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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents

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



FORM 10-K


ý

 

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

For the fiscal year ended December 31, 2011

OR

o

 

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

Commission file number 00-30747



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

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

10250 Constellation Blvd., Suite 1640

 

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

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



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

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

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

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

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

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

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

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

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

Large Accelerated filer o

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

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

         As of June 30, 2011, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the average high and low sales prices on The Nasdaq Global Select Market as of the close of business on June 30, 2011, was approximately $615.0 million. Registrant does not have any nonvoting common equities.

         As of March 2, 2012, there were 35,680,378 shares of registrant's common stock outstanding, excluding treasury shares and 1,617,760 shares of unvested restricted stock.

DOCUMENTS INCORPORATED BY REFERENCE

         The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive proxy statement for its 2012 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and such information is incorporated herein by this reference.

   



PACWEST BANCORP

2011 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

   

ITEM 1.

 

Business

  3

 

General

  3

 

Recent Transactions

  3

 

Banking Business

  3

 

Strategic Evolution and Acquisition Strategy

  9

 

Competition

  11

 

Employees

  11

 

Financial and Statistical Disclosure

  11

 

Supervision and Regulation

  11

 

Available Information

  23

 

Forward-Looking Information

  23

ITEM 1A.

 

Risk Factors

  24

ITEM 1B.

 

Unresolved Staff Comments

  33

ITEM 2.

 

Properties

  33

ITEM 3.

 

Legal Proceedings

  34

ITEM 4.

 

Mine Safety Disclosure

  34


PART II


 

 

ITEM 5.

 

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

  35

 

Marketplace Designation, Sales Price Information and Holders

  35

 

Dividends

  35

 

Securities Authorized for Issuance under Equity Compensation Plans

  37

 

Recent Sales of Unregistered Securities and Use of Proceeds

  37

 

Repurchases of Common Stock

  37

 

Five-Year Stock Performance Graph

  38

ITEM 6.

 

Selected Financial Data

  39

ITEM 7.

 

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

  41

 

Overview

  41

 

Key Performance Indicators

  45

 

Critical Accounting Policies

  46

 

Non-GAAP Measurements

  50

 

Results of Operations

  52

 

Financial Condition

  64

 

Borrowings

  85

 

Capital Resources

  85

 

Liquidity

  87

 

Contractual Obligations

  90

 

Off-Balance Sheet Arrangements

  90

 

Recent Accounting Pronouncements

  90

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  90

1



PACWEST BANCORP

2011 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

ITEM 8.

 

Financial Statements and Supplementary Data

  98

 

Contents

  98

 

Management's Report on Internal Control Over Financial Reporting

  99

 

Report of Independent Registered Public Accounting Firm

  100

 

Consolidated Balance Sheets as of December 31, 2011 and 2010

  101

 

Consolidated Statements of Earnings (Loss) for the Years Ended December 31, 2011, 2010, and 2009

  102

 

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2011, 2010, and 2009

  103

 

Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2011, 2010, and 2009

  104

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010, and 2009

  105

 

Notes to Consolidated Financial Statements

  106

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  170

ITEM 9A.

 

Controls and Procedures

  170

ITEM 9B.

 

Other Information

  170


PART III


 

 

ITEM 10.

 

Directors, Executive Officers and Corporate Governance

  171

ITEM 11.

 

Executive Compensation

  171

ITEM 12.

 

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

  171

ITEM 13.

 

Certain Relationships and Related Transactions, and Director Independence

  171

ITEM 14.

 

Principal Accountant Fees and Services

  171


PART IV


 

 

ITEM 15.

 

Exhibits and Financial Statement Schedules

  171

SIGNATURES

 
175

CERTIFICATIONS

   

2


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PART I

ITEM 1.    BUSINESS

General

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

        PacWest Bancorp was formerly known as First Community Bancorp. At a special meeting of the Company's shareholders held on April 23, 2008, the shareholders approved the reincorporation of the Company in Delaware from California and the change of the Company's name to PacWest Bancorp from First Community Bancorp. The reincorporation became effective on May 14, 2008. In connection with the reincorporation and name change, the Company also changed its ticker symbol on the NASDAQ Global Select Market to "PACW." Other than the name change, change in ticker symbol and change in corporate domicile, the reincorporation did not result in any change in the business, physical location, management, assets, liabilities or total stockholders' equity of the Company, nor did it result in any change in location of the Company's employees, including the Company's management. Additionally, the reincorporation did not alter any shareholder's percentage ownership interest or number of shares owned in the Company.


Recent Transactions

        In January 2012, Pacific Western Bank acquired Marquette Equipment Finance, or MEF, an equipment leasing company, for $35 million in cash. At January 3, 2012, MEF had $162.2 million in gross leases and leases in process outstanding, with no leases on nonaccrual status. In addition, Pacific Western Bank assumed $154.8 million in outstanding debt and other liabilities, which included $129 million payable to MEF's former parent. Pacific Western Bank repaid MEF's intercompany debt on the closing date from its excess liquidity on deposit at the Federal Reserve Bank.

        See "—Strategic Evolution and Acquisition Strategy", "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview", and Note 3, Acquisitions, Note 4, Goodwill and Other Intangible Assets, Note 6, Loans, and Note 23, Subsequent Events, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for further information regarding recent transactions.


Banking Business

        Pacific Western is a full-service commercial bank offering a broad range of banking products and services including: accepting demand, money market, and time deposits; originating loans, including commercial, real estate construction, real estate miniperm, SBA guaranteed and consumer loans; and providing other business-oriented products. We have 76 full-service community banking branches. Our operations are primarily located in Southern California extending from California's Central Coast to San Diego County; we also operate three banking offices in the San Francisco Bay area, all of which were added through the Affinity acquisition. The Bank focuses on conducting business with small to medium size businesses in our marketplace and the owners and employees of those businesses. The majority of our loans are secured by the real estate collateral of such businesses. Our asset-based lending function operates in Arizona, California, Texas, and the Pacific Northwest. Our equipment leasing function, added through the January 2012 MEF acquisition, operates in Utah and has lease receivables in 45 states. Special services, including international banking services, multi-state deposit

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services and investment services, or requests beyond the service area or current offerings of the Bank can be arranged through correspondent banks. The Bank also issues ATM and debit cards, has a network of branded ATMs and offers access to ATM networks through other major service providers. We provide access to customer accounts via a 24-hour seven day a week toll-free automated telephone customer service and a secure online banking service.

        We are committed to maintaining premier, relationship-based community banking in Southern California serving the needs of those businesses in our marketplace, as well as serving the needs of growing businesses that may not yet meet the credit standards of the Bank, through tightly controlled asset-based lending and factoring of accounts receivable. We compete actively for deposits, and emphasize solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on making quality loans and gathering low-cost deposits to maximize our net interest margin. The strategy for serving our target markets is the delivery of a finely-focused set of value-added products and services that satisfy the primary needs of our customers, emphasizing superior service and relationships over transaction volume or low pricing.

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

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

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

        The Bank's real estate portfolio is subject to certain risks, including, but not limited to: (i) the effects of economic downturns in the Southern California economy and in general; (ii) interest rate

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

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

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

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

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

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

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

        (4)    Consumer Loans.    Consumer loans include personal loans, auto loans, boat loans, home improvement loans, revolving lines of credit and other loans typically made by banks to individual borrowers. The Bank does not currently originate first trust deed home mortgage loans. The Bank's consumer loan portfolio is subject to certain risks, including: (i) amount of credit offered to consumers in the market; (ii) interest rate increases; and (iii) consumer bankruptcy laws which allow consumers to discharge certain debts. We strive to reduce the exposure to such risks through the direct approval of all consumer loans by: (a) reviewing each loan request and renewal individually; (b) using a dual signature approval system; (c) adhering to written credit policies; and (d) obtaining external independent credit reviews.

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

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        The following tables present the composition of our loan portfolio by segment and class, showing the non-covered and covered components, as of the dates indicated:

 
  December 31, 2011  
 
  Total Loans   Non-Covered Loans   Covered Loans  
 
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Real estate mortgage:

                                     

Hospitality

  $ 147,346     4 % $ 144,402     5 % $ 2,944      

SBA 504

    58,377     2 %   58,377     2 %        

Other

    2,513,099     69 %   1,779,685     63 %   733,414     91 %
                           

Total real estate mortgage

    2,718,822     75 %   1,982,464     70 %   736,358     91 %
                           

Real estate construction:

                                     

Residential

    39,190     1 %   17,669     1 %   21,521     3 %

Commercial

    120,787     3 %   95,390     3 %   25,397     3 %
                           

Total real estate construction

    159,977     4 %   113,059     4 %   46,918     6 %
                           

Total real estate loans

    2,878,799     79 %   2,095,523     74 %   783,276     97 %
                           

Commercial:

                                     

Collateralized

    438,828     12 %   414,020     15 %   24,808     3 %

Unsecured

    79,739     2 %   78,937     3 %   802      

Asset-based

    149,987     4 %   149,987     5 %        

SBA 7(a)

    28,995     1 %   28,995     1 %        
                           

Total commercial

    697,549     19 %   671,939     24 %   25,610     3 %
                           

Consumer

    24,446     1 %   23,711     1 %   735      

Foreign

    20,932     1 %   20,932     1 %        
                           

Total gross loans

  $ 3,621,726     100 % $ 2,812,105     100 %   809,621     100 %
                             

Covered loans:

                                     

Discount

                            (75,323 )      

Allowance for loan losses

                            (31,275 )      
                                     

Covered loans, net

                          $ 703,023        
                                     

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  December 31, 2010  
 
  Total Loans   Non-Covered Loans   Covered Loans  
 
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Real estate mortgage:

                                     

Hospitality

  $ 159,650     4 % $ 156,652     5 % $ 2,998      

SBA 504

    69,287     2 %   69,287     2 %        

Other

    2,965,094     70 %   2,048,794     65 %   916,300     87 %
                           

Total real estate mortgage

    3,194,031     76 %   2,274,733     72 %   919,298     87 %
                           

Real estate construction:

                                     

Residential

    109,680     2 %   65,043     2 %   44,637     4 %

Commercial

    161,539     4 %   114,436     3 %   47,103     5 %
                           

Total real estate construction

    271,219     6 %   179,479     5 %   91,740     9 %
                           

Total real estate loans

    3,465,250     82 %   2,454,212     77 %   1,011,038     96 %
                           

Commercial:

                                     

Collateralized

    396,400     9 %   358,427     11 %   37,973     4 %

Unsecured

    130,945     3 %   129,743     4 %   1,202      

Asset-based

    144,748     4 %   143,167     5 %   1,581      

SBA 7(a)

    32,220     1 %   32,220     1 %        
                           

Total commercial

    704,313     17 %   663,557     21 %   40,756     4 %
                           

Consumer

    26,005     1 %   25,058     1 %   947      

Foreign

    22,608     0 %   22,608     1 %        
                           

Total gross loans

  $ 4,218,176     100 % $ 3,165,435     100 %   1,052,741     100 %
                             

Covered loans:

                                     

Discount

                            (110,901 )      

Allowance for loan losses

                            (33,264 )      
                                     

Covered loans, net

                          $ 908,576        
                                     

        No individual or single group of related accounts is considered material in relation to our total assets or deposits of the Bank, or in relation to the overall business of the Company. However, approximately 79% of our total gross non-covered and covered loan portfolio at December 31, 2011 consisted of real estate loans, including miniperm loans, SBA 504 loans, and construction loans. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Non-Covered Loans," and also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Covered Loans." Since our business activities are currently focused primarily in Southern California, with the majority of our business concentrated in Los Angeles, Orange, Riverside, San Bernardino, San Diego, Ventura, Santa Barbara and San Luis Obispo Counties, our results of operations and financial condition are dependent upon the general trends in the Southern California economies and, in particular, the residential and commercial real estate markets. The concentration of our operations in Southern California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region.

        Our foreign loans consist predominately of commercial loans to individuals or entities located in Mexico and represent less than 1% of our non-covered loan portfolio at December 31, 2011. Such foreign loans are denominated in U.S. dollars and most are collateralized by assets located in the United States or are guaranteed or insured by businesses located in the United States. We have continued to allow our foreign loan portfolio to repay in the ordinary course of business without making any new privately-insured foreign loans other than those under existing commitments.

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Strategic Evolution and Acquisition Strategy

        The Company was organized on October 22, 1999 as a California corporation for the purpose of becoming a bank holding company and to acquire all the outstanding capital stock of Rancho Santa Fe National Bank. Since that time, we have grown through a series of business acquisitions.

        The following chart summarizes the acquisitions completed since our inception, some of which are described in more detail below. See also Note 3, Acquisitions, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for further details regarding recent acquisitions.

