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



FORM 10-Q


ý

 

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

For the quarterly period ended March 31, 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 May 3, 2012, there were 35,680,378 shares of the registrant's common stock outstanding, excluding 1,617,638 shares of unvested restricted stock.

   


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

MARCH 31, 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

    42  

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    82  

ITEM 4.

 

Controls and Procedures

    83  

PART II—OTHER INFORMATION

   
84
 

ITEM 1.

 

Legal Proceedings

    84  

ITEM 1A.

 

Risk Factors

    84  

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    84  

ITEM 6.

 

Exhibits

    85  

SIGNATURES

   
86
 

2


Table of Contents


PART I—FINANCIAL INFORMATION

ITEM 1.    Condensed Consolidated Financial Statements (Unaudited)


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Par Value Data)

(Unaudited)

 
  March 31,
2012
  December 31,
2011
 

ASSETS

             

Cash and due from banks

  $ 99,471   $ 92,342  

Interest-earning deposits in financial institutions

    34,290     203,275  
           

Total cash and cash equivalents

    133,761     295,617  
           

Securities available-for-sale, at fair value ($45,274 and $45,149 covered by FDIC loss sharing at March 31, 2012 and December 31, 2011, respectively)

    1,380,878     1,326,358  

Federal Home Loan Bank stock, at cost

    43,902     46,106  
           

Total investment securities

    1,424,780     1,372,464  
           

Non-covered loans and leases, net of unearned income

    2,865,283     2,807,713  

Allowance for loan and lease losses

    (74,767 )   (85,313 )
           

Non-covered loans and leases, net

    2,790,516     2,722,400  

Covered loans, net

    660,297     703,023  
           

Total loans and leases, net

    3,450,813     3,425,423  
           

Other real estate owned, net ($29,888 and $33,506 covered by FDIC loss sharing at March 31, 2012 and December 31, 2011, respectively)

    76,094     81,918  

Premises and equipment, net

    22,885     23,068  

FDIC loss sharing asset

    79,570     95,187  

Cash surrender value of life insurance

    67,301     67,469  

Goodwill

    56,144     39,141  

Core deposit and customer relationship intangibles, net

    17,380     17,415  

Other assets

    119,380     110,535  
           

Total assets

  $ 5,448,108   $ 5,528,237  
           

LIABILITIES

             

Noninterest-bearing deposits

  $ 1,785,678   $ 1,685,799  

Interest-bearing deposits

    2,770,992     2,891,654  
           

Total deposits

    4,556,670     4,577,453  

Borrowings

    193,104     225,000  

Subordinated debentures

    108,250     129,271  

Accrued interest payable and other liabilities

    40,439     50,310  
           

Total liabilities

    4,898,463     4,982,034  
           

Commitments and contingencies (Note 9)

             

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; 37,642,287 shares issued at March 31, 2012 and 37,542,287 at December 31, 2011 (includes 1,617,760 and 1,675,730 shares of unvested restricted stock, respectively)

    376     375  

Additional paid-in capital

    1,079,871     1,084,691  

Accumulated deficit

    (551,074 )   (556,338 )

Treasury stock, at cost—344,149 and 287,969 shares at March 31, 2012 and

             

December 31, 2011, respectively

    (6,629 )   (5,328 )

Accumulated other comprehensive income

    27,101     22,803  
           

Total stockholders' equity

    549,645     546,203  
           

Total liabilities and stockholders' equity

  $ 5,448,108   $ 5,528,237  
           

   

See "Notes to Condensed Consolidated Financial Statements."

3


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars in Thousands, Except Per Share Data)

(Unaudited)

 
  Three Months Ended  
 
  March 31,
2012
  December 31,
2011
  March 31,
2011
 

Interest income:

                   

Loans and leases

  $ 64,752   $ 61,684   $ 66,781  

Investment securities

    9,580     9,107     7,819  

Deposits in financial institutions

    68     122     57  
               

Total interest income

    74,400     70,913     74,657  
               

Interest expense:

                   

Deposits

    3,604     4,103     5,956  

Borrowings

    1,925     1,782     1,744  

Subordinated debentures

    1,191     1,255     1,219  
               

Total interest expense

    6,720     7,140     8,919  
               

Net interest income

    67,680     63,773     65,738  
               

Provision for credit losses:

                   

Non-covered loans and leases

    (10,000 )       7,800  

Covered loans

    3,926     4,122     2,910  
               

Total provision for credit losses

    (6,074 )   4,122     10,710  
               

Net interest income after provision for credit losses

    73,754     59,651     55,028  
               

Noninterest income:

                   

Service charges on deposit accounts

    3,353     3,326     3,558  

Other commissions and fees

    1,883     1,864     1,720  

Gain on sale of leases

    990          

Increase in cash surrender value of life insurance

    365     337     379  

FDIC loss sharing (expense) income, net

    (3,579 )   2,667     (1,170 )

Other income

    250     60     302  
               

Total noninterest income

    3,262     8,254     4,789  
               

Noninterest expense:

                   

Compensation

    24,187     21,597     21,929  

Occupancy

    7,288     7,137     6,983  

Data processing

    2,280     2,132     2,475  

Other professional services

    1,770     1,946     2,296  

Business development

    638     609     569  

Communications

    608     640     859  

Insurance and assessments

    1,293     1,590     2,337  

Non-covered other real estate owned, net

    1,821     1,714     703  

Covered other real estate owned expense (income), net

    822     226     (2,578 )

Intangible asset amortization

    1,735     1,836     2,307  

Acquisition costs

    25     600      

Debt termination

    22,598          

Other expense

    3,830     3,442     3,519  
               

Total noninterest expense

    68,895     43,469     41,399  
               

Earnings before income taxes

    8,121     24,436     18,418  

Income tax expense

    (2,857 )   (10,553 )   (7,742 )
               

Net earnings

  $ 5,264   $ 13,883   $ 10,676  
               

Earnings per share:

                   

Basic

  $ 0.14   $ 0.38   $ 0.29  

Diluted

  $ 0.14   $ 0.38   $ 0.29  

Dividends declared per share

  $ 0.18   $ 0.18   $ 0.01  

   

See "Notes to Condensed Consolidated Financial Statements."

