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



FORM 10-Q


ý

 

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

For the quarterly period ended September 30, 2012

OR

o

 

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

For the transition period from                        to                             

Commission File Number: 00-30747

PACWEST BANCORP
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization)
  33-0885320
(I.R.S. Employer
Identification Number)

10250 Constellation Blvd., Suite 1640

 

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

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



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

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

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

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

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

        As of October 31, 2012, there were 35,702,006 shares of the registrant's common stock outstanding, excluding 1,715,697 shares of unvested restricted stock.       

   


Table of Contents

PACWEST BANCORP AND SUBSIDIARIES

SEPTEMBER 30, 2012 FORM 10-Q

TABLE OF CONTENTS

 
   
  Page  

PART I—FINANCIAL INFORMATION

    3  

ITEM 1.

 

Condensed Consolidated Financial Statements (Unaudited)

    3  

 

Condensed Consolidated Balance Sheets (Unaudited)

    3  

 

Condensed Consolidated Statements of Earnings (Unaudited)

    4  

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

    5  

 

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

    6  

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

    7  

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

    8  

ITEM 2.

 

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

    50  

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    100  

ITEM 4.

 

Controls and Procedures

    101  

PART II—OTHER INFORMATION

    102  

ITEM 1.

 

Legal Proceedings

    102  

ITEM 1A.

 

Risk Factors

    102  

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    102  

ITEM 6.

 

Exhibits

    103  

SIGNATURES

    104  

2


Table of Contents


PART I—FINANCIAL INFORMATION

ITEM 1.    Condensed Consolidated Financial Statements (Unaudited)

        


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Par Value Data)

(Unaudited)

 
  September 30,
2012
  December 31,
2011
 

ASSETS

             

Cash and due from banks

  $ 89,370   $ 92,342  

Interest-earning deposits in financial institutions

    71,036     203,275  
           

Total cash and cash equivalents

    160,406     295,617  
           

Securities available-for-sale, at fair value ($45,887 and $45,149 covered by FDIC loss sharing at September 30, 2012 and December 31, 2011, respectively)

    1,357,211     1,326,358  

Federal Home Loan Bank stock, at cost

    40,923     46,106  
           

Total investment securities

    1,398,134     1,372,464  
           

Non-covered loans and leases, net of unearned income

    3,050,891     2,807,713  

Allowance for loan and lease losses

    (69,142 )   (85,313 )
           

Non-covered loans and leases, net

    2,981,749     2,722,400  

Covered loans, net

    567,396     703,023  
           

Total loans and leases, net

    3,549,145     3,425,423  
           

Other real estate owned, net ($26,374 and $33,506 covered by FDIC loss sharing at September 30, 2012 and December 31, 2011, respectively)

    63,707     81,918  

Premises and equipment, net

    18,064     23,068  

FDIC loss sharing asset

    72,640     95,187  

Cash surrender value of life insurance

    67,900     67,469  

Goodwill

    79,592     39,141  

Core deposit and customer relationship intangibles, net

    15,899     17,415  

Other assets

    113,015     110,535  
           

Total assets

  $ 5,538,502   $ 5,528,237  
           

LIABILITIES

             

Noninterest-bearing deposits

  $ 2,006,996   $ 1,685,799  

Interest-bearing deposits

    2,780,352     2,891,654  
           

Total deposits

    4,787,348     4,577,453  

Borrowings

    17,996     225,000  

Subordinated debentures

    108,250     129,271  

Accrued interest payable and other liabilities

    40,822     50,310  
           

Total liabilities

    4,954,416     4,982,034  
           

Commitments and contingencies

             

STOCKHOLDERS' EQUITY

             

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

         

Common stock, $0.01 par value; authorized 75,000,000 shares; 37,769,381 shares issued at September 30, 2012 and 37,542,287 at December 31, 2011 (includes 1,718,019 and 1,675,730 shares of unvested restricted stock, respectively)

    377     375  

Additional paid-in capital

    1,069,875     1,084,691  

Accumulated deficit

    (519,429 )   (556,338 )

Treasury stock, at cost; 349,356 and 287,969 shares at September 30, 2012 and December 31, 2011

    (6,752 )   (5,328 )

Accumulated other comprehensive income

    40,015     22,803  
           

Total stockholders' equity

    584,086     546,203  
           

Total liabilities and stockholders' equity

  $ 5,538,502   $ 5,528,237  
           

   

See "Notes to Condensed Consolidated Financial Statements."

3


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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2012
  June 30,
2012
  September 30,
2011
 
 
  2012   2011  

Interest income:

                               

Loans and leases

  $ 66,711   $ 63,312   $ 63,347   $ 194,775   $ 198,459  

Investment securities

    8,346     9,558     9,077     27,484     25,678  

Deposits in financial institutions

    66     20     94     154     234  
                       

Total interest income

    75,123     72,890     72,518     222,413     224,371  
                       

Interest expense:

                               

Deposits

    3,292     3,336     5,072     10,232     16,546  

Borrowings

    210     293     1,782     2,428     5,289  

Subordinated debentures

    850     848     1,223     2,889     3,668  
                       

Total interest expense

    4,352     4,477     8,077     15,549     25,503  
                       

Net interest income

    70,771     68,413     64,441     206,864     198,868  
                       

Provision for credit losses:

                               

Non-covered loans and leases

    (2,000 )           (12,000 )   13,300  

Covered loans

    (141 )   (271 )   348     3,514     9,148  
                       

Total provision for credit losses

    (2,141 )   (271 )   348     (8,486 )   22,448  
                       

Net interest income after provision for credit losses

    72,912     68,684     64,093     215,350     176,420  
                       

Noninterest income:

                               

Service charges on deposit accounts

    3,108     3,328     3,545     9,789     10,503  

Other commissions and fees

    2,123     2,095     2,052     6,101     5,752  

Gain on sale of leases

    132     403         1,525      

Other-than-temporary impairment loss on covered security

        (1,115 )       (1,115 )    

Increase in cash surrender value of life insurance

    304     295     359     964     1,106  

FDIC loss sharing (expense) income, net            

    (367 )   (102 )   963     (4,048 )   5,109  

Other income (expense)

    382     (33 )   224     599     702  
                       

Total noninterest income

    5,682     4,871     7,143     13,815     23,172  
                       

Noninterest expense:

                               

