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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 September 30, 2010

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)

401 West "A" Street

 

 
San Diego, California   92101
(Address of principal executive offices)   (Zip Code)

(619) 233-5588
(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 November 1, 2010 there were 35,348,681 shares of the registrant's common stock outstanding, excluding 1,359,594 shares of unvested restricted stock.


Table of Contents

PACWEST BANCORP AND SUBSIDIARIES

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

    36  
 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    73  
 

ITEM 4.

 

Controls and Procedures

    73  

PART II—OTHER INFORMATION

   
73
 
 

ITEM 1.

 

Legal Proceedings

    73  
 

ITEM 1A.

 

Risk Factors

    73  
 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    74  
 

ITEM 6.

 

Exhibits

    74  

SIGNATURES

   
75
 

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)

 
  September 30,
2010
  December 31,
2009
 

ASSETS

             

Cash and due from banks

  $ 91,615   $ 93,915  

Interest-earning deposits in financial institutions

    68,470     117,133  
           
 

Total cash and cash equivalents

    160,085     211,048  
           

Non-covered securities available-for-sale

    737,642     371,575  

Covered securities available-for-sale

    51,125     52,125  
           
 

Total securities available-for sale, at extimated fair value

    788,767     423,700  

Federal Home Loan Bank stock, at cost

    57,332     50,429  
           
 

Total investment securities

    846,099     474,129  
           

Non-covered loans, net of unearned income

    3,318,409     3,707,383  

Allowance for loan losses

    (96,494 )   (118,717 )
           
 

Total non-covered loans, net

    3,221,915     3,588,666  

Covered loans, net

    966,140     621,686  
           
 

Total loans

    4,188,055     4,210,352  
           

Non-covered other real estate owned, net

    24,598     43,255  

Covered other real estate owned, net

    55,244     27,688  
           
 

Total other real estate owned

    79,842     70,943  
           

Premises and equipment, net

    21,138     22,546  

Goodwill

    46,228      

Core deposit and customer relationship intangibles

    28,441     33,296  

Cash surrender value of life insurance

    65,735     66,149  

FDIC loss sharing asset

    141,591     112,817  

Other assets

    165,708     122,799  
           
   

Total assets

  $ 5,742,922   $ 5,324,079  
           

LIABILITIES

             

Noninterest-bearing deposits

  $ 1,467,862   $ 1,302,974  

Interest-bearing deposits

    3,333,052     2,791,595  
           
 

Total deposits

    4,800,914     4,094,569  

Borrowings

    275,000     542,763  

Subordinated debentures

    129,648     129,798  

Accrued interest payable and other liabilities

    43,598     50,176  
           
   

Total liabilities

    5,249,160     4,817,306  
           

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 and 50,000,000 shares at September 30, 2010 and December 31, 2009, respectively; issued 36,862,990 and 35,128,452 shares, respectively (includes 1,359,594 and 1,095,417 shares of unvested restricted stock, respectively)

    369     351  

Additional paid-in capital

    1,084,205     1,053,584  

Accumulated deficit

    (599,354 )   (545,026 )

Treasury stock, at cost—154,715 and 113,130 shares at September 30, 2010 and December 31, 2009, respectively

    (2,868 )   (2,032 )

Accumulated other comprehensive income (loss)

    11,410     (104 )
           
   

Total stockholders' equity

    493,762     506,773  
           
   

Total liabilities and stockholders' equity

  $ 5,742,922   $ 5,324,079  
           

See "Notes to Condensed Consolidated Financial Statements."

3


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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

 
  Three Months Ended   Nine Months
Ended
September 30,
 
 
  September 30,
2010
  June 30,
2010
  September 30,
2009
 
 
  2010   2009  

Interest income:

                               
 

Loans

  $ 68,480   $ 62,314   $ 64,658   $ 194,539   $ 188,168  
 

Investment securities

    6,519     5,702     2,741     17,342     5,928  
 

Deposits in financial institutions

    131     245     111     505     209  
                       
   

Total interest income

    75,130     68,261     67,510     212,386     194,305  
                       

Interest expense:

                               
 

Deposits

    6,375     6,945     7,754     20,209     24,441  
 

Borrowings

    2,129     2,216     3,989     7,013     11,197  
 

Subordinated debentures

    1,459     1,483     1,530     4,357     4,948  
                       
   

Total interest expense

    9,963     10,644     13,273     31,579     40,586  
                       
   

Net interest income

    65,167     57,617     54,237     180,807     153,719  
                       

Provision for credit losses:

                               
 

Non-covered loans

    17,050     14,100     75,000     143,677     107,000  
 

Covered loans

    7,400     8,850         36,950      
                       
   

Total provision for credit losses

    24,450     22,950     75,000     180,627     107,000  
                       
   

Net interest income (expense) after provision for credit losses

    40,717     34,667     (20,763 )   180     46,719  
                       

Noninterest income:

                               
 

Service charges on deposit accounts

    2,861     2,666     2,960     8,256     9,118  
 

Other commissions and fees

    1,760     1,845     1,721     5,395     5,152  
 

Other-than-remporary impairment loss on securities

    (874 )           (874 )    
 

Increase in cash surrender value of life insurance

    353     369     371     1,120     1,204  
 

FDIC loss sharing income, net

    6,406     7,029         29,607      
 

Gain from Affinity acquisition

            66,989         66,989  
 

Other income

    279     173     584     632     1,616  
                       
   

Total noninterest income

    10,785     12,082     72,625     44,136     84,079  
                       

Noninterest expense:

                               
 

Compensation

    23,060     21,068     20,128     63,539     57,853  
 

Occupancy

    6,872     6,576     6,435     20,406     19,283  
 

Data processing

    2,121     1,892     1,810     5,982     5,115  
 

Other professional services

    2,694     2,042     1,857     6,734     4,867  
 

Business development

    571     655     528     1,893     1,878  
 

Communications

    811     795     762     2,410     2,143  
 

Insurance and assessments

    2,431     2,611     2,010     7,316     7,479  
 

Other real estate owned, net

    1,832     536     8,141     12,978     18,369  
 

Intangible asset amortization

    2,434     2,424     2,578     7,282     7,192  
 

Reorganization and lease charges

                    1,215  
 

Other expense

    3,348     4,174     2,842     10,977     8,597  
                       
   

Total noninterest expense

    46,174     42,773     47,091     139,517     133,991  
                       

Earnings (loss) before income taxes

    5,328     3,976     4,771     (95,201 )   (3,193 )

Income tax (expense) benefit

    (1,828 )   (1,271 )   (2,046 )   40,873     1,623  
                       
 

Net earnings (loss)

  $ 3,500   $ 2,705   $ 2,725   $ (54,328 ) $ (1,570 )
                       

Earnings (loss) per share:

                               
 

Basic

  $ 0.10   $ 0.07   $ 0.08   $ (1.55 ) $ (0.06 )
 

Diluted

  $ 0.10   $ 0.07   $ 0.08   $ (1.55 ) $ (0.06 )

Dividends declared per share

  $ 0.01   $ 0.01   $ 0.01   $ 0.03   $ 0.34  

See "Notes to Condensed Consolidated Financial Statements."

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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

(Unaudited)

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2010
  June 30,
2010
  September 30,
2009
 
 
  2010   2009  

Net earnings (loss)

  $ 3,500   $ 2,705   $ 2,725   $ (54,328 ) $ (1,570 )

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

                               
 

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

    2,869     7,420     1,098     11,514     1,351  
                       

Comprehensive income (loss)

  $ 6,369   $ 10,125   $ 3,823   $ (42,814 ) $ (219 )
                       

See "Notes to Condensed Consolidated Financial Statements."

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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in Thousands, Except Share Data)

(Unaudited)

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

Balance as of January 1, 2010

    35,015,322   $ 351   $ 1,053,584   $ (545,026 ) $ (2,032 ) $ (104 ) $ 506,773  
 

Net loss

                (54,328 )           (54,328 )
 

Issuance of common stock

    1,348,040     14     26,573                 26,587  
 

Tax effect from vesting of restricted stock

            (1,427 )               (1,427 )
 

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

    386,498     4     6,559                 6,563  
 

Restricted stock surrendered

    (41,585 )               (836 )       (836 )
 

Cash dividends paid ($0.03 per share)

            (1,084 )               (1,084 )
 

Other comprehensive income—increase in net unrealized gain on securities available-for-sale, net of tax effect of $8.3 million

                        11,514     11,514  
                               

Balance as of September 30, 2010

    36,708,275   $ 369   $ 1,084,205   $ (599,354 ) $ (2,868 ) $ 11,410   $ 493,762  
                               

See "Notes to Condensed Consolidated Financial Statements."

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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Nine Months Ended
September 30,
 
 
  2010   2009  

Cash flows from operating activities:

             
 

Net loss

  $ (54,328 ) $ (1,570 )
   

Adjustments to reconcile net loss to net cash provided by operating activities:

             
     

Depreciation and amortization

    4,190     11,290  
     

Provision for credit losses

    180,627     107,000  
     

Gain from Affinity acquisition

        (66,989 )
     

(Gain) loss on sale of other real estate owned

    (4,044 )   1,320  
     

Provision for losses on other real estate owned

    14,778     13,697  
     

(Gain) loss on sale of premises and equipment

    (14 )   12  
     

Impairment loss on securities

    874      
     

Restricted stock amortization

    6,563     6,284  
     

Tax effect included in stockholders' equity of restricted stock vesting

    1,427     1,295  
     

Increase in accrued and deferred income taxes, net

    (41,718 )   (13,276 )
     

Decrease in FDIC loss sharing asset

    40,470      
     

Decrease in other assets

    13,578     11,351  
     

Decrease in accrued interest payable and other liabilities

    (8,991 )   (20,037 )
           
       

Net cash provided by operating activities

    153,412     50,377  
           

Cash flows from investing activities:

             
   

Cash paid to FDIC in settlement of Security Pacific Bank deposit acquisition

        (109 )
   

Net cash acquired in Los Padres Bank and Affinity Bank acquisitions

    171,366     251,679  
   

Net decrease in net loans outstanding

    24,043     71,708  
   

Proceeds from sale of loans

    204,164     30  
   

Securities available-for-sale:

             
     

Proceeds from maturities and paydowns

    135,295     53,009  
     

Purchases

    (448,856 )   (132,501 )
   

Net redemptions of FHLB stock

    3,744      
   

Proceeds from sales of other real estate owned

    61,560     28,533  
   

Capitalized costs to complete other real estate owned

    (638 )   (863 )
   

Purchases of premises and equipment, net

    (2,481 )   (2,564 )
   

Proceeds from sales of premises and equipment

    28     69  
           
     

Net cash provided by investing activities

    148,225     268,991  
           

Cash flows from financing activities:

             
   

Net increase (decrease) in deposits:

             
     

Noninterest-bearing

    131,166     99,468  
     

Interest-bearing

    (177,006 )   (395,272 )
   

Net proceeds from issuance of common stock

    26,587     148,782  
   

Restricted stock surrendered

    (836 )   (929 )
   

Tax effect included in stockholders' equity of restricted stock vesting

    (1,427 )   (1,295 )
   

Net decrease in borrowings

    (330,000 )   (20,383 )
   

Cash dividends paid

    (1,084 )   (10,800 )
           
     

Net cash used in financing activities

    (352,600 )   (180,429 )
           

Net (decrease) increase in cash and cash equivalents

    (50,963 )   138,939  

Cash and cash equivalents at beginning of period

    211,048     159,870  
           

Cash and cash equivalents at end of period

  $ 160,085   $ 298,809  
           

Supplemental disclosures of cash flow information:

             
 

Cash paid for interest

  $ 32,163   $ 41,979  
 

Cash paid for income taxes

    810     11,625  
 

Loans transferred to other real estate owned

    45,669     43,800  

See "Notes to Condensed Consolidated Financial Statements."