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PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

 
  Three Months Ended  
 
  March 31,
2012
  December 31,
2011
  March 31,
2011
 

Net earnings

  $ 5,264   $ 13,883   $ 10,676  

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

                   

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

                   

Before tax

    7,409     (899 )   1,180  

Income tax (expense) benefit

    (3,111 )   378     (496 )
               

Other comprehensive income (loss)

    4,298     (521 )   684  
               

Comprehensive income

  $ 9,562   $ 13,362   $ 11,360  
               

   

See "Notes to Condensed Consolidated Financial Statements."

5


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in Thousands, Except Share Data)

(Unaudited)

 
  Three Months Ended March 31, 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

                5,264             5,264  

Tax effect from vesting of restricted stock

            92                 92  

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

    100,000     1     1,632                 1,633  

Restricted stock surrendered

    (56,180 )               (1,301 )       (1,301 )

Cash dividends paid ($0.18 per share)

            (6,544 )               (6,544 )

Increase in net unrealized gain on securities available-for-sale, net of tax

                        4,298     4,298  
                               

Balance, March 31, 2012

    37,298,138   $ 376   $ 1,079,871   $ (551,074 ) $ (6,629 ) $ 27,101   $ 549,645  
                               

   

See "Notes to Condensed Consolidated Financial Statements."

6


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Three Months
Ended March 31,
 
 
  2012   2011  

Cash flows from operating activities:

             

Net earnings

  $ 5,264   $ 10,676  

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

             

Depreciation and amortization

    3,861     4,482  

Provision for credit losses

    (6,074 )   10,710  

Gain on sale of other real estate owned

    (1,434 )   (3,944 )

Provision for losses on other real estate owned

    2,981     1,272  

Gain on sale of leases

    (990 )    

Gain on sale of premises and equipment

    (3 )   (17 )

Restricted stock amortization

    1,633     2,000  

Tax effect included in stockholders' equity of restricted stock vesting

    (92 )   188  

Decrease in accrued and deferred income taxes, net

    2,849     7,741  

Decrease in FDIC loss sharing asset

    15,617     271  

Decrease (increase) in other assets

    5,637     (117 )

Decrease in accrued interest payable and other liabilities

    (18,592 )   (6,983 )
           

Net cash provided by operating activities

    10,657     26,279  
           

Cash flows from investing activities:

             

Net cash (used) acquired in acquisitions

    (27,908 )   26  

Net decrease in loans and leases

    96,668     111,399  

Proceeds from sale of loans and leases

    17,292     1,168  

Securities available-for-sale:

             

Proceeds from maturities and paydowns

    85,683     58,172  

Purchases

    (136,046 )   (71,060 )

Net redemptions of FHLB stock

    2,204     2,183  

Proceeds from sales of other real estate owned

    13,980     23,663  

Purchases of premises and equipment, net

    (955 )   (1,087 )

Proceeds from sales of premises and equipment

    37     20  
           

Net cash provided by investing activities

    50,955     124,484  
           

Cash flows from financing activities:

             

Net increase (decrease) in deposits:

             

Noninterest-bearing

    99,879     140,620  

Interest-bearing

    (120,662 )   (205,579 )

Restricted stock surrendered

    (1,301 )   (248 )

Tax effect included in stockholders' equity of restricted stock vesting

    92     (188 )

Net decrease in borrowings

    (47,697 )    

Redemption of subordinated debentures

    (18,558 )    

Repayment of acquired debt

    (128,677 )    

Cash dividends paid

    (6,544 )   (361 )
           

Net cash used in financing activities

    (223,468 )   (65,756 )
           

Net increase (decrease) in cash and cash equivalents

    (161,856 )   85,007  

Cash and cash equivalents, beginning of period

    295,617     108,552  
           

Cash and cash equivalents, end of period

  $ 133,761   $ 193,559  
           

Supplemental disclosures of cash flow information:

             

Cash paid for interest

  $ 8,052   $ 9,322  

Cash paid for income taxes

        (9 )

Loans transferred to other real estate owned

    9,081     29,112  

   

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; 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 FDIC-assisted acquisition of Affinity Bank, or Affinity, in August 2009. 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, and the Pacific Northwest. Our equipment leasing function, added through the acquisition of Pacific Western Equipment Finance, or PWE Finance, (formerly Marquette Equipment Finance) on January 3, 2012, is based in Utah and 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 24 acquisitions since May 2000, including PWE Finance and the April 3, 2012 acquisition of Celtic Capital Corporation, or Celtic, an asset-based lending company based in Santa Monica, California. See Note 2, Aquisitions, for more information about the PWE Finance acquisition and Note 14, Subsequent Events, for more information regarding the Celtic acquisition.

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

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION (Continued)

        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 PWE Finance acquisition.

        Certain prior period amounts have been reclassified to conform to the current period's presentation format. During the second quarter of 2011, we reclassified recoveries on covered loans such that recoveries now reduce the credit loss provision for covered loans rather than increase FDIC loss sharing income. Such reclassifications had no effect on reported net earnings or losses.

NOTE 2—ACQUISITIONS

        On January 3, 2012, Pacific Western Bank completed the acquisition of Marquette Equipment Finance (later renamed Pacific Western Equipment Finance, or PWE Finance), an equipment leasing company located in Midvale, Utah. Pacific Western Bank acquired all of the capital stock of PWE Finance 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, PWE Finance 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 $128.7 million payable to PWE Finance's former parent. Pacific Western Bank repaid PWE Finance's intercompany debt on the closing date from its excess liquidity on deposit at the Federal Reserve Bank.

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)

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

Pacific Western 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

    17,003  

Other assets

    467  
       

Total assets acquired

  $ 189,833  
       

Liabilities Assumed:

       

Borrowings from parent

  $ 128,677  

Other borrowings

    15,839  

Accrued interest payable and other liabilities

    10,317  
       

Total liabilities assumed

  $ 154,833  
       

Cash consideration paid

  $ 35,000  
       

        See Note 14, Subsequent Events, for information on acquisitions after March 31, 2012.