 
 
Date
  Institution/Company Acquired
(1)   May 2000   Rancho Santa Fe National Bank
(2)   May 2000   First Community Bank of the Desert
(3)   January 2001   Professional Bancorp, Inc.
(4)   October 2001   First Charter Bank
(5)   January 2002   Pacific Western National Bank
(6)   March 2002   W.H.E.C., Inc.
(7)   August 2002   Upland Bank
(8)   August 2002   Marathon Bancorp
(9)   September 2002   First National Bank
(10)   January 2003   Bank of Coronado
(11)   August 2003   Verdugo Banking Company
(12)   March 2004   First Community Financial Corporation
(13)   April 2004   Harbor National Bank
(14)   August 2005   First American Bank
(15)   October 2005   Pacific Liberty Bank
(16)   January 2006   Cedars Bank
(17)   May 2006   Foothill Independent Bancorp
(18)   October 2006   Community Bancorp Inc.
(19)   June 2007   Business Finance Capital Corporation
(20)   November 2008   Security Pacific Bank (deposits only)
(21)   August 2009   Affinity Bank
(22)   August 2010   Los Padres Bank
(23)   January 2012   Marquette Equipment Finance

        Our acquisitions focused generally on increasing our banking presence in California and increasing earning assets. Our most recent acquisition of an interest-earning asset generation company added earning assets and deployed excess liquidity and the FDIC-assisted banking acquisitions expanded our operations and branch banking network in California.

        On January 3, 2012, Pacific Western Bank completed the acquisition of Marquette Equipment Finance, or MEF, an equipment leasing company located in Midvale, Utah. Pacific Western Bank acquired all of the capital stock of MEF from Meridian Bank, N.A. for $35 million in cash. MEF focuses on business-essential equipment leases throughout the United States with transactions primarily in the mid-ticket segment. This acquisition diversifies our loan portfolio, expands our product line, and provides growth opportunities. It also importantly deployed our excess liquidity into higher-yielding assets.

        At January 3, 2012, MEF had $162.2 million in gross leases and leases in process outstanding, with no leases on nonaccrual status. MEF's leases are spread across 18 industries, with the top three being

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financial services/insurance, manufacturing, and health care and representing 68% of the lease portfolio balance. The weighted average yield on the lease portfolio at year end 2011 was approximately 9% and its weighted average remaining maturity was 34 months. In addition, Pacific Western Bank assumed $154.8 million in outstanding debt and other liabilities, which included $129 million payable to MEF's former parent. Pacific Western Bank repaid MEF's intercompany debt on the closing date from its excess liquidity on deposit at the Federal Reserve Bank. This resulted in MEF's interest-earning assets being funded with our low-cost deposit base.

        Effective March 23, 2012, MEF will change its name to Pacific Western Equipment Finance and operate under this name as a division of Pacific Western Bank. Pacific Western Bank retained all 71 MEF employees.

        On August 20, 2010, we acquired certain assets of Los Padres Bank, including all loans, and assumed substantially all of its liabilities, including all deposits, from the FDIC in an FDIC-assisted acquisition, which we refer to as the Los Padres acquisition. Pacific Western (i) acquired $437.1 million in loans, $33.9 million in other real estate owned, $44.3 million in investments, and $261.5 million in cash and other assets and (ii) assumed $752.2 million in deposits, $70.0 million in borrowings, and $1.9 million in other liabilities. In connection with the Los Padres acquisition, the FDIC made a cash payment to Pacific Western of $144.0 million. Other than a deposit premium of $3.4 million, we paid no cash or other consideration to acquire Los Padres.

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

        Los Padres was a federally chartered savings bank headquartered in Solvang, California that operated 14 branches, including 11 branches in California (three in Ventura County, four in Santa Barbara County, and four in San Luis Obispo County) and three branches in Arizona (Maricopa County). After office consolidations in 2011, we are operating eight of the former Los Padres branch offices, all of which are located in California. We made this acquisition to expand our presence in the Central Coast of California.

        On August 28, 2009, we acquired substantially all of the assets of Affinity Bank, including all loans, and assumed substantially all of its liabilities, including the insured and uninsured deposits and excluding certain brokered deposits, from the FDIC in an FDIC-assisted transaction, which we refer to as the Affinity acquisition. Pacific Western (i) acquired $675.6 million in loans, $22.9 million in foreclosed assets, $175.4 million in investments and $371.5 million in cash and other assets, and (ii) assumed $868.2 million in deposits, $305.8 million in borrowings, and $32.6 million in other liabilities. In connection with the Affinity acquisition, the FDIC made a cash payment to Pacific Western of $87.2 million.

        We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on acquired loans, other real estate owned, or OREO, and

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


Competition

        The banking business in California, and specifically in the Bank's primary service areas, is highly competitive with respect to originating loans, acquiring deposits and providing other banking services. The market is dominated by commercial banks in Southern California with assets between $500 million and $25 billion, including ourselves, and a few banking giants with a large number of offices and full-service operations over a wide geographic area. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and bank holding companies. Those competitors include savings and loan associations, brokerage houses, insurance companies, mortgage companies, credit unions, credit card companies, and other financial and non-financial institutions and entities.

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


Employees

        As of February 28, 2012, the Company had 982 full time equivalent employees.


Financial and Statistical Disclosure

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


Supervision and Regulation

        The banking and financial services business in which we engage is highly regulated. Such regulation is intended, among other things, to protect the interests of customers, including depositors. These regulations are not, however, generally charged with protecting the interests of our shareholders or

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creditors. Described below are the material elements of selected laws and regulations applicable to PacWest and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law or regulations, and in their application by regulatory agencies, cannot be predicted, but they may have a material effect on the business and results of PacWest and its subsidiaries.

        The commercial banking business is also influenced by the monetary and fiscal policies of the federal government and the policies of the Board of Governors of the Federal Reserve System, or FRB. The FRB implements national monetary policies (with the dual mandate of price stability and maximum employment) by its open-market operations in United States Government securities, by adjusting the required level of and paying interest on reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. Indirectly, such actions may also impact the ability of non-bank financial institutions to compete with the Bank. The nature and impact of any future changes in monetary policies cannot be predicted.

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

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

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

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

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

        Our earnings and activities are affected by legislation, by regulations and by local legislative and administrative bodies and decisions of courts in the jurisdictions in which we and the Bank conduct business. For example, these include limitations on the ability of the Bank to pay dividends to us and our ability to pay dividends to our shareholders. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Various federal and state statutory provisions limit the amount of dividends that subsidiary banks and savings associations can pay to their holding companies without regulatory approval.

        In addition to these explicit limitations, the federal regulatory agencies have general authority to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. Further, as discussed below under "—Regulation of the Bank", a bank holding company such as the Company is required to maintain minimum ratios of Tier 1 capital and total capital to total risk-weighted assets, and a minimum ratio of Tier 1 capital to total adjusted quarterly average assets as defined in such regulations. The level of our capital ratios may affect our ability to pay dividends. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters—Dividends" and Note 19, Dividend Availability and Regulatory Matters, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates. Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral for a loan or extension of credit to any person or company, issue a guarantee or accept letters of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary's capital stock and surplus on an individual basis or 20 percent of such subsidiary's capital stock and surplus on an aggregate basis. Such

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transactions must be on terms and conditions that are consistent with safe and sound banking practices. A bank holding company and its subsidiaries generally may not purchase a "low-quality asset," as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral. The Dodd-Frank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization.

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

        The Dodd-Frank Act requires the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds), with implementation starting as early as July 2012. The statutory provision is commonly called the "Volcker Rule". In October 2011, federal regulators proposed rules to implement the Volcker Rule which were issued for public comment, with comments due by February 13, 2012. The proposed rules are highly complex, and many aspects of their application remain uncertain. Based on the proposed rules, we do not currently anticipate that the Volcker Rule will have a material effect on our operations since we do not engage in the businesses prohibited by the Volcker Rule. We may incur costs if we are required to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any such costs are not expected to be material. Until a final rule is adopted, the precise financial impact of the rule on the Company, its customers or the financial industry more generally, cannot be determined.

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

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

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        Regulatory capital requirements limit the amount of deferred tax assets that may be included when determining the amount of regulatory capital. Deferred tax asset amounts in excess of the calculated limit are deducted from regulatory capital. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources" for further information on regulatory capital requirements and ratios as of December 31, 2011 for Pacific Western and the Company.

        The Company issued subordinated debentures to trusts that were established by us or entities we have acquired, which, in turn, issued trust preferred securities, which totaled $123.0 million at December 31, 2011. The Company includes in Tier 1 capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders' equity less goodwill, net of any related deferred income tax liability. While our existing trust preferred securities are grandfathered under the Dodd-Frank Wall Street Reform and Consumer Protection Act that was enacted in July 2010, new issuances will not qualify as Tier 1 capital. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Borrowings" for information regarding the redemption in March 2012 of certain of our subordinated debentures.

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

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

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

        In June 2008, the U.S. banking and thrift agencies announced a proposed rule that would provide all non-core banking organizations (that is, banking organizations not required to adopt the advanced approaches) with the option to adopt a way to determine required regulatory capital that is more risk sensitive than the current Basel I-based rules, yet is less complex than the advanced approaches in the

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final rule. The proposed standardized framework addresses (i) expanding the number of risk-weight categories to which credit exposures may be assigned; (ii) using loan-to-value ratios to risk weight most residential mortgages to enhance the risk sensitivity of the capital requirement; (iii) providing a capital charge for operational risk using the Basic Indicator Approach under the international Basel II capital accord; (iv) emphasizing the importance of a bank's assessment of its overall risk profile and capital adequacy; and (v) providing for comprehensive disclosure requirements to complement the minimum capital requirements and supervisory process through market discipline. This new proposal will replace the agencies' earlier Basel I-A proposal, issued in December 2006.

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

        The Basel III final capital framework, among other things:

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

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

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

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

        The U.S. banking agencies are expected to publish notice of proposed rule-making with respect to at least certain portions of Basel III during the first half of 2012. Given that the Basel III rules are subject to change, and the scope and content of capital regulations that the U.S. banking agencies may adopt under Dodd-Frank is uncertain, we cannot be certain of the impact new capital regulations will have on our capital ratios.

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

        The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Pursuant to FDICIA, the FDIC promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the prompt corrective action provisions of FDICIA, an insured depository institution generally will be classified as undercapitalized if its total risk-based capital is less than 8% or its Tier 1 risk-based capital or leverage ratio is less than 4%. An institution that, based upon its capital

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levels, is classified as "well capitalized", "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if a bank is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the federal bank regulator, and the holding company must guarantee the performance of that plan.

        In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal or state banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance for deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution- affiliated parties. The enforcement of such actions through injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.

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

        The Bank, as is the case with all FDIC insured banks, is subject to deposit insurance assessments as determined by the FDIC. Historically, the FDIC imposed insurance premiums based on the amount of deposits held and a risk matrix took into account, among other factors, a bank's capital level and supervisory rating. Pursuant to the Dodd-Frank Act, the FDIC amended its regulations to determine insurance assessments based on the average consolidated assets less the average tangible equity of the insured depository institution during the assessment period. Based on the current FDIC insurance assessment methodology our FDIC insurance assessment was $5.6 million for 2011 and is estimated to be $4.3 million for 2012. In addition, the Dodd-Frank Act requires the FDIC to adopt a new Deposit Insurance Fund restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.

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

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was extended to December 31, 2012 and to all insured depository institutions without a separate surcharge.

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

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

        The Dodd-Frank Act requires the Federal bank regulatory agencies and the Securities and Exchange Commission to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company and the Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011, which may become effective before the end of 2012. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which we may structure compensation for our executives.

        In June 2010, the FRB and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. These three principles are incorporated into the proposed joint compensation regulations under Dodd-Frank, discussed above. The FRB will review, as part of its regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not "large, complex banking organizations." These reviews will be tailored to each organization based on the scope and complexity of the organization's activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiency.

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        The Dodd-Frank Act established the new Consumer Financial Protection Bureau (the "CFPB") with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. While CFPB's examination and enforcement authority only extends to banking organizations with more than $10 billion in assets, banks with less than $10 billion in assets, such as the Bank, will be examined for compliance with the CFPB's rules and regulations by their primary federal banking agency. Given the recent establishment of the CFPB, there is still uncertainty surrounding the expected impact of this bureau on us and other banks. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and gives state attorneys general the ability to enforce federal consumer protection laws.

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

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

        As a result of the Sarbanes-Oxley Act, and its implementing regulations, we have incurred substantial costs to interpret and ensure ongoing compliance with the law and its regulations. Future

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changes in the laws, regulation, or policies that impact us cannot necessarily be predicted and may have a material effect on our business and earnings.

        The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the PATRIOT Act, designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The PATRIOT Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Company, to establish and implement policies and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers. The PATRIOT Act and its underlying regulations permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB, the FDIC and other federal banking agencies to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHCA or the Bank Merger Act.

        We regularly evaluate and continue to augment our systems and procedures to continue to comply with the PATRIOT Act and other anti-money laundering initiatives. We believe that the ongoing cost of compliance with the PATRIOT Act is not likely to be material to the Company. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

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

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

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to receive at least a "Satisfactory" rating could inhibit such institution or its holding company from undertaking certain activities, including acquisitions. The Bank received a CRA rating of "Satisfactory" as of its most recent examination.

