Forward-Looking Information

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

º •
º lower than expected revenues;

º •
º credit quality deterioration or pronounced and sustained reduction in real estate market values could cause an increase in the allowance for credit losses and a reduction in earnings;

º •
º increased competitive pressure among depository institutions;

º •
º the Company's ability to complete future acquisitions and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all;

º •
º the possibility that personnel changes will not proceed as planned;

º •
º the cost of additional capital is more than expected;

º •
º a change in the interest rate environment reduces interest margins;

º •
º asset/liability repricing risks and liquidity risks;

º •
º pending legal matters may take longer or cost more to resolve or may be resolved adversely to the Company;

º •
º general economic conditions, either nationally or in the market areas in which the Company does or anticipates doing business, are less favorable than expected;

º •
º environmental conditions, including natural disasters, may disrupt our business, impede our operations, negatively impact the values of collateral securing the Company's loans or impair the ability of our borrowers to support their debt obligations;

º •
º the economic and regulatory effects of the continuing war on terrorism and other events of war, including the conflicts and uncertainties in the Middle East;

º •
º legislative or regulatory requirements or changes adversely affecting the Company's business;

º •
º changes in the securities markets; and

º •
º regulatory approvals for any capital activities cannot be obtained on the terms expected or on the anticipated schedule.

Overview

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

Pacific Western is a full-service 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 (formerly Marquette Equipment Finance), and which we refer to as Equipment Finance, or EQF, on January 3, 2012, has lease receivables in 45 states.

Pacific Western competes actively for deposits, and emphasizes solicitation of noninterest-bearing deposits. In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin, as net interest income, on a year-to-date basis, accounted for 94% of our net revenues (net interest income plus noninterest income).

Total assets decreased $126.5 million, or 2.3%, during the second quarter due to lower balances in cash and cash equivalents, securities available-for-sale, loans and leases, and other assets. During the second quarter, cash and cash equivalents declined $10.3 million, including the use of $65 million to buy Celtic and repay its assumed debt. Securities available-for-sale decreased $29.2 million due mostly to paydowns, net of purchases of $50.3 million. The non-covered gross loan and lease portfolio declined $21.3 million. However, excluding the loans gained in the Celtic acquisition, non-covered gross loans declined $81.9 million; such decline is centered in the real estate mortgage and other commercial loan portfolios. The covered loan portfolio declined $51.3 million due to repayments and resolution activities. At June 30, 2012, non-covered gross loans and leases totaled $2.8 billion and the covered loan portfolio was $608.9 million.

Total liabilities declined $142.5 million during the second quarter due primarily to lower borrowings. Borrowings declined $177.6 million during the second quarter due to the payoff of overnight FHLB advances. At June 30, 2012, there were no FHLB advances outstanding. Total deposits increased $34.7 million during the second quarter to $4.6 billion at June 30, 2012. Core deposits increased $90.2 million due to an increase of $86.8 million in noninterest-bearing demand deposits. Time deposits decreased $55.5 million during the second quarter to $865.0 million at June 30, 2012. At June 30, 2012, core deposits totaled $3.7 billion, or 81% of total deposits at that date, and noninterest-bearing demand deposits were $1.9 billion, or 41% of total deposits at that date.

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 acquired all of the capital stock of Celtic for $18 million in cash. In addition, the Bank assumed $47 million in outstanding debt, which was repaid on the closing date. At June 30, 2012, Celtic's loan portfolio totaled $60.6 million. The acquisition diversified the Company's loan portfolio, expanded the Company's product lines, and deployed excess liquidity into higher yielding assets. Celtic is operating under the name Celtic Capital Corporation as a subsidiary of Pacific Western Bank.

American Perspective Bank Acquisition

On August 1, 2012, Pacific Western Bank completed the acquisition of American Perspective Bank ("APB") located in San Luis Obispo, California. Pacific Western Bank acquired all of the capital stock of APB for $58.1 million in cash, or $13.00 per share for each share of common stock of APB.

At June 30, 2012, APB had $271.0 million in assets, two operating branches located in San Luis Obispo and Santa Maria, California, and a loan production office located in Paso Robles, California. APB serves small-to-medium sized businesses and professionals through those locations. This acquisition is expected to strengthen the Company's presence in the Central Coast region and the loan production office is expected to provide opportunity for expansion and additional growth in that region.

Sale of Branches

On July 9, 2012, the Company announced that Pacific Western and Opus Bank had entered into a definitive agreement whereby Pacific Western will sell 10 branches to Opus Bank. The branches are located in Los Angeles, San Bernardino, Riverside, and San Diego Counties.

The transaction will result in the transfer of deposits to Opus Bank in exchange for a blended deposit premium of 2.5% applied to the deposit balances transferred at closing. The deposits of the offices to be sold total approximately $145 million at June 30, 2012. Although certain other immaterial assets related to the branches will be included in the transaction, no loans will be transferred. The transaction is expected to be completed before the end of the year subject to regulatory approval and other customary terms. Although the sale of these branches will not result in any material gain, the annual cost savings, representing noninterest expense less noninterest income, are estimated to be $2.0 million after tax.