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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. We accept time and demand deposits, fund loans including real estate, construction, SBA and commercial loans, and offer other business oriented banking products. Our operations are primarily located in Southern California, but we expanded our presence in California's Central Coast with the acquisition of Los Padres Bank on August 20, 2010. See Note 2 for more information on this acquisition. The Bank focuses on conducting business with small to medium sized businesses in our marketplace and the owners and employees of those businesses. We acquired through two FDIC-assisted mergers three banking offices in the San Francisco Bay area and three offices in Arizona. Through our asset-based lending function, we also operate in Arizona, Northern California, 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, including the Los Padres Bank acquisition on August 20, 2010. See Notes 2 and 3 for more information about our acquisitions.

        The accounting and reporting policies of the Company are in accordance with U.S. generally accepted accounting principles, which we 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, among other items, the allowances for credit losses, the carrying value of other real estate owned, the

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION (Continued)

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

        As described in Note 2 below, Pacific Western acquired assets and assumed liabilities of the former Los Padres Bank ("Los Padres") in an FDIC-assisted transaction, which we refer to as the Los Padres acquisition. The acquired assets and assumed liabilities were measured at their estimated fair values. Management made significant estimates and exercised significant judgment in estimating fair values and accounting for the acquisition of Los Padres.

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

NOTE 2—ACQUISITIONS

        Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Results of operations of an acquired business are included in the statement of earnings from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. We adopted this guidance as of January 1, 2009 and applied it to the Los Padres and Affinity acquisitions.

        For acquisitions completed prior to January 1, 2009, the estimated merger-related charges associated with each acquisition were recorded as a liability at closing when the related purchase price was allocated. For each acquisition, we developed an integration plan for the Company that addressed, among other things, requirements for staffing, systems platforms, branch locations and other facilities. The remaining merger-related liability totals $1.1 million at September 30, 2010 and represents the estimated lease payments, net of estimated sublease income, for the remaining life of leases for abandoned space.

Federally Assisted Acquisition of Los Padres Bank

        On August 20, 2010, Pacific Western Bank acquired certain assets and liabilities of Los Padres Bank from the Federal Deposit Insurance Corporation ("FDIC") in an FDIC-assisted transaction. The FDIC assistance is embodied in a loss sharing agreement with the FDIC that covers a substantial portion of any future losses on loans and other real estate owned. Under the terms of such loss sharing agreement, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. We refer to the acquired assets subject to the loss sharing agreement collectively as "covered assets." The loss sharing arrangement for single family and commercial (non-single family) loans is in effect for 10 years and 5 years, respectively, from the acquisition date and the loss recovery provisions are in effect for 10 years and 8 years, respectively, from the acquisition date. Los Padres was a federally chartered savings bank headquartered in Solvang, California that operated 14 branches, including 11 branches in California (three in Ventura County, four in Santa Barbara County, and four in San Luis Obispo County) and three branches in Arizona (Maricopa County). We made this acquisition to expand our presence in the Central Coast of California.

        The operations of Los Padres Bank are included in our operating results from August 20, 2010, and added revenue of $2.8 million, non-interest expenses of $2.1 million, and net earnings of $420,000 for the third quarter of 2010. Such operating results are not necessarily indicative of future operating results. Los Padres' results of operations prior to the acquisition are not included in our operating results.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)

        The Los Padres acquisition has been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 20, 2010 acquisition date. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to closing date fair values becomes available and such information is considered final, whichever is earlier. The application of the acquisition method of accounting resulted in goodwill of $46.2 million. Such goodwill includes $9.5 million related to the FDIC's settlement accounting for Los Padres' wholly-owned subsidiary. We disagree with the FDIC's accounting for this item and are in process of negotiating with the FDIC to resolve this matter. Should we be successful in our negotiations, goodwill would be reduced by a cash payment to us from the FDIC of $9.5 million. No assurance can be given, however, that we will be successful in our efforts.

        In the Los Padres acquisition, the estimated fair value of the liabilities assumed exceeded the estimated fair value of the assets acquired. The excess of the fair value of the liabilities assumed over the fair value of the assets acquired is goodwill. All of the recognized goodwill is expected to be deductible for tax purposes. The determination of goodwill is influenced significantly by the FDIC-assisted transaction process. Under the FDIC-assisted transaction process, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer's bid, the FDIC may be required to make a cash payment to the acquirer. In the Los Padres Acquisition, we acquired net liabilities with cost basis of $160.8 million, received $144.0 million in a cash payment, and established a $13.4 million receivable from the FDIC that is net of the $3.4 million deposit premium we paid. The receivable from the FDIC is due at final settlement. A summary of the net liabilities received from the FDIC and the estimated fair value adjustments resulting in goodwill follows:

 
  August 20,
2010
 
 
  (In thousands)
 

Los Padres cost basis net liabilities on August 20, 2010

  $ (160,794 )

Cash received and due from the FDIC

    160,794  

Fair value adjustments—

       
 

Net increase (decrease) in acquired assets:

       
   

Loans

    (99,332 )
   

Other real estate owned

    (4,507 )
   

FDIC loss sharing asset

    69,244  
   

Core deposit intangible

    2,427  
   

Receivable from subsidiary

    (9,513 )
   

Miscellaneous

    (674 )
 

Net (increase) decrease in assumed liabilities:

       
   

Time deposits

    (467 )
   

FHLB advances

    (13 )
       
     

Total fair value adjustments

    (42,835 )

Deposit premium paid

    (3,393 )
       
 

Goodwill resulting from the Los Padres acquisition

  $ 46,228  
       

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)

        The statement of assets acquired and liabilities assumed at their estimated fair values as of August 20, 2010 are presented in the following table.

 
  August 20,
2010
 
 
  (In thousands)
 

Assets

       
 

Cash and cash equivalents

  $ 171,366  
 

Investment securities

    44,251  
 

Loans

    440,219  
 

Other real estate owned

    33,394  
 

Core deposit intangible

    2,427  
 

Goodwill

    46,228  
 

FDIC loss sharing asset

    69,244  
 

Other assets

    16,954  
       
   

Total assets acquired at fair value

  $ 824,083  
       

Liabilities

       
 

Deposits

  $ 752,185  
 

FHLB advances

    70,013  
 

Other liabilities

    1,885  
       
   

Total liabilities assumed at fair value

  $ 824,083  
       

        We refer to the loans acquired in the Los Padres acquisition as "covered loans" as we will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss sharing agreement. We account for loans under ASC 310-30 ("acquired impaired loan accounting") when (a) we acquire loans deemed to be impaired when there is evidence of credit deterioration since the origination and it is probable at the date of acquisition that we would be unable to collect all contractually required payments and (b) as a general policy election for non-impaired loans that we acquire. We may refer to acquired loans accounted for under ASC 310-30 as "acquired impaired loans". Revolving credit agreements such as home equity lines and credit card loans are excluded from acquired impaired loan accounting requirements. We acquired $34.5 million, at fair value, of revolving credit agreements, mainly home equity loans and commercial asset-based lines of credit, where the borrower had revolving privileges on the acquisition date; we account for such revolving covered loans in accordance with accounting requirements for purchased non-impaired loans.

        The acquired covered loans were recorded at their estimated fair value at the time of acquisition. Fair value of acquired loans is determined using a discounted cash flow model based on assumptions about the amount and timing of principal and interest payments, estimated prepayments, estimated default rates, estimated loss severity in the event of defaults, and current market rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not recorded on the acquisition date.

        For acquired impaired loans, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (b) estimated the

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)


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

        The excess of expected cash flows at acquisition over the initial fair value of acquired impaired loans is referred to as the "accretable yield" and is recorded as interest income over the estimated life of the loans using the effective yield method if the timing and amount of the future cash flows is reasonably estimable. Subsequent to acquisition, the Company aggregates loans into pools of loans with common credit risk characteristics such as loan type and risk rating. Increases in expected cash flows over those originally estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in the amount and changes in the timing of expected cash flows compared to those originally estimated decrease the accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses.

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

        At the August 20, 2010 acquisition date, we estimated the fair value of the Los Padres loan portfolio at $440.2 million.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)

        A summary of the covered loans acquired in the Los Padres acquisition as of August 20, 2010 and the related discount is as follows:

 
  August 20,
2010
 
 
  (In thousands)
 

Commercial real estate

  $ 233,560  

Single family

    113,371  

Multi-family

    65,835  

Construction and land

    55,217  

Commercial and industrial

    43,988  

Home equity lines of credit

    26,220  

Consumer(1)

    1,360  
       
 

Total gross loans

    539,551  

Discount resulting from acquisition date fair value adjustment

    (99,332 )
       
 

Total net loans

  $ 440,219  
       

(1)
Includes $828,000 of loans not covered by loss sharing agreement.

        The carrying value of covered loans purchased in the Los Padres acquisition, where we applied acquired impaired loan accounting, was $405.7 million at August 20, 2010. The undiscounted contractual cash flows for such covered acquired impaired loans was $681.9 million and the undiscounted estimated cash flows not expected to be collected was $129.9 million on the acquisition date.

        The accretable yield represents the amount by which the undiscounted expected cash flows exceed the estimated fair value. The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the acquired impaired loans. As of August 20, 2010, the weighted average contractual maturity of the acquired impaired loans was 8 years. The following table summarizes the accretable yield on the covered loans purchased in the Los Padres acquisition and accounted for under acquired impaired loan accounting as of August 20, 2010:

 
  Accretable
Yield
 
 
  (In thousands)
 

Undiscounted contractual cash flows

  $ 681,936  

Undiscounted cash flows not expected to be collected (nonaccretable difference)

    (129,866 )
       

Undiscounted cash flows expected to be collected

    552,070  

Estimated fair value of loans acquired

    (405,656 )

Acquired accrued interest receivable

    (2,436 )
       

Accretable yield

  $ 143,978  
       

        Acquired revolving lines of credit were recorded at fair value. The carrying amount of covered revolving lines of credit was $34.5 million, net of a $12.2 million discount, at August 20, 2010. The difference between the loan balances and fair value will be accreted to interest income over the life of

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)


the loans on a straight-line basis. The estimated life of the purchased revolving lines of credit agreements was 6 years. Such loans will be subject to our allowance for credit loss methodology, and a provision for credit losses will be recorded when the required allowance exceeds the remaining credit discount.

        Other real estate owned covered under loss sharing agreements with the FDIC is recorded at fair value and is also carried exclusive of the FDIC loss sharing asset. Subsequent decreases in fair value estimates for covered other real estate owned results in a reduction of the covered other real estate owned carrying amounts with a charge against earnings; further, a partial offset of such amount will be credited to FDIC loss sharing noninterest income reflecting the increase to the FDIC loss sharing asset.

        The FDIC loss sharing asset is initially recorded at fair value which represents the present value of the estimated cash payments from the FDIC for future losses on covered assets. The estimated gross cash flows associated with this asset are $74.9 million. 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.