Compensation

    23,812     23,699     21,557     71,698     65,203  

Occupancy

    6,964     7,088     7,423     21,340     21,548  

Data processing

    2,310     2,258     2,228     6,848     6,832  

Other professional services

    2,019     2,378     2,239     6,167     7,040  

Business development

    635     581     548     1,854     1,712  

Communications

    652     626     678     1,886     2,371  

Insurance and assessments

    1,398     1,323     1,641     4,014     5,581  

Non-covered other real estate owned, net

    1,883     130     2,293     3,834     5,296  

Covered other real estate owned, net

    4,290     2,130     4,813     7,242     3,440  

Intangible asset amortization

    1,678     1,737     1,977     5,150     6,592  

Acquisition and integration

    2,101     871         2,997      

Debt termination

                22,598      

Other expense

    3,915     4,764     3,190     12,509     10,909  
                       

Total noninterest expense

    51,657     47,585     48,587     168,137     136,524  
                       

Earnings before income taxes

    26,937     25,970     22,649     61,028     63,068  

Income tax expense

    (10,849 )   (10,413 )   (9,345 )   (24,119 )   (26,247 )
                       

Net earnings

  $ 16,088   $ 15,557   $ 13,304   $ 36,909   $ 36,821  
                       

Earnings per share:

                               

Basic

  $ 0.43   $ 0.42   $ 0.36   $ 1.00   $ 0.99  

Diluted

  $ 0.43   $ 0.42   $ 0.36   $ 1.00   $ 0.99  

Dividends declared per share

  $ 0.18   $ 0.18   $ 0.01   $ 0.54   $ 0.03  

   

See "Notes to Condensed Consolidated Financial Statements."

4


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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2012
  June 30,
2012
  September 30,
2011
 
 
  2012   2011  

Net earnings

  $ 16,088   $ 15,557   $ 13,304   $ 36,909   $ 36,821  

Other comprehensive income related to securities available-for-sale:

                               

Unrealized holding gains arising during the period

    12,966     8,185     22,218     28,560     33,372  

Income tax expense related to unrealized holding gains arising during the period

    (5,445 )   (3,439 )   (9,332 )   (11,995 )   (14,017 )

Reclassification adjustment for loss included in net earnings(1)

        1,115         1,115      

Income tax benefit related to reclassification adjustment

        (468 )       (468 )    
                       

Other comprehensive income

    7,521     5,393     12,886     17,212     19,355  
                       

Comprehensive income

  $ 23,609   $ 20,950   $ 26,190   $ 54,121   $ 56,176  
                       

(1)
Included in "Other-than-temporary impairment loss on covered security" on condensed consolidated statements of earnings.

   

See "Notes to Condensed Consolidated Financial Statements."

5


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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in Thousands, Except Share Data)

(Unaudited)

 
  Nine Months Ended September 30, 2012  
 
  Common Stock    
   
   
   
 
 
   
   
  Accumulated
Other
Comprehensive
Income
   
 
 
  Shares   Par
Value
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Treasury
Stock
  Total  

Balance, December 31, 2011

    37,254,318   $ 375   $ 1,084,691   $ (556,338 ) $ (5,328 ) $ 22,803   $ 546,203  

Net earnings

                36,909             36,909  

Other comprehensive income

                        17,212     17,212  

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

    227,094     2     4,629                 4,631  

Restricted stock surrendered

    (61,387 )               (1,424 )       (1,424 )

Tax effect from vesting of restricted stock

            224                 224  

Cash dividends paid ($0.54 per share)

            (19,669 )               (19,669 )
                               

Balance, September 30, 2012

    37,420,025   $ 377   $ 1,069,875   $ (519,429 ) $ (6,752 ) $ 40,015   $ 584,086  
                               

   

See "Notes to Condensed Consolidated Financial Statements."

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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Nine Months Ended
September 30,
 
 
  2012   2011  

Cash flows from operating activities:

             

Net earnings

  $ 36,909   $ 36,821  

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

             

Depreciation and amortization

    18,349     13,721  

Provision for credit losses

    (8,486 )   22,448  

Gain on sale of other real estate owned

    (4,542 )   (8,334 )

Provision for losses on other real estate owned

    13,566     15,011  

Gain on sale of leases

    (1,525 )    

Loss (gain) on sale of premises and equipment

    158     (23 )

Gain on branch sale

    (297 )    

Other-than-temporary impairment loss on covered security

    1,115      

Earned stock compensation

    4,631     6,508  

Tax effect included in stockholders' equity of restricted stock vesting

    (224 )   497  

Decrease (increase) in accrued and deferred income taxes, net

    6,423     (3,689 )

Decrease in FDIC loss sharing asset

    22,547     27,155  

Decrease in other assets

    3,262     15,989  

Decrease in accrued interest payable and other liabilities

    (19,156 )   (2,406 )
           

Net cash provided by operating activities

    72,730     123,698  
           

Cash flows from investing activities:

             

Resolution of goodwill matter with FDIC

        7,636  

Net cash used in acquisitions

    (86,931 )    

Net cash used in branch sale

    (119,756 )    

Net decrease in loans and leases

    200,080     324,823  

Proceeds from sale of loans and leases

    42,128     2,495  

Securities available-for-sale:

             

Proceeds from maturities and paydowns

    310,273     137,622  

Proceeds from sales

    45,639      

Purchases

    (320,936 )   (495,341 )

Net redemptions of FHLB stock

    6,595     6,698  

Proceeds from sales of other real estate owned

    43,881     52,823  

Purchases of premises and equipment, net

    (2,208 )   (4,397 )

Proceeds from sales of premises and equipment

    700     27  
           

Net cash provided by investing activities

    119,465     32,386  
           

Cash flows from financing activities:

             

Net increase (decrease) in deposits:

             

Noninterest-bearing

    339,718     162,691  

Interest-bearing

    (224,165 )   (257,993 )

Net decrease in borrowings

    (222,736 )    

Redemption of subordinated debentures

    (18,558 )    

Repayment of acquired debt

    (180,796 )    

Restricted stock surrendered

    (1,424 )   (427 )

Tax effect included in stockholders' equity of restricted stock vesting

    224     (497 )

Cash dividends paid

    (19,669 )   (1,089 )
           

Net cash used in financing activities

    (327,406 )   (97,315 )
           

Net (decrease) increase in cash and cash equivalents

    (135,211 )   58,769  

Cash and cash equivalents, beginning of period

    295,617     108,552  
           

Cash and cash equivalents, end of period

  $ 160,406   $ 167,321  
           

Supplemental disclosures of cash flow information:

             

Cash paid for interest

  $ 17,457   $ 26,273  

Cash paid for income taxes

    17,884     29,969  

Loans transferred to other real estate owned

    32,244     57,266  

   

See "Notes to Condensed Consolidated Financial Statements."

