $ 15,800   $ 183,455   $ 202,637   $ 14,978  
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—LOANS (Continued)

 
  Three Months Ended
June 30, 2011
  Six Months Ended
June 30, 2011
 
 
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
 

With An Allowance Recorded:

                         

Real estate mortgage:

                         
 

Hospitality

  $ 17,749   $ 168   $ 17,448   $ 366  
 

SBA 504

    206     9     103     21  
 

Other

    38,411     339     29,382     870  

Real estate construction:

                         
 

Residential

    2,076     16     2,076     37  
 

Other

    14,555     89     10,260     165  
                   
   

Total real estate

    72,997     621     59,269     1,459  
                   

Commercial:

                         
 

Collateralized

    4,295     11     3,816     52  
 

Unsecured

    6,312     6     6,283     12  
 

SBA 7(a)

    2,083     20     1,994     40  

Consumer

    34         34      
                   
 

Total other

    12,724     37     12,127     104  
                   

With No Related Allowance Recorded:

                         

Real estate mortgage:

                         
 

Hospitality

  $   $   $   $  
 

SBA 504

    3,304         3,304      
 

Other

    21,650     629     20,501     795  

Real estate construction:

                         
 

Residential

    617         617      
 

Other

    8,821     61     8,821     122  
                   
   

Total real estate

    34,392     690     33,243     917  
                   

Commercial:

                         
 

Collateralized

    1,973     (2 )   1,855     (1 )
 

Unsecured

    670         668      
 

Asset-based

    15         15      
 

SBA 7(a)

    5,062     11     4,944     20  

Consumer

    688         652     1  

Foreign

                 
                   
 

Total other

    8,408     9     8,134     20  
                   

Total:

                         
 

Real estate mortgage

  $ 81,320   $ 1,145   $ 70,738   $ 2,052  
 

Real estate construction

    26,069     166     21,774     324  
 

Commercial

    20,410     46     19,575     123  
 

Consumer

    722         686     1  
 

Foreign

                 
                   
   

Total non-covered loans

  $ 128,521   $ 1,357   $ 112,773   $ 2,500  
                   

(1)
For the loans reported as impaired as of June 30, 2011, amounts are calculated based on the period of time such loans were impaired during the reporting period.

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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
  June 30,
2011
  December 31,
2010
 
 
  (In thousands)
 

Multi-family

  $ 286,615   $ 321,650  

Commercial real estate

    407,257     444,244  

Single family

    139,238     157,424  

Construction and land

    67,343     87,301  

Commercial and industrial

    24,135     34,828  

Home equity lines of credit

    6,235     5,916  

Consumer

    864     1,378  
           
 

Total gross covered loans

    931,687     1,052,741  

Less: discount

    (92,847 )   (110,901 )
           
 

Covered loans, net of discount

    838,840     941,840  

Less: allowance for loan losses

    (32,888 )   (33,264 )
           
 

Covered loans, net

  $ 805,952   $ 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

    36,898     36,898  
 

Payments received

    (130,536 )    
 

Increase in expected cash flows

        (10,472 )
 

Provision for credit losses

    (8,800 )    
           

Balance, June 30, 2011

  $ 777,048   $ (264,239 )
           

        The table above excludes the covered loans from the Los Padres acquisition which are accounted for as non-impaired loans and totaled $28.9 million and $29.1 million at June 30, 2011 and December 31, 2010, respectively.

        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.

 
  June 30, 2011   December 31, 2010  
 
  Nonclassified   Classified   Total   Nonclassified   Classified   Total  
 
  (In thousands)
 

Real estate mortgage

  $ 555,665   $ 175,211   $ 730,876   $ 622,837   $ 180,944   $ 803,781  

Real estate construction

    13,658     38,328     51,986     21,370     51,729     73,099  

Commercial

    13,302     8,972     22,274     14,630     16,219     30,849  

Consumer

    229     587     816     722     125     847  
                           
 

Total covered loans

  $ 582,854   $ 223,098   $ 805,952   $ 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:

 
  June 30, 2011   December 31, 2010  
Property Type
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Commercial real estate

  $ 23,408   $ 18,130   $ 41,538   $ 18,205   $ 21,658   $ 39,863  

Construction and land development

    26,446     19,461     45,907     4,650     19,205     23,855  

Multi-family

        515     515         10,393     10,393  

Single family residence

    2,340     2,843     5,183     2,743     4,560     7,303  
                           
 

Total OREO, net

  $ 52,194   $ 40,949   $ 93,143   $ 25,598   $ 55,816   $ 81,414  
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

OREO Activity:

                   