        On August 28, 2009, Pacific Western Bank acquired certain assets and assumed certain liabilities of Affinity Bank ("Affinity") from the FDIC in an FDIC-assisted transaction. We entered into a loss sharing agreement with the FDIC, whereby the FDIC will cover a substantial portion of any future losses on loans, other real estate owned and certain investment securities. Under the terms of this loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the first $234 million of losses on Affinity covered assets and absorb 95% of losses and receive 95% of loss recoveries on Affinity covered assets exceeding $234 million. The Affinity loss sharing agreement is in effect for 5 years for commercial assets (non-residential loans, commercial OREO and certain securities) and 10 years for residential assets, both loans and OREO, from the August 28, 2009 acquisition date. The Affinity loss recovery provisions are in effect for 8 years for commercial assets and 10 years for residential assets from the acquisition date. Through September 30, 2010, we have claimed $116.1 million in gross losses related to covered assets under the loss sharing agreement. Affinity was a full service commercial bank headquartered in Ventura, California that operated 10 branch locations in California. We made this acquisition to expand our presence in California.

        The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 28, 2009 acquisition date.

        The following table presents our unaudited pro forma results of operations for the periods presented as if the Los Padres and Affinity acquisitions had been completed on January 1, 2009. The unaudited pro forma results of operations include the historical accounts of the Company, Los Padres and Affinity and pro forma adjustments as may be required, including the amortization of intangibles

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)

with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had this acquisition been completed at the beginning of 2009. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

 
  Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2010   2009   2010   2009  
 
  (In thousands, except
per share data)

 

Revenues (net interest income plus noninterest income)

  $ 79,760   $ 78,333   $ 239,269   $ 256,530  

Net (loss) earnings

  $ 3,888   $ (39,637 ) $ (56,196 ) $ (57,296 )

Net (loss) income per share:

                         
 

Basic

  $ 0.11   $ (1.23 ) $ (1.61 ) $ (1.84 )
 

Diluted

  $ 0.11   $ (1.23 ) $ (1.61 ) $ (1.84 )

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

        Goodwill and intangible assets arise from purchase business combinations. 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 is recognized in an amount equal to that excess and is included in noninterest expense in the consolidated statement of earnings (loss). The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. First, the fair value of the reporting unit is determined, which is the price that would be received to sell the unit as a whole in an orderly transaction between market participants. Then, the estimated fair value of the reporting unit is allocated to all of the reporting unit's individual assets and liabilities as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the price paid to acquire it. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. Goodwill in the amount $46.2 million was recorded in the August 2010 Los Padres acquisition.

        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. If the recoverable amount of the intangible asset is determined to be less than its carrying value, we would then measure the amount of impairment based on an estimate of the intangible asset's fair value at that time. If the fair value is below the carrying value, the intangible asset is reduced to such fair value and impairment is recognized as noninterest expense in the consolidated statement of earnings (loss).

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—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   Nine Months Ended
September 30,
 
 
  September 30,
2010
  June 30,
2010
  September 30,
2009
 
 
  2010   2009  
 
  (In thousands)
 

Gross amount of CDI and CRI:

                               
 

Balance at beginning of period

  $ 75,911   $ 75,911   $ 73,099   $ 75,911   $ 72,990  
 

Adjustment to Security Pacific Bank CDI

                    109  
 

Additions

    2,427         2,812     2,427     2,812  
                       
   

Balance at end of period

    78,338     75,911     75,911     78,338     75,911  
                       

Accumulated amortization:

                               
 

Balance at beginning of period

    (47,463 )   (45,039 )   (37,682 )   (42,615 )   (33,068 )
 

Amortization

    (2,434 )   (2,424 )   (2,578 )   (7,282 )   (7,192 )
                       
   

Balance at end of period

    (49,897 )   (47,463 )   (40,260 )   (49,897 )   (40,260 )
                       

Net CDI and CRI at end of period

  $ 28,441   $ 28,448   $ 35,651   $ 28,441   $ 35,651  
                       

        The aggregate amortization expense related to the intangible assets is expected to be $9.7 million for 2010. The estimated aggregate amortization expense related to these intangible assets for each of the subsequent four years is $8.5 million for 2011, $6.1 million for 2012, $4.5 million for 2013, and $2.9 million for 2014.

NOTE 4—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 Affinity acquisition and are covered by a FDIC

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

loss sharing agreement. Other securities include an investment in overnight money market funds at a financial institution. See Note 9 for information on fair value measurements and methodology.

 
  September 30, 2010  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 
 
  (In thousands)
 

Government-sponsored entity debt securities

  $ 33,221   $ 124   $   $ 33,345  

Municipal securities

    7,439     208     (4 )   7,643  

Residental mortgage-backed securities:

                         
 

Government and government-sponsored entity pass through securities

    621,622     15,714     (223 )   637,113  
 

Government and government-sponsored entity collateralized mortgage obligations

    56,347     997     (106 )   57,238  
 

Covered private label collateralized mortgage obligations

    48,163     5,619     (2,657 )   51,125  

Other securities

    2,303             2,303  
                   
   

Total securities available-for-sale

  $ 769,095   $ 22,662   $ (2,990 ) $ 788,767  
                   

 

 
  December 31, 2009  
 
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 
 
  (In thousands)
 

Government-sponsored entity debt securities

  $ 38,945   $ 22   $ (319 ) $ 38,648  

Municipal securities

    7,880     334         8,214  

Residental mortgage-backed securities:

                         
 

Government and government-sponsored entity pass through securities

    232,717     3,655     (840 )   235,532  
 

Government and government-sponsored entity collateralized mortgage obligations

    89,087     512     (2,702 )   86,897  
 

Covered private label collateralized mortgage obligations

    52,967     713     (1,555 )   52,125  

Other securities

    2,284             2,284  
                   
   

Total securities available-for-sale

  $ 423,880   $ 5,236   $ (5,416 ) $ 423,700  
                   

        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 4—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:

 
  September 30, 2010  
 
  Amortized
Cost
  Estimated
Fair
Value
 
 
  (In thousands)
 

Due in one year or less

  $ 7,890   $ 7,928  

Due after one year through five years

    30,507     31,141  

Due after five years through ten years

    50,042     51,379  

Due after ten years

    680,656     698,319  
           
 

Total securities available-for-sale

  $ 769,095   $ 788,767  
           

        At September 30, 2010, 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 $617.0 million. We do not own any equity securities issued by Fannie Mae or Freddie Mac.

        As of September 30, 2010, securities available-for-sale with an estimated fair value of $155.0 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

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

 
  September 30, 2010   December 31, 2009  
 
  Less Than 12 Months   12 Months or Longer   Total   Less Than 12 Months  
 
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
  Estimated
Fair
Value
  Gross
Unrealized
Losses
 
 
  (In thousands)
 

Government-sponsored entity debt securities

  $   $   $   $   $   $   $ 35,626   $ (319 )

Municipal securities

    236     (4 )           236     (4 )        

Residential mortgage-backed securities:

                                                 
 

Government and government-sponsored entity pass through securities

    59,926     (223 )           59,926     (223 )   113,621     (840 )
 

Government and government-sponsored entity collateralized mortgage obligations

    6,127     (82 )   2,685     (24 )   8,812     (106 )   64,661     (2,702 )
 

Covered private label collateralized mortgage obligations

    2,651     (1,303 )   4,007     (1,354 )   6,658     (2,657 )   30,511     (1,555 )
                                   
   

Total

  $ 68,940   $ (1,612 ) $ 6,692   $ (1,378 ) $ 75,632   $ (2,990 ) $ 244,419   $ (5,416 )
                                   

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

        We reviewed the securities that were in a continuous loss position less than 12 months and longer than 12 months at September 30, 2010, and concluded that their losses were a result of the level of market interest rates relative to the types of securities in our investment portfolio and not a result of the underlying issuers' abilities to repay. Accordingly, we determined that the securities were temporarily impaired. Additionally, we have the ability to hold these securities until their fair values recover to their costs, and therefore did not recognize the temporary impairment in the consolidated statements of earnings (loss).

        During the quarter we determined that one covered private label collateralized mortgage obligation security was fully impaired due to deteriorating cash flows and significant delinquency of the underlying loan collateral and recorded an other-than-temporary impairment loss of $874,000 in the consolidated statement of earnings (loss). This loss is offset by FDIC loss sharing income of $699,000, which represents the FDIC's 80% share of the loss.

        At September 30, 2010, the Company had a $57.3 million investment in Federal Home Loan Bank of San Francisco (FHLB) stock carried at cost. This amount includes $10.7 million acquired in the Los Padres acquisition. 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 four cash dividends, though at rates less than that paid in the past, and repurchased $3.7 million of our excess stock. We evaluated the carrying value of our FHLB stock investment at September 30, 2010 and determined that it was not impaired. Our evaluation considered the long-term nature of the investment, the liquidity position of the FHLB, the actions being taken by the FHLB to address its regulatory situation, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

NOTE 5—COVERED LOANS AND COVERED OTHER REAL ESTATE OWNED

        We refer to the loans acquired in the Los Padres and Affinity acquisitions as "covered loans" as we will be reimbursed for a substantial portion of any future losses on them under the terms of the FDIC loss sharing agreements. At the August 20, 2010 acquisition date, we estimated the fair value of the Los Padres loan portfolio at $440.2 million, which represented the expected cash flows from the

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—COVERED LOANS AND COVERED OTHER REAL ESTATE OWNED (Continued)

portfolio discounted at a market-based rate. The carrying values of the covered loans were as follows as of the dates indicated:

 
  September 30,
2010
  December 31,
2009
 
 
  (In thousands)
 

Covered loans, gross

  $ 1,183,105   $ 742,535  

Less: discount

    (176,786 )   (102,849 )
           
 

Covered loans, net of discount

    1,006,319     639,686  

Less: allowance for loan losses

    (40,179 )   (18,000 )
           
 

Covered loans, net

  $ 966,140   $ 621,686  
           

        The amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired impaired loans on the acquisition date is the initial accretable yield. The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. The 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 as of January 1, 2010

  $ 621,686   $ (226,446 )
 

Addition

    405,656     (143,978 )
 

Accretion

    35,708     35,708  
 

Payments received

    (91,529 )    
 

Decrease in expected cash flows

        16,292  
 

Provision for credit losses

    (36,950 )    
           

Balance as of September 30, 2010

  $ 934,571   $ (318,424 )
           

        The carrying amount of covered revolving lines of credit is $31.6 million, net of a $12.1 million discount, at September 30, 2010.

        The covered loans are subject to our internal and external credit review. If and when deterioration in the expected cash flows occurs, a provision for credit losses will be charged to earnings for the full amount without regard to the FDIC loss sharing agreements. The portion of the estimated loss reimbursable from the FDIC will be recorded in FDIC loss sharing income, net and will increase the FDIC loss sharing asset. During the third quarter of 2010 we recorded a provision for credit losses of $7.4 million on the covered loan portfolio; such provision represents credit deterioration since the Affinity acquisition date based on decreases in expected cash flows on certain covered loans measured as of September 30, 2010 compared to acquisition date expected cash flows. We recorded $6.4 million in FDIC loss sharing income, net during the third quarter of 2010 primarily to reflect the FDIC's share of this estimated loss.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—COVERED LOANS AND COVERED OTHER REAL ESTATE OWNED (Continued)

        Other real estate owned ("OREO") covered under loss sharing agreements with the FDIC ("covered OREO") is recorded at fair value and is also carried exclusive of the FDIC loss sharing asset. Subsequent decreases in fair value estimates for covered OREO result in a reduction of the covered OREO carrying amounts and an increase in the FDIC loss sharing asset for the reimbursable portion.