Key Performance Indicators

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

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

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

We generally seek new lending opportunities in the $500,000 to $15 million range, try to limit loan maturities for commercial loans to one year, for construction loans up to 18 months, and for commercial real estate loans up to ten years, and to price lending products so as to preserve our interest spread and net interest margin. We sometimes encounter strong competition in pursuing lending opportunities such that potential borrowers obtain loans elsewhere at lower rates than those we offer. Our ability to make new loans is dependent on economic factors in our market area, borrower

qualifications, competition, and liquidity, among other items. Loan growth remains tepid, as new loan volume is not replacing maturities. We attribute this to the competition for new and maturing loans from money center banks, regional banks and community banks that operate in our market areas. Such competition centers on unreasonably low interest rates and unrestrictive loan terms. Excluding acquired loans, during the second quarter gross loans declined $81.9 million. We continue to retain, however, maturing lending relationships that contribute positively to our profitability and net interest margin, and selectively add new loans that meet our credit and pricing standards.

We have expanded our commercial loan and lease portfolio through the January 3, 2012 acquisition of Pacific Western Equipment Finance, an equipment leasing provider, and the April 3, 2012 acquisition of Celtic, an asset-based lender. As of June 30, 2012, Equipment Finance had $153.8 million of leases and $12.3 million of leases in process, and Celtic had $60.6 million in gross loans.

We stress credit quality in originating and monitoring the loans we make and measure our success by the levels of our nonperforming assets, net charge-offs and allowance for credit losses. We maintain an allowance for credit losses on non-covered loans and leases which is the sum of our allowance for loan and lease losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off balance sheet credit exposure. Loans and leases which are deemed uncollectible are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the non-covered loan and lease portfolio was based on our allowance methodology and reflected net charge-offs, the levels and trends of nonaccrual and classified loans, and the migration of loans into various risk classifications. A provision for credit losses on the covered loan portfolio may be recorded to reflect decreases in expected cash flows on covered loans compared to those previously estimated.

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

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

During the three months ended March 31, 2012, the Company incurred $22.6 million of debt termination expense in connection with the repayment of FHLB advances and the early redemption of subordinated debentures; there was no similar debt termination expense in any other quarterly period presented. See calculations in "Results of Operations-Non-GAAP Measurements" contained herein.

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

                                           Base        Adjusted
                                        Efficiency    Efficiency
                   Three Months Ended      Ratio         Ratio
                   June 30, 2012               64.9 %        60.8 %
                   March 31, 2012              97.1 %        58.6 %
                   December 31, 2011           60.4 %        59.9 %
                   September 30, 2011          67.9 %        58.7 %
                   June 30, 2011               58.2 %        57.7 %

The base efficiency ratio fluctuations shown in the above table result mostly from the volatility of FDIC loss sharing income (expense) and OREO expenses and, for the second quarter of 2012, from an other-than-temporary impairment loss on a covered security, and for the first quarter of 2012, from the debt termination expense. The adjusted efficiency ratio eliminates (a) the volatility of FDIC loss sharing income (expense) and OREO expenses and (b) an other-than-temporary impairment loss on a covered security and debt termination expense and shows the trend in overhead-related noninterest expense relative to net revenues. See "Results of Operations-Non-GAAP Measurements" for the calculations of the base and adjusted efficiency ratios.

Critical Accounting Policies

The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses and the carrying values of intangible assets and deferred income tax assets. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Certain discussion in this Form 10-Q contains non-GAAP financial disclosures for tangible common equity, adjusted earnings before income taxes, and adjusted efficiency ratios. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. Given the use of tangible common equity amounts and ratio is prevalent among banking regulators, investors and analysts, we disclose our tangible common equity ratio in addition to the equity-to-assets ratio. Also, as analysts and investors view adjusted earnings before income taxes as an indicator of the Company's ability to absorb credit losses, we disclose this amount in addition to net earnings. The methodology of determining tangible common equity and adjusted earnings before income taxes may differ among companies. We disclose the adjusted efficiency ratio as it eliminates (a) the volatility of FDIC loss sharing income and OREO expenses and (b) an other-than-temporary impairment loss on a covered security recognized in the second quarter of 2012 and debt termination expense recognized in the first quarter of 2012 from the base efficiency ratio and shows the trend in overhead-related noninterest expense relative to net revenues.

These non-GAAP financial measures are presented for supplemental informational purposes only for understanding the Company's operating results and should not be considered a substitute for financial information presented in accordance with United States generally accepted accounting principles ("GAAP"). The following table presents performance amounts and ratios in accordance with

GAAP and a reconciliation of the non-GAAP financial measurements to the GAAP financial measurements.