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

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

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

        Our primary exposure to environmental laws is through our lending activities and through properties or businesses we may own, lease or acquire since we are not involved in any business that manufactures, uses or transports chemicals, waste, pollutants or toxins that might have a material adverse effect on the environment. Based on a general survey of the Bank's loan portfolio, conversations with local appraisers and the type of lending currently and historically done by the Bank, we are not aware of any potential liability for hazardous waste contamination that would be reasonably likely to have a material adverse effect on the Company as of February 29, 2012. In addition, we are not aware of any physical or regulatory consequence resulting from climate change that would have a material adverse effect upon the Company.

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Available Information

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

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

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

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


Forward-Looking Information

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

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

ITEM 1A.    RISK FACTORS

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

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

        From December 2007 through June 2009, the U.S. economy was in recession and economic recovery through 2011 has been sluggish. As a result, the global financial markets have undergone and may continue to experience pervasive and fundamental disruptions. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength. While economic conditions have recently shown signs of improvement, the sustainability of an economic recovery is uncertain as business activity across a wide range of industries continues to face difficulties due to the lack of consumer spending and sustained high levels of unemployment.

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

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

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

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

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

        There has been a slow-down in the real estate market due to negative economic trends and credit market disruption, the impacts of which are not yet completely known or quantified. At December 31, 2011, 75% and 4% of our total gross loans, both non-covered and covered, were comprised of real estate mortgage loans and real estate construction loans, respectively. We have observed in the marketplace tighter credit underwriting and higher premiums on liquidity, both of which may continue to place downward pressure on real estate values. Any further downturn in the real estate market could materially and adversely affect our business because a significant portion of our non-covered loans are secured by real estate. Our ability to recover on defaulted non-covered loans by selling the real estate

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collateral would then be diminished and we would be more likely to suffer losses on defaulted non-covered loans. Substantially all of our real property collateral is located in Southern California. If there is a further decline in real estate values, especially in Southern California, the collateral for our non-covered loans would provide less security. Real estate values could be affected by, among other things, a worsening of the economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates, continued high levels of unemployment, earthquakes and other natural disasters particular to California.

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

        Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or "spread" between the interest earned on loans, securities and other interest earning assets, and interest paid on deposits, borrowings and other interest bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest bearing liabilities. Changes in market interest rates generally affect loan volume, loan yields, funding sources and funding costs. Our net interest spread depends on many factors that are partly or completely out of our control, including competition, federal economic monetary and fiscal policies, and general economic conditions.

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

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

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

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

        We conduct our banking operations primarily in Southern California. Increased competition in our market may result in reduced loans and deposits or less favorable loan and deposit terms. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that we offer in our service area. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries.

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In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.

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

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

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

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

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

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

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

        Our operations are subject to extensive regulation by federal and state governmental authorities, and we are subject to various laws and judicial and administrative decisions imposing requirements and

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

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

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

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

The Dodd-Frank repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.

        All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, financial institutions can offer interest on demand deposits to compete for clients. Our interest expense will increase and our net interest margin will decrease if the Bank begins offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

        Since 2008, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. In addition, the FDIC instituted temporary programs, some of which were made permanent by the Dodd-Frank Act, to further insure customer deposits at FDIC insured banks, which have placed additional stress on the deposit insurance fund.

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

        Historically, the FDIC utilized a risk-based assessment system that imposed insurance premiums based upon a risk matrix that takes into account several components including but not limited to the bank's capital level and supervisory rating. Pursuant to the Dodd-Frank Act, the FDIC amended its regulations to base insurance assessments on the average consolidated assets less the average tangible equity of the insured depository institution during the assessment period.

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

Our information systems may experience an interruption or security breach.

        We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability.

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

        Approximately 1% of our non-covered loan portfolio is represented by credit we extend and loans we make to businesses located outside the United States, predominantly in Mexico. These loans, which include commercial loans, real estate loans and credit extensions for the financing of international trade, are subject to risks in addition to risks we face with our loans to businesses located in the United States including, but not limited to transaction risk, country risk and legal risk. While these loans are denominated in U.S. dollars, the ability of the borrower to repay may be affected by fluctuations in the borrower's home country currency relative to the U.S. dollar. Additionally, while most of our foreign loans are insured by U.S.-based institutions, guaranteed by a U.S.-based entity, or collateralized with

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U.S.-based assets or real property, our ability to collect in the event of default is subject to a number of conditions, as well as deductibles and co-payments with respect to insurance, and we may not be successful in obtaining partial or full repayment or reimbursement from the insurers. Furthermore, foreign laws may restrict our ability to foreclose on, take a security interest in, or seize collateral located in the foreign country.

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

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

We may not pay dividends on common stock.

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

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

        We are a legal entity separate and distinct from the Bank and our other subsidiaries. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the FRB, the FDIC and/or the DFI could assert that payment of dividends or other payments is an unsafe or unsound practice, or that such regulatory authority may impose restrictions on the Bank's ability to pay dividends as a condition to the Bank's participation in any stabilization program. In the event the Bank is unable to pay dividends to us, it is likely that we, in turn, would have to stop paying dividends on our common stock and may have difficulty meeting our other financial obligations, including payments in respect of any outstanding indebtedness or trust preferred securities. The inability of the Bank to pay dividends to us could have a material adverse effect on the market price of our common stock. See "Item 1.

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Business—Supervision and Regulation" for additional information on the regulatory restrictions to which we and the Bank are subject.

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

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

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

        In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for loan defaults and non-performance and a reserve for unfunded loan commitments which, when combined, we refer to as the allowance for credit losses. Our allowance for credit losses may not be adequate to address actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results. Our allowance for credit losses is based on prior experience and an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Our federal and state regulators, as an integral part of their examination process, review our loans and allowance for credit losses. While we believe our allowance for credit losses is appropriate for the risk identified in the Company's loan portfolio, we cannot assure you that we will not further increase the allowance for credit losses, that it will be sufficient to address losses, or that regulators will not require us to increase this allowance. Any of these occurrences could materially and adversely affect our earnings. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.

Our acquisitions may subject us to unknown risks.

        We have completed 23 acquisitions since May 2000, including the MEF acquisition in January 2012 and the FDIC-assisted acquisitions of Los Padres Bank in August 2010 and Affinity Bank in August 2009. Certain events may arise after the date of an acquisition, or we may learn of certain facts, events or circumstances after the closing of an acquisition, that may affect our financial condition or performance or subject us to risk of loss. These events include, but are not limited to: litigation resulting from circumstances occurring at the acquired entity prior to the date of acquisition; loan downgrades and credit loss provisions resulting from underwriting of certain acquired loans determined not to meet our credit standards; personnel changes that cause instability within a department; delays in implementing new policies or procedures or the failure to apply new policies or procedures; and other events relating to the performance of our business. Acquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstances that could result in loss or give assurances that our investigation or mitigation efforts will be sufficient to protect against any such loss.

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

        We currently depend heavily on the services of our chairman, John Eggemeyer, our chief executive officer, Matthew Wagner, and a number of other key management personnel. The loss of Mr. Eggemeyer's or Mr. Wagner's services or that of other key personnel could materially and adversely affect our results of operations and financial condition. Our success also depends, in part, on our ability to attract and retain additional qualified management personnel. Competition for such

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personnel is strong in the banking industry, and we may not be successful in attracting or retaining the personnel we require.

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

        As of March 2, 2012, directors and members of our executive management team owned or controlled approximately 4% of our common stock, excluding shares that may be issued to executive officers upon vesting of restricted stock awards. Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large stockholders of a significant portion of that stockholder's holdings could have a material adverse effect on the market price of our common stock. In addition, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly.

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

        CapGen Capital Group II LP, which we refer to as CapGen, beneficially owned approximately 11% of the Company as of March 2, 2012. CapGen is a registered bank holding company under the BHCA and is regulated by the FRB. Under the Dodd-Frank Act and related regulations, bank holding companies must be a "source of strength" for their subsidiaries. See "Item 1. Business—Supervision and Regulation—Bank Holding Company Regulation" for more information. Regulation of CapGen by the FRB may materially and adversely affect the activities and strategic plans of the Company should the FRB determine that CapGen or any other company in which either has invested has engaged in any unsafe or unsound banking practices or activities. While we have no reason to believe that the FRB is proposing to take any action with respect to CapGen that would adversely affect the Company, we remain subject to such risk.

A natural disaster could harm the Company's business.

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

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

        Management makes various assumptions and judgments about the collectibility of the acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions that include loss sharing agreements, we may record a loss sharing asset that we consider adequate to absorb future losses which may occur in the acquired loan portfolio. In determining the size of the loss sharing asset, we analyze the loan portfolio based on historical loss experience, volume and classification of loans,

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volume and trends in delinquencies and nonaccruals, local economic conditions, and other pertinent information. If our assumptions are incorrect, the balance of the FDIC loss sharing asset may at any time be insufficient to cover future loan losses, and credit loss provisions may be needed to respond to different economic conditions or adverse developments in the acquired loan portfolio. Any increase in future losses on loans and other assets covered by loss sharing agreements could have a negative effect on our operating results.

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

        Management must certify to the FDIC on a quarterly basis our compliance with the terms of the FDIC loss sharing agreements as a prerequisite to obtaining reimbursement from the FDIC for realized losses on covered assets. The required terms of the agreements are extensive and failure to comply with any of the guidelines could result in a specific asset or group of assets temporarily or permanently losing their loss sharing coverage. Additionally, management may decide to forgo loss share coverage on certain assets to allow greater flexibility over the management of certain assets. As of December 31, 2011, $781.7 million, or 14.1%, of the Company's assets were covered by FDIC loss sharing agreements.

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

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

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        As of March 1, 2012, we had a total of 97 properties consisting of 76 operating branch offices, two annex offices, three operations centers, 10 loan production offices, and six other properties. We own eight locations and the remaining properties are leased. Almost all properties are located in Southern California. Pacific Western's principal office is located at 10250 Constellation Blvd., Suite 1640, Los Angeles, CA 90067.

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

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ITEM 3.    LEGAL PROCEEDINGS

        In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to the operation of our business. The outcome of such legal actions and the timing of ultimate resolution are inherently difficult to predict. In the opinion of management, based upon information currently available to us, any resulting liability, in addition to amounts already accrued, would not have a material adverse effect on the Company's financial statements or operations.

ITEM 4.    MINE SAFETY DISCLOSURE

        Not applicable.

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PART II

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

Marketplace Designation, Sales Price Information and Holders

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

 
  Stock Sales Prices   Dividends
Declared
During
Quarter
 
 
  High   Low  

2010

                   

First quarter

  $ 23.70   $ 19.03   $ 0.01  

Second quarter

  $ 24.98   $ 18.25   $ 0.01  

Third quarter

  $ 21.81   $ 16.85   $ 0.01  

Fourth quarter

  $ 22.07   $ 16.56   $ 0.01  

2011

                   

First quarter

  $ 22.64   $ 19.61   $ 0.01  

Second quarter

  $ 23.31   $ 19.00   $ 0.01  

Third quarter

  $ 21.34   $ 13.82   $ 0.01  

Fourth quarter

  $ 19.76   $ 13.00   $ 0.18  

        As of March 2, 2012, the closing price of our common stock on Nasdaq was $21.26 per share. As of that date, based on the records of our transfer agent, there were approximately 1,598 record holders of our common stock.


Dividends

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

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

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

        Holders of Company common stock are entitled to receive dividends declared by the Board of Directors out of funds legally available under state law governing the Company and certain federal laws and regulations governing the banking and financial services business. During 2011, 2010, and 2009, the Company paid $7.6 million, $1.4 million, and $11.1 million, respectively, in cash dividends on common stock.

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

        PacWest's primary source of income is the receipt of cash dividends from the Bank. The availability of cash dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the bank in question, and other factors, that the FRB, the FDIC or the DFI could assert that payment of dividends or other payments is an unsafe or unsound practice. Pacific Western is subject to restrictions under certain federal and state laws and regulations governing banks which limit its ability to transfer funds to the holding company through intercompany loans, advances or cash dividends.

        Dividends paid by state banks, such as Pacific Western, are regulated by the DFI under its general supervisory authority as it relates to a bank's capital requirements. A state bank may declare a dividend without the approval of the DFI as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for three previous fiscal years less any dividend paid during such period. During 2011, the Bank paid $25.5 million in dividends to the Company. For the foreseeable future, any further cash dividends from the Bank to the Company will require DFI approval. See "Item 1. Business—Supervision and Regulation," for further discussion of potential regulatory limitations on the holding company's receipt of funds from the Bank, as well as "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity" and Note 19, Dividend Availability and Regulatory Matters, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for a discussion of other factors affecting the availability of dividends and limitations on the ability to declare dividends.

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Securities Authorized for Issuance Under Equity Compensation Plans

        The following table provides information as of December 31, 2011, regarding securities issued and to be issued under our equity compensation plans that were in effect during fiscal 2011:

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

Equity compensation plans approved by security holders

  The PacWest Bancorp 2003 Stock Incentive Plan(1)     (2) $     514,365 (3)

Equity compensation plans not approved by security holders

  None              

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

(2)
Amount does not include the 1,675,730 shares of unvested time-based and performance-based restricted stock outstanding as of December 31, 2011 with an exercise price of zero.

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


Recent Sales of Unregistered Securities and Use of Proceeds

        None.


