10-Q 1 a2210392z10-q.htm 10-Q

Use these links to rapidly review the document
TABLE OF CONTENTS

Table of Contents

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



FORM 10-Q


ý

 

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

For the quarterly period ended June 30, 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   90067
(Address of principal executive offices)   (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 August 1, 2012, there were 35,698,357 shares of the registrant's common stock outstanding, excluding 1,703,936 shares of unvested restricted stock.


Table of Contents

PACWEST BANCORP AND SUBSIDIARIES

JUNE 30, 2012 FORM 10-Q

TABLE OF CONTENTS

 
   
  Page  

PART I—FINANCIAL INFORMATION

    3  

ITEM 1.

 

Condensed Consolidated Financial Statements (Unaudited)

    3  

 

Condensed Consolidated Balance Sheets (Unaudited)

    3  

 

Condensed Consolidated Statements of Earnings (Unaudited)

    4  

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

    5  

 

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

    6  

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

    7  

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

    8  

ITEM 2.

 

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

    48  

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    97  

ITEM 4.

 

Controls and Procedures

    97  

PART II—OTHER INFORMATION

   
98
 

ITEM 1.

 

Legal Proceedings

    98  

ITEM 1A.

 

Risk Factors

    98  

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    98  

ITEM 6.

 

Exhibits

    99  

SIGNATURES

   
100
 

2


Table of Contents


PART I—FINANCIAL INFORMATION

ITEM 1.    Condensed Consolidated Financial Statements (Unaudited)

        


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Par Value Data)

(Unaudited)

 
  June 30,
2012
  December 31,
2011
 

ASSETS

             

Cash and due from banks

  $ 97,499   $ 92,342  

Interest-earning deposits in financial institutions

    25,970     203,275  
           

Total cash and cash equivalents

    123,469     295,617  
           

Securities available-for-sale, at fair value ($44,053 and $45,149 covered by FDIC loss sharing at June 30, 2012 and December 31, 2011, respectively)

    1,351,701     1,326,358  

Federal Home Loan Bank stock, at cost

    41,736     46,106  
           

Total investment securities

    1,393,437     1,372,464  
           

Non-covered loans and leases, net of unearned income

    2,844,291     2,807,713  

Allowance for loan and lease losses

    (72,061 )   (85,313 )
           

Non-covered loans and leases, net

    2,772,230     2,722,400  

Covered loans, net

    608,949     703,023  
           

Total loans and leases, net

    3,381,179     3,425,423  
           

Other real estate owned, net ($31,090 and $33,506 covered by FDIC loss sharing at June 30, 2012 and December 31, 2011, respectively)

    72,832     81,918  

Premises and equipment, net

    21,565     23,068  

FDIC loss sharing asset

    76,401     95,187  

Cash surrender value of life insurance

    67,595     67,469  

Goodwill

    62,008     39,141  

Core deposit and customer relationship intangibles, net

    16,943     17,415  

Other assets

    106,193     110,535  
           

Total assets

  $ 5,321,622   $ 5,528,237  
           

LIABILITIES

             

Noninterest-bearing deposits

  $ 1,872,459   $ 1,685,799  

Interest-bearing deposits

    2,718,870     2,891,654  
           

Total deposits

    4,591,329     4,577,453  

Borrowings

    15,546     225,000  

Subordinated debentures

    108,250     129,271  

Accrued interest payable and other liabilities

    40,849     50,310  
           

Total liabilities

    4,755,974     4,982,034  
           

Commitments and contingencies

             

STOCKHOLDERS' EQUITY

             

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

         

Common stock, $0.01 par value; authorized 75,000,000 shares; 37,749,531 shares issued at June 30, 2012 and 37,542,287 at December 31, 2011 (includes 1,703,936 and 1,675,730 shares of unvested restricted stock, respectively)

    377     375  

Additional paid-in capital

    1,074,996     1,084,691  

Accumulated deficit

    (535,517 )   (556,338 )

Treasury stock, at cost—347,238 and 287,969 shares at June 30, 2012 and December 31, 2011, respectively

    (6,702 )   (5,328 )

Accumulated other comprehensive income

    32,494     22,803  
           

Total stockholders' equity

    565,648     546,203  
           

Total liabilities and stockholders' equity

  $ 5,321,622   $ 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   Six Months Ended
June 30,
 
 
  June 30,
2012
  March 31,
2012
  June 30,
2011
 
 
  2012   2011  

Interest income:

                               

Loans and leases

  $ 63,312   $ 64,752   $ 68,331   $ 128,064   $ 135,112  

Investment securities

    9,558     9,580     8,782     19,138     16,601  

Deposits in financial institutions

    20     68     83     88     140  
                       

Total interest income

    72,890     74,400     77,196     147,290     151,853  
                       

Interest expense:

                               

Deposits

    3,336     3,604     5,518     6,940     11,474  

Borrowings

    293     1,925     1,763     2,218     3,507  

Subordinated debentures

    848     1,191     1,226     2,039     2,445  
                       

Total interest expense

    4,477     6,720     8,507     11,197     17,426  
                       

Net interest income

    68,413     67,680     68,689     136,093     134,427  
                       

Provision for credit losses:

                               

Non-covered loans and leases

        (10,000 )   5,500     (10,000 )   13,300  

Covered loans

    (271 )   3,926     5,890     3,655     8,800  
                       

Total provision for credit losses

    (271 )   (6,074 )   11,390     (6,345 )   22,100  
                       

Net interest income after provision for credit losses

    68,684     73,754     57,299     142,438     112,327  
                       

Noninterest income:

                               

Service charges on deposit accounts

    3,328     3,353     3,400     6,681     6,958  

Other commissions and fees

    2,095     1,883     1,980     3,978     3,700  

Gain on sale of leases

    403     990         1,393      

Other-than-temporary impairment loss on covered security

    (1,115 )           (1,115 )    

Increase in cash surrender value of life insurance

    295     365     368     660     747  

FDIC loss sharing (expense) income, net

    (102 )   (3,579 )   5,316     (3,681 )   4,146  

Other income

    (33 )   250     176     217     478  
                       

Total noninterest income

    4,871     3,262     11,240     8,133     16,029  
                       

Noninterest expense:

                               

Compensation

    23,699     24,187     21,717     47,886     43,646  

Occupancy

    7,088     7,288     7,142     14,376     14,125  

Data processing

    2,258     2,280     2,129     4,538     4,604  

Other professional services

    2,378     1,770     2,505     4,148     4,801  

Business development

    581     638     595     1,219     1,164  

Communications

    626     608     834     1,234     1,693  

Insurance and assessments

    1,323     1,293     1,603     2,616     3,940  

Non-covered other real estate owned, net

    130     1,821     2,300     1,951     3,003  

Covered other real estate owned expense (income), net

    2,130     822     1,205     2,952     (1,373 )

Intangible asset amortization

    1,737     1,735     2,308     3,472     4,615  

Acquisition costs

    871     25         896      

Debt termination

        22,598         22,598      

Other expense

    4,764     3,830     4,200     8,594     7,719  
                       

Total noninterest expense

    47,585     68,895     46,538     116,480     87,937  
                       

Earnings before income taxes

    25,970     8,121     22,001     34,091     40,419  

Income tax expense

    (10,413 )   (2,857 )   (9,160 )   (13,270 )   (16,902 )
                       

Net earnings

  $ 15,557   $ 5,264   $ 12,841   $ 20,821   $ 23,517  
                       

Earnings per share:

                               

Basic

  $ 0.42   $ 0.14   $ 0.35   $ 0.57   $ 0.64  

Diluted

  $ 0.42   $ 0.14   $ 0.35   $ 0.57   $ 0.64  

Dividends declared per share

  $ 0.18   $ 0.18   $ 0.01   $ 0.36   $ 0.02  

   

See "Notes to Condensed Consolidated Financial Statements."

4


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

 
  Three Months Ended   Six Months Ended
June 30,
 
 
  June 30,
2012
  March 31,
2012
  June 30,
2011
 
 
  2012   2011  

Net earnings

  $ 15,557   $ 5,264   $ 12,841   $ 20,821   $ 23,517  

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

                               

Unrealized holding gains arising during the period

    8,185     7,409     9,974     15,594     11,154  

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

    (3,439 )   (3,111 )   (4,189 )   (6,550 )   (4,685 )

Reclassification adjustment for loss included in net earnings

    1,115             1,115      

Income tax benefit related to reclassification adjustment

    (468 )           (468 )    
                       

Other comprehensive income

    5,393     4,298     5,785     9,691     6,469  
                       

Comprehensive income

  $ 20,950   $ 9,562   $ 18,626   $ 30,512   $ 29,986  
                       

   

See "Notes to Condensed Consolidated Financial Statements."

5


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in Thousands, Except Share Data)

(Unaudited)

 
  Six Months Ended June 30, 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

                20,821             20,821  

Other comprehensive income

                        9,691     9,691  

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

    207,244     2     3,254                 3,256  

Restricted stock surrendered

    (59,269 )               (1,374 )       (1,374 )

Tax effect from vesting of restricted stock

            156                 156  

Cash dividends paid ($0.36 per share)

            (13,105 )               (13,105 )
                               

Balance, June 30, 2012

    37,402,293   $ 377   $ 1,074,996   $ (535,517 ) $ (6,702 ) $ 32,494   $ 565,648  
                               

   

See "Notes to Condensed Consolidated Financial Statements."

6


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Six Months Ended
June 30,
 
 
  2012   2011  

Cash flows from operating activities:

             

Net earnings

  $ 20,821   $ 23,517  

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

             

Depreciation and amortization

    10,730     8,732  

Provision for credit losses

    (6,345 )   22,100  

Gain on sale of other real estate owned

    (2,479 )   (4,387 )

Provision for losses on other real estate owned

    5,786     4,734  

Gain on sale of leases

    (1,393 )    

Loss (gain) on sale of premises and equipment

    160     (18 )

Other-than-temporary impairment loss on covered security

    1,115      

Restricted stock amortization

    3,256     4,392  

Tax effect included in stockholders' equity of restricted stock vesting

    (156 )   183  

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

    7,264     (5,428 )

Decrease in FDIC loss sharing asset

    18,786     13,446  

Decrease in other assets

    10,500     2,498  

Decrease in accrued interest payable and other liabilities

    (17,932 )   (5,683 )
           

Net cash provided by operating activities

    50,113     64,086  
           

Cash flows from investing activities:

             

Net cash used in acquisitions

    (42,306 )    

Net decrease in loans and leases

    204,368     275,593  

Proceeds from sale of loans and leases

    22,693     2,495  

Securities available-for-sale:

             

Proceeds from maturities and paydowns

    169,630     87,735  

Purchases

    (186,387 )   (262,173 )