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 PWE Finance acquisition

    17,003  
       

Balance, March 31, 2012

  $ 56,144  
       

        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  
 
  March 31,
2012
  December 31,
2011
  March 31,
2011
 
 
  (In thousands)
 

Gross Amount of CDI and CRI:

                   

Balance, beginning of period

  $ 67,100   $ 67,100   $ 76,319  

Additions

    1,700          

Fully amortized portion

    (7,828 )        
               

Balance, end of period

    60,972     67,100     76,319  
               

Accumulated Amortization:

                   

Balance, beginning of period

    (49,685 )   (47,849 )   (50,476 )

Amortization

    (1,735 )   (1,836 )   (2,307 )

Fully amortized portion

    7,828          
               

Balance, end of period

    (43,592 )   (49,685 )   (52,783 )
               

Net CDI and CRI, end of period

  $ 17,380   $ 17,415   $ 23,536  
               

        The aggregate amortization expense related to the intangible assets is expected to be $6.2 million for 2012. The estimated aggregate amortization expense related to these intangible assets for each of the subsequent four years is $4.8 million for 2013, $3.3 million for 2014, $3.1 million for 2015, and $1.4 million for 2016.

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

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.

 
  March 31, 2012  
Security Type
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Carrying
Value
 
 
  (In thousands)
 

Residential mortgage-backed securities:

                         

Government and government-sponsored entity pass through securities

  $ 1,000,280   $ 33,662   $ (33 ) $ 1,033,909  

Government and government-sponsored entity collateralized mortgage obligations

    100,250     1,982     (12 )   102,220  

Covered private label collateralized mortgage obligations

    39,910     6,929     (1,565 )   45,274  

Municipal securities

    144,127     3,787     (273 )   147,641  

Corporate debt securities

    43,202     133     (186 )   43,149  

Other securities

    6,384     2,301         8,685  
                   

Total securities available-for-sale

  $ 1,334,153   $ 48,794   $ (2,069 ) $ 1,380,878  
                   

 

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

Residential mortgage-backed securities:

                         

Government and government-sponsored entity pass through securities

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

Government and government-sponsored entity 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  
                   

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

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

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

 
  March 31, 2012  
Maturity
  Amortized
Cost
  Carrying
Value
 
 
  (In thousands)
 

Due in one year or less

  $ 10,826   $ 13,130  

Due after one year through five years

    4,590     4,808  

Due after five years through ten years

    33,686     35,333  

Due after ten years

    1,285,051     1,327,607  
           

Total securities available-for-sale

  $ 1,334,153   $ 1,380,878  
           

        At March 31, 2012, the estimated fair value of debt securities and residential mortgage-backed debt securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation was approximately $1.1 billion.

        As of March 31, 2012, securities available-for-sale with an estimated fair value of $72.0 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:

 
  March 31, 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 and government-sponsored entity pass through securities

  $ 27,672   $ (32 ) $ 24   $ (1 ) $ 27,696   $ (33 )

Government and government- sponsored entity collateralized mortgage obligations

    5,581     (12 )           5,581     (12 )

Covered private label collateralized mortgage obligations

    3,084     (189 )   4,879     (1,376 )   7,963     (1,565 )

Municipal securities

    20,303     (273 )           20,303     (273 )

Corporate debt securities

    17,958     (186 )           17,958     (186 )
                           

Total

  $ 74,598   $ (692 ) $ 4,903   $ (1,377 ) $ 79,501   $ (2,069 )
                           

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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 and government- sponsored entity pass through securities

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

Government and government- sponsored entity 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 March 31, 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' abilities to repay. Accordingly, we determined that the securities were temporarily impaired. Additionally, we have no plans to sell these securities and believe that it is more likely than not we would not be required to sell these securities before recovery of their amortized cost. Therefore, we did not recognize the temporary impairment in the consolidated statements of earnings.

        At March 31, 2012, the Company had a $43.9 million investment in Federal Home Loan Bank of San Francisco ("FHLB") stock carried at cost. In January 2009, the FHLB announced that it suspended excess FHLB stock redemptions and dividend payments. Since this announcement, the FHLB has declared and paid cash dividends in 2010, 2011and 2012, though at rates less than those paid in the past, and repurchased certain amounts of our excess stock at carrying value. We evaluated the carrying value of our FHLB stock investment at March 31, 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, 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:

Loan Segment
  March 31,
2012
  December 31,
2011
 
 
  (In thousands)
 

Real estate mortgage

  $ 1,896,052   $ 1,982,464  

Real estate construction

    118,304     113,059  

Commercial

    665,441     671,939  

Leases(1)

    153,845      

Consumer

    15,826     23,711  

Foreign

    18,752     20,932  
           

Total gross non-covered loans and leases

    2,868,220     2,812,105  

Less:

             

Unearned income

    (2,937 )   (4,392 )

Allowance for loan and lease losses

    (74,767 )   (85,313 )
           

Total net non-covered loans and leases

  $ 2,790,516   $ 2,722,400  
           

(1)
Does not include leases in process of $13.8 million.

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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 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 March 31, 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

    (2,190 )       (871 )       (199 )       (3,260 )

Recoveries

    329     10     824         31     20     1,214  

Provision

    (6,134 )   (2,232 )   295     458     (692 )   (195 )   (8,500 )
                               

Balance, end of period

  $ 42,210   $ 6,475   $ 23,556   $ 458   $ 1,908   $ 160   $ 74,767  
                               

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

                                           

Individually evaluated for impairment

  $ 9,369   $ 1,312   $ 6,897   $   $ 262   $   $ 17,840  
                               

Collectively evaluated for impairment

  $ 32,841   $ 5,163   $ 16,659   $ 458   $ 1,646   $ 160   $ 56,927  
                               

Non-Covered Loan and Lease Balances:

                                           

Ending balance

  $ 1,896,052   $ 118,304   $ 665,441   $ 153,845   $ 15,826   $ 18,752   $ 2,868,220  
                               

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

                                           

Individually evaluated for impairment

  $ 104,923   $ 30,026   $ 22,544   $ 233   $ 498   $   $ 158,224  
                               

Collectively evaluated for impairment

  $ 1,791,129   $ 88,278   $ 642,897   $ 153,612   $ 15,328   $ 18,752   $ 2,709,996  
                               

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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 March 31, 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

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

Recoveries

    97     92     617     411     32     1,249  

Provision

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

Balance, end of period

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

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

                                     

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Non-Covered Loan Balances:

                                     

Ending balance

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

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

                                     

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

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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.