Balance, January 1, 2011

  $ 25,598   $ 55,816   $ 81,414  
 

Foreclosures

    24,981     4,130     29,111  
 

Payments to third parties(1)

    950         950  
 

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  
 

Foreclosures

    6,073     13,329     19,402  
 

Payments to third parties(1)

    172         172  
 

Provision for losses

    (1,897 )   (1,565 )   (3,462 )
 

Reductions related to sales

    (521 )   (12,932 )   (13,453 )
               

Balance, June 30, 2011

  $ 52,194   $ 40,949   $ 93,143  
               

(1)
Represents amounts due to participants and for guarantees, property taxes or any other prior lien positions.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

 
  Three Months Ended   Six Months Ended
June 30,
 
 
  June 30,
2011
  March 31,
2011
  June 30,
2010
 
 
  2011   2010  
 
  (In thousands)
 

Non-Covered OREO Expense:

                               

Provision for losses

  $ 1,897   $ 382   $ 985   $ 2,279   $ 9,297  

Maintenance costs

    400     473     307     873     1,382  

(Gain) loss on sale

    3     (152 )   (667 )   (149 )   (1,613 )
                       
 

Total non-covered OREO expense, net

  $ 2,300   $ 703   $ 625   $ 3,003   $ 9,066  
                       

Covered OREO Expense:

                               

Provision for losses

  $ 1,565   $ 890   $ 233   $ 2,455   $ 2,378  

Maintenance costs

    86     324     45     410     170  

(Gain) loss on sale

    (446 )   (3,792 )   (367 )   (4,238 )   (468 )
                       
 

Total covered OREO expense, net

  $ 1,205   $ (2,578 ) $ (89 ) $ (1,373 ) $ 2,080  
                       

Total OREO Expense:

                               

Provision for losses

  $ 3,462   $ 1,272   $ 1,218   $ 4,734   $ 11,675  

Maintenance costs

    486     797     352     1,283     1,552  

(Gain) loss on sale

    (443 )   (3,944 )   (1,034 )   (4,387 )   (2,081 )
                       
 

Total OREO expense, net

  $ 3,505   $ (1,875 ) $ 536   $ 1,630   $ 11,146  
                       

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, net of recoveries

    6,906  
 

Cash received from FDIC

    (20,946 )
 

Net accretion

    594  
 

FDIC goodwill settlement receivable

    7,610  
       

Balance, June 30, 2011

  $ 110,516  
       

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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 outstanding FHLB advances by their contractual maturity dates as of the date indicated:

 
  June 30, 2011    
 
Contractual Maturity Date
  Amount   Interest
Rate
  Next Date
Callable
by FHLB(1)
 
 
  (In thousands)
   
   
 

December 11, 2017

  $ 200,000     3.16 %   September 11, 2011  

January 11, 2018

    25,000     2.61 %   October 11, 2011  
                   
 

Total FHLB advances

  $ 225,000     3.10 %      
                   

(1)
Callable quarterly.

        The FHLB advances outstanding at June 30, 2011 are each callable term advances. The maturities shown are the contractual maturities for the advances. The advances have each 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 $1.1 billion at June 30, 2011. As of June 30, 2011, approximately $2.8 billion of real estate and commercial loans and securities with a carrying value of $44.9 million were pledged to secure our FHLB advances. Additionally, the Bank had secured borrowing capacity from the Federal Reserve discount window of $390.5 million at June 30, 2011. As of June 30, 2011, $474.8 million of real estate construction and commercial loans not pledged to the FHLB were pledged to secure the Federal Reserve borrowing capacity. 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 $129.4 million in subordinated debentures outstanding at June 30, 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 June 30, 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

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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)


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 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 June 30, 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     3.35 %   9/15/11  

Trust VI

    9/3/03     10,310     9/15/33       (1) Variable   3 month LIBOR + 3.05     3.30 %   9/13/11  

Trust CII

    9/17/03     5,155     9/17/33       (1) Variable   3 month LIBOR + 2.95     3.20 %   9/15/11  

Trust VII

    2/5/04     61,856     4/23/34       (1) Variable   3 month LIBOR + 2.75     3.00 %   10/28/11  

Trust CIII

    8/15/05     20,619     9/15/35       (1) Variable   3 month LIBOR + 1.69     1.94 %   9/13/11  
                                             

Gross subordinated debentures

          126,808                                  

Unamortized premium(3)

          2,615                                  
                                             

Net subordinated debentures

        $ 129,423                                  
                                             

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

(2)
As of July 28, 2011.