                                                        Three Months Ended              Six Months Ended
                                                June 30,     March 31,    June 30,          June 30,
Adjusted Earnings Before Income Taxes             2012         2012         2011        2012        2011
                                                                      (In thousands)
Net earnings                                     $ 15,557    $    5,264    $ 12,841    $ 20,821   $ 23,517
Plus:   Total provision for credit losses            (271 )      (6,074 )    11,390      (6,345 )   22,100
        Non-covered OREO expense, net                 130         1,821       2,300       1,951      3,003
        Covered OREO expense (income), net          2,130           822       1,205       2,952     (1,373 )
        Other-than-temporary impairment loss
        on covered security                         1,115             -           -       1,115          -
        Debt termination expense                        -        22,598           -      22,598          -
        Income tax expense                         10,413         2,857       9,160      13,270     16,902
Less:   FDIC loss sharing income (expense),
        net                                          (102 )      (3,579 )     5,316      (3,681 )    4,146

        Adjusted earnings before income taxes    $ 29,176    $   30,867    $ 31,580    $ 60,043   $ 60,003

                                            Three Months Ended              Six Months Ended
                                    June 30,     March 31,    June 30,          June 30,
Adjusted Efficiency Ratio             2012         2012         2011        2012        2011
                                                      (Dollars in thousands)
Noninterest expense                  $ 47,585    $   68,895    $ 46,538   $ 116,480   $  87,937
Less:   Non-covered OREO expense          130         1,821       2,300       1,951       3,003
        Covered OREO expense
        (income), net                   2,130           822       1,205       2,952      (1,373 )
        Debt termination expense            -        22,598           -      22,598           -

        Adjusted noninterest
        expense                      $ 45,325    $   43,654    $ 43,033   $  88,979   $  86,307

Net interest income                  $ 68,413    $   67,680    $ 68,689   $ 136,093   $ 134,427
Noninterest income                      4,871         3,262      11,240       8,133      16,029

        Net revenues                   73,284        70,942      79,929     144,226     150,456
Less:   FDIC loss sharing income
        (expense), net                   (102 )      (3,579 )     5,316      (3,681 )     4,146
        Other-than-temporary
        impairment loss on
        covered security               (1,115 )           -           -      (1,115 )         -

        Adjusted net revenues        $ 74,501    $   74,521    $ 74,613   $ 149,022   $ 146,310

Base efficiency ratio(1)                 64.9 %        97.1 %      58.2 %      80.8 %      58.4 %
Adjusted efficiency ratio(2)             60.8 %        58.6 %      57.7 %      59.7 %      59.0 %


--------------------------------------------------------------------------------
   º (1)

º (2)
º Adjusted noninterest expense divided by adjusted net revenues.

                                              June 30,      March 31,     December 31,
  Tangible Common Equity                        2012           2012           2011
                                                      (Dollars in thousands)
  PacWest Bancorp Consolidated:
  Stockholders' equity                      $    565,648   $    549,645    $    546,203
  Less:   Intangible assets                       78,951         73,524          56,556

          Tangible common equity            $    486,697   $    476,121    $    489,647

  Total assets                              $  5,321,622   $  5,448,108    $  5,528,237
  Less:   Intangible assets                       78,951         73,524          56,556

          Tangible assets                   $  5,242,671   $  5,374,584    $  5,471,681

          Equity to assets ratio                   10.63 %        10.09 %          9.88 %
          Tangible common equity ratio(1)           9.28 %         8.86 %          8.95 %
  Book value per share                      $      15.12   $      14.74    $      14.66
  Tangible book value per share             $      13.01   $      12.77    $      13.14
  Shares outstanding                          37,402,293     37,298,138      37,254,318
  Pacific Western Bank:
  Stockholders' equity                      $    642,553   $    627,792    $    625,494
  Less:   Intangible assets                       78,951         73,524          56,556

          Tangible common equity            $    563,602   $    554,268    $    568,938

  Total assets                              $  5,305,170   $  5,430,107    $  5,512,025
  Less:   Intangible assets                       78,951         73,524          56,556

          Tangible assets                   $  5,226,219   $  5,356,583    $  5,455,469

          Equity to assets ratio                   12.11 %        11.56 %         11.35 %
          Tangible common equity ratio(1)          10.78 %        10.35 %         10.43 %


--------------------------------------------------------------------------------
   º (1)

     Earnings Performance

    Summarized financial information for the periods indicated are as follows:

                                          Three Months Ended              Six Months Ended
                                  June 30,    March 31,    June 30,           June 30,
                                    2012         2012        2011         2012        2011
                                         (Dollars in thousands, except per share data)
Earnings Summary:
Interest income                   $  72,890    $  74,400   $  77,196   $  147,290   $ 151,853
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                         271        6,074     (11,390 )      6,345     (22,100 )

FDIC loss sharing income
(expense), net                         (102 )     (3,579 )     5,316       (3,681 )     4,146
Other-than-temporary impairment
loss on covered security             (1,115 )          -           -       (1,115 )         -
Other noninterest income              6,088        6,841       5,924       12,929      11,883

Total noninterest income              4,871        3,262      11,240        8,133      16,029

Non-covered OREO costs, net            (130 )     (1,821 )    (2,300 )     (1,951 )    (3,003 )
Covered OREO costs, net              (2,130 )       (822 )    (1,205 )     (2,952 )     1,373
Debt termination expense                  -      (22,598 )         -      (22,598 )         -
Other noninterest expense           (45,325 )    (43,654 )   (43,033 )    (88,979 )   (86,307 )

Total noninterest expense           (47,585 )    (68,895 )   (46,538 )   (116,480 )   (87,937 )

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
. . .