Repurchases of Common Stock

        The following table presents stock purchases made during the fourth quarter of 2011:

Purchase Dates
  Total
Number of
Shares
Purchased(1)
  Average
Price Paid
Per Share
 

October 1 - October 31, 2011

      $  

November 1 - November 30, 2011

    57,790     17.96  

December 1 - December 31, 2011

         
             

Total

    57,790   $ 17.96  
             

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

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Five-Year Stock Performance Graph

        The following chart compares the yearly percentage change in the cumulative shareholder return on our common stock based on the closing price during the five years ended December 31, 2011, with (1) the Total Return Index for U.S. companies traded on The Nasdaq Stock Market (the "NASDAQ Composite"), and (2) the Total Return Index for the KBW Regional Bank Stocks (the "KBW Regional Banking Index"). This comparison assumes $100 was invested on December 31, 2006, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. PacWest's total cumulative loss was 59.4% over the five year period ending December 31, 2011 compared to a gain of 10.8% and loss of 33.6% for the NASDAQ Composite and KBW Regional Banking Index, respectively.


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

GRAPHIC


*
$100 invested on December 31, 2006 in stock or index, including reinvestment of dividends.

 
  Year Ended December 31,  
Index
  2006   2007   2008   2009   2010   2011  

PacWest Bancorp

  $ 100.00   $ 80.87   $ 55.63   $ 42.56   $ 45.25   $ 40.56  

NASDAQ Composite

    100.00     110.26     65.65     95.19     112.10     110.81  

KBW Regional Banking

    100.00     82.26     76.03     66.07     75.02     66.42  

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ITEM 6.    SELECTED FINANCIAL DATA

        The following table sets forth certain of our financial and statistical information for each of the years in the five-year period ended December 31, 2011. This data should be read in conjunction with our audited consolidated financial statements as of December 31, 2011 and 2010, and for each of the years in the three-year period ended December 31, 2011 and related Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

 
  At or For the Year Ended December 31,  
 
  2011   2010   2009   2008   2007  
 
  (In thousands, except per share amounts and percentages)
 

Results of Operations(1):

                               

Interest income

  $ 295,284   $ 290,284   $ 269,874   $ 287,828   $ 350,981  

Interest expense

    (32,643 )   (40,957 )   (53,828 )   (68,496 )   (85,866 )
                       

Net interest income

    262,641     249,327     216,046     219,332     265,115  
                       

Provision for credit losses:

                               

Non-covered loans

    (13,300 )   (178,992 )   (141,900 )   (45,800 )   (3,000 )

Covered loans

    (13,270 )   (33,500 )   (18,000 )        
                       

Total provision for credit losses

    (26,570 )   (212,492 )   (159,900 )   (45,800 )   (3,000 )
                       

Net interest income after provision for credit losses

    236,071     36,835     56,146     173,532     262,115  

FDIC loss sharing income, net

    7,776     22,784     16,314          

Other noninterest income

    23,650     20,454     22,604     24,427     32,920  

Gain from Affinity acquisition

            66,989          

Goodwill write-off

                (761,701 )    

Non-covered OREO costs, net

    (7,010 )   (12,310 )   (21,569 )   (2,218 )   (105 )

Covered OREO costs, net

    (3,666 )   (2,460 )   (1,753 )        

Other noninterest expense

    (169,317 )   (174,033 )   (155,882 )   (142,016 )   (142,160 )
                       

Earnings (loss) before income tax (expense) benefit

    87,504     (108,730 )   (17,151 )   (707,976 )   152,770  

Income tax (expense) benefit

    (36,800 )   46,714     7,801     (20,089 )   (62,444 )
                       

Net earnings (loss)

  $ 50,704   $ (62,016 ) $ (9,350 ) $ (728,065 ) $ 90,326  
                       

Per Common Share Data:

                               

Earnings (loss) per share (EPS):

                               

Basic

  $ 1.37   $ (1.77 ) $ (0.30 ) $ (26.81 ) $ 3.08  

Diluted

  $ 1.37   $ (1.77 ) $ (0.30 ) $ (26.81 ) $ 3.08  

Dividends declared during year

  $ 0.21   $ 0.04   $ 0.35   $ 1.28   $ 1.28  

Book value per share(2)

  $ 14.66   $ 13.06   $ 14.47   $ 13.17   $ 40.65  

Tangible book value per share(2)

  $ 13.14   $ 11.06   $ 13.52   $ 11.77   $ 11.88  

Shares outstanding at year-end(2)

    37,254     36,672     35,015     28,528     28,002  

Average shares outstanding:

                               

Basic EPS

    35,491     35,108     31,899     27,177     28,572  

Diluted EPS

    35,491     35,108     31,899     27,177     28,591  

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  At or For the Year Ended December 31,  
 
  2011   2010   2009   2008   2007  
 
  (In thousands, except per share amounts and percentages)
 

Balance Sheet Data:

                               

Total assets

  $ 5,528,237   $ 5,529,021   $ 5,324,079   $ 4,495,502   $ 5,179,040  

Cash and cash equivalents

    295,617     108,552     211,048     159,870     101,783  

Investment securities

    1,372,464     929,056     474,129     155,359     133,537  

Loans held for sale

                    63,565  

Non-covered loans, net of unearned income(3)

    2,807,713     3,161,055     3,707,383     3,987,891     3,949,218  

Allowance for credit losses, non-covered loans(3)

    93,783     104,328     124,278     68,790     61,028  

Covered loans, net

    703,023     908,576     621,686          

FDIC loss sharing asset

    95,187     116,352     112,817          

Goodwill

    39,141     47,301             761,990  

Core deposit and customer relationship intangibles

    17,415     25,843     33,296     39,922     43,785  

Deposits

    4,577,453     4,649,698     4,094,569     3,475,215     3,245,146  

Borrowings

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

Subordinated debentures

    129,271     129,572     129,798     129,994     138,488  

Stockholders' equity

    546,203     478,797     506,773     375,726     1,138,352  

Performance Ratios:

                               

Stockholders' equity to total assets ratio

    9.88 %   8.66 %   9.52 %   8.36 %   21.98 %

Tangible common equity ratio

    8.95 %   7.44 %   8.95 %   7.54 %   7.60 %

Loans to deposits ratio

    76.70 %   87.52 %   105.73 %   114.75 %   121.70 %

Net interest margin

    5.26 %   5.02 %   4.79 %   5.30 %   6.34 %

Efficiency ratio(4)

    61.21 %   64.53 %   55.66 %   59.17 %   47.73 %

Return on average assets

    0.92 %   (1.14 )%   (0.19 )%   (15.43 )%   1.73 %

Return on average equity

    9.92 %   (12.56 )%   (1.93 )%   (106.28 )%   7.66 %

Average equity to average assets

    9.32 %   9.10 %   10.06 %   14.52 %   22.55 %

Dividend payout ratio

    15.04 %   (5)     (5)     (5)     41.56 %

Asset Quality:

                               

Non-covered nonaccrual loans(3)

  $ 58,260   $ 94,183   $ 240,167   $ 63,470   $ 22,473  

Non-covered OREO

    48,412     25,598     43,255     41,310     2,736  
                       

Non-covered nonperforming assets

  $ 106,672   $ 119,781   $ 283,422   $ 104,780   $ 25,209  
                       

Asset Quality Ratios:

                               

Non-covered nonaccrual loans to non-covered loans, net of unearned income(3)

    2.07 %   2.98 %   6.48 %   1.59 %   0.57 %

Non-covered nonperforming assets to non-covered loans, net of unearned income, and OREO(3)

    3.73 %   3.76 %   7.56 %   2.60 %   0.64 %

Allowance for credit losses to non-covered nonaccrual loans

    161.0 %   110.8 %   51.8 %   108.4 %   271.6 %

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

    3.34 %   3.30 %   3.35 %   1.72 %   1.55 %

(1)
Operating results of acquired companies are included from the respective acquisition dates. See Note 3, Acquisitions, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

(2)
Includes 1,675,730 shares, 1,230,582 shares, 1,095,417 shares, 1,309,586 shares, and 861,269 shares of unvested restricted stock outstanding at December 31, 2011, 2010, 2009, 2008, and 2007, respectively.

(3)
During 2010, the Bank executed two sales of non-covered adversely classified loans totaling $398.5 million that included a total of $128.1 million in nonaccrual loans. For further information about the 2010 loan sales, see "—Overview—2010 Non-Covered Classified Loan Sales" included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

(4)
The 2009 efficiency ratio includes the gain from the Affinity acquisition. Excluding this gain, the efficiency ratio would be 70.29%. The 2008 efficiency ratio excludes the goodwill write-off. Including the goodwill write-off, the efficiency ratio would be 371.65%.

(5)
Not meaningful.

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

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


Overview

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

        Pacific Western is a full-service commercial bank offering a broad range of banking products and services including: accepting demand, money market, and time deposits; originating loans, including commercial, real estate construction, SBA guaranteed and consumer loans; and providing other business-oriented products. Our operations are primarily located in Southern California extending from California's Central Coast to San Diego County; we also operate three banking offices in the San Francisco Bay area, all of which were added through the Affinity acquisition. The Bank focuses on conducting business with small to medium size businesses in our marketplace and the owners and employees of those businesses. The majority of our loans are secured by the real estate collateral of such businesses. Our asset-based lending function operates in Arizona, California, Texas, and the Pacific Northwest. Our equipment leasing function, added through the January 2012 MEF acquisition, operates in Utah and has lease receivables in 45 states.

        Over the last year, the Company's assets have essentially remained flat, declining $784,000 to $5.5 billion at December 31, 2011. The change was due primarily to decreases of $353.3 million, $205.6 million, $50.2 million, and $21.2 million in gross non-covered loans, covered loans, other assets, and FDIC loss sharing asset, respectively. These decreases were offset partially by increases of $452.3 million in securities available-for-sale attributable to purchases using excess liquidity and $176.9 million in interest-earning deposits in financial institutions attributable mostly to principal payments received on loans and investment securities. At December 31, 2011, gross non-covered loans, securities available-for-sale, and covered loans totaled $2.8 billion, $1.3 billion, and $703 million, respectively, or 51%, 24%, and 13% of total assets, respectively.

        Pacific Western competes actively for deposits and emphasizes solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin, as net interest income accounted for 89% of our net revenues (net interest income plus noninterest income) for 2011.

        We have completed 23 business acquisitions since the Company's inception in 1999, including the purchase of Marquette Equipment Finance in January 2012 and the FDIC-assisted acquisitions of Los Padres Bank and Affinity Bank in August 2010 and August 2009, respectively. These acquisitions affect the comparability of our reported financial information as the operating results of the acquired entities are included in our operating results only from their respective acquisition dates. For further information on our acquisitions, see Note 3, Acquisitions, and Note 4, Goodwill and Other Intangible Assets, of the Notes to Consolidated Financial Statements included in "Item 8. Financial Statement and Supplementary Data."

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        On January 3, 2012, Pacific Western Bank completed the acquisition of Marquette Equipment Finance, or MEF, an equipment leasing company located in Midvale, Utah. Pacific Western Bank acquired all of the capital stock of MEF from Meridian Bank, N.A. for $35 million in cash. MEF focuses on business-essential equipment leases throughout the United States with transactions primarily in the mid-ticket segment. This acquisition diversifies our loan portfolio, expands our product line, and provides growth opportunities. It also importantly deployed our excess liquidity into higher-yielding assets.

        At January 3, 2012, MEF had $162.2 million in gross leases and leases in process outstanding, with no leases on nonaccrual status. MEF's leases are spread across 18 industries, with the top three being financial services/insurance, manufacturing, and health care and representing 68% of the lease portfolio balance. The weighted average yield on the lease portfolio at year end 2011 was approximately 9% and its weighted average remaining maturity was 34 months. In addition, Pacific Western Bank assumed $154.8 million in outstanding debt and other liabilities, which included $129 million payable to MEF's former parent. Pacific Western Bank repaid MEF's intercompany debt on the closing date from its excess liquidity on deposit at the Federal Reserve Bank. This resulted in MEF's interest-earning assets being funded with our low-cost deposit base.

        Effective March 23, 2012, MEF will change its name to Pacific Western Equipment Finance and operate under this name as a division of Pacific Western Bank. Pacific Western Bank retained all 71 MEF employees.

        The following table presents the MEF balance sheet presented at fair value as of the acquisition date, January 3, 2012:

Marquette Equipment Finance
  January 3,
2012
 
 
  (In thousands)
 

Assets Acquired:

       

Cash and cash equivalents

  $ 7,092  

Direct financing leases

    142,989  

Leases in process

    19,162  

Customer relationship intangible

    1,700  

Other intangible assets

    1,420  

Goodwill

    17,004  

Other assets

    467  
       

Total assets acquired

  $ 189,834  
       

Liabilities Assumed:

       

Borrowings

  $ 144,516  

Accrued interest payable and other liabilities

    10,318  
       

Total liabilities assumed

  $ 154,834  
       

Cash consideration paid

  $ 35,000  
       

        During 2010, we made strategic decisions to sell $398.5 million of non-covered classified loans to reduce credit risk, thereby strengthening the Bank's balance sheet and enhancing its ability to continue to participate in bidding on FDIC-assisted acquisitions. The loans sold included $128.1 million in nonaccrual loans and $148.8 million in performing restructured loans. All of the loans sold were

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originated by Pacific Western Bank and none were covered loans acquired in the Los Padres Bank or Affinity Bank acquisitions. These sales were for cash of $254.6 million and were completed on a servicing-released basis and without recourse to Pacific Western Bank. Such sales resulted in immediate reductions of non-covered classified loans and improved credit quality metrics.