(3)
This amount represents the fair value adjustment on the subordinated debentures issued to the 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. The Company includes 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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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


any related deferred income tax liability. At June 30, 2011, the amount of trust preferred securities included in Tier I capital was $123.0 million.

        Brokered deposits totaled $43.3 million at June 30, 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 $645.5 million and $723.1 million at June 30, 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 $31.6 million and $23.7 million at June 30, 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 a few small business investment companies. As of June 30, 2011, the Company had commitments to contribute capital to these entities totaling $7.4 million.

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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 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 June 30, 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

  $ 24,059   $   $ 24,059   $  
 

Government and government-sponsored entity residential mortgage-backed securities

    982,137         982,137      
 

Covered private label CMOs

    49,501             49,501  
 

Other securities

    2,295         2,295      
                   

  $ 1,057,992   $   $ 1,008,491   $ 49,501  
                   

Measured on a Nonrecurring Basis:

                         
 

Non-covered impaired loans

  $ 82,143   $   $ 13,491   $ 68,652  
 

Non-covered other real estate owned

    32,425         965     31,460  
 

Covered other real estate owned

    5,689         1,964     3,725  
 

SBA loan servicing asset

    1,327             1,327  
                   

  $ 121,584   $   $ 16,420   $ 105,164  
                   

        There were no significant transfers of assets between Level 1 and Level 2 of the fair value hierarchy during the three months ended June 30, 2011.

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

 
  Three Months
Ended
June 30,
2011
  Six Months
Ended
June 30,
2011
 
 
  (In thousands)
 

Non-covered impaired loans

  $ (6,593 ) $ (14,206 )

Non-covered other real estate owned

    (1,898 )   (2,273 )

Covered other real estate owned

    (569 )   (983 )

SBA loan servicing asset

        (70 )
           
 

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

  $ (9,060 ) $ (17,532 )
           

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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

    1,144  
 

Total unrealized in comprehensive income

    1,570  
 

Net settlements

    (3,650 )
       

Balance as of June 30, 2011

  $ 49,501  
       

        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:

 
  June 30, 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

  $ 91,405   $ 91,405   $ 82,170   $ 82,170  
 

Interest-earning deposits in financial institutions

    59,100     59,100     26,382     26,382  
 

Securities available-for-sale

    1,057,992     1,057,992     874,016     874,016  
 

Investment in FHLB stock

    50,591     50,591     55,040     55,040  
 

Loans, net

    3,622,661     3,611,589     3,970,978     3,960,244  

Financial Liabilities:

                         
 

Deposits

    4,486,495     4,499,393     4,649,698     4,664,575  
 

Borrowings

    225,000     245,128     225,000     243,273  
 

Subordinated debentures

    129,423     135,117     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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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 3 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 June 30, 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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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.    Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. Non-covered nonaccrual loans with an unpaid principal balance over $250,000 and all performing restructured loans are reviewed individually for the amount of impairment, if any. Non-covered nonaccrual loans with an unpaid principal balance of $250,000 or less are evaluated for impairment collectively. 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 non-covered impaired loan balances shown above represent those nonaccrual and restructured loans for which impairment was recognized during the three and six months ended June 30, 2011. The amounts shown as losses represent, for the loan balances shown, the impairment recognized during the three and six months ended June 30, 2011. We recorded $2.1 million and $5.4 million in losses on impaired loans for the three and six months ended June 30, 2011, respectively, for loans with a fair value of zero as of June 30, 2011. Of the $65.3 million of nonaccrual loans at June 30, 2011, $19.8 million were written down to their fair values through charge-offs during the quarter.

        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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)


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.

        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. 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 not disclosed as it is not material.

        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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of June 30, 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   Six Months Ended
June 30,
 
 
  June 30,
2011
  March 31,
2011
  June 30,
2010
 
 
  2011   2010  
 
  (In thousands, except per share data)
 

Basic Earnings (Loss) Per Share:

                               
 

Net earnings (loss)

  $ 12,841   $ 10,676   $ 2,705   $ 23,517   $ (57,828 )
 

Less: earnings allocated to unvested restricted stock(1)

    (600 )   (386 )   (99 )   (976 )   (17 )
                       
     

Net earnings (loss) allocated to common shares

  $ 12,241   $ 10,290   $ 2,606   $ 22,541   $ (57,845 )
                       
 

Weighted-average basic shares and unvested restricted stock outstanding

    37,239.8     36,801.7     36,732.9     37,021.9     36,173.4  
 

Less: weighted-average unvested restricted stock outstanding

    (1,768.2 )   (1,347.6 )   (1,420.6 )   (1,559.0 )   (1,333.6 )