        The following table summarizes covered OREO by property type as of the date indicated:

Property Type
  September 30,
2010
 
 
  (In thousands)
 

Construction and land development

  $ 17,322  

Commercial real estate

    13,557  

Multi-family

    11,219  

Single family residence

    13,146  
       
 

Total covered OREO

  $ 55,244  
       

        The following table summarizes the activity related to the covered OREO for the period indicated:

 
  Covered
OREO
 
 
  (In thousands)
 

Balance as of January 1, 2010

  $ 27,688  

Addition due to acquisition

    33,394  
 

Foreclosures

    14,239  
 

Write-downs from updated appraisals

    (3,415 )
 

Reductions related to sales

    (16,662 )
       

Balance as of September 30, 2010

  $ 55,244  
       

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 collectability of this asset is dependent upon the performance of the underlying covered assets, the

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—FDIC LOSS SHARING ASSET (Continued)


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 as of January 1, 2010

  $ 112,817  
 

Addition due to acquisition

    69,244  
 

FDIC share of additional losses

    31,377  
 

Cash payments received from FDIC

    (70,160 )
 

Net accretion

    (2,470 )
 

Reclassification to claims receivable

    (8,767 )
       
   

Subtotal

    132,041  
 

Filed claims receivable(1)

    9,550  
       

Balance as of September 30, 2010

  $ 141,591  
       

(1)
Represents second quarter 2010 claim filed with the FDIC for losses on covered assets related to the Affinity acquisition. We received payment from the FDIC for this claim on October 28, 2010.

NOTE 7—BORROWINGS, SUBORDINATED DEBENTURES AND BROKERED DEPOSITS

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

September 30, 2010  
Maturity Date
  Amount   Interest
Rate
  Next Date
Callable
by FHLB
 
 
  (In thousands)
   
   
 

January 11, 2013

  $ 50,000     2.71 %   January 11, 2011 (1)

December 11, 2017

    200,000     3.16 %   December 11, 2010 (1)

January 11, 2018

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

Total FHLB advances

  $ 275,000     3.03 %      
                   

(1)
Callable quarterly thereafter by FHLB.

        The FHLB advances outstanding at September 30, 2010, are callable advances. The maturities shown are the contractual maturities for the advances. The callable advances have all passed their initial call dates and are currently callable on a quarterly basis by the FHLB. While the FHLB may call the advances to be repaid for any reason, they are likely to be called if market interest rates, for borrowings of similar remaining term, are higher than the advances' stated rates on the call dates. We may repay the advances at any time with a prepayment penalty. Our aggregate remaining borrowing capacity under the FHLB secured lines of credit was $925.8 million at September 30, 2010. Additionally, the Bank had secured borrowing capacity from the Federal Reserve discount window of

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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)


$387.2 million at September 30, 2010. The Bank also maintains unsecured lines of credit of $52.0 million with correspondent banks for the purchase of overnight funds; these lines are subject to availability of funds. We acquired and retired $70.0 million in FHLB advances in the Los Padres acquisition.

        The Company had an aggregate amount of $129.6 million in subordinated debentures outstanding at September 30, 2010. These subordinated debentures were issued in seven separate series. Each issuance has 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 total $123.0 million at September 30, 2010. 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 relates to one of the following three events: (i) a change in the tax treatment of the debentures stemming from a change in the IRS laws; (ii) a change in the regulatory treatment of the underlying trust preferred securities as Tier 1 capital; and (iii) a requirement to register the underlying trust as a registered investment company. However, redemption in the first five years was subject to a prepayment penalty. Trust I and Trust CI may not be called for 10 years from the date of issuance unless one of the three events described above has occurred and then a prepayment penalty applies. In addition, there is a prepayment penalty if 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 or we no longer need to provide notice under applicable regulations.

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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)

        The following table summarizes the terms of each issuance of the subordinated debentures outstanding as of September 30, 2010:

Series
  Date
Issued
  September 30,
2010
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     3.39 %   12/15/10  

Trust VI

    9/3/03     10,310     9/15/33       (1) Variable   3 month LIBOR + 3.05     3.34 %   12/11/10  

Trust CII

    9/17/03     5,155     9/17/33       (1) Variable   3 month LIBOR + 2.95     3.24 %   12/15/10  

Trust VII

    2/5/04     61,856     4/23/34       (1) Variable   3 month LIBOR + 2.75     3.04 %   1/28/11  

Trust CIII

    8/15/05     20,619     9/15/35       (1) Variable   3 month LIBOR + 1.69     1.98 %   12/15/10  

Unamortized premium(3)

          2,840                                  
                                             

Total subordinated debentures

        $ 129,648                                  
                                             

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

(2)
As of October 28, 2010; excludes debt issuance costs.

(3)
This amount represents the fair value adjustment on assumed trusts.

        As previously mentioned, the subordinated debentures were issued to trusts established by us, or entities we acquired, which in turn issued $123.0 million of trust preferred securities. These securities are currently included in our Tier I capital for purposes of determining the Company's Tier I and total risk-based capital ratios. The Board of Governors of the Federal Reserve System, which is the holding company's banking regulator, has promulgated a modification of the capital regulations affecting trust preferred securities that is scheduled to be effective on March 31, 2011. At that time, the Company will be allowed to include in Tier I capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders' equity less certain intangibles, including goodwill, core deposit intangibles and customer relationship intangibles, net of any related deferred income tax liability. The regulations currently in effect through December 31, 2010, limit the amount of trust preferred securities that can be included in Tier I capital to 25% of the sum of core capital elements without a deduction for permitted intangibles. We have determined that our Tier I capital ratios would remain above the well-capitalized level had the modification of the capital regulations been in effect at September 30, 2010. We expect that our Tier I capital ratios will be at or above the existing well-capitalized levels on March 31, 2011, the first date on which the modified capital regulations must be applied.

        The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, provides that existing trust preferred securities issued before May 19, 2010 are grandfathered in as Tier 1 capital for all bank holding companies having less than $15 billion in

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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)


consolidated total assets at December 31, 2009. Since our consolidated total assets were less than $15 billion at December 31, 2009, our trust preferred securities will continue to be included in Tier 1 capital at the allowable amounts.

        Brokered deposits totaled $159.7 million at September 30, 2010 and are included in the interest-bearing deposits balance on the accompanying condensed consolidated balance sheets. Such amount includes (a) $55.2 million of 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, and (b) $104.5 million of wholesale CDs.

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 amounting to $739.1 million and $790.6 million were outstanding at September 30, 2010 and December 31, 2009, 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 amounting to $24.4 million and $31.2 million were outstanding at September 30, 2010 and December 31, 2009, respectively.

        The Company has investments in low income housing project partnerships which provide the Company income tax credits and in several small business investment companies. As of September 30, 2010 the Company had commitments to contribute capital to these entities totaling $177,000.

        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 ultimate outcome and amount of liability, if any, with

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 8—COMMITMENTS AND CONTINGENCES (Continued)

respect to these legal actions to which we are currently a party cannot presently be ascertained with certainty. In the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

NOTE 9—FAIR VALUE MEASUREMENTS

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

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

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

 
  Fair Value Measurement as of September 30, 2010  
 
  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:

                         
 

Government-sponsored entity debt securities

  $ 33,345   $   $ 33,345   $  
 

Municipal securities

    7,643         7,643      
 

Government and government-sponsored enitity mortgage-backed securities

    694,351         694,351      
 

Covered private label CMOs

    51,125             51,125  
 

Other securities

    2,303         2,303      
                   

  $ 788,767   $   $ 737,642   $ 51,125  
                   

Measured on a Nonrecurring Basis:

                         
 

Non-covered impaired loans

  $ 136,743   $   $ 18,734   $ 118,009  
 

Covered impaired loans

    59,334         51,373     7,961  
 

Non-covered other real estate owned

    12,753         11,972     781  
 

Covered other real estate owned

    10,664         10,568     96  
 

SBA loan servicing asset

    1,669             1,669  
                   

  $ 221,163   $   $ 92,647   $ 128,516  
                   

        There were no significant transfers of assets between Level 1 and Level 2 of the fair value hierarchy during the three and nine months ended September 30, 2010.

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

 
  Three Months
Ended
September 30,
2010
  Nine Months
Ended
September 30,
2010
 
 
  (In thousands)
 

Non-covered impaired loans

  $ (14,958 ) $ (28,215 )

Covered impaired loans

    (7,166 )   (25,633 )

Non-covered other real estate owned

    (1,571 )   (8,042 )

Covered other real estate owned

    (1,038 )   (3,091 )

SBA loan servicing asset

        139  
           
 

Total loss on assets measured on a nonrecurring basis

  $ (24,733 ) $ (64,842 )
           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

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

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

Beginning as of January 1, 2010

  $ 52,125  
 

Total realized in earnings

    1,055  
 

Other-than-temporary impairment loss

    (874 )
 

Total unrealized in comprehensive income

    3,804  
 

Principal collections

    (4,985 )
       

Balance as of September 30, 2010

  $ 51,125  
       

        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:

 
  September 30, 2010   December 31, 2009  
 
  Carrying or
Contract
Amount
  Estimated
Fair
Value
  Carrying or
Contract
Amount
  Estimated
Fair
Value
 
 
  (In thousands)
 

Financial Assets:

                         
 

Cash and due from banks

  $ 91,615   $ 91,615   $ 93,915   $ 93,915  
 

Interest-earning deposits in financial institutions

    68,470     68,470     117,133     117,133  
 

Securities available-for-sale

    788,767     788,767     423,700     423,700  
 

Investment in FHLB stock

    57,332     57,332     50,429     50,429  
 

Loans, net

    4,188,055     4,175,933     4,210,352     4,195,805  

Financial Liabilities:

                         
 

Deposits

    4,800,914     4,816,420     4,094,569     4,102,467  
 

Borrowings

    275,000     299,455     542,763     557,363  
 

Subordinated debentures

    129,648     134,369     129,798     146,413  

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

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

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

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

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

        Our covered private label collateralized mortgage obligation securities, which we refer to as private label CMOs, are categorized as Level 3 due in part to the inactive market for such securities. There is a wide range of prices quoted for private label CMOs among independent third party pricing services and this range reflects the significant judgment being exercised over the assumptions and variables that determine the pricing of such securities. We consider this subjectivity to be a significant unobservable input and have concluded the private label CMOs should be categorized as a Level 3 measured asset. While the private label CMOs may be based on significant unobservable inputs, our fair value was based on prices provided to us by a nationally recognized pricing service which we also use to determine the fair value of the majority of our securities portfolio. We determined the reasonableness of the fair values by reviewing assumptions at the individual security level about prepayment, default expectations, estimated severity loss factors, projected cash flows and estimated collateral performance, all of which are not directly observable in the market. We recorded $874,000 in losses on impaired securities for the three and nine months ended September 30, 2010 for a security with a fair value of zero as of September 30, 2010.

        FHLB stock.    The fair value of FHLB stock is based on our recorded investment. 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 four cash dividends, though at rates less than that paid in the past, and the FHLB recently redeemed $3.7 million 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 September 30, 2010 or December 31, 2009.

        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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

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

        Non-covered impaired loans.    Non-covered impaired loans are measured and recorded at fair value on a non-recurring basis. All of our non-covered nonaccrual loans and restructured loans are considered impaired and are reviewed individually for the amount of impairment, if any. To the extent a loan is collateral dependent we measure such impaired loan based on the estimated fair value of the underlying collateral. The fair value of each loan's collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The impaired loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, including an SBA government guarantee, cash flows discounted at the effective loan rate, and management's judgment. Of the $105.5 million of nonaccrual loans at September 30, 2010, loans totaling $13.0 million were written down to their fair values through charge-offs during the quarter. We recorded $585,000 and $1.1 million in losses on impaired loans for the three and nine months ended September 30, 2010 for loans with a fair value of zero as of September 30, 2010. At September 30, 2010, the recorded investment in non-covered impaired loans with a related allowance is $140.0 million and the related allowance is $16.3 million.