        These sales resulted in a charge-off to the allowance for credit losses of $143.9 million, of which $58.2 million had been previously allocated to the loans sold through our allowance methodology and $85.7 million represented the market discount necessary for the loans to be sold to the buyer.

        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. 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 had sold a 95% participating interest in these loans for cash and continued to service them and maintain the borrower relationships. When the opportunity to purchase this loan portfolio presented itself, we concluded it would be in the best interests of the Company and the Bank to make this purchase as we are familiar with the credit risk and it would deploy excess liquidity in a manner that would increase interest income and expand the net interest margin. As of December 31, 2011, such portfolio totaled $179.4 million.

        The estimated losses expected to be collected from the FDIC under the terms of the loss share agreements for the Los Padres and Affinity acquisitions are reflected in the loss share receivable. We file claims to the FDIC for the losses incurred on covered assets on a quarterly basis in the calendar month following each quarter-end. We received reimbursement from the FDIC, subject to their satisfactory review of our loss share claim certificates. As of January 2012, we have filed claims to the FDIC for losses on covered assets through the fourth quarter of 2011 in an aggregate amount of $191.7 million. We have received payment from the FDIC of $149.4 million, which represents 80% of our losses, and we expect to receive $3.9 million for recently submitted claims.

        On August 20, 2010, we acquired certain assets of Los Padres Bank, including all loans, and assumed substantially all of its liabilities, including all deposits, from the FDIC in an FDIC-assisted acquisition, which we refer to as the Los Padres acquisition. Pacific Western (i) acquired $437.1 million in loans, $33.9 million in other real estate owned, $44.3 million in investments, and $261.5 million in cash and other assets, and (ii) assumed $752.2 million in deposits, $70.0 million in borrowings, and $1.9 million in other liabilities. In connection with the Los Padres acquisition, the FDIC made a cash payment to Pacific Western of $144.0 million. Other than a deposit premium of $3.4 million, we paid no cash or other consideration to acquire Los Padres. The estimated fair value of the liabilities assumed exceeded the estimated fair value of the assets acquired and we recorded $47.3 million of goodwill.

        We entered into a loss sharing agreement with the FDIC, whereby the FDIC agreed to cover a substantial portion of any future losses on the acquired loans, with the exception of consumer loans, and other real estate owned. We refer to the acquired assets subject to the loss sharing agreement collectively as "covered assets." Under the terms of such loss sharing agreement, the FDIC is obligated to reimburse the Bank for 80% of losses with respect to the covered assets. The Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid the Bank 80% reimbursement under the loss sharing agreement. The loss sharing provisions for single family covered assets and commercial (non-single family) covered assets are in effect for 10 years and 5 years,

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respectively, from the acquisition date, and the loss recovery provisions are in effect for 10 years and 8 years, respectively, from the acquisition date.

        Los Padres was a federally chartered savings bank headquartered in Solvang, California that operated 14 branches, including 11 branches in California (three in Ventura County, four in Santa Barbara County, and four in San Luis Obispo County) and three branches in Arizona (Maricopa County). After office consolidations in 2011, we are operating eight of the former Los Padres branch offices, all of which are located in California. We made this acquisition to expand our presence in the Central Coast of California.

        The assets acquired and liabilities assumed are 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. The application of the acquisition method of accounting resulted in goodwill of $47.3 million. Such goodwill included $9.5 million related to the FDIC's settlement accounting for a wholly-owned subsidiary of Los Padres. We disagreed with the FDIC's accounting for this item and during 2011 we successfully resolved this matter with the FDIC through a cash receipt of $7.6 million and a goodwill reduction for the same amount. See Note 3, Acquisitions, and Note 4, Goodwill and Other Intangible Assets, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for additional information regarding the Los Padres acquisition.

        On August 28, 2009, we acquired substantially all of the assets of Affinity Bank, including all loans, and assumed substantially all of its liabilities, including the insured and uninsured deposits and excluding certain brokered deposits, from the FDIC in an FDIC-assisted transaction, which we refer to as the Affinity acquisition. Pacific Western (i) acquired $675.6 million in loans, $22.9 million in foreclosed assets, $175.4 million in investments and $371.5 million in cash and other assets, and (ii) assumed $868.2 million in deposits, $305.8 million in borrowings, and $32.6 million in other liabilities. In connection with the Affinity acquisition, the FDIC made a cash payment to Pacific Western of $87.2 million.

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

        Affinity was a full service commercial bank headquartered in Ventura, California that operated 10 branch locations in California, all of which we continue to operate. We made this acquisition to expand our presence in California.

        The acquisition has been accounted for under the acquisition method of accounting. Accordingly the acquired assets, including the FDIC loss sharing asset and identifiable intangible asset, and the assumed liabilities were recorded at their estimated fair values as of the August 28, 2009 acquisition date. The application of the acquisition method of accounting resulted in a gain of $67.0 million ($38.9 million after-tax). Such gain represented the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed. See Note 3, Acquisitions, and Note 4, Goodwill and Other Intangible Assets, of the Notes to Consolidated Financial Statements contained in

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"Item 8. Financial Statements and Supplementary Data" for additional information regarding the Affinity acquisition.


Key Performance Indicators

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

        Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. A sustained low interest rate environment combined with low loan growth and high levels of marketplace liquidity may lower both our net interest income and net interest margin going forward.

        Our primary interest-earning assets are loans and investments. Our primary interest-bearing liabilities are deposits. We attribute our high net interest margin to our high level of noninterest-bearing deposits and low cost of deposits. While our deposit balances will fluctuate depending on deposit holders' perceptions of alternative yields available in the market, we attempt to minimize these variances by attracting a high percentage of noninterest-bearing deposits, which have no expectation of yield. At December 31, 2011, approximately 37% of our total deposits were noninterest-bearing.

        We generally seek new lending opportunities in the $500,000 to $15 million range, try to limit loan maturities for commercial loans to one year, for construction loans up to 18 months, and for commercial real estate loans up to ten years, and to price lending products so as to preserve our interest spread and net interest margin. We sometimes encounter strong competition in pursuing lending opportunities such that potential borrowers obtain loans elsewhere at lower rates than those we offer. Our ability to make new loans is dependent on economic factors in our market area, borrower qualifications, competition, and liquidity, among other items. Loan growth remains tepid, as new loan volume is not replacing maturities. We continue to retain maturing lending relationships that contribute positively to our profitability and net interest margin, and selectively add new loans that meet our credit and pricing standards.

        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. We maintain an allowance for credit losses on non-covered loans which is the sum of our allowance for loan losses and our reserve for unfunded loan commitments. 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. The provision for credit losses on the non-covered loan portfolio was based on our allowance methodology and reflected net charge-offs, the levels and trends of nonaccrual and classified loans, and the migration of loans into various risk classifications. A provision for credit losses on the covered loan portfolio may be recorded to reflect decreases in expected cash flows on covered loans compared to those previously estimated.

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

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        Our noninterest expense includes fixed and controllable overhead, the major components of which are compensation, occupancy, data processing, and other professional services. It also includes costs that tend to vary based on the volume of activity, such as OREO expense. We measure success in controlling both fixed and variable costs through monitoring of the efficiency ratio. We calculate the base efficiency ratio by dividing noninterest expense by net revenues (the sum of net interest income plus noninterest income). We also calculate a non-GAAP measure called the "credit cost adjusted efficiency ratio." The credit cost adjusted efficiency ratio is calculated in the same manner as the base efficiency ratio except that noninterest income is reduced by FDIC loss sharing income and noninterest expense is reduced by OREO expenses. See calculations in "Non-GAAP Measurements" contained herein.

        The consolidated base and credit cost adjusted efficiency ratios have been as follows:

Quarterly Period in 2011
  Base
Efficiency
Ratio
  Credit Cost
Adjusted
Efficiency
Ratio
 

First

    58.7 %   60.4 %

Second

    58.2 %   57.7 %

Third

    67.9 %   58.7 %

Fourth

    60.4 %   59.9 %

        The base efficiency ratio fluctuations shown in the above table result from the volatility of FDIC loss sharing income and OREO expenses. The credit cost adjusted efficiency ratio eliminates such volatility and shows the trend in overhead related noninterest expense relative to net revenues.


Critical Accounting Policies

        The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.

        Our significant accounting policies and practices are described in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. We have identified our policies for the allowances for credit losses, the carrying values of intangible assets, and deferred income tax assets as critical accounting policies.

        The allowance for credit losses on non-covered loans is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for credit losses on non-covered loans relates only to loans which are not subject to loss sharing agreements with the FDIC. The allowance for loan losses is reported as a reduction of outstanding loan balances and the reserve for unfunded loan commitments is included within other liabilities. Generally, as loans are funded, the

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amount of the commitment reserve applicable to such funded loans is transferred from the reserve for unfunded loan commitments to the allowance for loan losses based on our allowance methodology. The following discussion is for non-covered loans and the allowance for credit losses thereon. Refer to "—Allowance for Credit Losses on Covered Loans" for the policy on covered loans.

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

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

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

        Impaired loans are identified at each reporting date based on certain criteria and the majority of which are individually reviewed for impairment. Non-covered nonaccrual loans with an unpaid principal balance over $250,000 and all performing restructured loans are reviewed individually for the amount of impairment, if any. Non-covered nonaccrual loans with an unpaid principal balance of $250,000 or less are evaluated for impairment collectively. The population of such loans totaled $4.3 million, represented by 64 loans, as of December 31, 2011. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the original contractual terms of the loan agreement. We measure impairment of a loan based upon the fair value of the loan's collateral if the loan is collateral dependent or the present value of cash flows, discounted at the loan's effective interest rate, if the loan is not collateral-dependent. The impairment amount on a collateral-dependent loan is charged-off to the allowance and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve. Increased charge-offs or additions to specific reserves generally result in increased provisions for credit losses.

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

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        In addition, we may refer to the loans classified as "substandard" and "doubtful" together as "criticized loans." For further information on classified loans, see Note 6, Loans, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        The allowance amounts for "pass" rated loans and those loans adversely classified, which are not reviewed individually, are determined using historical loss rates developed through migration analysis. The migration analysis is updated quarterly based on historic losses and movement of loans between ratings.

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

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

        We recognize that the determination of the allowance for loan losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time. Therefore, we perform sensitivity analyses to provide insight regarding the impact adverse changes in credit risk ratings may have on our allowance for loan losses. The sensitivity analyses have inherent limitations and are based on various assumptions as of a point in time and, accordingly, it is not necessarily representative of the impact loan risk rating changes may have on the allowance for loan losses.

        At December 31, 2011, in the event that 1% of our non-covered loans were downgraded one credit risk rating category for each category (e.g., 1% of the "pass" category moved to the "special mention" category, 1% of the "special mention" category moved to "substandard" category, and 1% of the "substandard" category moved to the "doubtful" category within our current allowance methodology), the allowance for credit losses would have increased by approximately $1.4 million. In the event that 5% of our non-covered loans were downgraded one credit risk category, the allowance for credit losses would increase by approximately $7.2 million. Given current processes employed by the Company, management believes the credit risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different conclusions that could be significant to the Company's financial statements. In addition, current credit

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risk ratings are subject to change as we continue to review loans within our portfolio and as our borrowers are impacted by economic trends within their market areas.

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

        The loans acquired in the Los Padres and Affinity acquisitions are covered by loss sharing agreements with the FDIC and we will be reimbursed for a substantial portion of any future losses. Under the terms of the Los Padres loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the covered assets. The loss sharing provisions are in effect for 10 years for single family covered assets and 5 years for commercial (non-single family) covered assets from the August 20, 2010 acquisition date. The loss recovery provisions are in effect for 10 years for single family assets and 8 years for commercial (non-single family) assets from the acquisition date. Under the terms of the Affinity loss sharing agreement, the FDIC will absorb 80% of losses and receive 80% of loss recoveries on the first $234 million of losses on covered assets and absorb 95% of losses and receive 95% of loss recoveries on covered assets exceeding the $234 million threshold. Through December 31, 2011, gross losses for Affinity covered assets totaled $144.6 million and gross losses for Los Padres covered assets totaled $47.1 million. The loss sharing provisions are in effect for 10 years for residential loans and 5 years for commercial assets (non-residential loans, OREO and certain securities) from the August 28, 2009 acquisition date. The loss recovery provisions are in effect for 10 years for residential loans and 8 years for commercial assets from the acquisition date.

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

        The covered loans are subject to our internal and external credit review. If deterioration in the expected cash flows results in a reserve requirement, a provision for credit losses is charged to earnings without regard to the FDIC loss sharing agreement. The portion of the estimated loss reimbursable from the FDIC is recorded in FDIC loss sharing income and increases the FDIC loss sharing asset. For acquired impaired loans, the allowance for loan losses is measured at the end of each financial reporting period based on expected cash flows. Decreases in the amount and changes in the timing of expected cash flows on the acquired impaired loans as of the financial reporting date compared to those previously estimated are usually recognized by recording a provision for credit losses on such covered loans.