Net redemptions of FHLB stock

    4,370     4,449  

Proceeds from sales of other real estate owned

    26,213     37,559  

Purchases of premises and equipment, net

    (1,827 )   (3,398 )

Proceeds from sales of premises and equipment

    691     21  
           

Net cash provided by investing activities

    197,445     142,281  
           

Cash flows from financing activities:

             

Net increase (decrease) in deposits:

             

Noninterest-bearing

    186,660     133,848  

Interest-bearing

    (172,784 )   (297,051 )

Restricted stock surrendered

    (1,374 )   (302 )

Tax effect included in stockholders' equity of restricted stock vesting

    156     (183 )

Net decrease in borrowings

    (225,220 )    

Redemption of subordinated debentures

    (18,558 )    

Repayment of acquired debt

    (175,481 )    

Cash dividends paid

    (13,105 )   (726 )
           

Net cash used in financing activities

    (419,706 )   (164,414 )
           

Net (decrease) increase in cash and cash equivalents

    (172,148 )   41,953  

Cash and cash equivalents, beginning of period

    295,617     108,552  
           

Cash and cash equivalents, end of period

  $ 123,469   $ 150,505  
           

Supplemental disclosures of cash flow information:

             

Cash paid for interest

  $ 12,778   $ 17,623  

Cash paid for income taxes

    6,229     22,315  

Loans transferred to other real estate owned

    19,721     48,513  

Goodwill resolution included in FDIC loss sharing asset

        7,636  

   

See "Notes to Condensed Consolidated Financial Statements."

7


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

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

        Pacific Western is a full-service commercial bank offering a broad range of banking products and services including: accepting demand, money market, and time deposits; originating loans, including commercial, real estate construction, SBA guaranteed and consumer loans; originating equipment finance leases; and providing other business-oriented products. Our operations are primarily located in Southern California extending from California's Central Coast to San Diego County; we also operate three banking offices in the San Francisco Bay area, a leasing operation based in Utah, and asset-based lending operations based in Arizona as well as San Jose and Santa Monica, California. The Bank focuses on conducting business with small to medium sized businesses in our marketplace and the owners and employees of those businesses. The majority of our loans are secured by the real estate collateral of such businesses. Our asset-based lending function operates in Arizona, California, Texas, Colorado, Minnesota, and the Pacific Northwest, and includes the operations of Celtic Capital Corporation, or Celtic, acquired April 3, 2012. Our equipment leasing function, added through the acquisition of Pacific Western Equipment Finance ("Equipment Finance" or "EQF") on January 3, 2012, 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 Celtic and EQF. See Note 2, Aquisitions, for more information about the Celtic and EQF acquisitions and Note 15, Subsequent Events, for information regarding the acquisition of American Perspective Bank, which closed on August 1, 2012.

    Basis of Presentation

        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.

8


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION (Continued)

    Use of Estimates

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

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

NOTE 2—ACQUISITIONS

    Marquette Equipment Finance Acquisition

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

        At January 3, 2012, EQF had $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 EQF's former parent. Pacific Western Bank repaid EQF's intercompany debt on the closing date from its excess liquidity on deposit at the Federal Reserve Bank. EQF operates as a division of Pacific Western Bank and at June 30, 2012, had $166.1 million in gross leases and leases in process outstanding.

    Celtic Capital Corporation Acquisition

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

        At April 3, 2012, Celtic had approximately $56 million in gross loans outstanding. In addition, Pacific Western Bank assumed $47 million in outstanding debt, which was repaid on the closing date. Celtic operates under the name Celtic Capital Corporation as a subsidiary of Pacific Western Bank and at June 30, 2012, had $60.6 million in gross loans outstanding.

        We completed the following acquisitions during the time period of January 1, 2012 to June 30, 2012, using the acquisition method of accounting, and accordingly, the operating results of the acquired

9


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 2—ACQUISITIONS (Continued)

entities have been included in our consolidated financial statements from their respective dates of acquisition. The balance sheets are presented at fair value as of their respective acquisition dates:

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

Assets Acquired:

             

Cash and cash equivalents

  $ 3,602   $ 7,092  

Loans and leases

    54,433     142,989  

Leases in process

        19,162  

Customer relationship intangible

    1,300     1,700  

Other intangible assets

    670     1,420  

Goodwill

    5,864     17,003  

Other assets

    421     467  
           

Total assets acquired

  $ 66,290   $ 189,833  
           

Liabilities Assumed:

             

Borrowings from parent

  $   $ 128,677  

Other borrowings

    46,804     15,839  

Accrued interest payable and other liabilities

    1,486     10,317  
           

Total liabilities assumed

  $ 48,290   $ 154,833  
           

Cash consideration paid

  $ 18,000   $ 35,000  
           

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

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

10


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

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

 
  Goodwill  
 
  (In thousands)
 

Balance, December 31, 2011

  $ 39,141  

Tax deductible addition from the EQF acquisition

    17,003  
       

Balance, March 31, 2012

    56,144  

Non tax deductible addition from the Celtic acquisition

    5,864  
       

Balance, June 30, 2012

  $ 62,008  
       

        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   Six Months Ended
June 30,
 
 
  June 30,
2012
  March 31,
2012
  June 30,
2011
 
 
  2012   2011  
 
  (In thousands)
 

Gross Amount of CDI and CRI:

                               