        Covered loans.    Covered loans were measured at estimated fair value on the date of acquisition. Thereafter, the fair value of covered loans is measured using the same methodology as that for non-covered loans. The above discussion for non-covered loans and non-covered impaired loans is applicable to covered loans following their acquisition date.

        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; 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

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)


considered a Level 3 measurement. The OREO losses shown above are write-downs based on either a recent appraisal obtained after foreclosure or an accepted purchase offer by an independent third party received after foreclosure.

        SBA servicing asset.    In accordance with ASC Topic 860, Accounting for Servicing of Financial Assets, the SBA servicing asset, included in other assets in the condensed consolidated balance sheets, is carried at its implied fair value of $1.7 million. The fair value of the servicing asset is estimated by discounting future cash flows using market-based discount rates and prepayment speeds. The discount rate is based on the current US Treasury yield curve, as published by the Department of the Treasury, plus a spread for the marketplace risk associated with these assets. We utilize estimated prepayment vectors using SBA prepayment information provided by Bloomberg for pools of similar assets to determine the timing of the cash flows. These nonrecurring valuation inputs are considered to be Level 3 inputs.

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

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

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

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

        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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

characteristics of various financial instruments, and other factors. These estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of September 30, 2010, 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   Nine Months Ended
September 30,
 
 
  September 30,
2010
  June 30,
2010
  September 30,
2009
 
 
  2010   2009  
 
  (In thousands, except per share data)
 

Basic Earnings (Loss) Per Share:

                               
 

Net earnings (loss)

  $ 3,500   $ 2,705   $ 2,725   $ (54,328 ) $ (1,570 )
 

Less: earnings allocated to unvested restricted stock(1)

    (126 )   (99 )   (93 )   (24 )   (240 )
                       
     

Net earnings (loss) allocated to common shares

  $ 3,374   $ 2,606   $ 2,632   $ (54,352 ) $ (1,810 )
                       
 

Weighted-average basic shares and unvested restricted stock outstanding

    36,712.4     36,732.9     33,308.0     36,355.1     32,473.5  
 

Less: weighted-average unvested restricted stock outstanding

    (1,375.1 )   (1,420.6 )   (1,203.2 )   (1,347.6 )   (1,245.1 )
                       
     

Weighted-average basic shares outstanding

    35,337.3     35,312.3     32,104.8     35,007.5     31,228.4  
                       
 

Basic earnings (loss) per share

  $ 0.10   $ 0.07   $ 0.08   $ (1.55 ) $ (0.06 )
                       

Diluted Earnings (Loss) Per Share:

                               
 

Net earnings (loss) allocated to common shares

  $ 3,374   $ 2,606   $ 2,632   $ (54,352 ) $ (1,810 )
                       
 

Weighted-average basic shares outstanding

    35,337.3     35,312.3     32,104.8     35,007.5     31,228.4  
 

Add: warrants outstanding

        86.8              
                       
   

Weighted-average diluted shares outstanding

    35,337.3     35,399.1     32,104.8     35,007.5     31,228.4  
                       
 

Diluted earnings (loss) per share

  $ 0.10   $ 0.07   $ 0.08   $ (1.55 ) $ (0.06 )
                       

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 11—STOCK COMPENSATION PLANS

        At September 30, 2010, there were outstanding 859,594 shares of unvested time-based restricted common stock and 500,000 shares of unvested performance-based restricted common stock. The awarded shares of time-based restricted common stock vest over a service period of three to five years from date of the grant. The awarded shares of performance-based restricted common stock vest in full on the date the Compensation, Nominating and Governance, or CNG, Committee of the Board of Directors, as Administrator of the Company's 2003 Stock Incentive Plan, or the 2003 Plan, determines that the Company achieved certain financial goals established by the CNG Committee as set forth in the grant documents. Both time-based and performance-based restricted common stock vest immediately upon a change in control of the Company as defined in the 2003 Plan and upon death of the employee.

        Compensation expense related to awards of restricted stock is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using the straight-line method. The vesting of performance-based restricted stock awards and recognition of related compensation expense may occur over a shorter vesting period if financial performance targets are achieved earlier than anticipated. In 2007, the amortization of certain performance-based restricted stock awards was suspended. In 2008 we concluded it was improbable that the financial targets would be met for the performance-based stock awards and we reversed the accumulated amortization on those awards. If and when the attainment of such performance targets is deemed probable in future periods, a catch-up adjustment will be recorded and amortization of such performance-based restricted stock will begin again. The total amount of unrecognized compensation expense related to the performance-based restricted stock for which amortization was suspended totaled $26.6 million at September 30, 2010. The unvested performance-based restricted stock awarded in 2006 expires in 2013. The unvested performance-based restricted stock awarded in 2007 and 2008 expires in 2017. Restricted stock amortization totaled $2.1 million, $2.2 million and $2.2 million for the three months ended September 30, 2010, June 30, 2010 and September 30, 2009, respectively, and $6.6 million and $6.3 million for the nine months ended September 30, 2010 and 2009, respectively. Such amounts are included in compensation expense on the accompanying condensed consolidated statements of earnings (loss).

        The Company's 2003 Plan permits stock based compensation awards to officers, directors, key employees and consultants. The 2003 Plan authorizes grants of stock-based compensation instruments to purchase or issue up to 5,000,000 shares of authorized but unissued Company common stock, subject to adjustments provided by the 2003 Plan. As of November 1, 2010, there were 1,193,662 shares available for grant under the 2003 Plan.

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS

        FASB ASC 810 Consolidation ("ASC 810") became effective for us on January 1, 2010, and was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. The new authoritative accounting guidance requires additional

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS (Continued)


disclosures about the reporting entity's involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity's financial statements. The new authoritative accounting guidance under ASC 810 did not have an impact on our financial statements.

        FASB ASC 860 Transfers and Servicing ("ASC 860") was amended to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a "qualifying special-purpose entity" and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did not have an impact on our financial statements.

        In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-06, "Improving Disclosures about Fair Value Measurements". ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately. This standard is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of revised Level 3 disclosure requirements which are effective for interim and annual reporting periods beginning after December 15, 2010. Comparative disclosures are not required in the year of adoption. We adopted the provisions of the standard on January 1, 2010, which did not have a material impact on our financial statements.

        In April 2010, the FASB issued ASU 2010-18, "Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset". ASU 2010-18 requires that a modified loan in a pool of purchased credit-impaired loans remain in the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. A one-time election to terminate accounting for loans in a pool, which may be made on a pool-by-pool basis, is provided upon adoption of ASU 2010-18. This ASU is effective for modifications of loans accounted for within pools under ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality," occurring in the first interim and annual reporting period ending on or after July 15, 2010. ASU 2010-18 is to be applied prospectively, but early application is permitted. We adopted the provisions of this ASU effective September 30, 2010; such adoption had no material effect on our financial statements.

        In July 2010, the FASB issued ASU 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses." ASU 2010-20 requires additional information about credit risk exposure for financing receivables and the related allowance for loan losses including an allowance rollforward on a portfolio segment basis, the recorded investment in financing receivables on a portfolio segment basis, the nonaccrual status of financing receivables by class, impaired financing receivables by class, aging of past due receivables by class, credit quality indicators by class, troubled debt restructurings information by class, and significant purchases and sales of financing receivables. ASU 2010-20 defines portfolio segment as the level at which an entity develops and documents a

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 12—RECENT ACCOUNTING PRONOUNCEMENTS (Continued)


systematic method for determining its allowance for loan losses. Classes of financing receivables generally are a disaggregation of portfolio segments. The required disclosures will be effective for us on December 31, 2010, and will be included in our 2010 Annual Report on Form 10-K. Adoption of this standard is not expected to have a material impact on our financial statements.

NOTE 13—COMMON STOCK

        On March 1, 2010 holders of 1,348,040 warrants to acquire PacWest Bancorp common stock exercised such warrants for net proceeds of $26.6 million. The warrants, which had a strike price of $20.20 per share, represented 99% of the 1,361,656 six-month warrants issued in August 2009. The additional 1,361,657 million warrants that were issued in August 2009 with a strike price of $20.20 expired unexercised during August 2010.

NOTE 14—DIVIDED APPROVAL

        On November 3, 2010, our Board of Directors declared a quarterly cash dividend of $0.01 per common share payable on November 30, 2010, to stockholders of record at the close of business on November 15, 2010.

NOTE 15—SUBSEQUENT EVENTS

        We have evaluated events that have occurred subsequent to September 30, 2010 and have concluded there are no subsequent events that would require recognition or disclosure in the accompanying condensed consolidated financial statements.

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

Forward-Looking Information

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

        If any of these risks or uncertainties materializes, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. The Company assumes no obligation to update such forward-looking statements.

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Overview

        We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our subsidiary bank, Pacific Western Bank, which we refer to as Pacific Western or the Bank.

        Pacific Western is a full-service community bank offering a broad range of banking products and services including: accepting time and demand deposits; originating loans, including commercial, real estate construction, SBA-guaranteed, consumer, and international loans; and providing other business-oriented products. Our operations are primarily located in Southern California and the Bank focuses on conducting business with small to medium-sized businesses and the owners and employees of those businesses in our marketplace. We acquired through two FDIC-assisted mergers three banking offices in the San Francisco Bay area and three offices in Arizona. Through our asset-based lending operation we also operate in Arizona, Northern California, and the Pacific Northwest. At September 30, 2010, our assets totaled $5.7 billion, of which loans totaled $4.3 billion, including $996.1 million of covered loans. At that date, the loan portfolio was broken down as follows: approximately 74% were real estate mortgage loans, 18% were commercial loans, 7% were real estate construction loans, and less than 1% were consumer and other loans. These percentages include some foreign loans, primarily to individuals or entities with business in Mexico, representing 1% of total non-covered loans. Our portfolio's value and credit quality is affected in large part by real estate trends in Southern California, which have been negative over the last several quarters.

        Pacific Western competes actively for deposits, and emphasizes solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on quality loan growth and loan yield, deposit cost, and net interest margin, as net interest income, on a year-to-date basis, accounts for 80% of our net revenues (net interest income plus noninterest income).

Los Padres Acquisition

        On August 20, 2010, Pacific Western Bank acquired certain assets and liabilities of Los Padres Bank from the Federal Deposit Insurance Corporation ("FDIC") in an FDIC-assisted transaction. As of that date, we added $824.1 million in assets, consisting primarily of $440.2 million in loans, and $752.2 million in deposits. The acquisition enabled us to expand our presence in California's Central Coast. We added 14 branches, including 11 branches in California (three in Ventura County, four in Santa Barbara County, and four in San Luis Obispo County) and three branches in Arizona (in Maricopa County). We entered into a loss sharing agreement with the FDIC, whereby the FDIC will cover a substantial portion of any future losses on loans and other real estate owned. Under the terms of such loss sharing agreement, the FDIC will absorb 80% of losses and share in 80% of loss recoveries. The loss sharing arrangement for non-residential and residential loans is in effect for 5 years and 10 years from the August 20, 2010 acquisition date and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date.

        The acquisition has been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the August 20, 2010 acquisition date. Such fair values are preliminary estimates and are subject to adjustment for up to one year after the acquisition date or when additional information relative to closing date fair values becomes available and such information is considered final, whichever is earlier. The application of the acquisition method of accounting resulted in $46.2 million of goodwill. Such goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired. See Note 2 of the Notes to unaudited Consolidated Financial Statements for additional information regarding the acquisition.