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

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

        Pacific Western is a full-service commercial bank offering a broad range of banking products and services including: accepting demand, money market, and time deposits; originating loans, including commercial, real estate construction, SBA guaranteed and consumer loans; originating equipment finance leases; 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, a leasing operation based in Utah, and asset-based lending operations based in Arizona as well as San Jose and Santa Monica, California. The Bank focuses on conducting business with small to medium sized businesses in our marketplace and the owners and employees of those businesses. The majority of our loans are secured by the real estate collateral of such businesses. Our asset-based lending function operates in Arizona, California, Texas, Colorado, Minnesota, and the Pacific Northwest. Our equipment leasing function has lease receivables in 45 states.

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

        We have completed 25 acquisitions since May 2000, including three in 2012: Pacific Western Equipment Finance, which we refer to as Equipment Finance, or EQF, which closed on January 3, 2012; Celtic Capital Corporation, or Celtic, which closed on April 3, 2012; and American Perspective Bank, or APB, which closed on August 1, 2012. These three acquisitions have been accounted for using the purchase method of accounting and accordingly, their operating results have been included in the consolidated financial statements from their respective acquisition dates. See Note 2, Acquisitions, for more information about these acquisitions.

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

        Our financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION (Continued)

Exchange Commission. The interim operating results are not necessarily indicative of operating results for the full year.

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

        Management made significant estimates and exercised significant judgment in estimating fair values and accounting for the acquired assets and assumed liabilities in the EQF, Celtic, and APB acquisitions.

NOTE 2—ACQUISITIONS

        On January 3, 2012, Pacific Western Bank completed the acquisition of Pacific Western Equipment Finance (formerly known as Marquette Equipment Finance, which we refer to as EQF), an equipment leasing company located in Midvale, Utah. Pacific Western Bank acquired all of the capital stock of EQF for $35 million in cash. The acquisition diversified the Company's loan portfolio, expanded the Company's product lines, and deployed excess liquidity into higher yielding assets.

        At January 3, 2012, EQF had $160.1 million in gross leases outstanding and leases in process, with no leases on nonaccrual status. In addition, Pacific Western Bank assumed $154.8 million in outstanding debt and other liabilities, which included $128.7 million payable to EQF's former parent. Pacific Western Bank repaid EQF's intercompany debt on the closing date from its excess liquidity on deposit at the Federal Reserve Bank. EQF operates as a division of Pacific Western Bank.

        On April 3, 2012, Pacific Western Bank completed the acquisition of Celtic Capital Corporation, or Celtic, an asset-based lending company based in Santa Monica, California. Celtic focuses on providing asset-based loans to borrowers in the $5 million and under loan market in the United States. Pacific Western Bank acquired all of the capital stock of Celtic for $18 million in cash. The acquisition diversified the Company's loan portfolio, expanded the Company's product lines, and deployed excess liquidity into higher yielding assets.

        At April 3, 2012, Celtic had $54.4 million in gross loans outstanding. In addition, Pacific Western Bank assumed $46.8 million in outstanding debt, which was repaid on the closing date. Celtic operates under the name Celtic Capital Corporation as a subsidiary of Pacific Western Bank.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)

        On August 1, 2012, Pacific Western Bank completed the acquisition of American Perspective Bank, or APB, located in San Luis Obispo, California. Pacific Western Bank acquired all of the outstanding common stock of APB for $58.1 million in cash. APB had two operating branches located in San Luis Obispo and Santa Maria, California, and a loan production office located in Paso Robles, California. This acquisition is expected to strengthen the Company's presence in the Central Coast region. The loan production office has been approved to open as a branch in the fourth quarter of 2012 and is expected to provide opportunity for expansion and additional growth in that region.

        At August 1, 2012, APB had $197.3 million in gross loans outstanding, $48.9 million in investment securities available-for-sale, and $219.6 million in deposits. In August 2012, we sold $45.6 million of APB's government-sponsored enterprise mortgage backed securities and collateralized mortgage obligations. We retained APB's municipal securities portfolio. Immediately following the completion of the acquisition, APB was merged with and into Pacific Western Bank.

        We completed the following acquisitions during the time period of January 1, 2012 to September 30, 2012, using the purchase method of accounting, and accordingly, the operating results of the acquired entities have been included in our consolidated financial statements from their respective

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)

dates of acquisition. The balance sheets are presented at estimated fair value as of their respective acquisition dates:

 
  Acquisition and Date Acquired  
 
  American
Perspective
Bank
  Celtic
Capital
Corporation
  Pacific Western
Equipment
Finance
 
 
  August
2012
  April
2012
  January
2012
 
 
  (In thousands)
 

Assets Acquired:

                   

Cash and due from banks

  $ 3,370   $ 3,602   $ 7,092  

Interest-earning deposits in financial institutions

    10,081          

Investment securities available-for-sale

    48,887          

FHLB stock

    1,412          

Loans and leases

    197,279     54,433     140,959  

Other real estate owned

    1,561          

Core deposit and customer relationship intangibles

    1,924     1,300     1,700  

Other intangible assets

        670     1,420  

Goodwill

    15,563     5,855     19,033  

Leases in process

            19,162  

Other assets

    3,718     430     467  
               

Total assets acquired

  $ 283,795   $ 66,290   $ 189,833  
               

Liabilities Assumed:

                   

Noninterest-bearing deposits

  $ 40,673   $   $  

Interest-bearing deposits

    178,891          

Borrowings from parent

            128,677  

Other borrowings

    5,315     46,804     15,839  

Accrued interest payable and other liabilities

    840     1,486     10,317  
               

Total liabilities assumed

  $ 225,719   $ 48,290   $ 154,833  
               

Cash consideration paid

  $ 58,076   $ 18,000   $ 35,000  
               

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

        The following table presents the changes in the carrying amount of goodwill for the period indicated:

 
  Goodwill  
 
  (In thousands)
 

Balance, December 31, 2011

  $ 39,141  

Tax deductible addition from the EQF acquisition

    19,033  

Non-tax deductible addition from the Celtic acquisition

    5,855  

Non-tax deductible addition from the APB acquisition

    15,563  
       

Balance, September 30, 2012

  $ 79,592  
       

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

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

 
  Three Months Ended   Nine Months Ended
September 30,
 
 
  September 30,
2012
  June 30,
2012
  September 30,
2011
 
 
  2012   2011  
 
  (In thousands)
 

Gross Amount of CDI and CRI:

                               

Balance, beginning of period

  $ 62,272   $ 60,972   $ 73,629   $ 67,100   $ 76,319  

Additions

    1,924     1,300         4,924      

Fully amortized portion

    (12,918 )       (6,529 )   (20,746 )   (9,219 )