Balance, beginning of period

  $ 60,972   $ 67,100   $ 76,319   $ 67,100   $ 76,319  

Additions

    1,300     1,700         3,000      

Fully amortized portion

        (7,828 )   (2,690 )   (7,828 )   (2,690 )
                       

Balance, end of period

    62,272     60,972     73,629     62,272     73,629  
                       

Accumulated Amortization:

                               

Balance, beginning of period

    (43,592 )   (49,685 )   (52,783 )   (49,685 )   (50,476 )

Amortization

    (1,737 )   (1,735 )   (2,308 )   (3,472 )   (4,615 )

Fully amortized portion

        7,828     2,690     7,828     2,690  
                       

Balance, end of period

    (45,329 )   (43,592 )   (52,401 )   (45,329 )   (52,401 )
                       

Net CDI and CRI, end of period

  $ 16,943   $ 17,380   $ 21,228   $ 16,943   $ 21,228  
                       

        The aggregate amortization expense related to the intangible assets is expected to be $6.5 million for 2012. The estimated aggregate amortization expense related to these intangible assets for each of the subsequent four years is $5.1 million for 2013, $3.5 million for 2014, $3.2 million for 2015, and $1.6 million for 2016.

11


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES

    Securities Available-for-Sale

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

 
  June 30, 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

  $ 949,984   $ 39,096   $ (90 ) $ 988,990  

Government and government-sponsored entity collateralized mortgage obligations

    93,668     1,977     (40 )   95,605  

Covered private label collateralized mortgage obligations

    37,944     6,609     (500 )   44,053  

Municipal securities

    156,527     5,857     (192 )   162,192  

Corporate debt securities

    51,162     61     (204 )   51,019  

Other securities

    6,391     3,451         9,842  
                   

Total securities available-for-sale

  $ 1,295,676   $ 57,051   $ (1,026 ) $ 1,351,701  
                   

 

 
  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

12


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

obligors and/or issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

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

Due in one year or less

  $ 44,886   $ 48,219  

Due after one year through five years

    4,201     4,340  

Due after five years through ten years

    32,933     34,744  

Due after ten years

    1,213,656     1,264,398  
           

Total securities available-for-sale

  $ 1,295,676   $ 1,351,701  
           

        At June 30, 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 $1.0 billion.

        As of June 30, 2012, securities available-for-sale with an estimated fair value of $79.8 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

13


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

        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:

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

Residential mortgage-backed securities:

                                     

Government and government- sponsored entity pass through securities

  $ 29,288   $ (89 ) $ 23   $ (1 ) $ 29,311   $ (90 )

Government and government- sponsored entity collateralized mortgage obligations

    3,883     (40 )           3,883     (40 )

Covered private label collateralized mortgage obligations

    882     (77 )   6,861     (423 )   7,743     (500 )

Municipal securities

    17,674     (192 )           17,674     (192 )

Corporate debt securities

    35,936     (204 )           35,936     (204 )
                           

Total

  $ 87,663   $ (602 ) $ 6,884   $ (424 ) $ 94,547   $ (1,026 )
                           

 
  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 )
                           

14


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 4—INVESTMENT SECURITIES (Continued)

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

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

    FHLB Stock

        At June 30, 2012, the Company had a $41.7 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 June 30, 2012, and determined that it was not impaired. Our evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, the actions being taken by the FHLB to address its regulatory situation, repurchase activity of excess stock by the FHLB at its carrying value, and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

15


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES

    Non-Covered 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:

 
  June 30, 2012   December 31, 2011  
Loan Segment
  Amount   % of
Total
  Amount   % of
Total
 
 
  (In thousands)
 

Real estate mortgage

  $ 1,828,777     64 % $ 1,982,464     70 %

Real estate construction

    129,107     4 %   113,059     4 %

Commercial

    701,044     25 %   671,939     24 %

Leases(1)

    153,793     5 %        

Consumer

    17,151     1 %   23,711     1 %

Foreign

    17,017     1 %   20,932     1 %
                   

Total gross non-covered loans and leases

    2,846,889     100 %   2,812,105     100 %
                       

Less:

                         

Unearned income

    (2,598 )         (4,392 )      

Allowance for loan and lease losses

    (72,061 )         (85,313 )      
                       

Total net non-covered loans and leases

  $ 2,772,230         $ 2,722,400        
                       

(1)
Does not include leases in process of $12.3 million.

        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 June 30, 2012  
 
  Real
Estate
Mortgage
  Real
Estate
Construction
  Commercial   Leases   Consumer   Foreign   Total  
 
  (In thousands)
 

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

                                           

Balance, beginning of period

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

Charge-offs

    (2,583 )       (1,352 )       (34 )       (3,969 )

Recoveries

    43     14     190         16         263  

Provision

    2,566     (993 )   (415 )   40     (155 )   (43 )   1,000  
                               

Balance, end of period

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

16


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

 

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

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

                                           

Balance, beginning of period

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

Charge-offs

    (4,773 )       (2,223 )       (233 )       (7,229 )

Recoveries

    372     24     1,014         47     20     1,477  

Provision

    (3,568 )   (3,225 )   (120 )   498     (847 )   (238 )   (7,500 )
                               

Balance, end of period

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

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

                                           

Individually evaluated for impairment

  $ 6,221   $ 1,197   $ 6,363   $   $ 255   $   $ 14,036  
                               

Collectively evaluated for impairment

  $ 36,015   $ 4,299   $ 15,616   $ 498   $ 1,480   $ 117   $ 58,025  
                               

Non-Covered Loan and Lease Balances:

                                           

Ending balance

  $ 1,828,777   $ 129,107   $ 701,044   $ 153,793   $ 17,151   $ 17,017   $ 2,846,889  
                               

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

                                           

Individually evaluated for impairment

  $ 102,265   $ 32,607   $ 20,983   $ 244   $ 479   $   $ 156,578  
                               

Collectively evaluated for impairment

  $ 1,726,512   $ 96,500   $ 680,061   $ 153,549   $ 16,672   $ 17,017   $ 2,690,311  
                               

 

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

Allowance for Loan Losses on Non-Covered Loans:

                                     

Balance, beginning of period

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

Charge-offs

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

Recoveries

    27     896     308     890     13     2,134  

Provision

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

Balance, end of period

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

17


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

 

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

Allowance for Loan Losses on Non-Covered Loans:

                                     

Balance, beginning of period

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

Charge-offs

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

Recoveries

    124     988     925     1,301     45     3,383  

Provision

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

Balance, end of period

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

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

                                     

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Non-Covered Loan Balances:

                                     

Ending balance

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

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

                                     

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

        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

18


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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.

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

Real estate mortgage:

                                     

Hospitality

  $ 118,534   $ 19,087   $ 137,621   $ 123,071   $ 21,331   $ 144,402  

SBA 504

    50,041     6,684     56,725     51,522     6,855     58,377  

Other

    1,577,843     56,588     1,634,431     1,690,830     88,855     1,779,685  
                           

Total real estate mortgage

    1,746,418     82,359     1,828,777     1,865,423     117,041     1,982,464  
                           

Real estate construction:

                                     

Residential

    28,365     2,888     31,253     14,743     2,926     17,669  

Commercial

    78,869     18,985     97,854     64,667     30,723     95,390  
                           

Total real estate construction

    107,234     21,873     129,107     79,410     33,649     113,059  
                           

Commercial:

                                     

Collateralized

    354,370     16,487     370,857     395,041     18,979     414,020  

Unsecured

    73,142     2,902     76,044     75,017     3,920     78,937  

Asset-based

    226,278     1,801     228,079     149,947     40     149,987  

SBA 7(a)

    16,175     9,889     26,064     18,045     10,950     28,995  
                           

Total commercial

    669,965     31,079     701,044     638,050     33,889     671,939  
                           

Leases

    150,124     3,669     153,793              

Consumer

    16,221     930     17,151     22,730     981     23,711  

Foreign

    17,017         17,017     20,932         20,932  
                           

Total non-covered loans and leases

  $ 2,706,979   $ 139,910   $ 2,846,889   $ 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.

19


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

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

Real estate mortgage:

                                     

Hospitality

  $   $   $ 6,200   $ 6,200   $ 131,421   $ 137,621  

SBA 504

    2,948         1,044     3,992     52,733     56,725  

Other

    2,621     1,996     4,972     9,589     1,624,842     1,634,431  
                           

Total real estate mortgage

    5,569     1,996     12,216     19,781     1,808,996     1,828,777  
                           

Real estate construction:

                                     

Residential

                    31,253     31,253  

Commercial

                    97,854     97,854  
                           

Total real estate construction

                    129,107     129,107  
                           

Commercial:

                                     

Collateralized

    310         2,005     2,315     368,542     370,857  

Unsecured

            247     247     75,797     76,044  

Asset-based

                    228,079     228,079  

SBA 7(a)

    933     598     2,952     4,483     21,581     26,064  
                           

Total commercial

    1,243     598     5,204     7,045     693,999     701,044  
                           

Leases

    148             148     153,645     153,793  

Consumer

    216         52     268     16,883     17,151  

Foreign

                    17,017     17,017  
                           

Total non-covered loans and leases

  $ 7,176   $ 2,594   $ 17,472   $ 27,242   $ 2,819,647   $ 2,846,889  
                           

        At June 30, 2012 and December 31, 2011, the Company had no non-covered loans and leases that were greater than 90 days past due and still accruing interest. It is the Company's policy to discontinue accruing interest when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to the collectibility of a loan or lease in the normal course of business. At June 30, 2012, nonaccrual loans and leases totaled $52.8 million. Nonaccrual loans and leases include $3.3 million of loans 30 to 89 days past due and $32.0 million of current loans and leases which have been placed on nonaccrual status based on management's judgment regarding the collectibility of such loans and leases.

20


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

Real estate mortgage:

                                     

Hospitality

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

SBA 504

    718         842     1,560     56,817     58,377  

Other

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

Total real estate mortgage

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

Real estate construction:

                                     

Residential

        475         475     17,194     17,669  

Commercial

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

Total real estate construction

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

Commercial:

                                     

Collateralized

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

Unsecured

    4         151     155     78,782     78,937  

Asset-based

                    149,987     149,987  

SBA 7(a)

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

Total commercial

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

Consumer

    72     40     17     129     23,582     23,711  

Foreign

                    20,932     20,932  
                           

Total non-covered loans

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

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

21


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

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

Real estate mortgage:

                                     

Hospitality

  $ 13,279   $ 124,342   $ 137,621   $ 7,251   $ 137,151   $ 144,402  

SBA 504

    1,873     54,852     56,725     2,800     55,577     58,377  

Other

    14,548     1,619,883     1,634,431     21,286     1,758,399     1,779,685  
                           

Total real estate mortgage

    29,700     1,799,077     1,828,777     31,337     1,951,127     1,982,464  
                           

Real estate construction:

                                     

Residential

    1,069     30,184     31,253     1,086     16,583     17,669  

Commercial

    4,453     93,401     97,854     6,194     89,196     95,390  
                           

Total real estate construction

    5,522     123,585     129,107     7,280     105,779     113,059  
                           

Commercial:

                                     

Collateralized

    7,258     363,599     370,857     8,186     405,834     414,020  

Unsecured

    2,554     73,490     76,044     3,057     75,880     78,937  

Asset-based

    176     227,903     228,079     14     149,973     149,987  

SBA 7(a)

    6,830     19,234     26,064     7,801     21,194     28,995  
                           

Total commercial

    16,818     684,226     701,044     19,058     652,881     671,939  
                           

Leases

    244     153,549     153,793              

Consumer

    479     16,672     17,151     585     23,126     23,711  

Foreign

        17,017     17,017         20,932     20,932  
                           

Total non-covered loans and leases

  $ 52,763   $ 2,794,126   $ 2,846,889   $ 58,260   $ 2,753,845   $ 2,812,105  
                           

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

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

Real estate mortgage

  $ 29,700   $ 72,565   $ 102,265   $ 31,337   $ 87,484   $ 118,821  

Real estate construction

    5,522     27,085     32,607     7,280     24,512     31,792  

Commercial

    16,818     4,165     20,983     19,058     4,652     23,710  

Leases

    244         244              

Consumer

    479         479     585     143     728  
                           

Total

  $ 52,763   $ 103,815   $ 156,578   $ 58,260   $ 116,791   $ 175,051  
                           

22


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 for the dates indicated:

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

With An Allowance Recorded:

                                     

Real estate mortgage:

                                     

Hospitality

  $ 9,144   $ 9,658   $ 2,788   $ 17,548   $ 17,890   $ 4,369  

SBA 504

    563     563     193     1,147     1,245     206  

Other

    55,115     55,483     3,240     78,349     81,921     6,919  

Real estate construction:

                                     

Residential

    1,289     1,311     222     2,766     2,776     409  

Commercial

    13,528     13,636     975     12,477     12,520     1,664  

Commercial:

                                     

Collateralized

    4,243     4,534     3,809     5,515     5,741     3,901  

Unsecured

    2,352     3,019     2,110     2,864     3,061     2,513  

SBA 7(a)

    2,666     2,764     444     3,397     3,428     379  

Consumer

    276     309     255     433     459     413  

With No Related Allowance Recorded:

                                     

Real estate mortgage:

                                     

Hospitality

  $ 6,200   $ 7,245   $   $   $   $  

SBA 504

    1,873     2,700         2,262     3,007      

Other

    29,370     34,753         19,515     22,999      

Real estate construction:

                                     

Residential

    778     778         611     611      

Commercial

    17,012     20,118         15,938     19,536      

Commercial:

                                     

Collateralized

    5,131     5,380         4,759     4,927      

Unsecured

    636     731         643     716      

Asset-based

    176     176         14     14      

SBA 7(a)

    5,779     8,096         6,518     8,181      

Leases

    244     244                  

Consumer

    203     271         295     351      

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

                                     

Real estate mortgage

  $ 102,265   $ 110,402   $ 6,221   $ 118,821   $ 127,062   $ 11,494  

Real estate construction

    32,607     35,843     1,197     31,792     35,443     2,073  

Commercial

    20,983     24,700     6,363     23,710     26,068     6,793  

Leases

    244     244                  

Consumer

    479     580     255     728     810     413  
                           

Total

  $ 156,578   $ 171,769   $ 14,036   $ 175,051   $ 189,383   $ 20,773  
                           

23


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

With An Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $ 9,144   $ 107   $ 17,749   $ 127  

SBA 504

    563     7     206     1  

Other

    54,310     545     38,411     161  

Real estate construction:

                         

Residential

    1,289     6     2,076     13  

Commercial

    13,528     131     14,555     38  

Commercial:

                         

Collateralized

    4,101     29     4,295     3  

Unsecured

    2,348     39     6,312     4  

SBA 7(a)

    2,666     49     2,083     6  

Consumer

    276     4     34      

With No Related Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $ 6,200   $ (70 ) $   $  

SBA 504

    1,873     29     3,304      

Other

    29,371     163     21,650     244  

Real estate construction:

                         

Residential

    778     17     617      

Commercial

    16,187     166     8,821     45  

Commercial:

                         

Collateralized

    5,075     73     1,973     (1 )

Unsecured

    636     10     670      

Asset-based

    174         15      

SBA 7(a)

    5,686     272     5,062     6  

Leases

    244              

Consumer

    203     5     688      

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

                         

Real estate mortgage

  $ 101,461   $ 781   $ 81,320   $ 533  

Real estate construction

    31,782     320     26,069     96  

Commercial

    20,686     472     20,410     18  

Leases

    244              

Consumer

    479     9     722      
                   

Total

  $ 154,652   $ 1,582   $ 128,521   $ 647  
                   

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

24


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

With An Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $ 9,144   $ 208   $ 17,448   $ 176  

SBA 504

    352     5     103     2  

Other

    52,640     1,068     29,382     249  

Real estate construction:

                         

Residential

    1,289     16     2,076     18  

Commercial

    13,528     270     10,260     56  

Commercial:

                         

Collateralized

    3,803     70     3,816     11  

Unsecured

    2,341     80     6,283     6  

SBA 7(a)

    2,652     74     1,994     8  

Consumer

    276     8     34      

With No Related Allowance Recorded:

                         

Real estate mortgage:

                         

Hospitality

  $ 6,200   $ 47   $   $  

SBA 504

    1,873     79     3,304      

Other

    28,874     854     20,501     251  

Real estate construction:

                         

Residential

    778     33     617      

Commercial

    15,878     331     8,821     60  

Commercial:

                         

Collateralized

    4,974     135     1,855      

Unsecured

    636     18     668      

Asset-based

    87     2     15      

SBA 7(a)

    5,670     403     4,944     8  

Leases

    203              

Consumer

    203     12     652      

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

                         

Real estate mortgage

  $ 99,083   $ 2,261   $ 70,738   $ 678  

Real estate construction

    31,473     650     21,774     134  

Commercial

    20,163     782     19,575     33  

Leases

    203              

Consumer

    479     20     686      
                   

Total

  $ 151,401   $ 3,713   $ 112,773   $ 845  
                   

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

25


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

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

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

Troubled Debt Restructurings:

                                     

Real estate mortgage:

                                     

SBA 504

      $   $     1   $ 563   $ 563  

Real estate construction:

                                     

Commercial

    1     1,446     1,446     1     1,446     1,446  

Commercial:

                                     

Collateralized

    3     568     568     5     1,174     1,174  

Unsecured

    2     23     23     3     38     38  

SBA 7(a)

    1     120     120     2     229     229  
                           

Total

    7   $ 2,157   $ 2,157     12   $ 3,450   $ 3,450  
                           

 

 
  Three Months Ended
June 30, 2012
  Six Months Ended
June 30, 2012
 
 
  Number of
Loans
  Recorded
Investment(1)
  Number of
Loans
  Recorded
Investment(1)
 
 
  (Dollars in thousands)
 

Troubled Debt Restructurings That Subsequently Defaulted(2):

                         

Real estate mortgage:

                         

Hospitality

    1   $ 6,200     1   $ 6,200  

Other

            1     1,725  

Commercial:

                         

Collateralized

    7     828     7     828  

Unsecured

    2     99     2     99  

SBA 7(a)

    3     1,987     4     2,021  
                   

Total

    13   $ 9,114     15   $ 10,873  
                   

(1)
Represents the balance at June 30, 2012 and is net of charge-offs of $531,000 and $855,000 for the three months and six months ended June 30, 2012.

(2)
The population of defaulted restructured loans for the period indicated includes only those loans restructured during the preceding 12-month period. The table excludes defaulted troubled debt restructurings in those classes for which the recorded investment was zero at June 30, 2012.

26


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

    Covered Loans

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

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

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

Real estate mortgage:

                         

Hospitality

  $ 2,916       $ 2,944      

Other

    648,081     93 %   733,414     91 %
                   

Total real estate mortgage

    650,997     93 %   736,358     91 %
                   

Real estate construction:

                         

Residential

    7,658     1 %   21,521     3 %

Commercial

    24,467     3 %   25,397     3 %
                   

Total real estate construction

    32,125     4 %   46,918     6 %
                   

Commercial:

                         

Collateralized

    18,229     3 %   24,808     3 %

Unsecured

    725         802      
                   

Total commercial

    18,954     3 %   25,610     3 %
                   

Consumer

    659         735      
                   

Total gross covered loans

    702,735     100 %   809,621     100 %
                       

Discount

    (62,323 )         (75,323 )      

Allowance for loan losses

    (31,463 )         (31,275 )      
                       

Covered loans, net

  $ 608,949         $ 703,023        
                       

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

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

Balance, December 31, 2011

  $ 677,014   $ (259,265 )

Accretion

    26,246     26,246  

Payments received

    (116,376 )    

Decrease in expected cash flows, net

        13,148  

Provision for credit losses

    (3,656 )    
           

Balance, June 30, 2012

  $ 583,228   $ (219,871 )
           

27


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 5—LOANS AND LEASES (Continued)

        The table above excludes the covered loans from the Los Padres acquisition which are accounted for as non-impaired loans and totaled $25.7 million and $26.0 million at June 30, 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.

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

Real estate mortgage

  $ 389,585   $ 175,801   $ 565,386   $ 478,119   $ 163,768   $ 641,887  

Real estate construction

    5,626     22,032     27,658     5,762     35,337     41,099  

Commercial

    7,969     7,279     15,248     11,076     8,221     19,297  

Consumer

    132     525     657     178     562     740  
                           

Total covered loans, net

  $ 403,312   $ 205,637   $ 608,949   $ 495,135   $ 207,888   $ 703,023  
                           

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

NOTE 6—OTHER REAL ESTATE OWNED (OREO)

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

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

Commercial real estate

  $ 17,630   $ 17,896   $ 35,526   $ 23,003   $ 15,053   $ 38,056  

Construction and land development

    24,112     10,011     34,123     24,788     15,461     40,249  

Single family residence

        3,183     3,183     621     2,992     3,613  
                           

Total OREO, net

  $ 41,742   $ 31,090   $ 72,832   $ 48,412   $ 33,506   $ 81,918  
                           

28


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

OREO Activity:

                   

Balance, December 31, 2011

  $ 48,412   $ 33,506   $ 81,918  

Foreclosures

    1,839     7,241     9,080  

Payments to third parties(1)