        Certain home equity lines of credit acquired in the Los Padres acquisition are not eligible for acquired impaired loan accounting and are therefore accounted for as performing acquired loans. Such acquired loans were initially recorded at a discount and are subject to our quarterly allowance for credit losses methodology. We record a provision for such loan losses only when the reserve requirement exceeds any remaining credit discount on these covered loans. Please see "—Financial Condition—Allowance for Credit Losses on Covered Loans" and Note 1(h), Nature of Operations and Summary of Significant Accounting Policies—Impaired Loans and Allowances for Credit Losses, and Note 6, Loans, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for more information.

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

        Our other intangible assets with definite lives include core deposit and customer relationship intangibles. The establishment and subsequent amortization of these intangible assets requires several assumptions including, among other things, the estimated cost to service deposits acquired, discount rates, estimated attrition rates and useful lives. These intangibles are being amortized over their estimated useful lives up to 10 years and tested for impairment quarterly. If the value of the core deposit intangible or the customer relationship intangible is determined to be less than the carrying value in future periods, a write-down would be taken through a charge to our earnings. The most significant element in evaluation of these intangibles is the attrition rate of the acquired deposits or loan relationships. If such attrition rate were to accelerate from that which we expected, the intangible may have to be reduced by a charge to earnings. The attrition rate related to deposit flows or loan flows is influenced by many factors, the most significant of which are alternative yields for loans and deposits available to customers and the level of competition from other financial institutions and financial services companies.

        Our deferred income tax assets arise from differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. From an accounting standpoint, we determine whether a deferred tax asset is realizable based on facts and circumstances, including the Company's current and projected future tax position, the historical level of our taxable income, and estimates of our future taxable income. In most cases, the realization of deferred tax assets is based on our future profitability. If we were to experience either reduced profitability or operating losses in a future period, the realization of our deferred tax assets may no longer be considered more likely than not that they will be realized. In such an instance, we could be required to record a valuation allowance on our deferred tax assets by charging earnings.


Non-GAAP Measurements

        Certain discussion in this Form 10-K contains non-GAAP financial disclosures for tangible common equity, pre-credit, pre-tax earnings, and a credit cost adjusted efficiency ratio. 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. Given the use of tangible common equity amount and ratio is prevalent among banking regulators, investors and analysts, we disclose our tangible common equity ratio in addition to equity-to-assets ratio. Also, as analysts and investors view pre-credit, pre-tax earnings as an indicator of the Company's ability to absorb credit losses, we disclose this amount in addition to net earnings. The methodology of determining tangible common equity and pre-credit, pre-tax earnings may differ among companies. We disclose the credit cost adjusted efficiency ratio as it eliminates the volatility of FDIC loss sharing income and OREO expenses from the base efficiency ratio and shows the trend in overhead related noninterest expense relative to net revenues. These non-GAAP financial measures are presented for supplemental informational purposes only for understanding the Company's financial condition and operating results and should not be considered a substitute for financial information presented in accordance with United States generally accepted accounting principles ("GAAP").

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        The following tables present performance amounts and ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measurements to the GAAP financial measurements.

 
  Year Ended December 31,  
Pre-Credit, Pre-Tax Earnings
  2011   2010   2009  
 
  (In thousands)
 

Net earnings (loss)

  $ 50,704   $ (62,016 ) $ (9,350 )

Plus: Total provision for credit losses

    26,570     212,492     159,900  

  Other real estate owned expense (income):

                   

Non-covered

    7,010     12,310     21,569  

Covered

    3,666     2,460     1,753  

  Income tax expense (benefit)

    36,800     (46,714 )   (7,801 )

Less: FDIC loss sharing income, net

    7,776     22,784     16,314  
               

  Pre-credit, pre-tax earnings

  $ 116,974   $ 95,748   $ 149,757  
               

 

 
  Year Ended December 31,  
Credit Cost Adjusted Efficiency Ratio
  2011   2010   2009  
 
  (Dollars in thousands)
 

Noninterest expense

  $ 179,993   $ 188,803   $ 179,204  

Less: Non-covered OREO expense

    7,010     12,310     21,569  

  Covered OREO expense

    3,666     2,460     1,753  
               

Credit adjusted noninterest expense

  $ 169,317   $ 174,033   $ 155,882  
               

Net interest income

  $ 262,641   $ 249,327   $ 216,046  

Noninterest income

    31,426     43,238     105,907  
               

  Net revenues

    294,067     292,565     321,953  

Less: FDIC loss sharing income, net

    7,776     22,784     16,314  
               

  Credit adjusted net revenues

  $ 286,291   $ 269,781   $ 305,639  
               

Base efficiency ratio(1)(3)

    61.2 %   64.5 %   55.7 %

Credit cost adjusted efficiency ratio(2)(3)

    59.1 %   64.5 %   51.0 %

(1)
Noninterest expense divided by net revenues.

(2)
Credit adjusted noninterest expense divided by credit adjusted net revenues.

(3)
The 2009 base efficiency ratio and credit cost adjusted efficiency ratio include the $67.0 million gain from the Affinity acquisition. Excluding this gain, the efficiency ratios would be 70.3% and 65.3%, respectively.

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  December 31,  
Tangible Common Equity
  2011   2010   2009  
 
  (Dollars in thousands)
 

PacWest Bancorp Consolidated:

                   

Stockholders' equity

  $ 546,203   $ 478,797   $ 506,773  

Less: Intangible assets

    56,556     73,144     33,296  
               

Tangible common equity

  $ 489,647   $ 405,653   $ 473,477  
               

Total assets

  $ 5,528,237   $ 5,529,021   $ 5,324,079  

Less: Intangible assets

    56,556     73,144     33,296  
               

Tangible assets

  $ 5,471,681   $ 5,455,877   $ 5,290,783  
               

Equity to assets ratio

    9.88 %   8.66 %   9.52 %

Tangible common equity ratio(1)

    8.95 %   7.44 %   8.95 %

Book value per share

  $ 14.66   $ 13.06   $ 14.47  

Tangible book value per share

  $ 13.14   $ 11.06   $ 13.52  

Shares outstanding

    37,254,318     36,672,429     35,015,322  

Pacific Western Bank:

                   

Stockholders' equity

  $ 625,494   $ 570,118   $ 585,940  

Less: Intangible assets

    56,556     73,144     33,296  
               

Tangible common equity

  $ 568,938   $ 496,974   $ 552,644  
               

Total assets

  $ 5,512,025   $ 5,513,601   $ 5,313,750  

Less: Intangible assets

    56,556     73,144     33,296  
               

Tangible assets

  $ 5,455,469   $ 5,440,457   $ 5,280,454  
               

Equity to assets ratio

    11.35 %   10.34 %   11.03 %

Tangible common equity ratio(1)

    10.43 %   9.13 %   10.47 %

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


Results of Operations

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

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        The following table sets forth our unaudited, quarterly results for the periods indicated:

 
  Three Months Ended  
 
  December 31,
2011
  September 30,
2011
 
 
  (Dollars in thousands, except per share data)
 

Interest income

  $ 70,913   $ 72,518  

Interest expense

    (7,140 )   (8,077 )
           

Net interest income

    63,773     64,441  
           

Provision for credit losses:

             

Non-covered loans

         

Covered loans

    (4,122 )   (348 )
           

Total provision for credit losses

    (4,122 )   (348 )
           

Net interest income after provision for credit losses

    59,651     64,093  
           

FDIC loss sharing income, net

    2,667     963  

Other noninterest income

    5,587     6,180  
           

Total noninterest income

    8,254     7,143  
           

Non-covered OREO expense, net

    (1,714 )   (2,293 )

Covered OREO expense, net

    (226 )   (4,813 )

Other noninterest expense

    (41,529 )   (41,481 )
           

Total noninterest expense

    (43,469 )   (48,587 )
           

Income tax expense

    (10,553 )   (9,345 )
           

Net earnings

  $ 13,883   $ 13,304  
           

Earnings per share:

             

Basic

  $ 0.38   $ 0.36  

Diluted

  $ 0.38   $ 0.36  

Annualized return on:

             

Average assets

    1.00 %   0.97 %

Average equity

    10.22 %   10.11 %

Net interest margin

    5.00 %   5.15 %

Efficiency ratio

    60.4 %   67.9 %

        We recorded net earnings of $13.9 million for the fourth quarter of 2011 compared to net earnings of $13.3 million for the third quarter of 2011. The $579,000 increase in net earnings for the linked quarters was due to lower covered OREO costs of $4.6 million ($2.7 million after tax) and higher FDIC loss sharing income of $1.7 million ($1.0 million after tax), offset by a higher provision for credit losses on covered loans of $3.8 million ($2.2 million after tax) and lower net interest income of $668,000 ($387,000 after tax).

        Net interest income was $63.8 million for the fourth quarter of 2011 compared to $64.4 million for the third quarter of 2011. The $668,000 decline was due to a $1.7 million decrease in loan interest income from lower average loans. Offsetting the decline in interest income was a reduction in interest expense of $937,000 due to lower rates on all interest-bearing deposits and a decline in average time deposits.

        Our net interest margin for the fourth quarter of 2011 was 5.00%, a decrease of 15 basis points from the 5.15% reported for the third quarter of 2011. The decrease reflected a shift in the mix of average interest-earning assets to lower yielding investment securities from higher yielding loans and lower

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accelerated accretion of discounts on covered loan payoffs. Average interest-earning assets increased $91.1 million for the linked quarters including a $141.1 million increase in average investment securities. The yield on average loans was 6.87% for the fourth and third quarters of 2011. The yield on average non-covered loans was 6.49% and 6.53% for the fourth and third quarters, respectively, while the yield on average covered loans was 8.35% and 8.13%, respectively. The combination of accelerated accretion of discounts on covered loan payoffs and nonaccrual loan interest positively impacted the loan yield for the fourth quarter by 4 basis points and the third quarter by 17 basis points. The cost of interest-bearing deposits declined 12 basis points to 0.57% due to lower rates on interest-bearing deposits and lower average time deposits, and all-in deposit cost declined 8 basis points to 0.36%.

        The following table presents the impact on the net interest margin of accelerated accretion of discounts on covered loan payoffs and loans being placed on or removed from nonaccrual status for the periods indicated:

 
  Three Months Ended  
 
  December 31,
2011
  September 30,
2011
 

Net interest margin as reported

    5.00 %   5.15 %

Less:

             

Accelerated accretion of purchase discounts on covered loan payoffs

    0.02 %   0.10 %

Nonaccrual loan interest

    0.01 %   0.03 %
           

Net interest margin as adjusted

    4.97 %   5.02 %
           

        The provision for credit losses for the fourth and third quarters totaled $4.1 million and $348,000, respectively; such provisions related only to the covered loan portfolio. The zero provision level on the non-covered portfolio is generated by our allowance methodology and reflects net charge-offs, the levels of nonaccrual and classified loans, and the migration of loans into various risk classifications. The provision for credit losses on the covered loans results from decreases in expected cash flows on covered loans compared to those previously estimated.

        Net charge-offs on non-covered loans for the fourth quarter of 2011 totaled $2.8 million compared to third quarter net charge-offs of $6.0 million. The allowance for credit losses on the non-covered portfolio totaled $93.8 million and $96.5 million at December 31, 2011 and September 30, 2011, respectively, and represented 3.34% of the non-covered loan balances at both of those dates. The allowance for credit losses as a percent of nonaccrual loans was 161% at both December 31, 2011 and September 30, 2011.

        Noninterest income for the fourth quarter of 2011 totaled $8.3 million compared to $7.1 million for the third quarter of 2011. The $1.1 million increase was due to higher FDIC loss sharing income of $1.7 million stemming from a higher provision for credit losses on covered loans. FDIC loss sharing income also includes reductions of the FDIC loss sharing asset when the estimated amount of losses collectible from the FDIC decreases; this occurs when expected cash flows on covered loan pools improve during a reporting period causing the carrying value of the FDIC loss sharing asset to be reduced.

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        The following table presents the details of FDIC loss sharing income, net for the periods indicated:

 
  Three Months Ended  
 
  December 31,
2011
  September 30,
2011
  Increase
(Decrease)
 
 
  (In thousands)
 

FDIC Loss Sharing Income, Net:

                   

Gain (loss) on indemnification asset(1)

  $ 2,560   $ (2,782 ) $ 5,343  

Net reimbursement from FDIC for covered OREO write-downs and sales

    102     3,741     (3,639 )

Other

    5     6     (1 )
               

Total FDIC loss sharing income, net

  $ 2,667   $ 964   $ 1,703  
               

(1)
Includes (a) increases related to covered loan loss provisions and (b) decreases for loss share asset amortization and write-offs for covered loans resolved or expected to be resolved at amounts higher than their carrying value.