Removal due to branch sale

    (5,866 )           (5,866 )    
                       

Balance, end of period

    45,412     62,272     67,100     45,412     67,100  
                       

Accumulated Amortization:

                               

Balance, beginning of period

    (45,329 )   (43,592 )   (52,401 )   (49,685 )   (50,476 )

Amortization

    (1,678 )   (1,737 )   (1,977 )   (5,150 )   (6,592 )

Fully amortized portion

    12,918         6,529     20,746     9,219  

Removal due to branch sale

    4,576             4,576      
                       

Balance, end of period

    (29,513 )   (45,329 )   (47,849 )   (29,513 )   (47,849 )
                       

Net CDI and CRI, end of period

  $ 15,899   $ 16,943   $ 19,251   $ 15,899   $ 19,251  
                       

        The $1.3 million of CDI written off during the third quarter of 2012 related to previously acquired deposits that were sold in connection with the sale of branches in September 2012. Such expense is included in "other income" in the net gain on sale of branches. The aggregate amortization expense related to the intangible assets is expected to be $6.3 million for 2012. The estimated aggregate amortization expense related to these intangible assets for each of the subsequent four years is $4.5 million for 2013, $3.8 million for 2014, $3.5 million for 2015, and $1.8 million for 2016.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES

        The following tables present amortized cost, gross unrealized gains and losses and carrying value, which is the estimated fair value, of securities available-for-sale as of the dates indicated. The private label collateralized mortgage obligations were acquired in the FDIC-assisted acquisition of Affinity in August 2009 and are covered by a FDIC loss sharing agreement. Other securities primarily consist of equity securities and an investment in overnight money market funds at a financial institution. See Note 10, Fair Value Measurements, for information on fair value measurements and methodology.

 
  September 30, 2012  
Security Type
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Carrying
Value
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                         

Government agency and government-sponsored enterprise pass through securities

  $ 901,955   $ 43,777   $ (151 ) $ 945,581  

Government agency and government-sponsored enterprise collateralized mortgage obligations

    89,320     2,128     (173 )   91,275  

Covered private label collateralized mortgage obligations

    37,116     8,932     (161 )   45,887  

Municipal securities

    236,385     10,909     (14 )   247,280  

Corporate debt securities

    17,049     206         17,255  

Other securities

    6,395     3,538         9,933  
                   

Total securities available-for-sale

  $ 1,288,220   $ 69,490   $ (499 ) $ 1,357,211  
                   

 

 
  December 31, 2011  
Security Type
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Carrying
Value
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                         

Government agency and government-sponsored enterprise pass through securities

  $ 1,011,222   $ 31,350   $ (65 ) $ 1,042,507  

Government agency and government-sponsored enterprise collateralized mortgage obligations

    80,353     1,710     (36 )   82,027  

Covered private label collateralized mortgage obligations

    41,426     5,878     (2,155 )   45,149  

Municipal securities

    124,079     2,774     (56 )   126,797  

Corporate debt securities

    25,077     77     (26 )   25,128  

Other securities

    4,885         (135 )   4,750  
                   

Total securities available-for-sale

  $ 1,287,042   $ 41,789   $ (2,473 ) $ 1,326,358  
                   

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

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

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

 
  September 30, 2012  
Maturity
  Amortized
Cost
  Carrying
Value
 
 
  (In thousands)
 

Due in one year or less

  $ 11,718   $ 15,381  

Due after one year through five years

    3,206     3,349  

Due after five years through ten years

    32,306     34,422  

Due after ten years

    1,240,990     1,304,059  
           

Total securities available-for-sale

  $ 1,288,220   $ 1,357,211  
           

        At September 30, 2012, the estimated fair value of residential mortgage-backed debt securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation was approximately $975.7 million.

        As of September 30, 2012, securities available-for-sale with an estimated fair value of $116.1 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

        The following tables present, for those securities that were in a gross unrealized loss position, the carrying values and the gross unrealized losses on securities by length of time the securities were in an unrealized loss position as of the dates indicated:

 
  September 30, 2012  
 
  Less Than 12 Months   12 months or Longer   Total  
Security Type
  Carrying
Value
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Losses
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                                     

Government agency and government-sponsored enterprise pass through securities

  $ 34,136   $ (150 ) $ 20   $ (1 ) $ 34,156   $ (151 )

Government agency and government-sponsored enterprise collateralized mortgage obligations

    28,547     (173 )           28,547     (173 )

Covered private label collateralized mortgage obligations

            2,359     (161 )   2,359     (161 )

Municipal securities

    5,511     (14 )           5,511     (14 )
                           

Total

  $ 68,194   $ (337 ) $ 2,379   $ (162 ) $ 70,573   $ (499 )
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

 

 
  December 31, 2011  
 
  Less Than 12 Months   12 months or Longer   Total  
Security Type
  Carrying
Value
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Losses
  Carrying
Value
  Gross
Unrealized
Losses
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                                     

Government agency and government-sponsored enterprise pass through securities

  $ 34,682   $ (64 ) $ 22   $ (1 ) $ 34,704   $ (65 )

Government agency and government-sponsored enterprise collateralized mortgage obligations

    10,790     (21 )   1,530     (15 )   12,320     (36 )

Covered private label collateralized mortgage obligations

    5,228     (595 )   4,427     (1,560 )   9,655     (2,155 )

Municipal securities

    7,755     (56 )           7,755     (56 )

Corporate debt securities

    10,758     (26 )           10,758     (26 )

Other securities

    2,445     (135 )           2,445     (135 )
                           

Total

  $ 71,658   $ (897 ) $ 5,979   $ (1,576 ) $ 77,637   $ (2,473 )
                           

        We reviewed the securities that were in a continuous loss position less than 12 months and longer than 12 months at September 30, 2012, and concluded that their losses were a result of the level of market interest rates relative to the types of securities and not a result of the underlying issuers' ability to repay. Accordingly, we determined that the securities were temporarily impaired and we did not recognize such impairment in the consolidated statements of earnings. Additionally, we have no plans to sell these securities and believe that it is more likely than not we would not be required to sell these securities before recovery of their amortized cost.

        During the second quarter, however, we determined that one covered private label collateralized mortgage obligation security was impaired due to deteriorating cash flows and the depletion of the credit support from the subordinated classes of the securitization. We recorded an other-than-temporary impairment loss of $1.1 million, which was entirely credit-related, in the consolidated statement of earnings. This loss was offset by FDIC loss sharing income of $892,000, which represented the FDIC's 80% share of the loss.