    622         622  

Provision for losses

    (752 )   (2,229 )   (2,981 )

Reductions related to sales

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

Balance, March 31, 2012

    46,206     29,888     76,094  

Foreclosures

    684     9,957     10,641  

Payments to third parties(1)

    91         91  

Provision for losses

    (101 )   (2,704 )   (2,805 )

Reductions related to sales

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

Balance, June 30, 2012

  $ 41,742   $ 31,090   $ 72,832  
               

(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 to be received 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

    6,514  

Cash received from FDIC

    (18,196 )

Net amortization

    (7,104 )
       

Balance, June 30, 2012

  $ 76,401  
       

NOTE 8—BORROWINGS, SUBORDINATED DEBENTURES AND BROKERED DEPOSITS

    Debt Termination Expense—FHLB Advances and Subordinated Debentures

        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

29


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

million in fixed-rate subordinated debentures. 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 subordinated debentures were composed of a $10.3 million debenture, due in March 2030 and bearing a fixed rate of 11.00%, which was referred to as "Trust CI," and an $8.3 million debenture due in September 2030 and bearing a fixed rate of 10.6%, which was referred to as "Trust I."

    Borrowings

        As of June 30, 2012, there were no outstanding FHLB advances. Our aggregate remaining borrowing capacity under the FHLB secured lines of credit was $1.2 billion at June 30, 2012. As of June 30, 2012, our FHLB advances facility was secured by all of our loans and leases under a blanket lien, in addition to securities with a carrying value of $25.3 million. Additionally, the Bank had secured borrowing capacity from the Federal Reserve discount window of $337.1 million at June 30, 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 $15.5 million of non-recourse debt, in which the payment stream of certain leases have been sold to third parties. The debt is secured by the equipment in the leases and all interest rates are fixed. As of June 30, 2012, the weighted average interest rate of the debt was 6.72% with a weighted average remaining maturity of 2.84 years.

    Subordinated Debentures

        The following table summarizes the terms of each issuance of the subordinated debentures outstanding as of June 30, 2012:

Series
  June 30,
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 %   9/14/12  

Trust VI

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

Trust CII

    5,155     9/17/03     9/17/33   3 month LIBOR + 2.95     3.42 %   9/14/12  

Trust VII

    61,856     2/5/04     4/23/34   3 month LIBOR + 2.75     3.20 %   10/26/12  

Trust CIII

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

Total subordinated debentures

  $ 108,250                              
                                   

(1)
As of July 26, 2012.

        The Company had an aggregate amount of $108.3 million in subordinated debentures outstanding at June 30, 2012. These subordinated debentures were issued in five separate series. Each issuance had

30


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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 June 30, 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 June 30, 2012, the amount of trust preferred securities included in Tier I capital was $105.0 million. While our existing trust preferred securities are currently grandfathered as Tier 1 capital under the Dodd-Frank Wall Street Reform and Consumer Protection Act, proposed regulatory capital guidelines would phase them out of Tier 1 capital over a period of 10 years, until they are fully-phased out on January 1, 2022. New issuances of trust preferred securities will not qualify as Tier 1 capital. We remain "well capitalized" excluding the trust preferred securities as Tier 1 capital.

        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

        Brokered deposits totaled $35.6 million at June 30, 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

    Lending Commitments

        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.

31


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 9—COMMITMENTS AND CONTINGENCIES (Continued)

        Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to extend credit totaled $709.8 million and $691.5 million at June 30, 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 $29.5 million and $32.0 million at June 30, 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 June 30, 2012, the Company had commitments to contribute capital to these entities totaling $15.6 million.

    Legal Matters

        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:

    Level 1:    Quoted prices (unadjusted) for identical assets or liabilities in active markets.

    Level 2:    Observable inputs other than Level 1, including quoted prices for similar assets and liabilities in active markets, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data, either directly or indirectly, for substantially the full term of the financial instrument. This category generally includes U.S. government and agency securities.

    Level 3:    Inputs to a valuation methodology that are unobservable, supported by little or no market activity, and significant to the fair value measurement. These valuation methodologies generally include pricing models, discounted cash flow models, or a determination of fair value that requires significant management judgment or estimation. This category includes our covered

32


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

NOTE 10—FAIR VALUE MEASUREMENTS (Continued)

      private label collateralized mortgage obligations ("CMOs"), which we refer to as private label CMOs.

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

        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 June 30, 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

  $ 1,084,595   $   $ 1,084,595   $  

Covered private label CMOs

    44,053             44,053  

Municipal securities

    162,192         162,192      

Corporate securities

    51,019         51,019      

Other securities

    9,842     8,068     1,774      
                   

  $ 1,351,701   $ 8,068   $ 1,299,580   $ 44,053  
                   

        There were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for assets measured on a recurring basis during the six months ended June 30, 2012.

        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 June 30, 2012:

Unobservable Inputs
  Range of Inputs   Weighted
Average
Input
 

Voluntary prepayment speeds

  1.5% - 31.6%     8.6 %

Monthly default rates

  0.1% - 18.4%     3.5 %

Loss severity rates

  9.2% - 81.6%     46.3 %

Discount rates

  2.7% - 13.3%     7.0 %

33


Table of Contents


PACWEST BANCORP AND SUBSIDIARIES

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)
 

Balance, December 31, 2011

  $ 45,149  

Total realized in earnings(1)

    214