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

Real estate mortgage:

                                     

Hospitality

  $ 122,944   $ 20,547   $ 143,491   $ 123,071   $ 21,331   $ 144,402  

SBA 504

    50,611     6,949     57,560     51,522     6,855     58,377  

Other

    1,640,177     54,824     1,695,001     1,690,830     88,855     1,779,685  
                           

Total real estate mortgage

    1,813,732     82,320     1,896,052     1,865,423     117,041     1,982,464  
                           

Real estate construction:

                                     

Residential

    22,547     2,907     25,454     14,743     2,926     17,669  

Commercial

    71,087     21,763     92,850     64,667     30,723     95,390  
                           

Total real estate construction

    93,634     24,670     118,304     79,410     33,649     113,059  
                           

Commercial:

                                     

Collateralized

    402,904     19,092     421,996     395,041     18,979     414,020  

Unsecured

    65,072     3,471     68,543     75,017     3,920     78,937  

Asset-based

    145,948     1,233     147,181     149,947     40     149,987  

SBA 7(a)

    17,152     10,569     27,721     18,045     10,950     28,995  
                           

Total commercial

    631,076     34,365     665,441     638,050     33,889     671,939  
                           

Leases

    150,220     3,625     153,845              

Consumer

    14,873     953     15,826     22,730     981     23,711  

Foreign

    18,752         18,752     20,932         20,932  
                           

Total non-covered loans and leases

  $ 2,722,287   $ 145,933   $ 2,868,220   $ 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:

 
  March 31, 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

  $   $   $   $   $ 143,491   $ 143,491  

SBA 504

    2,214         448     2,662     54,898     57,560  

Other

    1,026     3,501     3,069     7,596     1,687,405     1,695,001  
                           

Total real estate mortgage

    3,240     3,501     3,517     10,258     1,885,794     1,896,052  
                           

Real estate construction:

                                     

Residential

                    25,454     25,454  

Commercial

                    92,850     92,850  
                           

Total real estate construction

                    118,304     118,304  
                           

Commercial:

                                     

Collateralized

    516     152     1,800     2,468     419,528     421,996  

Unsecured

    104         151     255     68,288     68,543  

Asset-based

                    147,181     147,181  

SBA 7(a)

    1,467     1,429     171     3,067     24,654     27,721  
                           

Total commercial

    2,087     1,581     2,122     5,790     659,651     665,441  
                           

Leases

                    153,845     153,845  

Consumer

    65     219         284     15,542     15,826  

Foreign

                    18,752     18,752  
                           

Total non-covered loans and leases

  $ 5,392   $ 5,301   $ 5,639   $ 16,332   $ 2,851,888   $ 2,868,220  
                           

        At March 31, 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 March 31, 2012, nonaccrual loans and leases totaled $48.2 million. Nonaccrual loans and leases include $7.6 million of loans 30 to 89 days past due and $34.9 million of

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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

current loans and leases which have been placed on nonaccrual status based on management's judgment regarding the collectibility of such loans and leases.

 
  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.

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

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

Real estate mortgage:

                                     

Hospitality

  $ 7,165   $ 136,326   $ 143,491   $ 7,251   $ 137,151   $ 144,402  

SBA 504

    2,354     55,206     57,560     2,800     55,577     58,377  

Other

    14,171     1,680,830     1,695,001     21,286     1,758,399     1,779,685  
                           

Total real estate mortgage

    23,690     1,872,362     1,896,052     31,337     1,951,127     1,982,464  
                           

Real estate construction:

                                     

Residential

    1,075     24,379     25,454     1,086     16,583     17,669  

Commercial

    4,524     88,326     92,850     6,194     89,196     95,390  
                           

Total real estate construction

    5,599     112,705     118,304     7,280     105,779     113,059  
                           

Commercial:

                                     

Collateralized

    8,030     413,966     421,996     8,186     405,834     414,020  

Unsecured

    2,608     65,935     68,543     3,057     75,880     78,937  

Asset-based

    88     147,093     147,181     14     149,973     149,987  

SBA 7(a)

    7,416     20,305     27,721     7,801     21,194     28,995  
                           

Total commercial

    18,142     647,299     665,441     19,058     652,881     671,939  
                           

Leases(1)

    233     153,612     153,845              

Consumer

    498     15,328     15,826     585     23,126     23,711  

Foreign

        18,752     18,752         20,932     20,932  
                           

Total non-covered loans and leases

  $ 48,162   $ 2,820,058   $ 2,868,220   $ 58,260   $ 2,753,845   $ 2,812,105  
                           

(1)
Leases relate to PWE Finance only.

        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:

 
  March 31, 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

  $ 23,690   $ 81,233   $ 104,923   $ 31,337   $ 87,484   $ 118,821  

Real estate construction

    5,599     24,427     30,026     7,280     24,512     31,792  

Commercial

    18,142     4,402     22,544     19,058     4,652     23,710  

Leases

    233         233              

Consumer

    498         498     585     143     728  
                           

Total

  $ 48,162   $ 110,062   $ 158,224   $ 58,260   $ 116,791   $ 175,051  
                           

21


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 information regarding our non-covered impaired loans and leases by portfolio segment and class as of and for the dates indicated:

 
  March 31, 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

  $ 16,784   $ 17,212   $ 5,086   $ 17,548   $ 17,890   $ 4,369  

SBA 504

    563     563     198     1,147     1,245     206  

Other

    54,762     54,983     4,085     78,349     81,921     6,919  

Real estate construction:

                                     

Residential

    689     707     197     2,766     2,776     409  

Commercial

    9,431     9,507     1,115     12,477     12,520     1,664  
                           

Total real estate

    82,229     82,972     10,681     112,287     116,352     13,567  
                           

Commercial:

                                     

Collateralized

    5,048     5,317     4,033     5,515     5,741     3,901  

Unsecured

    2,395     3,028     2,094     2,864     3,061     2,513  

SBA 7(a)

    4,124     4,267     770     3,397     3,428     379  

Leases

                         