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July 1, 2010 Loan Portfolio Purchase

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

February 2010 Non-Covered Loan Sale

        On February 23, 2010, the Bank sold 61 non-covered adversely classified loans totaling $323.6 million to an institutional buyer for $200.6 million in cash. The difference between the amount of the loans sold and the cash selling price of $123.0 million was charged to the allowance for loan losses at the time of the sale. Such charge-off was offset by $51.6 million in allowance previously allocated to the loans sold. The sale was on a servicing-released basis and without recourse to Pacific Western Bank. All loans sold were legacy Pacific Western Bank loans and none were covered loans. The loans sold included $110.5 million in nonaccrual loans and $105.1 million in restructured loans. The loan sale was intended to reduce non-covered loan concentrations and improve credit quality measures.

Recent Legislation

        On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Dodd-Frank Act contains numerous provisions that will affect all banks and bank holding companies, and will fundamentally change the system of oversight described in Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 under the caption "Business—Supervision and Regulation." The Dodd-Frank Act includes provisions that, among other things, will:

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        Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. The environment in which banking organizations will now operate, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the business model and profitability of banking organizations that cannot now be foreseen. The specific impact of the Dodd-Frank Act on our current activities or new financial activities we may consider in the future, our financial performance and the markets in which we operate will depend on the manner in which the relevant agencies develop and implement the required regulations and the reaction of market participants to these regulatory developments. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us, our customers or the financial industry more generally.

Key Performance Indicators

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

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

        Our primary interest-earning asset is loans. Our primary interest-bearing liabilities include deposits, borrowings, and subordinated debentures. We attribute our high net interest margin to our loan-to-deposit ratio and a high level of noninterest-bearing deposits. While our deposit balances will fluctuate depending on deposit holders' perceptions of alternative yields available in the market, we attempt to minimize these variances by attracting a high percentage of noninterest-bearing deposits, which have no expectation of yield. At September 30, 2010, approximately 31% of our total deposits were noninterest-bearing.

        The disruptions in the financial credit and liquidity markets have resulted in increased competition from financial institutions seeking to maintain liquidity. In addition to deposits, we have borrowing capacity under various credit lines which we use for liquidity needs such as funding loan demand, managing deposit flows and interim acquisition financing. This borrowing capacity is relatively flexible and has become one of the least expensive sources of funds. However, our borrowing lines are considered a secondary source of liquidity as we serve our local markets and customers with our deposit products.

        We generally seek new lending opportunities in the $500,000 to $10 million range, try to limit loan maturities for commercial loans to one year, for construction loans up to 18 months, and for commercial real estate loans up to ten years, and to price lending products so as to preserve our interest spread and net interest margin. We sometimes encounter strong competition in pursuing lending opportunities such that potential borrowers obtain loans elsewhere at lower rates than those we

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offer. We have continued to reduce our exposure to residential construction and foreign loans, including limiting the amount of new loans in these categories. Our ability to make new loans is dependent on economic factors in our market area, borrower qualifications, competition, and liquidity, among other items. Considering the current state of the economy in Southern California and the competition among banks for liquidity, loan growth has not been a focus area for us thus far in 2010.

        We stress credit quality in originating and monitoring the loans we make and measure our success by the levels of our nonperforming assets, net charge-offs and allowance for credit losses. Our allowance for credit losses is the sum of our allowance for loan losses and our reserve for unfunded loan commitments and relates only to our non-covered loans. Provisions for credit losses are charged to operations as and when needed for both on and off balance sheet credit exposure. Loans which are deemed uncollectible are charged off and deducted from the allowance for loan losses. Recoveries on loans previously charged off are added to the allowance for loan losses. During the three months ended September 30, 2010, we made a provision for credit losses totaling $24.5 million composed of $17.1 million on non-covered loans and $7.4 million on covered loans. The provision on the non-covered loan portfolio was based on our allowance methodology and reflected net charge-offs and the levels of nonaccrual and classified loans and the migration of loans into various risk classifications. The provision for credit losses on the covered loan portfolio reflected an increase in the covered loan allowance for credit losses resulting from lower expected cash flows on covered loans since the Affinity acquisition date.

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

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

Three Months Ended:
  Efficiency
Ratio
 

September 30, 2010

    60.8 %

June 30, 2010

    61.4 %

March 31, 2010

    63.8 %

December 31, 2009

    53.7 %

September 30, 2009

    37.1 %

        The decrease in the efficiency ratio for the third quarter of 2010 compared to the second quarter of 2010 was due mostly to higher revenues attributable to higher interest income related to the July real estate loan purchase and the Los Padres acquisition. The gain from the Affinity acquisition reduced the third quarter of 2009 efficiency ratio by 4,840 basis points from 85.5% to 37.1%.

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Critical Accounting Policies

        The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowances for credit losses and the carrying values of intangible assets and deferred income tax assets. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

        Certain discussion in this Form 10-Q contains non-GAAP financial disclosures for tangible common equity. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. Tangible common equity is a non-GAAP financial measure used by investors, analysts, and bank regulatory agencies. Tangible common equity includes total equity, less any preferred equity, goodwill and intangible assets. The methodology of determining tangible common equity may differ among companies. Management reviews tangible common equity along with other measures of capital adequacy on a regular basis and has included this non-GAAP financial information, and the corresponding reconciliation to total equity, because of current interest in such information on the part of market participants.

        These non-GAAP financial measures are presented for supplemental informational purposes only for understanding the Company's operating results and should not be considered a substitute for financial information presented in accordance with United States generally accepted accounting

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principles (GAAP). The following table presents performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measurements to the GAAP financial measurements.

GAAP to Non-GAAP Reconciliations
  September 30,
2010
  June 30,
2010
  December 31,
2009
 
 
  (Dollars in thousands)
 

PacWest Bancorp Consolidated:

                   
 

Stockholders' equity

  $ 493,762   $ 486,585   $ 506,773  
 

Less: intangible assets

    74,669     28,448     33,296  
               
   

Tangible common equity

  $ 419,093   $ 458,137   $ 473,477  
               
 

Total assets

  $ 5,742,922   $ 5,153,682   $ 5,324,079  
 

Less: intangible assets

    74,669     28,448     33,296  
               
   

Tangible assets

  $ 5,668,253   $ 5,125,234   $ 5,290,783  
               
 

Equity to assets ratio

    8.60 %   9.44 %   9.52 %
 

Tangible common equity ratio(1)

    7.39 %   8.94 %   8.95 %

Pacific Western Bank:

                   
 

Stockholder's equity

  $ 582,335   $ 573,227   $ 585,940  
 

Less: intangible assets

    74,669     28,448     33,296  
               
   

Tangible common equity

  $ 507,666   $ 544,779   $ 552,644  
               
 

Total assets

  $ 5,728,353   $ 5,141,150   $ 5,313,750  
 

Less: intangible assets

    74,669     28,448     33,296  
               
   

Tangible assets

  $ 5,653,684   $ 5,112,702   $ 5,280,454  
               
 

Equity to assets ratio

    10.17 %   11.15 %   11.03 %
 

Tangible common equity ratio(1)

    8.98 %   10.66 %   10.47 %

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

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        Summarized financial information for the periods indicated are as follows:

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2010
  June 30,
2010
  September 30,
2009
 
 
  2010   2009  
 
  (Dollars in thousands, except per share data)
 

Earnings Summary:

                               
 

Net interest income

  $ 65,167   $ 57,617   $ 54,237   $ 180,807   $ 153,719  
 

Noninterest income

    10,785     12,082     72,625     44,136     84,079  
                       
   

Net revenues

    75,952     69,699     126,862     224,943     237,798  
 

Provision for credit losses

    (24,450 )   (22,950 )   (75,000 )   (180,627 )   (107,000 )
 

Noninterest expense

    (46,174 )   (42,773 )   (47,091 )   (139,517 )   (133,991 )
 

Income tax (expense) benefit

    (1,828 )   (1,271 )   (2,046 )   40,873     1,623  
                       
   

Net earnings (loss)

  $ 3,500   $ 2,705   $ 2,725   $ (54,328 ) $ (1,570 )
                       

Average interest-earning assets

  $ 5,089,703   $ 4,768,527   $ 4,553,398   $ 4,886,964   $ 4,296,293  

Profitability Measures:

                               
 

Earnings (loss) per share:

                               
   

Basic

  $ 0.10   $ 0.07   $ 0.08   $ (1.55 ) $ (0.06 )
   

Diluted

  $ 0.10   $ 0.07   $ 0.08   $ (1.55 ) $ (0.06 )
 

Annualized return (loss) on:

                               
   

Average assets

    0.25 %   0.21 %   0.22 %   (1.37 )%   (0.05 )%
   

Average equity

    2.82 %   2.26 %   2.23 %   (14.74 )%   (0.44 )%
 

Net interest margin

    5.08 %   4.85 %   4.73 %   4.95 %   4.78 %
 

Efficiency ratio

    60.8 %   61.4 %   37.1 %   62.0 %   56.3 %

        Net earnings for the third quarter of 2010 were $3.5 million, or $0.10 per diluted share, compared to net earnings of $2.7 million, or $0.07 per diluted share, for the second quarter of 2010. The $795,000 improvement in third quarter net earnings compared to the prior quarter is due mostly to the combination of higher net interest income offset by higher net credit-related costs and higher noninterest expense.

        Net earnings for the third quarter of 2010 were $3.5 million, or $0.10 per diluted share, compared to net earnings of $2.7 million, or $0.08 per diluted share, for the third quarter of 2009. The increase in net earnings for the current quarter reflected higher net interest income and lower net credit-related costs, offset by lower noninterest income compared to the same period last year.

        The net loss of $54.3 million, or $1.55 per diluted share, for the nine months ended September 30, 2010 compared to a net loss of $1.6 million, or $0.06 per diluted share, for the nine months ended September 30, 2009. The higher net loss for the 2010 period compared to the 2009 period was due mostly to two factors: the 2009 gain recorded in connection with the Affinity acquisition and the higher credit loss provisions in 2010 from the Company's sale of $323.6 million of classified loans in the first quarter and higher non-covered loan charge-offs.