        At September 30, 2012, the Company had a $40.9 million investment in Federal Home Loan Bank of San Francisco ("FHLB") stock carried at cost. We evaluated the carrying value of our FHLB stock investment at September 30, 2012, and determined that it was not impaired. Our evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, the actions being taken by the FHLB to address its regulatory situation, repurchase activity of excess stock by the FHLB at its carrying value, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES

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

        The following table presents the composition of non-covered loans and leases by portfolio segment as of the dates indicated:

 
  September 30, 2012   December 31, 2011  
Loan Segment
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Real estate mortgage

  $ 1,928,890     63 % $ 1,982,464     70 %

Real estate construction

    152,748     5     113,059     4  

Commercial

    772,768     25     671,939     24  

Leases(1)

    161,934     5          

Consumer

    20,615     1     23,711     1  

Foreign

    16,126     1     20,932     1  
                   

Total gross non-covered loans and leases

    3,053,081     100 %   2,812,105     100 %
                       

Less:

                         

Unearned income

    (2,190 )         (4,392 )      

Allowance for loan and lease losses

    (69,142 )         (85,313 )      
                       

Total net non-covered loans and leases

  $ 2,981,749         $ 2,722,400        
                       

(1)
Does not include leases in process of $15.1 million at September 30, 2012.

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

 
  Three Months Ended September 30, 2012  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Leases   Consumer   Foreign   Total  
 
  (In thousands)
 

Allowance for Loan and Lease Losses on Non-Covered Loans and Leases:

                                           

Balance, beginning of period

  $ 42,236   $ 5,496   $ 21,979   $ 498   $ 1,735   $ 117   $ 72,061  

Charge-offs

    (1,118 )   (492 )   (492 )       (25 )       (2,127 )

Recoveries

    845     11     218         32     2     1,108  

Provision

    (3,226 )   1,582     (685 )   629     (188 )   (12 )   (1,900 )
                               

Balance, end of period

  $ 38,737   $ 6,597   $ 21,020   $ 1,127   $ 1,554   $ 107   $ 69,142  
                               

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

 

 
  Nine Months Ended September 30, 2012  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Leases   Consumer   Foreign   Total  
 
  (In thousands)
 

Allowance for Loan and Lease Losses on Non-Covered Loans and Leases:

                                           

Balance, beginning of period

  $ 50,205   $ 8,697   $ 23,308   $   $ 2,768   $ 335   $ 85,313  

Charge-offs

    (5,891 )   (492 )   (2,715 )       (258 )       (9,356 )

Recoveries

    1,217     35     1,232         79     22     2,585  

Provision

    (6,794 )   (1,643 )   (805 )   1,127     (1,035 )   (250 )   (9,400 )
                               

Balance, end of period

  $ 38,737   $ 6,597   $ 21,020   $ 1,127   $ 1,554   $ 107   $ 69,142  
                               

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

                                           

Individually evaluated for impairment

  $ 5,568   $ 2,468   $ 6,051   $   $ 265   $   $ 14,352  
                               

Collectively evaluated for impairment

  $ 33,169   $ 4,129   $ 14,969   $ 1,127   $ 1,289   $ 107   $ 54,790  
                               

Non-Covered Loan and Lease Balances:

                                           

Ending balance

  $ 1,928,890   $ 152,748   $ 772,768   $ 161,934   $ 20,615   $ 16,126   $ 3,053,081  
                               

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

                                           

Individually evaluated for impairment

  $ 99,137   $ 31,792   $ 17,847   $ 420   $ 623   $   $ 149,819  
                               

Collectively evaluated for impairment

  $ 1,829,753   $ 120,956   $ 754,921   $ 161,514   $ 19,992   $ 16,126   $ 2,903,262  
                               

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

 

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

Allowance for Loan Losses on Non-Covered Loans:

                                     

Balance, beginning of period

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

Charge-offs

    (4,293 )       (2,237 )   (54 )       (6,584 )

Recoveries

    225     33     235     74         567  

Provision

    2,341     (885 )   (925 )   (642 )   (189 )   (300 )
                           

Balance, end of period

  $ 51,813   $ 10,333   $ 25,332   $ 2,288   $ 344   $ 90,110  
                           

 

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

Allowance for Loan Losses on Non-Covered Loans:

                                     

Balance, beginning of period

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

Charge-offs

    (9,859 )   (5,838 )   (7,967 )   (1,379 )       (25,043 )

Recoveries

    349     1,021     1,160     1,375     45     3,950  

Provision

    9,666     6,384     (1,090 )   (2,360 )   (50 )   12,550  
                           

Balance, end of period

  $ 51,813   $ 10,333   $ 25,332   $ 2,288   $ 344   $ 90,110  
                           

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

                                     

Individually evaluated for impairment

  $ 6,399   $ 3,363   $ 7,035   $ 2   $   $ 16,799  
                           

Collectively evaluated for impairment

  $ 45,414   $ 6,970   $ 18,297   $ 2,286   $ 344   $ 73,311  
                           

Non-Covered Loan Balances:

                                     

Ending balance

  $ 2,031,893   $ 152,411   $ 671,963   $ 20,621   $ 20,932   $ 2,897,820  
                           

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

                                     

Individually evaluated for impairment

  $ 91,495   $ 32,621   $ 21,692   $ 565   $   $ 146,373  
                           

Collectively evaluated for impairment

  $ 1,940,398   $ 119,790   $ 650,271   $ 20,056   $ 20,932   $ 2,751,447  
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

 
  September 30, 2012   December 31, 2011  
 
  Nonclassified   Classified   Total   Nonclassified   Classified   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     

Hospitality

  $ 105,417   $ 12,772   $ 118,189   $ 123,071   $ 21,331   $ 144,402  

SBA 504

    48,971     6,112     55,083     51,522     6,855     58,377  

Other

    1,715,968     39,650     1,755,618     1,690,830     88,855     1,779,685  
                           

Total real estate mortgage

    1,870,356     58,534     1,928,890     1,865,423     117,041     1,982,464  
                           

Real estate construction:

                                     

Residential

    39,774     2,978     42,752     14,743     2,926     17,669  

Commercial

    102,098     7,898     109,996     64,667     30,723     95,390  
                           

Total real estate construction

    141,872     10,876     152,748     79,410     33,649     113,059  
                           

Commercial:

                                     

Collateralized

    417,379     15,651     433,030     395,041     18,979     414,020  

Unsecured

    84,374     2,961     87,335     75,017     3,920     78,937  

Asset-based

    225,700     701     226,401     149,947     40     149,987  

SBA 7(a)