Consumer

    283     312     262     433     459     413  
                           

Total other

    11,850     12,924     7,159     12,209     12,689     7,206  
                           

With No Related Allowance Recorded:

                                     

Real estate mortgage:

                                     

Hospitality

  $   $   $   $   $   $  

SBA 504

    2,354     3,247         2,262     3,007      

Other

    30,460     35,522         19,515     22,999      

Real estate construction:

                                     

Residential

    1,392     1,392         611     611      

Commercial

    18,514     21,593         15,938     19,536      
                           

Total real estate

    52,720     61,754         38,326     46,153      
                           

Commercial:

                                     

Collateralized

    5,284     5,507         4,759     4,927      

Unsecured

    654     734         643     716      

Asset-based

    88     88         14     14      

SBA 7(a)

    4,951     6,603         6,518     8,181      

Leases

    233     233                  

Consumer

    215     278         295     351      
                           

Total other

    11,425     13,443         12,229     14,189      
                           

Total:

                                     

Real estate mortgage

  $ 104,923   $ 111,527   $ 9,369   $ 118,821   $ 127,062   $ 11,494  

Real estate construction

    30,026     33,199     1,312     31,792     35,443     2,073  

Commercial

    22,544     25,544     6,897     23,710     26,068     6,793  

Leases

    233     233                  

Consumer

    498     590     262     728     810     413  
                           

Total non-covered loans and leases

  $ 158,224   $ 171,093   $ 17,840   $ 175,051   $ 189,383   $ 20,773  
                           

22


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

 
  Three Months Ended  
 
  March 31, 2012   March 31, 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

  $ 16,784   $ 217   $ 17,173   $ 189  

SBA 504

    142         1,888      

Other

    51,922     566     29,078     211  

Real estate construction:

                         

Residential

    689     10     2,366     14  

Commercial

    9,431     115     9,239     39  
                   

Total real estate

    78,968     908     59,744     453  
                   

Commercial:

                         

Collateralized

    4,735     46     3,521     11  

Unsecured

    2,394     40     9,249     5  

SBA 7(a)

    4,119     43     2,190     9  

Leases

                 

Consumer

    283     4     1,123      
                   

Total other

    11,531     133     16,083     25  
                   

With No Related Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $   $   $   $  

SBA 504

    2,354     49     3,250      

Other

    29,447     670     21,869     (9 )

Real estate construction:

                         

Residential

    1,392     17     3,625     (35 )

Commercial

    18,514     197     8,908     61  
                   

Total real estate

    51,707     933     37,652     17  
                   

Commercial:

                         

Collateralized

    5,132     67     2,452     6  

Unsecured

    654     8     181     1  

Asset-based

    63         15      

SBA 7(a)

    4,927     116     4,814     4  

Leases

    156              

Consumer

    215     7     604      

Foreign

                 
                   

Total other

    11,147     198     8,066     11  
                   

Total:

                         

Real estate mortgage

  $ 100,649   $ 1,502   $ 73,258   $ 391  

Real estate construction

    30,026     339     24,138     79  

Commercial

    22,024     320     22,422     36  

Leases

    156              

Consumer

    498     11     1,727      

Foreign

                 
                   

Total non-covered loans and leases

  $ 153,353   $ 2,172   $ 121,545   $ 506  
                   

(1)
For the loans and leases reported as impaired as of March 31, 2012 and March 31, 2011, amounts were calculated based on the period of time such loans and leases were impaired during the reporting period.

23


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 March 31, 2012  
 
  Number
of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
 
 
  (Dollars in thousands)
 

Troubled Debt Restructurings:

                   

Real estate mortgage:

                   

Hospitality

    1   $ 2,083   $ 2,083  

SBA 504

    1     563     563  

Other

    3     16,993     16,993  

Real estate construction:

                   

Residential

    1     467     467  

Commercial

    2     6,117     6,117  

Commercial:

                   

Collateralized

    2     606     606  

Unsecured

    1     14     14  

SBA 7(a)

    5     1,603     1,603  
               

Total

    16   $ 28,446   $ 28,446  
               

 

 
  Three Months Ended
March 31, 2012
 
 
  Number
of
Loans
  Recorded
Investment(1)
 
 
  (Dollars in thousands)
 

Troubled Debt Restructurings That Subsequently Defaulted(2):

             

Real estate mortgage:

             

Other

    1   $ 1,725  

Commercial:

             

SBA 7(a)

    1     34  
           

Total

    2   $ 1,759  
           

(1)
Represents the balance at March 31, 2012 and is net of charge-offs of $324,000 for the three months ended March 31, 2012.

(2)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceeding 12-month period. The table excludes defaulted troubled debt restructurings in those classes for which the recorded investment was zero at March 31, 2012.

24


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

        We refer to the loans acquired in the Los Padres Bank, or Los Padres, acquisition and Affinity acquisition 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.

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

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

Real estate mortgage:

                         

Hospitality

  $       $ 2,944     0 %

Other

    699,653     92 %   733,414     91 %
                   

Total real estate mortgage

    699,653     92 %   736,358     91 %
                   

Real estate construction:

                         

Residential

    15,913     2 %   21,521     3 %

Commercial

    25,278     3 %   25,397     3 %
                   

Total real estate construction

    41,191     5 %   46,918     6 %
                   

Commercial:

                         

Collateralized

    20,149     3 %   24,808     3 %

Unsecured

    741     0 %   802     0 %
                   

Total commercial

    20,890     3 %   25,610     3 %
                   

Consumer

    685     0 %   735     0 %
                   

Total gross covered loans

    762,419     100 %   809,621     100 %
                       

Discount

    (66,312 )         (75,323 )      

Allowance for loan losses

    (35,810 )         (31,275 )      
                       

Covered loans, net

  $ 660,297         $ 703,023        
                       

25


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

        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

    13,398     13,398  

Payments received

    (51,164 )    

Decrease in expected cash flows, net

        5,233  

Provision for credit losses

    (3,926 )    
           

Balance, March 31, 2012

  $ 635,322   $ (240,634 )
           

        The table above excludes the covered loans from the Los Padres acquisition which are accounted for as non-impaired loans and totaled $25.0 million and $26.0 million at March 31, 2012 and December 31, 2011, respectively.