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        Net interest income, which is our principal source of revenue, represents the difference between interest earned on assets and interest paid on liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities. The following table presents, for the periods indicated, the distribution of average assets, liabilities and stockholders' equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates on average interest-bearing liabilities:

 
  Three Months Ended  
 
  September 30, 2010   June 30, 2010   September 30, 2009  
 
  Average
Balance
  Interest
Income/
Expense
  Yields
and
Rates
  Average
Balance
  Interest
Income/
Expense
  Yields
and
Rates
  Average
Balance
  Interest
Income/
Expense
  Yields
and
Rates
 
 
  (Dollars in thousands)
 

ASSETS

                                                       

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

  $ 4,123,684   $ 68,480     6.59 % $ 3,809,546   $ 62,314     6.56 % $ 4,140,220   $ 64,658     6.20 %

Investment securities(1)

    757,945     6,519     3.41 %   584,368     5,702     3.91 %   262,816     2,741     4.14 %

Deposits in financial institutions

    208,074     131     0.25 %   374,613     245     0.26 %   150,358     111     0.29 %

Federal funds sold

                            4          
                                             
 

Total interest-earning assets

    5,089,703   $ 75,130     5.86 %   4,768,527   $ 68,261     5.74 %   4,553,398   $ 67,510     5.88 %
                                                   

Other assets

    455,323                 413,103                 304,817              
                                                   
 

Total assets

  $ 5,545,026               $ 5,181,630               $ 4,858,215              
                                                   

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                       

Interest checking deposits

  $ 466,366   $ 262     0.22 % $ 438,945   $ 338     0.31 % $ 402,503   $ 420     0.41 %

Money market deposits

    1,246,585     2,034     0.65 %   1,203,527     2,773     0.92 %   1,001,609     3,024     1.20 %

Savings deposits

    124,132     63     0.20 %   112,909     58     0.21 %   111,184     53     0.19 %

Time deposits

    1,281,423     4,016     1.24 %   1,068,033     3,776     1.42 %   841,001     4,257     2.01 %
                                             
 

Total interest-bearing deposits

    3,118,506     6,375     0.81 %   2,823,414     6,945     0.99 %   2,356,297     7,754     1.31 %

Borrowings

    276,543     2,129     3.05 %   303,877     2,216     2.92 %   567,320     3,989     2.79 %

Subordinated debentures

    129,683     1,459     4.46 %   129,732     1,483     4.59 %   129,876     1,530     4.67 %
                                             
 

Total interest-bearing liabilities

    3,524,732   $ 9,963     1.12 %   3,257,023   $ 10,644     1.31 %   3,053,493   $ 13,273     1.72 %
                                                   

Noninterest-bearing demand deposits

    1,472,366                 1,403,348                 1,274,968              

Other liabilities

    55,450                 41,053                 44,117              
                                                   
 

Total liabilities

    5,052,548                 4,701,424                 4,372,578              

Stockholders' equity

    492,478                 480,206                 485,637              
                                                   
 

Total liabilities and stockholders' equity

  $ 5,545,026               $ 5,181,630               $ 4,858,215              
                                                   

Net interest income

        $ 65,167               $ 57,617               $ 54,237        
                                                   

Net interest rate spread

                4.73 %               4.43 %               4.16 %

Net interest margin

                5.08 %               4.85 %               4.73 %

(1)
Includes nonaccrual loans and loan fees.

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

        Net interest income was $65.2 million for the third quarter of 2010 compared to $57.6 million for the second quarter of 2010. The $7.6 million net increase is due mostly to a $6.9 million increase in interest income attributable to higher average loans from the Los Padres acquisition and the July 1, 2010 real estate loan purchase. Contributing to the increase in net interest income was a reduction in

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interest expense of $681,000 due mainly to rate reductions on our deposit products implemented during the third quarter.

        Our net interest margin for the third quarter of 2010 was 5.08%, an increase of 23 basis points from the 4.85% posted for the second quarter of 2010. Such improvement reflects higher average loans during the third quarter as a result of the Los Padres acquisition and the July 1, 2010 real estate loan purchase. The yield on average loans was 6.59% for the third quarter of 2010 compared to 6.56% for the prior quarter. The loan yield, earning asset yield and net interest margin are all affected by loans being placed on or removed from nonaccrual status and the acceleration of purchase discounts on covered loan pay-offs: the net interest margin for the third quarter was positively impacted by 10 basis points from the combination of these items. The cost of interest-bearing deposits and all-in deposit cost decreased 18 basis points and 11 basis points to 0.81% and 0.55%, respectively; such decreases resulted primarily from lower rates on our deposit products, offset partially by an increase in time deposit volume attributable mostly to the Los Padres acquisition.

        Net interest income grew $10.9 million during the third quarter of 2010 compared to the same quarter of 2009. The increase was due to higher interest income of $7.6 million and lower interest expense of $3.3 million. The growth in interest income was attributable to a higher yield on average loans due to the July 1, 2010 real estate loan purchase, and a higher average balance of investment securities due to the purchases of securities during 2010 to deploy excess cash. Interest expense declined primarily due to a lower rate on average deposits and a reduction in average borrowings.

        The net interest margin grew 35 basis points to 5.08% for the third quarter of 2010 compared to 4.73% for the same period last year. The increase was due mostly to a higher yield on average loans, lower funding costs, and lower interest expense on borrowings due principally to a lower average balance. The yield on average loans grew 39 basis points to 6.59% for the third quarter of 2010 from 6.20% from the third quarter of 2009. The cost of interest-bearing deposits and all-in deposit cost decreased 50 basis points and 30 basis points to 0.81% and 0.55%, respectively. The cost of average interest-bearing liabilities declined 60 basis points to 1.12% for the three months ended September 30, 2010 compared to 1.72% for the same period last year.

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  Nine Months Ended September 30,  
 
  2010   2009  
 
  Average
Balance
  Interest
Income/
Expense
  Yields
and
Rates
  Average
Balance
  Interest
Income/
Expense
  Yields
and
Rates
 
 
  (Dollars in thousands)
 

ASSETS

                                     

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

  $ 4,018,697   $ 194,539     6.47 % $ 4,000,774   $ 188,168     6.29 %

Investment securities(2)

    605,071     17,342     3.83 %   203,065     5,928     3.90 %

Deposits in financial institutions

    263,196     505     0.26 %   92,367     209     0.30 %

Federal funds sold

                87          
                               
 

Total interest-earning assets

    4,886,964   $ 212,386     5.81 %   4,296,293   $ 194,305     6.05 %
                                   

Other assets

    429,116                 288,345              
                                   
 

Total assets

  $ 5,316,080               $ 4,584,638              
                                   

LIABILITIES AND STOCKHOLDERS' EQUITY

                                     

Interest checking deposits

  $ 446,702   $ 993     0.30 % $ 374,551   $ 1,268     0.45 %

Money market deposits

    1,205,893     7,675     0.85 %   912,130     8,349     1.22 %

Savings deposits

    115,918     179     0.21 %   116,133     203     0.23 %

Time deposits

    1,132,489     11,362     1.34 %   810,820     14,621     2.41 %
                               
 

Total interest-bearing deposits

    2,901,002     20,209     0.93 %   2,213,634     24,441     1.48 %

Borrowings

    341,438     7,013     2.75 %   498,611     11,197     3.00 %

Subordinated debentures

    129,731     4,357     4.49 %   129,925     4,948     5.09 %
                               
 

Total interest-bearing liabilities

    3,372,171   $ 31,579     1.25 %   2,842,170   $ 40,586     1.91 %
                                   

Noninterest-bearing demand deposits

    1,403,370                 1,220,809              

Other liabilities

    47,786                 49,098              
                                   
 

Total liabilities

    4,823,327                 4,112,077              

Stockholders' equity

    492,753                 472,561              
                                   
 

Total liabilities and stockholders' equity

  $ 5,316,080               $ 4,584,638              
                                   

Net interest income

        $ 180,807               $ 153,719        
                                   

Net interest rate spread

                4.56 %               4.14 %

Net interest margin

                4.95 %               4.78 %

(1)
Includes nonaccrual loans and loan fees.

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

        Net interest income increased $27.1 million to $180.8 million during the nine months ended September 30, 2010 compared to the same period last year. This growth was due to an $18.1 million increase in interest income and a $9.0 million decline in interest expense. The increase in interest income was due to a higher average balance of investment securities from the purchase of $448.8 million of government-sponsored entity pass through securities during 2010, the interest-earning assets from the Los Padres and Affinity acquisitions, and a higher average yield on loans. The decline in interest expense was due mainly to lower rates paid on deposits and borrowings and lower average borrowings.

        The net interest margin grew 17 basis points to 4.95% for the first nine months of 2010 compared to 4.78% for the same period last year. The increase was due mostly to a higher yield on average loans, lower funding costs, and lower interest expense on borrowings due principally to a lower average balance. The yield on average loans grew 18 basis points to 6.47% for the nine months ended September 30, 2010 from 6.29% from the same period last year. The cost of interest-bearing deposits and all-in deposit cost decreased 55 basis points and 32 basis points to 0.93% and 0.63%, respectively.

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The cost of average interest-bearing liabilities declined 66 basis points to 1.25% for the first nine months of 2010 compared to 1.91% for the same period last year.

        The amount of the provision for credit losses in a reporting period is a charge against earnings in that reporting period. We have a provision for credit losses on our non-covered loans and a provision for credit losses on our covered loans. The provision for credit losses on our non-covered loans is based on our allowance methodology and is a cost that, in our judgment, is required to maintain the adequacy of the allowance for loan losses and the reserve for unfunded loan commitments. Our allowance methodology reflects net charge-offs and the levels of nonaccrual and classified loans and the migration of loans into various risk classifications. The provision for credit losses on our covered loans reflects an increase in the covered loan allowance for credit losses resulting from credit deterioration since the acquisition date.

        We made provisions for credit losses totaling $24.5 million during the third quarter of 2010 compared to $23.0 million for the second quarter of 2010 and $75.0 million for the third quarter of 2009. The third quarter 2010 provision for credit losses was composed of a $17.3 million addition to the allowance for loan losses on the non-covered loan portfolio, a $7.4 million addition to the covered loan allowance for credit losses and a $221,000 reduction to the reserve for unfunded loan commitments. The second quarter of 2010 provision for credit losses was composed of a $14.3 million addition to the allowance for loan losses on the non-covered loan portfolio, an $8.9 million addition to the covered loan allowance for credit losses and a $245,000 reduction to the reserve for unfunded loan commitments. The third quarter 2009 provision for credit losses was composed of a $73.6 million addition to the allowance for loan losses and a $1.4 million addition to the reserve for unfunded loan commitments.

        Net non-covered loan charge-offs were $9.2 million and $12.0 million in the third quarter and second quarter of 2010, respectively. The allowance for credit losses on the non-covered loans was $101.2 million and $93.4 million as of September 30, 2010 and June 30, 2010, respectively, and represented 3.05% and 2.93% of the non-covered loan balances at those respective dates. The commercial real estate loan segment of the loan portfolio continues to be under stress from the current economic conditions. A protracted economic down cycle will increase the stress on this portion of the loan portfolio and we may continue to experience increased levels of charge-offs and provisions.

        During the third quarter of 2010, we recorded a $7.4 million provision for credit losses on the covered loan portfolio that was based on a September 30, 2010 analysis of acquired loans, which indicated a decrease in expected cash flows from previous estimates. Under the terms of the FDIC loss sharing agreement, the FDIC absorbs 80% of the losses reflected by the provision. As a result, we recorded $5.9 million in FDIC loss sharing income related to this provision on the condensed consolidated statements of earnings (loss) during the third quarter of 2010.

        We made provisions for credit losses totaling $180.6 million during the nine months ended September 30, 2010 compared to $107.0 million for the same period last year. The provision for credit losses for the first nine months of 2010 was composed of a $143.7 million addition to the allowance for credit losses on the non-covered loan portfolio and a $36.9 million addition to the reserve for credit losses on the covered loans. The provision for credit losses for the first nine months of 2009 related to non-covered loan only. The increase in the provision for non-covered loans was driven mostly by the February 2010 classified loan sale that resulted in net charge-offs of $123 million and other non-covered loan net charge-offs of $43.7 million; this compares to total net charge-offs of $55.2 million in the first nine months of 2009. As our allowance methodology considers, among other factors, net charge-offs, an increase in net charge-offs contributed to the increased provision levels.

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        Net credit costs, which include OREO expense, net, are shown in the following table for the periods indicated.