        Noninterest expense decreased $5.1 million to $43.5 million during the fourth quarter of 2011 compared to $48.6 million for the third quarter of 2011. This change was due mostly to lower covered OREO costs. Covered OREO costs decreased by $4.6 million due to lower write-downs of $7.7 million and lower gains on sales of $3.1 million. The fourth quarter included an $885,000 charge to compensation related to a staff reduction, which is expected to result in annual savings of approximately $2.4 million, and $600,000 in acquisition costs related to the Marquette Equipment Finance transaction; there were no similar items in the prior quarter. Other professional services declined $293,000 due mostly to internal audit transition costs recognized in the third quarter and a recovery of $368,000 in legal costs from an insurance claim in the fourth quarter. Occupancy costs declined $286,000 due mostly to third quarter leasing commissions and a lease buyout.

        Noninterest expense includes amortization of time-based restricted stock, which is included in compensation, and intangible asset amortization. Amortization of restricted stock totaled $1.4 million and $2.1 million for the fourth and third quarters of 2011, respectively. Intangible asset amortization totaled $1.8 million and $2.0 million for the fourth and third quarters of 2011, respectively.

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

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stockholders' equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities.

 
  Year Ended December 31,  
 
  2011   2010   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)

  $ 3,755,190   $ 260,143     6.93 % $ 4,068,450   $ 265,136     6.52 % $ 4,111,379   $ 258,499     6.29 %

Investment securities(2)

    1,100,869     34,785     3.16 %   675,979     24,564     3.63 %   258,160     10,969     4.25 %

Deposits in financial institutions

    136,447     356     0.26 %   226,276     584     0.26 %   144,216     406     0.28 %

Federal funds sold

                            135          
                                             

Total interest-earning assets

    4,992,506   $ 295,284     5.91 %   4,970,705   $ 290,284     5.84 %   4,513,890   $ 269,874     5.98 %
                                                   

Other assets

    492,577                 455,005                 309,827              
                                                   

Total assets

  $ 5,485,083               $ 5,425,710               $ 4,823,717              
                                                   

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                       

Interest checking deposits

  $ 491,145   $ 777     0.16 % $ 458,703   $ 1,265     0.28 % $ 390,605   $ 1,754     0.45 %

Money market deposits

    1,227,482     5,356     0.44 %   1,230,924     9,629     0.78 %   981,901     11,767     1.20 %

Savings deposits

    150,837     226     0.15 %   121,793     249     0.20 %   114,933     270     0.23 %

Time deposits

    1,077,930     14,290     1.33 %   1,181,735     15,094     1.28 %   874,786     18,125     2.07 %
                                             

Total interest-bearing deposits

    2,947,394     20,649     0.70 %   2,993,155     26,237     0.88 %   2,362,225     31,916     1.35 %

Borrowings

    225,542     7,071     3.14 %   324,150     9,126     2.82 %   550,888     15,497     2.81 %

Subordinated debentures

    129,432     4,923     3.80 %   129,703     5,594     4.31 %   129,901     6,415     4.94 %
                                             

Total interest-bearing liabilities

    3,302,368   $ 32,643     0.99 %   3,447,008   $ 40,957     1.19 %   3,043,014   $ 53,828     1.77 %
                                                   

Noninterest-bearing demand deposits

    1,627,729                 1,437,493                 1,245,512              

Other liabilities

    43,996                 47,586                 50,043              
                                                   

Total liabilities

    4,974,093                 4,932,087                 4,338,569              

Stockholders' equity

    510,990                 493,623                 485,148              
                                                   

Total liabilities and stockholders' equity

  $ 5,485,083               $ 5,425,710               $ 4,823,717              
                                                   

Net interest income

        $ 262,641               $ 249,327               $ 216,046        
                                                   

Net interest rate spread

                4.92 %               4.65 %               4.21 %

Net interest margin

                5.26 %               5.02 %               4.79 %

(1)
Includes nonaccrual loans and loan fees.

(2)
The tax-equivalent yield on investment securities was 3.22% for 2011; not applicable for 2010 and 2009.

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

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        The following table presents, for the years indicated, changes in interest income and expense and the amount of change attributable to changes in volume and rate:

 
  2011 Compared to 2010   2010 Compared to 2009  
 
   
  Increase (Decrease)
Due to
   
  Increase (Decrease)
Due to
 
 
  Total
Increase
(Decrease)
  Total
Increase
(Decrease)
 
 
  Volume   Rate   Volume   Rate  
 
  (In thousands)
 

Interest Income:

                                     

Loans

  $ (4,993 ) $ (21,122 ) $ 16,129   $ 6,637   $ (2,721 ) $ 9,358  

Investment securities

    10,221     13,772     (3,551 )   13,595     15,394     (1,799 )

Deposits in financial institutions

    (228 )   (234 )   6     178     214     (36 )
                           

Total interest income

    5,000     (7,584 )   12,584     20,410     12,887     7,523  
                           

Interest Expense:

                                     

Interest checking deposits

    (488 )   84     (572 )   (489 )   269     (758 )

Money market deposits

    (4,273 )   (27 )   (4,246 )   (2,138 )   2,547     (4,685 )

Savings deposits

    (23 )   52     (75 )   (21 )   15     (36 )

Time deposits

    (804 )   (1,361 )   557     (3,031 )   5,194     (8,225 )
                           

Total interest-bearing deposits

    (5,588 )   (1,252 )   (4,336 )   (5,679 )   8,025     (13,704 )

Borrowings

    (2,055 )   (3,006 )   951     (6,371 )   (6,383 )   12  

Subordinated debentures

    (671 )   (12 )   (659 )   (821 )   (10 )   (811 )
                           

Total interest expense

    (8,314 )   (4,270 )   (4,044 )   (12,871 )   1,632     (14,503 )
                           

Net interest income

  $ 13,314   $ (3,314 ) $ 16,628   $ 33,281   $ 11,255   $ 22,026  
                           

        The following table presents the impact on the net interest margin of accelerated accretion of discounts on covered loan payoffs and loans being placed on or removed from nonaccrual status for the years indicated:

 
  Year Ended December 31,  
 
  2011   2010   2009  

Net interest margin as reported

    5.26 %   5.02 %   4.79 %

Less:

                   

Accelerated accretion of purchase discounts on covered loan payoffs

    0.18 %   0.10 %    

Nonaccrual loan interest

    0.01 %   (0.02 )%   (0.09 )%
               

Net interest margin as adjusted

    5.07 %   4.94 %   4.88 %
               

        Our net interest income and net interest margin are driven by the combination of our loan and securities volume, asset yield, high proportion of demand deposit balances to total deposits, and disciplined deposit pricing.

        The $13.3 million growth in net interest income for 2011 compared to 2010 was due to a $5.0 million increase in interest income and an $8.3 million decline in interest expense. The increase in interest income was due mainly to purchases of investment securities and a higher yield on average loans, offset partially by lower average loans and a lower yield on average securities. The loan yield, earning asset yield and net interest margin are all affected by loans being placed on or removed from nonaccrual status and the acceleration of purchase discounts on covered loan pay-offs; the combination of these items increased interest income $9.5 million and positively impacted the net interest margin 19 basis points in 2011. For 2010, these items increased interest income $4.1 million and increased the net

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interest margin 8 basis points. Accelerated accretion of purchase discounts on covered loan payoffs positively impacted the net interest margin by 18 basis points and 10 basis points for 2011 and 2010, respectively.

        The decline in interest expense was due to a lower average rate on money market deposits, lower average time deposits and lower average borrowings as $260 million of FHLB advances were repaid in the first half of 2010 and another $50 million were repaid in December 2010. Our overall cost of average deposits was 0.45% for 2011 compared to 0.59% for 2010. Noninterest-bearing demand deposits averaged $1.6 billion, or 36% of total average deposits for 2011 compared to $1.4 billion, or 32% of total average deposits for 2010.

        The net interest margin for 2011 was 5.26%, an increase of 24 basis points when compared to 2010. The increase was due to a higher yield on loans, lower costs for money market deposits and subordinated debentures, and a lower average balance of FHLB advances. This was offset partially by a shift in the mix of average interest-earning assets to lower yielding investment securities from higher yielding loans. Average interest-earning assets increased $21.8 million due mostly to a $424.9 million increase in average investment securities while average loans decreased $313.3 million.

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

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

        The net interest margin for 2010 was 5.02%, an increase of 23 basis points when compared to 2009. The increase is due mostly to a higher yield on average loans and lower funding costs, due principally to lower rates paid on deposits and lower average borrowings. Accelerated accretion of purchase discounts on covered loan payoffs positively impacted the net interest margin by 10 basis points for 2010; there was no impact for 2009.

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        The following table presents the details of the provision for credit losses, the related year-over-year increases and decreases, and allowance for credit losses data for the years indicated:

 
  Year Ended December 31,  
 
  2011   Increase
(Decrease)
  2010   Increase
(Decrease)
  2009  
 
  (Dollars in thousands)
 

Provision For Credit Losses:

                               

Addition to allowance for loan losses

  $ 10,505   $ (168,373 ) $ 178,878   $ 37,268   $ 141,610  

Addition (reduction) to reserve for unfunded loan commitments

    2,795     2,681     114     (176 )   290  
                       

Total provision for non-covered loans

    13,300     (165,692 )   178,992     37,092     141,900  

Provision for covered loans

    13,270     (20,230 )   33,500     15,500     18,000  
                       

Total provision for credit losses

  $ 26,570   $ (185,922 ) $ 212,492   $ 52,592   $ 159,900  
                       

Allowance for Credit Losses Data:

                               

Net charge-offs on non-covered loans

  $ 23,845   $ (175,097 ) $ 198,942   $ 112,530   $ 86,412  

Charge-offs on classified loans sold

        (144,647 )   144,647     144,647      

Allowance for loan losses (year-end)

    85,313     (13,340 )   98,653     (20,064 )   118,717  

Allowance for credit losses (year-end)

    93,783     (10,545 )   104,328     (19,950 )   124,278  

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

    3.34 %         3.30 %         3.35 %

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

    161.0 %         110.8 %         51.8 %

Net charge-off ratios:

                               

Net charge-offs to non-covered average loans

    0.81 %         5.94 %         2.22 %

Net charge-offs, excluding charge-offs on classified loans sold, to non-covered average loans

    0.81 %         1.62 %         2.22 %

        Provisions for credit losses are charged to earnings as and when needed for both on and off balance sheet credit exposures. 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 an expense 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, the levels and trends of nonaccrual and classified loans, and the migration of loans into various risk classifications. The provision for credit losses on our covered loans reflects decreases in expected cash flows on covered loans compared to those previously estimated.

        We made provisions for credit losses totaling $26.6 million during 2011, $212.5 million during 2010, and $159.9 million during 2009. The 2011 provision for credit losses was comprised of a $10.5 million addition to the allowance for loan losses on the non-covered loan portfolio, a $13.3 million addition to the covered loan allowance for credit losses, and a $2.8 million addition to the reserve for unfunded loan commitments.

        The 2010 provision for credit losses was comprised of a $179.0 million addition to the allowance for loan losses on the non-covered loan portfolio, a $33.5 million addition to the covered loan allowance for credit losses, and a $114,000 addition to the reserve for unfunded loan commitments. The 2010 provision for credit losses on non-covered loans includes $85.7 million related to $398.5 million of classified loans sold in 2010.

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

        Net charge-offs on non-covered loans decreased by $175.1 million to $23.8 million when compared to 2010. The net charge-offs for 2010 included $144.6 million related to the sales of $398.5 million in classified loans.

        The allowance for credit losses on the non-covered loan portfolio totaled $93.8 million, or 3.34% of non-covered loans, net of unearned income, at December 31, 2011. The allowance for credit losses on the non-covered loan portfolio totaled $104.3 million, or 3.30% of non-covered loans, net of unearned income, at December 31, 2010. Of these amounts, the allowance for loan losses totaled $85.3 million at December 31, 2011 and $98.6 million at December 31, 2010.

        Under the terms of our loss sharing agreements, the FDIC will absorb 80% of the losses on the covered loans. As a result, the effect on pre-tax earnings was 20% of the provision for covered loans as we recorded 80% of this provision as an offset in FDIC loss sharing income. The provisions for credit losses on covered loans for 2011, 2010 and 2009 were $13.3 million, $33.5 million and $18.0 million, respectively. The increase in the provision for 2010 compared to 2009 reflects the additional covered loans from the Los Padres acquisition.

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

        The following table presents the details of noninterest income and related year-over-year increases and decreases for the years indicated:

 
  Year Ended December 31,  
 
  2011   Increase
(Decrease)
  2010   Increase
(Decrease)
  2009  
 
  (In thousands)
 

Noninterest Income:

                               

Service charges on deposit accounts

  $ 13,829   $ 2,268   $ 11,561   $ (447 ) $ 12,008  

Other commissions and fees

    7,616     325     7,291     340     6,951  

Other-than-temporary-impairment loss on securities

        874     (874 )   (874 )    

Increase in cash surrender value of life insurance

    1,443     3     1,440     (139 )   1,579  

FDIC loss sharing income, net

    7,776     (15,008 )   22,784     6,470     16,314  

Gain from Affinity acquisition

                (66,989 )   66,989  

Other income

    762     (274 )   1,036     (1,030 )   2,066  
                       

Total noninterest income

  $ 31,426   $ (11,812 ) $ 43,238   $ (62,669 ) $ 105,907  
                       

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        The following table presents the details of FDIC loss sharing income, net for the years indicated:

 
  Year Ended December 31,  
 
  2011   2010   2009  
 
  (In thousands)
 

FDIC Loss Sharing Income, Net:

                   

Gain (loss) on indemnification asset(1)

  $ 10,829   $ 25,010   $ 15,100  

Loan recoveries shared with FDIC

    (5,513 )   (4,437 )    

Net reimbursement from FDIC for covered OREO write-downs and sales

    2,416     1,512     1,214  

Other

    44     699      
               

Total FDIC loss sharing income, net

  $ 7,776   $ 22,784   $ 16,314  
               

(1)
Includes (a) increases related to covered loan loss provisions and (b) decreases for loss share asset amortization and write-offs for covered loans resolved or expected to be resolved at amounts higher than their carrying value.