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

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

Real estate mortgage

  $ 452,276   $ 154,441   $ 606,717   $ 478,119   $ 163,768   $ 641,887  

Real estate construction

    5,763     30,799     36,562     5,762     35,337     41,099  

Commercial

    8,393     7,945     16,338     11,076     8,221     19,297  

Consumer

    139     541     680     178     562     740  
                           

Total covered loans, net

  $ 466,571   $ 193,726   $ 660,297   $ 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.

26


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PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 6—OTHER REAL ESTATE OWNED (OREO)

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

 
  March 31, 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

  $ 20,885   $ 13,868   $ 34,753   $ 23,003   $ 15,053   $ 38,056  

Construction and land development

    25,321     13,143     38,464     24,788     15,461     40,249  

Single family residence

        2,877     2,877     621     2,992     3,613  
                           

Total OREO, net

  $ 46,206   $ 29,888   $ 76,094   $ 48,412   $ 33,506   $ 81,918  
                           

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

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

NOTE 7—FDIC LOSS SHARING ASSET

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

 
  FDIC
Loss Sharing
Asset
 
 
  (In thousands)
 

Balance, December 31, 2011

  $ 95,187  

FDIC share of additional losses, net of recoveries

    979  

Cash received from FDIC

    (12,736 )

Net amortization

    (3,860 )
       

Balance, March 31, 2012

  $ 79,570  
       

27


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 8—BORROWINGS, SUBORDINATED DEBENTURES AND BROKERED DEPOSITS

        In March 2012, the Company incurred $22.6 million in debt termination expense related to the prepayment of $225.0 million in fixed-rate term FHLB advances and the early redemption of $18.6 million in fixed-rate subordinated debentures for Trust CI and Trust I. The Company used a combination of excess cash and collateralized overnight FHLB advances to repay these debt instruments. The FHLB advances were composed of $200 million maturing in December 2017 with a fixed rate of 3.16% and $25 million due in January 2018 with a fixed rate of 2.61%. The agreements for these FHLB advances had an early prepayment penalty or fee for payoffs before maturity. The Trust CI subordinated debenture was in the amount of $10.3 million, due in March 2030 and bearing a fixed rate of 11.00%. The Trust I subordinated debenture was for $8.3 million with a maturity date of September 2030 and fixed rate of 10.6%.

        As of March 31, 2012, there were $179.5 million in outstanding FHLB advances borrowed on an overnight basis and bearing an interest rate of 0.13%. Our aggregate remaining borrowing capacity under the FHLB secured lines of credit was $1.0 billion at March 31, 2012. As of March 31, 2012, our FHLB advances were secured by all of our loans and leases under a blanket lien, in addition to securities with a carrying value of $29.0 million. Additionally, the Bank had secured borrowing capacity from the Federal Reserve discount window of $375.4 million at March 31, 2012. The Bank also maintains unsecured lines of credit of $45.0 million with correspondent banks for the purchase of overnight funds; these lines are subject to availability of funds.

        Included in borrowings are $13.6 million of non-recourse notes added through the PWE Finance acquisition, in which the payment stream of certain of its leases were sold to third parties. The debt is secured by the equipment in the leases and all interest rates are fixed. As of March 31, 2012, the weighted average interest rate of the notes was 6.84% with a weighted average remaining maturity of 2.4 years.

        The following table summarizes the terms of each issuance of the subordinated debentures outstanding as of March 31, 2012:

Series
  March 31,
2012
Amount
  Issuance
Date
  Maturity
Date
  Rate Index   Current
Rate(1)
  Next
Reset
Date
 
 
  (In thousands)
   
   
   
   
   
 

Trust V

  $ 10,310     8/15/03     9/17/33   3 month LIBOR + 3.10     3.57 %   6/15/12  

Trust VI

    10,310     9/3/03     9/15/33   3 month LIBOR + 3.05     3.52 %   6/13/12  

Trust CII

    5,155     9/17/03     9/17/33   3 month LIBOR + 2.95     3.42 %   6/15/12  

Trust VII

    61,856     2/5/04     4/23/34   3 month LIBOR + 2.75     3.22 %   7/26/12  

Trust CIII

    20,619     8/15/05     9/15/35   3 month LIBOR + 1.69     2.16 %   6/13/12  
                                   

Total subordinated

                                   

debentures

  $ 108,250                              
                                   

(1)
As of April 26, 2012.

28


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 8—BORROWINGS, SUBORDINATED DEBENTURES AND BROKERED DEPOSITS (Continued)

        The Company had an aggregate amount of $108.3 million in subordinated debentures outstanding at March 31, 2012. These subordinated debentures were issued in five separate series. Each issuance had a maturity of thirty years from its date of issue. The subordinated debentures are variable rate instruments and are each callable at par with no prepayment penalty. The subordinated debentures were issued to trusts established by us or entities we have acquired, which in turn issued trust preferred securities, which totaled $105.0 million at March 31, 2012. The proceeds of the subordinated debentures were used primarily to fund several of our acquisitions and to augment regulatory capital.

        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. At March 31, 2012, the amount of trust preferred securities included in Tier I capital was $105.0 million.

        Notification to the Federal Reserve Board, or FRB, is required prior to our declaring and paying a dividend to our stockholders during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount. Interest payments made by the Company on subordinated debentures are considered dividend payments under FRB regulations. This notification requirement is included in regulatory guidance regarding safety and soundness surrounding capital and includes other non-financial measures such as asset quality and credit concentrations. Should the FRB object to our dividend payments, we would be precluded from paying interest on our subordinated debentures. Payments would not commence until approval is received or we no longer need to provide notice under applicable guidance.

        Brokered deposits totaled $37.4 million at March 31, 2012 and are included in the interest-bearing deposits balance on the accompanying condensed consolidated balance sheets. Such amount represented customer deposits that were subsequently participated with other FDIC-insured financial institutions through the CDARS program as a means to provide FDIC deposit insurance coverage for the full amount of our customers' deposits.

NOTE 9—COMMITMENTS AND CONTINGENCIES

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

        Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—COMMITMENTS AND CONTINGENCIES (Continued)

represent future cash requirements. Commitments to extend credit totaled $690.5 million and $691.5 million at March 31, 2012 and December 31, 2011, respectively.

        Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most guarantees expire within one year from the date of issuance. The Company generally requires collateral or other security to support financial instruments with credit risk. Standby letters of credit totaled $28.9 million and $32.0 million at March 31, 2012 and December 31, 2011, respectively.

        The Company has investments in low income housing project partnerships, which provide the Company income tax credits, and in a few small business investment companies. As of March 31, 2012, the Company had commitments to contribute capital to these entities totaling $6.7 million.

        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 of operations.

NOTE 10—FAIR VALUE MEASUREMENTS

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

        We use fair value to measure certain assets on a recurring basis, primarily securities available-for-sale; we have no liabilities being measured at fair value. For assets measured at the lower

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 10—FAIR VALUE MEASUREMENTS (Continued)

of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered "nonrecurring" for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for impaired loans and other real estate owned and also to record impairment on certain assets, such as goodwill, core deposit intangibles and other long-lived assets. There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2012. The following table presents information on the assets measured and recorded at fair value on a recurring basis as of the date indicated:

 
  Fair Value Measurement as of March 31, 2012  
 
  Total   Level 1   Level 2   Level 3  
 
  (In thousands)
 

Measured on a Recurring Basis:

                         

Securities available-for-sale:

                         

Government and government-sponsored entity residential mortgage-backed securities

  $ 1,136,129   $   $ 1,136,129   $  

Covered private label CMOs

    45,274             45,274  

Municipal securities

    147,641         147,641      

Corporate securities

    43,149         43,149      

Other securities

    8,685     6,911     1,774      
                   

  $ 1,380,878   $ 6,911   $ 1,328,693   $ 45,274  
                   

        The following table presents information about quantitative inputs and assumptions used to evaluate the fair values provided by our third party pricing service for our Level 3 private label CMOs measured at fair value on a recurring basis as of March 31, 2012:

Unobservable Inputs
  Range of Inputs   Weighted
Average
Input
 

Voluntary prepayment speeds

  0.1% - 32.2%     8.2 %

Monthly default rates

  0.4% - 20.5%     3.6 %

Loss severity rates

  9.1% - 70.6%     45.2 %

Discount rates

  3.6% - 11.5%     7.2 %

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 10—FAIR VALUE MEASUREMENTS (Continued)

        The following table summarizes activity for assets measured at fair value on a recurring basis that are categorized as Level 3 for the period indicated:

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

Beginning as of December 31, 2011

  $ 45,149  

Total realized in earnings

    607  

Total unrealized in comprehensive income

    1,641  

Net settlements

    (2,123 )
       

Balance, March 31, 2012

  $ 45,274  
       

        There were no transfers of assets in or out of Level 3 during the three months ended March 31, 2012.

        The following table presents gains and (losses) and other information on assets measured at fair value on a non-recurring basis as of and for the period ended March 31, 2012:

 
  Gains
(Losses)
Three Months
Ended
March 31,
2012
   
   
   
   
 
 
  Fair Value Measurement as of March 31, 2012  
 
  Total   Level 1   Level 2   Level 3  
 
  (In thousands)
 

Measured on a Nonrecurring Basis:

                               

Non-covered impaired loans

  $ (2,274 ) $ 93,815   $   $ 14,039   $ 79,776  

Non-covered other real estate owned

    (569 )   3,440         819     2,621  

Covered other real estate owned

    (1,266 )   10,392         7,676     2,716  

SBA loan servicing asset

    1     1,182             1,182  
                       

  $ (4,108 ) $ 108,829   $   $ 22,534   $ 86,295  
                       

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 10—FAIR VALUE MEASUREMENTS (Continued)

        The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2012:

Asset
  Fair Value
(in 000's)
  Valuation
Methodology
  Unobservable
Inputs
  Range   Weighted
Average
 

Impaired loans(1)

  $ 77,650   Discounted
cash flow
  Discount rate   4.00% - 8.75%     6.28 %

OREO

 
$

5,337
 
Appraisals
 

Discount, including 8% for selling costs

 

9% - 30%

   

20

%

SBA loan servicing asset

 
$

1,182
 
Discounted cash flow
 

Prepayment speeds

 

3.69% - 17.04%

   

  

(2)

            Discount rates   9.68% - 12.58%        (2)

(1)
Excludes $2.1 million of impaired loans with balances of $250,000 or less.

(2)
Not readily available.

        ASC Topic 825, "Financial Instruments," requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

        The following tables present a summary of the carrying values and estimated fair values of certain financial instruments as of the dates indicated:

 
  March 31, 2012  
 
   
  Estimated Fair Value  
 
  Carrying or
Contract
Amount
 
 
  Total   Level 1   Level 2   Level 3  
 
  (In thousands)
 

Financial Assets:

                               

Cash and due from banks

  $ 99,471   $ 99,471   $ 99,471   $   $  

Interest-earning deposits in

                               

financial institutions

    34,290     34,290     34,290          

Securities available-for-sale

    1,380,878     1,380,878     6,911     1,328,693     45,274  

Investment in FHLB stock

    43,902     43,902     43,902          

Loans and leases, net

    3,450,813     3,496,003         12,959     3,483,044  

SBA loan servicing asset

    1,182     1,182             1,182  

Financial Liabilities:

                               

Deposits

    4,556,670     4,564,845     928,745     3,636,100      

Borrowings

    193,104     193,102     179,500     13,602      

Subordinated debentures

    108,250     108,190         108,190      

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 10—FAIR VALUE MEASUREMENTS (Continued)

 

 
  December 31, 2011  
 
   
  Estimated Fair Value  
 
  Carrying or
Contract
Amount
 
 
  Total   Level 1   Level 2   Level 3  
 
  (In thousands)
 

Financial Assets:

                               

Cash and due from banks

  $ 92,342   $ 92,342   $ 92,342   $   $  

Interest-earning deposits in

                               

financial institutions

    203,275     203,275     203,275          

Securities available-for-sale

    1,326,358     1,326,358     2,976     1,278,233     45,149  

Investment in FHLB stock

    46,106     46,106     46,106          

Loans and leases, net

    3,425,423     3,469,754         13,803     3,455,951  

SBA loan servicing asset

    1,613     1,613             1,613  

Financial Liabilities:

                               

Deposits

    4,577,453     4,587,148     977,589     3,609,559      

Borrowings

    225,000     249,000         249,000      

Subordinated debentures

    129,271     135,532         135,532      

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

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

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

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

        Fair value for securities categorized as Level 1, which are primarily equity securities, are based on readily available quoted prices. In determining the fair value of the securities categorized as Level 2, we obtain a report from a nationally recognized broker-dealer detailing the fair value of each investment security we hold as of each reporting date. The broker-dealer uses observable market information to value our securities, with the primary source being a nationally recognized pricing service. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the marketplace and we consider any credit issues related to the securities. As we have not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

        Our private label CMOs are categorized as Level 3 due in part to the inactive market for such securities. There is a wide range of prices quoted for private label CMOs among independent third party pricing services and this range reflects the significant judgment being exercised over the assumptions and variables that determine the pricing of such securities. We consider this subjectivity to

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(Unaudited)

NOTE 10—FAIR VALUE MEASUREMENTS (Continued)

be a significant unobservable input and have concluded the private label CMOs should be categorized as a Level 3 measured asset. Our fair value estimate was based on prices provided to us by a nationally recognized pricing service which we also use to determine the fair value of the majority of our securities portfolio. We determined the reasonableness of the fair values by reviewing assumptions at the individual security level about prepayment, default expectations, estimated severity loss factors, and discount rates, all of which are not directly observable in the market. Significant increases (decreases) in default expectations, severity loss factors, or discount rates, which occur all together or in isolation, would result in lower (higher) fair value measurements.

        FHLB stock.    The fair value of FHLB stock is based on our recorded investment. FHLB stock is held at par value consistent with the value at which the FHLB has repurchased shares from its members during the first quarter of 2012. In January 2009, the FHLB announced that it had suspended excess FHLB stock redemptions and dividend payments. Since this announcement, the FHLB has declared and paid cash dividends in 2010, 2011 and 2012, though at rates less than those paid in the past, and repurchased certain amounts of our excess stock. As a result of these actions, we evaluated the carrying value of our FHLB stock investment. Based on the FHLB's most recent publicly available financial results, its capital position and its bond ratings, we concluded such investment was not impaired at March 31, 2012.

        Non-covered loans and leases.    As non-covered loans and leases are not measured at fair value, the following discussion relates to estimating the fair value disclosures under ASC Topic 825. Fair values are estimated for portfolios of loans and leases with similar financial characteristics. Loans are segregated by type and further segmented into fixed and adjustable rate interest terms and by credit risk categories. The fair value estimates do not take into consideration the value of the loan portfolio in the event the loans are sold outside the parameters of normal operating activities. The fair value of performing fixed rate loans is estimated by discounting scheduled cash flows through the estimated maturity using estimated market prepayment speeds. The fair value of equipment leases is estimated by discounting scheduled lease and expected lease residual cash flows over their remaining term. The estimated market discount rates used for performing fixed rate loans and equipment leases are the Company's current offering rates for comparable instruments with similar terms. The fair value of performing adjustable rate loans is estimated by discounting scheduled cash flows through the next repricing date. As these loans reprice frequently at market rates and the credit risk is not considered to be greater than normal, the market value is typically close to the carrying amount of these loans.

        Non-covered impaired loans.    Nonaccrual loans and performing restructured loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. Non-covered nonaccrual loans with an unpaid principal balance over $250,000 and all performing restructured loans are reviewed individually for the amount of impairment, if any. Non-covered nonaccrual loans with an unpaid principal balance of $250,000 or less are evaluated for impairment collectively.

        To the extent a loan is collateral dependent, we measure such impaired loan based on the estimated fair value of the underlying collateral. The fair value of each loan's collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement.

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(Unaudited)

NOTE 10—FAIR VALUE MEASUREMENTS (Continued)

        When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The impaired loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, including an SBA government guarantee, cash flows discounted at the effective loan rate, and management's judgment.

        The non-covered impaired loan balances shown above represent those nonaccrual and restructured loans for which impairment was recognized during the three months ended March 31, 2012. The amounts shown as losses represent, for the loan balances shown, the impairment recognized during the three months ended March 31, 2012. Of the $48.2 million of nonaccrual loans at March 31, 2012, $5.5 million were written down to their fair values through charge-offs during the quarter.

        Other real estate owned.    The fair value of foreclosed real estate, both non-covered and covered, is generally based on estimated market prices from independently prepared current appraisals or negotiated sales prices with potential buyers, less estimated costs to sell; such valuation inputs result in a fair value measurement that is categorized as a Level 2 measurement on a nonrecurring basis. As a matter of policy, appraisals are required annually and may be updated more frequently as circumstances require in the opinion of management. The Level 2 measurement is based on appraisals obtained within the last 12 months and for which a write-down was recognized during the three months ended March 31, 2012.

        When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement that is categorized as a Level 3 measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement. The OREO losses disclosed are write-downs based on either a recent appraisal obtained after foreclosure or an accepted purchase offer by an independent third party received after foreclosure.

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

        Deposits.    Deposits are carried at historical cost. The fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, interest checking, money market, and savings accounts, is equal to the amount payable on demand as of the balance sheet date and considered Level 1. The fair value of time deposits is based on the discounted value of contractual cash flows and considered Level 2. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. No value has been separately assigned to the Company's long-term relationships with its deposit customers, such as a core deposit intangible.

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(Unaudited)

NOTE 10—FAIR VALUE MEASUREMENTS (Continued)

        Borrowings.    Borrowings are carried at amortized cost. The fair value of overnight FHLB advances is equal to the carrying value and considered Level 1. The fair value of fixed rate borrowings is calculated by discounting scheduled cash flows through the estimated maturity dates or call dates, if applicable, using estimated market discount rates that reflect current rates offered for borrowings with similar remaining maturities and characteristics.

        Subordinated debentures.    Subordinated debentures are carried at amortized cost. The fair value of subordinated debentures with variable rates is deemed to be the carrying value.

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

        Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect income taxes or any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on what management believes to be conservative judgments regarding expected future cash flows, current economic conditions, risk characteristics of va