    19,117     6,885     26,002     18,045     10,950     28,995  
                           

Total commercial

    746,570     26,198     772,768     638,050     33,889     671,939  
                           

Leases

    161,514     420     161,934              

Consumer

    19,745     870     20,615     22,730     981     23,711  

Foreign

    16,126         16,126     20,932         20,932  
                           

Total non-covered loans and leases

  $ 2,956,183   $ 96,898   $ 3,053,081   $ 2,626,545   $ 185,560   $ 2,812,105  
                           

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

        The following tables present an aging analysis of our non-covered loans and leases by portfolio segment and class as of the dates indicated:

 
  September 30, 2012  
 
  30 - 59 Days
Past Due
  60 - 89 Days
Past Due
  Greater
Than
90 Days
Past Due
  Total
Past Due
  Current   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     

Hospitality

  $   $   $   $   $ 118,189   $ 118,189  

SBA 504

    2,926         522     3,448     51,635     55,083  

Other

    1,970     1,348     2,547     5,865     1,749,753     1,755,618  
                           

Total real estate mortgage

    4,896     1,348     3,069     9,313     1,919,577     1,928,890  
                           

Real estate construction:

                                     

Residential

                    42,752     42,752  

Commercial

                    109,996     109,996  
                           

Total real estate construction

                    152,748     152,748  
                           

Commercial:

                                     

Collateralized

    12         2,027     2,039     430,991     433,030  

Unsecured

            238     238     87,097     87,335  

Asset-based

                    226,401     226,401  

SBA 7(a)

    220     1,122     1,181     2,523     23,479     26,002  
                           

Total commercial

    232     1,122     3,446     4,800     767,968     772,768  
                           

Leases

        176     244     420     161,514     161,934  

Consumer

    23         8     31     20,584     20,615  

Foreign

                    16,126     16,126  
                           

Total non-covered loans and leases

  $ 5,151   $ 2,646   $ 6,767   $ 14,564   $ 3,038,517   $ 3,053,081  
                           

        At September 30, 2012 and December 31, 2011, the Company had no non-covered loans and leases that were greater than 90 days past due and still accruing interest. It is the Company's policy to discontinue accruing interest when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to the collectibility of a loan or lease in the normal course of business. At September 30, 2012, nonaccrual loans and leases totaled $37.0 million. Nonaccrual loans and leases include $3.3 million of loans 30 to 89 days past due and $26.9 million of current loans and leases which have been placed on nonaccrual status based on management's judgment regarding the collectibility of such loans and leases.

20


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

Real estate mortgage:

                                     

Hospitality

  $   $   $   $   $ 144,402   $ 144,402  

SBA 504

    718         842     1,560     56,817     58,377  

Other

    12,953     191     13,205     26,349     1,753,336     1,779,685  
                           

Total real estate mortgage

    13,671     191     14,047     27,909     1,954,555     1,982,464  
                           

Real estate construction:

                                     

Residential

        475         475     17,194     17,669  

Commercial

    2,290         2,182     4,472     90,918     95,390  
                           

Total real estate construction

    2,290     475     2,182     4,947     108,112     113,059  
                           

Commercial:

                                     

Collateralized

    275     423     1,701     2,399     411,621     414,020  

Unsecured

    4         151     155     78,782     78,937  

Asset-based

                    149,987     149,987  

SBA 7(a)

    996     646     274     1,916     27,079     28,995  
                           

Total commercial

    1,275     1,069     2,126     4,470     667,469     671,939  
                           

Consumer

    72     40     17     129     23,582     23,711  

Foreign

                    20,932     20,932  
                           

Total non-covered loans

  $ 17,308   $ 1,775   $ 18,372   $ 37,455   $ 2,774,650   $ 2,812,105  
                           

        Nonaccrual loans totaled $58.3 million at December 31, 2011, of which $2.5 million were 30 to 89 days past due and $37.4 million were current.

21


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

 
  September 30, 2012   December 31, 2011  
 
  Nonaccrual   Performing   Total   Nonaccrual   Performing   Total  
 
  (In thousands)
 

Real estate mortgage:

                                     

Hospitality

  $ 6,993   $ 111,196   $ 118,189   $ 7,251   $ 137,151   $ 144,402  

SBA 504

    1,330     53,753     55,083     2,800     55,577     58,377  

Other

    9,031     1,746,587     1,755,618     21,286     1,758,399     1,779,685  
                           

Total real estate mortgage

    17,354     1,911,536     1,928,890     31,337     1,951,127     1,982,464  
                           

Real estate construction:

                                     

Residential

    1,063     41,689     42,752     1,086     16,583     17,669  

Commercial

    3,885     106,111     109,996     6,194     89,196     95,390  
                           

Total real estate construction

    4,948     147,800     152,748     7,280     105,779     113,059  
                           

Commercial:

                                     

Collateralized

    7,180     425,850     433,030     8,186     405,834     414,020  

Unsecured

    2,055     85,280     87,335     3,057     75,880     78,937  

Asset-based

    176     226,225     226,401     14     149,973     149,987  

SBA 7(a)

    4,433     21,569     26,002     7,801     21,194     28,995  
                           

Total commercial

    13,844     758,924     772,768     19,058     652,881     671,939  
                           

Leases

    420     161,514     161,934              

Consumer

    419     20,196     20,615     585     23,126     23,711  

Foreign

        16,126     16,126         20,932     20,932  
                           

Total non-covered loans and leases

  $ 36,985   $ 3,016,096   $ 3,053,081   $ 58,260   $ 2,753,845   $ 2,812,105  
                           

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

 
  September 30, 2012   December 31, 2011  
Loan Segment
  Nonaccrual
Loans/Leases
  Performing
Restructured
Loans
  Total
Impaired
Loans/Leases
  Nonaccrual
Loans/Leases
  Performing
Restructured
Loans
  Total
Impaired
Loans/Leases
 
 
  (In thousands)
 

Real estate mortgage

  $ 17,354   $ 81,783   $ 99,137   $ 31,337   $ 87,484   $ 118,821  

Real estate construction

    4,948     26,844     31,792     7,280     24,512     31,792  

Commercial

    13,844     4,003     17,847     19,058     4,652     23,710  

Leases

    420         420              

Consumer

    419     204     623     585     143     728  
                           

Total

  $ 36,985   $ 112,834   $ 149,819   $ 58,260   $ 116,791   $ 175,051  
                           

22


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

 
  September 30, 2012   December 31, 2011  
 
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
 
 
  (In thousands)
 

With An Allowance Recorded:

                                     

Real estate mortgage:

                                     

Hospitality

  $ 9,049   $ 9,649   $ 2,504   $ 17,548   $ 17,890   $ 4,369  

SBA 504

    1,681     1,681     385     1,147     1,245     206  

Other

    32,495     32,630     2,679     78,349     81,921     6,919  

Real estate construction:

                                     

Residential

    1,283     1,307     177     2,766     2,776     409  

Commercial

    18,408     18,548     2,291     12,477     12,520     1,664  

Commercial:

                                     

Collateralized

    4,199     4,476     3,609     5,515     5,741     3,901  

Unsecured

    2,309     3,011     2,108     2,864     3,061     2,513  

SBA 7(a)

    2,042     2,172     334     3,397     3,428     379  

Consumer

    474     510     265     433     459     413  

With No Related Allowance Recorded:

                                     

Real estate mortgage:

                                     

SBA 504

  $ 1,330   $ 2,042   $   $ 2,262   $ 3,007   $  

Other

    54,582     58,205         19,515     22,999      

Real estate construction:

                                     

Residential

    753     753         611     611      

Commercial

    11,348     14,978         15,938     19,536      

Commercial:

                                     

Collateralized

    5,055     5,417         4,759     4,927      

Unsecured

    156     168         643     716      

Asset-based

    176     176         14     14      

SBA 7(a)

    3,910     5,959         6,518     8,181      

Leases

    420     420                  

Consumer

    149     217         295     351      

Total Non-Covered Loans and Leases With and Without An Allowance Recorded:

                                     

Real estate mortgage

  $ 99,137   $ 104,207   $ 5,568   $ 118,821   $ 127,062   $ 11,494  

Real estate construction

    31,792     35,586     2,468     31,792     35,443     2,073  

Commercial

    17,847     21,379     6,051     23,710     26,068     6,793  

Leases

    420     420                  

Consumer

    623     727     265     728     810     413  
                           

Total

  $ 149,819   $ 162,319   $ 14,352   $ 175,051   $ 189,383   $ 20,773  
                           

23


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

 
  Three Months Ended September 30,  
 
  2012   2011  
 
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
 
 
  (In thousands)
 

With An Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $ 9,049   $ 107   $ 17,634   $ 162  

SBA 504

    927     25     1,159     8  

Other

    30,884     445     55,580     562  

Real estate construction:

                         

Residential

    1,283     6     2,069     17  

Commercial

    18,408     178     20,969     197  

Commercial:

                         

Collateralized

    4,199     45     4,568     26  

Unsecured

    2,309     40     4,748     6  

SBA 7(a)

    2,042     50     3,131     33  

Consumer

    474     6     69      

With No Related Allowance Recorded:

                         

Real estate mortgage:

                         

SBA 504

  $ 1,330   $ 17   $ 2,348   $  

Other

    52,200     738     13,900     144  

Real estate construction:

                         

Residential

    753     16     1,329     48  

Commercial

    11,348     128     4,849     114  

Commercial:

                         

Collateralized

    4,972     92     2,198      

Unsecured

    156     3     574     2  

Asset-based

    176         15      

SBA 7(a)

    3,902     161     4,815     9  

Leases

    360              

Consumer

    149     5     496      

Total Non-Covered Loans and Leases With and Without An Allowance Recorded:

                         

Real estate mortgage

  $ 94,390   $ 1,332   $ 90,621   $ 876  

Real estate construction

    31,792     328     29,216     376  

Commercial

    17,756     391     20,049     76  

Leases

    360              

Consumer

    623     11     565      
                   

Total

  $ 144,921   $ 2,062   $ 140,451   $ 1,328  
                   

(1)
For the loans and leases reported as impaired at the period-ends presented, amounts were calculated based on the period of time such loans and leases were impaired during the reporting period.

24


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

 
  Nine Months Ended September 30,  
 
  2012   2011  
 
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
  Weighted
Average
Recorded
Investment(1)
  Interest
Income
Recognized
 
 
  (In thousands)
 

With An Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $ 9,049   $ 315   $ 17,435   $ 519  

SBA 504

    545     17     820     13  

Other

    27,749     893     43,025     1,495  

Real estate construction:

                         

Residential

    1,283     21     2,069     55  

Commercial

    18,408     504     16,293     337  

Commercial:

                         

Collateralized

    3,773     99     3,644     40  

Unsecured

    2,302     120     4,739     16  

SBA 7(a)

    1,996     147     2,400     63  

Consumer

    370     15     69      

With No Related Allowance Recorded:

                         

Real estate mortgage:

                         

SBA 504

  $ 1,330   $ 80   $ 2,348   $  

Other

    48,441     1,886     10,992     217  

Real estate construction:

                         

Residential

    753     49     1,329     48  

Commercial

    10,598     382     4,849     163  

Commercial:

                         

Collateralized

    4,796     229     2,133     (1 )

Unsecured

    156     4     548     2  

Asset-based

    117     3     15      

SBA 7(a)

    3,771     478     4,704     9  

Leases

    256              

Consumer

    149     16     462      

Total Non-Covered Loans and Leases With and Without An Allowance Recorded:

                         

Real estate mortgage

  $ 87,114   $ 3,191   $ 74,620   $ 2,244  

Real estate construction

    31,042     956     24,540     603  

Commercial

    16,911     1,080     18,183     129  

Leases

    256              

Consumer

    519     31     531      
                   

Total

  $ 135,842   $ 5,258   $ 117,874   $ 2,976  
                   

(1)
For the loans and leases reported as impaired at the period-ends presented, amounts were calculated based on the period of time such loans and leases were impaired during the reporting period.

25


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

        The following tables present non-covered new troubled debt restructurings and defaulted troubled debt restructurings for the periods indicated:

 
  Three Months Ended September 30,  
 
  2012   2011  
 
  Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
  Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
 
 
  (Dollars in thousands)
 

Troubled Debt Restructurings:

                                     

Real estate mortgage:

                                     

SBA 504

    1   $ 1,118   $ 1,118       $   $  

Other

    4     10,119     10,119     8     5,189     4,998  

Real estate construction:

                                     

Commercial

    1     6,973     6,973     1     2,082     2,082  

Commercial:

                                     

Collateralized

    2     370     370     2     477     477  

Unsecured

                1     450     450  

SBA 7(a)

    2     70     70     5     344     344  

Consumer

    1     206     206              
                           

Total

    11   $ 18,856   $ 18,856     17   $ 8,542   $ 8,351  
                           

 

 
  Nine Months Ended September 30,  
 
  2012   2011  
 
  Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
  Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
 
 
  (Dollars in thousands)
 

Troubled Debt Restructurings:

                                     

Real estate mortgage:

                                     

Hospitality

      $   $     1   $ 2,086   $ 2,086  

SBA 504

    2     1,680     1,680     2     1,089     1,089  

Other

    4     10,119     10,119     20     22,886     22,695  

Real estate construction:

                                     

Commercial

    2     8,419     8,419     5     14,626     14,626  

Commercial:

                                     

Collateralized

    7     1,545     1,545     8     2,425     2,425  

Unsecured

    3     38     38     1     450     450  

SBA 7(a)

    4     299     299     12     2,048     2,048  

Consumer

    1     206     206              
                           

Total

    23   $ 22,306   $ 22,306     49   $ 45,610   $ 45,419  
                           

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)


 
  Three Months Ended September 30,  
 
  2012   2011  
 
  Number
of
Loans
  Recorded
Investment(1)
  Number
of
Loans
  Recorded
Investment(2)
 
 
  (Dollars in thousands)
 

Troubled Debt Restructurings That Subsequently Defaulted(3):

                         

Real estate mortgage—Other

    2   $ 627     4   $ 5,566  

Commercial—SBA 7(a)

    2     118     1     448  
                   

Total

    4   $ 745     5   $ 6,014  
                   

(1)
Represents the balance at September 30, 2012 and is net of charge-offs of $82,000.

(2)
Represents the balance at September 30, 2011 and is net of charge-offs of $2.1 million.

(3)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. The table excludes defaulted troubled debt restructurings in those classes for which the recorded investment was zero at the end of the period.

 
  Nine Months Ended September 30,  
 
  2012   2011  
 
  Number
of
Loans
  Recorded
Investment(1)
  Number
of
Loans
  Recorded
Investment(2)
 
 
  (Dollars in thousands)
 

Troubled Debt Restructurings That Subsequently Defaulted(3):

                         

Real estate mortgage—Other

    2   $ 627     4   $ 5,566  

Commercial:

                         

Collateralized

    7     828          

Unsecured

    2     93          

SBA 7(a)

    3     991     1     448  
                   

Total

    14   $ 2,539     5   $ 6,014  
                   

(1)
Represents the balance at September 30, 2012 and is net of charge-offs of $613,000.

(2)
Represents the balance at September 30, 2011 and is net of charge-offs of $3.0 million.

(3)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. The table excludes defaulted troubled debt restructurings in those classes for which the recorded investment was zero at the end of the period.

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

 
  September 30, 2012   December 31, 2011  
 
  Amount   % of
Total
  Amount   % of
Total
 
 
  (Dollars in thousands)
 

Real estate mortgage:

                         

Hospitality

  $ 2,903       $ 2,944      

Other

    603,521     93 %   733,414     91 %
                   

Total real estate mortgage

    606,424     93 %   736,358     91 %
                   

Real estate construction:

                         

Residential

    7,092     1 %   21,521     3 %

Commercial

    19,503     3 %   25,397     3 %
                   

Total real estate construction

    26,595     4 %   46,918     6 %
                   

Commercial:

                         

Collateralized

    16,215     3 %   24,808     3 %

Unsecured

    685         802      
                   

Total commercial

    16,900     3 %   25,610     3 %
                   

Consumer

    618         735      
                   

Total gross covered loans

    650,537     100 %   809,621     100 %
                       

Discount

    (52,437 )         (75,323 )      

Allowance for loan losses

    (30,704 )         (31,275 )      
                       

Covered loans, net

  $ 567,396         $ 703,023        
                       

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

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

Balance, December 31, 2011

  $ 677,014   $ (259,265 )

Accretion

    38,417     38,417  

Payments received

    (168,710 )    

Decrease in expected cash flows, net

        20,616  

Provision for credit losses

    (3,514 )    
           

Balance, September 30, 2012

  $ 543,207   $ (200,232 )
           

        The table above excludes the covered loans from the Los Padres acquisition which are accounted for as non-impaired loans and totaled $24.2 million and $26.0 million at September 30, 2012 and December 31, 2011, respectively.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

        The following table presents the credit risk rating categories for covered loans by portfolio segment as of the dates indicated. Nonclassified loans are those with a credit risk rating of either pass or special mention, while classified loans are those with a credit risk rating of either substandard or doubtful. It should be noted, however, that all of these loans are covered by loss sharing agreements with the FDIC.

 
  September 30, 2012   December 31, 2011  
 
  Nonclassified   Classified   Total   Nonclassified   Classified   Total  
 
  (In thousands)
 

Real estate mortgage

  $ 363,033   $ 167,597   $ 530,630   $ 478,119   $ 163,768   $ 641,887  

Real estate construction

    4,705     18,632     23,337     5,762     35,337     41,099  

Commercial

    6,088     6,721     12,809     11,076     8,221     19,297  

Consumer

    124     496     620     178     562     740  
                           

Total covered loans, net

  $ 373,950   $ 193,446   $ 567,396   $ 495,135   $ 207,888   $ 703,023  
                           

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

NOTE 6—OTHER REAL ESTATE OWNED (OREO)

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

 
  September 30, 2012   December 31, 2011  
Property Type
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
  Non-Covered
OREO
  Covered
OREO
  Total
OREO
 
 
  (In thousands)
 

Commercial real estate(1)

  $ 1,684   $ 18,500   $ 20,184   $ 23,003   $ 15,053   $ 38,056  

Construction and land development(1)

    33,911     6,807     40,718     24,788     15,461     40,249  

Multi-family

        939     939              

Single family residence

    1,738     128     1,866     621     2,992     3,613  
                           

Total OREO, net

  $ 37,333   $ 26,374   $ 63,707   $ 48,412   $ 33,506   $ 81,918  
                           

(1)
During the third quarter of 2012, the status of one OREO property with a balance of $8.3 million changed from commercial real estate to land.

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Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—OTHER REAL ESTATE OWNED (OREO) (Continued)

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

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

OREO Activity:

                   

Balance, December 31, 2011

  $ 48,412   $ 33,506   $ 81,918  

Foreclosures

    1,839     7,241     9,080  

Payments to third parties(1)

    622         622  

Provision for losses

    (752 )   (2,229 )   (2,981 )

Reductions related to sales

    (3,915 )   (8,630 )   (12,545 )
               

Balance, March 31, 2012

    46,206     29,888     76,094  

Foreclosures

    684     9,957     10,641  

Payments to third parties(1)

    91         91  

Provision for losses

    (101 )   (2,704 )   (2,805 )

Reductions related to sales

    (5,138 )   (6,051 )   (11,189 )
               

Balance, June 30, 2012

    41,742     31,090     72,832  

Addition from the APB acquisition

    1,561         1,561  

Foreclosures

    1,700     10,823     12,523  

Payments to third parties(1)

    176         176  

Provision for losses