        Noninterest income declined by $11.8 million to $31.4 million during the year ended December 31, 2011 compared to the same period last year. This reduction was attributable to the $15.0 million decrease in FDIC loss sharing income, due mostly to the lower provision for credit losses on covered loans. In addition to including the FDIC's share of losses and recoveries on covered assets, FDIC loss sharing income also includes reductions of the FDIC loss sharing asset when the estimated amount of losses collectible from the FDIC decreases. This occurs when expected cash flows on covered loan pools improve during a reporting period causing the carrying value of the FDIC loss sharing asset to be reduced. Service charges on deposit accounts increased due primarily to the growth in service charges on checking accounts and account analysis fees. In 2010 we recognized an $874,000 other-than-temporary impairment loss on one covered investment security due to deteriorating cash flows and significant delinquency of the underlying loan collateral. The 2010 impairment loss was offset partially by related FDIC loss sharing income of $699,000. There were no such impairments or impairment-related loss sharing income in 2011.

        Noninterest income declined in 2010 to $43.2 million from the $105.9 million earned in 2009. The $62.7 million decrease was due mainly to the $67.0 million gain on the Affinity acquisition recorded in August 2009; there was no similar gain in 2010. The 2010 overall decline compared to 2009 was offset partially by an increase of $6.5 million in FDIC loss sharing income to $22.8 million. The increase in FDIC loss sharing income for 2010 was attributable mostly to the FDIC's share of the $15.5 million increase in the provision for credit losses on covered loans. Another factor contributing to the decline in noninterest income was an $874,000 other-than-temporary impairment loss recognized in 2010. This impairment loss was offset partially by related FDIC loss sharing income of $699,000. Service charges on deposit accounts decreased $447,000 due mostly to a decrease in NSF handling fees because fewer checks were drawn against accounts with insufficient funds. The decline in other income is attributed to the receipt of a death benefit in 2009; there were no such benefits received in 2010.

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        The following table presents the details of noninterest expense and related increases and decreases for the years indicated:

 
  Year Ended December 31,  
 
  2011   Increase (Decrease)   2010   Increase (Decrease)   2009  
 
  (In thousands)
 

Noninterest Expense:

                               

Compensation

  $ 86,800   $ (683 ) $ 87,483   $ 9,310   $ 78,173  

Occupancy

    28,685     1,046     27,639     1,256     26,383  

Data processing

    8,964     426     8,538     1,592     6,946  

Other professional services

    8,986     1,151     7,835     1,521     6,314  

Business development

    2,321     (142 )   2,463     (78 )   2,541  

Communications

    3,011     (318 )   3,329     397     2,932  

Insurance and assessments

    7,171     (2,514 )   9,685     380     9,305  

Non-covered other real estate owned, net

    7,010     (5,300 )   12,310     (9,259 )   21,569  

Covered other real estate owned, net

    3,666     1,206     2,460     707     1,753  

Intangible asset amortization

    8,428     (1,214 )   9,642     95     9,547  

Acquisition costs

    600     (132 )   732     132     600  

Other expense

    14,351     (2,336 )   16,687     3,546     13,141  
                       

Total noninterest expense

  $ 179,993   $ (8,810 ) $ 188,803   $ 9,599   $ 179,204  
                       

        The following tables present the components of non-covered and covered OREO expense, net for the years indicated:

 
  Year Ended December 31,  
 
  2011   2010   2009  
 
  (In thousands)
 

Non-Covered OREO Expense:

                   

Provision for losses

  $ 5,026   $ 12,271   $ 16,277  

Maintenance costs

    2,177     2,065     3,999  

(Gain) loss on sale

    (193 )   (2,026 )   1,293  
               

Total non-covered OREO expense, net

  $ 7,010   $ 12,310   $ 21,569  
               

 

 
  Year Ended December 31,  
 
  2011   2010   2009  
 
  (In thousands)
 

Covered OREO Expense:

                   

Provision for losses

  $ 11,968   $ 5,389   $ 1,518  

Maintenance costs

    645     570     220  

(Gain) loss on sale

    (8,947 )   (3,499 )   15  
               

Total covered OREO expense, net

  $ 3,666   $ 2,460   $ 1,753  
               

        Noninterest expense declined by $8.8 million to $180.0 million for 2011. This reduction was attributable to decreases in non-covered net OREO costs, insurance and assessments expense, other expense, intangible asset amortization, and compensation expense, offset partially by increases in covered OREO costs, other professional services, and occupancy expense. Non-covered OREO costs

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declined $5.3 million due to lower write-downs of $7.2 million, offset by lower gains on sales of $1.8 million. Insurance and assessment costs decreased $2.5 million due to a reduction in FDIC deposit insurance costs. Other expense declined $2.3 million due mostly to $2.7 million in penalties for early repayment of $175 million in FHLB advances in 2010; there were no FHLB prepayment penalties in 2011. Intangible asset amortization decreased $1.2 million due mainly to $9.2 million of core deposit and customer relationship intangibles becoming fully amortized in 2011. Compensation expense declined $683,000 due primarily to a decrease in amortization of restricted stock. Included in compensation expense for 2011 was an $885,000 charge in the fourth quarter for a staff reduction, which is expected to result in annual savings of $2.4 million. Covered OREO costs increased by $1.2 million due to higher write-downs, which were offset by higher gains on sales. The increase in other professional services was due to higher legal costs for ongoing credit work-outs. For acquisitions completed after January 1, 2009, acquisition related costs, such as legal, accounting valuation and other professional fees, necessary to effect a business combination, are charged to earnings in periods in which the costs are incurred. We incurred and charged to expense approximately $600,000 and $732,000 of such costs in 2011 and 2010, respectively. Occupancy costs grew $1.0 million due to lease renewal activity and the inclusion for a full year of occupancy costs related to the branches added in the Los Padres acquisition, which was completed in August 2010. Initially we acquired 14 branches, and through branch consolidations, ended 2011 with eight former Los Padres branches.

        Noninterest expense includes (i) amortization of time-based restricted stock, which vests either in increments over a three to five year period or at the end of such period and is included in compensation expense and (ii) intangible asset amortization, which is related to customer deposit and customer relationship intangible assets. Amortization of restricted stock totaled $7.6 million and $8.5 million for the years ended December 31, 2011 and 2010. Intangible asset amortization was $8.4 million and $9.6 million for 2011 and 2010.

        Noninterest expense increased $9.6 million year-over-year to $188.8 million for 2010. The growth in most expense categories was due primarily to higher overhead costs related to the Affinity and Los Padres acquisitions. Compensation increased $9.3 million due to the acquisitions and severance costs. Excluding employees gained in the Los Padres acquisition, we reduced our workforce by approximately 5% and paid $1.0 million in severance at the end of the third quarter of 2010. Occupancy costs increased $1.3 million due mostly to the 10 branches added in the Affinity acquisition and 14 branches added in the Los Padres acquisition. Other professional services increased $1.5 million due mostly to higher legal costs related to loan workout activity and consulting fees for various strategic initiatives. For our successful acquisition activity, we incurred and charged to expense $732,000 and $600,000 of professional services fees which are separately categorized as acquisition costs. Other expense increased $3.5 million due mostly to a $1.2 million increase in loan-related costs, $2.7 million in penalties for early repayment of $175 million in FHLB advances in 2010, and lower reorganization charges of $1.2 million. There were no FHLB prepayment penalties in 2009. The elevated loan-related costs were attributed to ongoing workout efforts. The 2009 reorganization charges totaled $1.2 million and related to a first quarter staff reduction, premises costs for the closing of two banking offices in the second quarter, and additional rent for a discontinued acquired office. OREO costs declined $8.6 million due mostly to higher net gains on sales and lower write-downs and costs in 2010.

        Amortization of restricted stock totaled $8.5 million and $8.2 million for the years ended December 31, 2010 and 2009. Intangible asset amortization was $9.6 million and $9.5 million for 2010 and 2009.

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        Effective income tax rates were 42.1%, 43.0%, and 45.5% for the years ended December 31, 2011, 2010, and 2009, respectively. The difference in the effective tax rates between the annual periods relates mainly to the level of tax credits and tax deductions and the amount of tax exempt income recorded in each of the years. For further information on income taxes, see Note 14, Income Taxes, of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."


Financial Condition

        The following tables present our total gross loan portfolio by segment, showing the non-covered and covered components, as of the dates indicated:

 
  December 31, 2011  
 
  Total Loans   Non-Covered Loans   Covered Loans(1)  
Loan Segment
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Real estate mortgage

  $ 2,718,822     75 % $ 1,982,464     70 % $ 736,358     91 %

Real estate construction

    159,977     4 %   113,059     4 %   46,918     6 %

Commercial

    697,549     19 %   671,939     24 %   25,610     3 %

Consumer

    24,446     1 %   23,711     1 %   735      

Foreign

    20,932     1 %   20,932     1 %        
                           

Total gross loans

  $ 3,621,726     100 % $ 2,812,105     100 % $ 809,621     100 %
                           

 

 
  December 31, 2010  
 
  Total Loans   Non-Covered Loans   Covered Loans(1)  
Loan Segment
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Real estate mortgage

  $ 3,194,031     76 % $ 2,274,733     72 % $ 919,298     87 %

Real estate construction

    271,219     6 %   179,479     5 %   91,740     9 %

Commercial

    704,313     17 %   663,557     21 %   40,756     4 %

Consumer

    26,005     1 %   25,058     1 %   947      

Foreign

    22,608         22,608     1 %        
                           

Total gross loans

  $ 4,218,176     100 % $ 3,165,435     100 % $ 1,052,741     100 %
                           

(1)
Excludes purchase discount.

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        The following table presents our total real estate mortgage loan portfolio, showing the non-covered and covered components, as of December 31, 2011:

 
  December 31, 2011  
 
  Total Loans   Non-Covered Loans   Covered Loans(1)  
Loan Category
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Commercial real estate mortgage:

                                     

Industrial/warehouse

  $ 401,249     14.8 % $ 367,494     18.5 % $ 33,755     4.6 %

Retail

    401,166     14.8 %   286,691     14.5 %   114,475     15.5 %

Office buildings

    367,841     13.5 %   290,074     14.6 %   77,767     10.6 %

Owner-occupied

    251,144     9.2 %   226,307     11.4 %   24,837     3.4 %

Hotel

    147,346     5.4 %   144,402     7.3 %   2,944     0.4 %

Healthcare

    148,476     5.5 %   131,625     6.6 %   16,851     2.3 %

Mixed use

    61,672     2.3 %   53,855     2.7 %   7,817     1.1 %

Gas station

    39,716     1.5 %   33,715     1.7 %   6,001     0.8 %

Self storage

    75,941     2.8 %   23,148     1.2 %   52,793     7.2 %

Restaurant

    25,081     0.9 %   22,549     1.1 %   2,532     0.3 %

Land acquisition/development

    14,015     0.5 %   14,015     0.7 %        

Unimproved land

    3,121     0.1 %   1,369     0.1 %   1,752     0.2 %

Other

    223,039     8.2 %   206,504     10.4 %   16,535     2.2 %
                           

Total commercial real estate mortgage

    2,159,807     79.4 %   1,801,748     90.9 %   358,059     48.6 %
                           

Residential real estate mortgage:

                                     

Multi-family

    344,499     12.7 %   93,866     4.7 %   250,633     34.0 %

Single family owner-occupied

    127,457     4.7 %   32,209     1.6 %   95,248     12.9 %

Single family nonowner-occupied

    44,965     1.7 %   19,341     1.0 %   25,624     3.5 %

Home equity lines of credit

    42,094     1.5 %   35,300     1.8 %   6,794     0.9 %
                           

Total residential real estate

                                     

mortgage

    559,015     20.6 %   180,716     9.1 %   378,299     51.4 %
                           

Total gross real estate mortgage loans

  $ 2,718,822     100.0 % $ 1,982,464     100.0 % $ 736,358     100.0 %
                           

(1)
Excludes purchase discount.

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

 
  December 31,  
 
  2011   2010   2009   2008   2007  
Loan Segment
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Real estate mortgage

  $ 1,982,464     70 % $ 2,274,733     72 % $ 2,423,712     65 % $ 2,473,089     62 % $ 2,280,963     58 %

Real estate construction

    113,059     4 %   179,479     5 %   440,286     12 %   579,884     15 %   717,419     18 %

Commercial

    671,939     24