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2010
  June 30,
2010
 
 
  2010   2009  
 
  (In thousands)
 

Provision for credit losses on non-covered loans

  $ 17,050   $ 14,100   $ 143,677   $ 107,000  
                   

Provision for credit losses on covered loans

    7,400     8,850     36,950      

Less: increase in FDIC loss sharing asset

    5,920     7,080     29,560      
                   
 

Net credit costs on covered loans

    1,480     1,770     7,390      
                   

Non-covered OREO expense

    2,151     625     11,218     18,369  
                   

Covered OREO (income) expense

    (319 )   (89 )   1,760      

Less: OREO-related (decrease) increase in FDIC loss sharing asset

    (409 )   (52 )   1,257      
                   
 

Net covered OREO (income) expense

    90     (37 )   503      
                   

Total credit-related costs, net

  $ 20,771   $ 16,458   $ 162,788   $ 125,369  
                   

Non-covered loan net charge-offs

  $ 9,240   $ 12,045   $ 166,711   $ 55,204  
                   

        Increased provisions for credit losses may be required in the future based on loan and unfunded commitment growth, the effect changes in economic conditions, such as inflation, unemployment, market interest rate levels, and real estate values may have on the ability of our borrowers to repay their loans, and other negative conditions specific to our borrowers' businesses. See further discussion in Balance Sheet Analysis—Allowance for Credit Losses on Non-Covered Loans and—Allowance for Credit Losses on Covered Loans contained herein.

        The following table summarizes noninterest income by category for the periods indicated:

 
  Three Months Ended  
 
  September 30,
2010
  June 30,
2010
  March 31,
2010
  December 31,
2009
  September 30,
2009
 
 
  (In thousands)
 

Service charges on deposit accounts

  $ 2,861   $ 2,666   $ 2,729   $ 2,890   $ 2,960  

Other commissions and fees

    1,760     1,845     1,790     1,799     1,721  

Other-than-remporary impairment loss on securities

    (874 )                

Increase in cash surrender value of life insurance

    353     369     398     375     371  

FDIC loss sharing income, net

    6,406     7,029     16,172     16,314      

Gain from Affinity acquisition

                    66,989  

Other income

    279     173     180     450     584  
                       
 

Total noninterest income

  $ 10,785   $ 12,082   $ 21,269   $ 21,828   $ 72,625  
                       

        Noninterest income for the second quarter of 2010 totaled $10.8 million compared to $12.1 million for the second quarter of 2010 and $72.6 million for the third quarter 2009. The $1.3 million decline in noninterest income for the third quarter of 2010 compared to the second quarter of 2010 was due

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mostly to lower FDIC loss sharing income stemming from lower credit-related costs on covered loans and OREO. Noninterest income included an other-than-temporary impairment loss of $874,000 on one covered investment security, which was offset partially by related FDIC loss sharing income of $699,000. The $61.8 million decline in noninterest income for the third quarter of 2010 compared to the same period last year was due primarily to the $67.0 million gain on the Affinity acquisition recorded in 2009; there was no similar gain in 2010. The current quarter also includes $6.4 million of FDIC loss sharing income and the $874,000 impairment loss; there were no similar items recorded in the third quarter of 2009.

        Noninterest income declined $39.9 million to $44.1 million for the nine months ended September 30, 2010 compared to $84.1 million for the same period last year. The decline was due mainly to the $67.0 million gain on the Affinity acquisition recorded in August 2009; there was no similar gain in the 2010 period. The 2010 period includes $29.6 million of FDIC loss sharing income; there was no similar income in the 2009 period.

        The following table summarizes noninterest expense by category for the periods indicated:

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

Compensation

  $ 23,060   $ 21,068   $ 19,411   $ 20,320   $ 20,128  

Occupancy

    6,872     6,576     6,958     7,100     6,435  

Data processing

    2,121     1,892     1,969     1,831     1,810  

Other professional services

    2,694     2,042     1,998     2,047     1,857  

Business development

    571     655     667     663     528  

Communications

    811     795     804     789     762  

Insurance and assessments

    2,431     2,611     2,274     1,826     2,010  

Other real estate owned, net

    1,832     536     10,610     4,953     8,141  

Intangible asset amortization

    2,434     2,424     2,424     2,355     2,578  

Other expense

    3,348     4,174     3,455     3,329     2,842  
                       
 

Total noninterest expense

  $ 46,174   $ 42,773   $ 50,570   $ 45,213   $ 47,091  
                       

Efficiency ratio

    60.8 %   61.4 %   63.8 %   53.7 %   37.1 %

        Noninterest expense totaled $46.2 million for the third quarter of 2010 compared to $42.8 million for the second quarter of 2010. The $3.4 million increase was due mostly to addition of the Los Padres operations, employee termination severance costs, and higher OREO expenses. Los Padres noninterest expense totaled $2.1 million, including $1.0 million in compensation and $447,000 in other professional services expense for integration, audit and consulting fees. We reduced our workforce, excluding the Los Padres employees, by approximately 5% and paid $900,000 in severance at the end of September 2010; we expect annual pre-tax savings from these departures to be $3.6 million. OREO costs increased $1.3 million due mostly to write-downs from updated appraisals, offset partially by higher net gains on sales. Other expense decreased $826,000 as the second quarter included a penalty of $726,000 for the early repayment of $125 million in FHLB advances; there was no similar expense in the current period. Third quarter noninterest expense includes $430,000 related to two legal settlements on customer actions.

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        The following table presents OREO costs, net for the periods indicated:

 
  Three Months Ended  
 
  September 30,
2010
  June 30,
2010
  September 30,
2009
 
 
  (In Thousands)
 

Provision for losses

  $ 3,102   $ 1,218   $ 6,165  

Maintenance costs

    693     352     2,161  

(Gain) loss on sale

    (1,963 )   (1,034 )   (185 )
               
 

Total OREO costs, net

  $ 1,832   $ 536   $ 8,141  
               

        Noninterest expense includes amortization of time-based restricted stock, which is included in compensation, and intangible asset amortization, which is for core deposit and customer relationship intangible assets. Amortization of restricted stock totaled $2.1 million for the third quarter of 2010 compared to $2.2 million for the second quarter of 2010. Amortization expense for restricted stock is estimated to be $8.4 million for 2010. Intangible asset amortization totaled $2.4 million for both the third and second quarters of 2010, and is estimated to be $9.7 million for 2010, which includes amortization of the Los Padres core deposit intangible. The 2010 estimates of both restricted stock award expense and intangible asset amortization are subject to change.

        Noninterest expense declined $917,000 for the third quarter of 2010 compared to the same period of 2009. The reduction in noninterest expense was due mostly to lower OREO costs offset partially by higher overhead costs related to the Affinity and Los Padres acquisitions. OREO costs decreased by $6.3 million due to lower write-downs and expenses and higher net gains recorded on OREO sales during the third quarter of 2010 compared to the same period of 2009. Compensation costs grew $2.9 million due to the acquisitions and severance costs.

        Noninterest expense grew $5.5 million to $139.5 million during the nine months ended September 30, 2010 from $134.0 million for the same period in 2009. The growth in most expense categories was due primarily to higher overhead costs related to the Affinity and Los Padres acquisitions. Compensation increased $5.7 million due to the acquisitions and severance costs. Occupancy costs increased $1.1 million due mostly to the 10 branches added in the Affinity acquisition. Other professional services increased $1.9 million due mostly to higher legal costs related to loan workout activity and acquisition-related professional services expense. Other expense increased $1.2 million due mostly to higher loan-related costs from loan workouts and a $726,000 penalty for early repayment of $125 million of FHLB advances; there were no FHLB prepayment penalties in the first nine months of 2009. OREO costs declined $5.4 million due mostly to higher net gains on sales of OREO recorded in 2010, offset partially by higher OREO write-downs in 2010.

        The effective tax rate for the third quarter of 2010 was 34.3% compared to 32.0% for the second quarter of 2010. Both effective rates were lower than the Company's blended Federal and California statutory rate of 42.0% due to resolution and /or lapse of tax contingencies, which reduced income tax expense by $417,000 and $400,000 in the third and second quarters of 2010, respectively.

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Balance Sheet Analysis

        Gross non-covered loans increased $132.9 million during the third quarter of 2010 due to the July 1, 2010 purchase of $234.1 million in performing real estate loans, offset by continued payments and resolutions. Gross non-covered loans totaled $3.3 billion at September 30, 2010 and were comprised primarily of $2.4 billion in real estate mortgage loans, $731.3 million in commercial loans, and $192.6 million in real estate construction loans. Our loan portfolio's value and credit quality is affected in large part by real estate trends in Southern California which have been negative for the last several quarters. The real estate mortgage loan category includes loans secured by commercial real estate totaling $2.1 billion and loans secured by residential real estate totaling $249.7 million. The real estate construction loan category includes commercial real estate construction loans totaling $116.1 million and residential real estate construction loans totaling $76.5 million.

        The following table presents the balances by loan categories of the real estate loans purchased on July 1, 2010:

 
  July 1,
2010
 
 
  (In thousands)
 

Office building and light industrial

  $ 151,958  

Retail

    47,968  

Commercial owner-occupied

    16,757  

Other commercial

    12,476  

Residential

    2,685  

Hotel

    1,797  

Commercial land

    497  
       
 

Total loans purchased

  $ 234,138  
       

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

 
  September 30, 2010   June 30, 2010   December 31, 2009   September 30, 2009  
Loan Category
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Domestic:

                                                 
 

Real estate mortgage

  $ 2,368,943     71 % $ 2,229,331     70 % $ 2,423,712     65 % $ 2,500,520     65 %
 

Commercial

    708,329     21     709,075     22     781,003     21     774,755     20  
 

Real estate construction

    192,595     6     194,181     6     440,286     12     480,119     13  
 

Consumer

    28,328     1     30,323     1     32,138     1     33,011     1  

Foreign:

                                                 
 

Commercial

    22,948     1     25,309     1     34,524     1     38,964     1  
 

Other, including real estate

    1,595         1,637         1,719         1,763      
                                   
   

Total gross non-covered loans

    3,322,738     100 %   3,189,856     100 %   3,713,382     100 %   3,829,132     100 %
                                           

Less: unearned income

    (4,329 )         (4,831 )         (5,999 )         (6,447 )      

Less: allowance for loan losses

    (96,494 )         (88,463 )         (118,717 )         (114,575 )      
                                           
 

Total net non-covered loans

  $ 3,221,915         $ 3,096,562         $ 3,588,666         $ 3,708,110        
                                           

        At September 30, 2010, the non-covered SBA loan portfolio totaled $124.1 million and was composed of $92.5 million in SBA 504 loans and $31.6 million in SBA 7(a) and Express loans. SBA 7(a) loans are secured by borrowers' real estate and/or business assets and are covered by an SBA guarantee of up to 85% of the loan amount. The SBA 504 loans are included in the real estate mortgage category and the SBA 7(a) and Express loans are included in the commercial category.

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        The following table presents the composition of our non-covered real estate mortgage loan portfolio:

 
  September 30, 2010   June 30, 2010  
Loan Category
  Balance   % of
Total
  Balance   % of
Total
 
 
  (Dollars in thousands)
 

Commercial real estate mortgage:

                         
 

Retail

  $ 394,727     16.7 % $ 386,132     17.3 %
 

Industrial/warehouse

    414,020     17.5 %   326,002     14.6 %
 

Office buildings

    358,858     15.1 %   305,843     13.7 %
 

Owner-occupied

    279,760     11.8 %   279,428     12.5 %
 

Hotel

    166,504     7.0 %   172,122     7.7 %
 

Healthcare

    95,311     4.0 %   90,298     4.1 %
 

Gas station

    40,008     1.7 %   40,051     1.8 %
 

Self storage

    32,235     1.4 %   29,721     1.3 %
 

Restaurant

    26,461     1.1 %   24,929     1.1 %
 

Land acquisition/development

    9,693     0.4 %   9,734     0.4 %
 

Unimproved land

    1,524     0.1 %   1,067     0.0 %
 

Other

    300,144  <