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Loan and Lease Finance Receivables and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2012

Allowance for Credit Losses and Loans & Lease Real Estate Owned (Non-Covered Loans) [Abstract]

LOAN AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

6.	LOAN AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

The following is a summary of the components of loan and lease finance receivables:


	As of June 30, 2012
	Non-Covered Loans			Covered Loans			Total
	(Dollars in thousands)
Commercial and Industrial	$	523,816		$	22,914		$	546,730
Real Estate:
Construction		68,312			6,448			74,760
Commercial Real Estate		1,965,011			201,765			2,166,776
SFR Mortgage		159,633			1,891			161,524
Consumer		48,460			7,214			55,674
Municipal lease finance receivables		109,816			—			109,816
Auto and equipment leases, net of unearned discount		15,137			—			15,137
Dairy and Livestock		281,027			—			281,027
Agribusiness		9,403			6,417			15,820

Gross loans	$	3,180,615		$	246,649		$	3,427,264
Less:
Purchase accounting discount		—			(36,502	)		(36,502	)
Deferred loan fees, net		(5,707	)		—			(5,707	)

Gross loans, net of deferred loan fees	$	3,174,908		$	210,147		$	3,385,055
Less: Allowance for credit losses		(91,892	)		—			(91,892	)

Net loans and lease finance receivables	$	3,083,016		$	210,147		$	3,293,163


	As of December 31, 2011
	Non-Covered Loans			Covered Loans			Total
	(Dollars in thousands)
Commercial and Industrial	$	494,299		$	29,651		$	523,950
Real Estate:
Construction		76,146			18,685			94,831
Commercial Real Estate		1,948,292			223,107			2,171,399
SFR Mortgage		176,442			3,289			179,731
Consumer		51,436			8,353			59,789
Municipal lease finance receivables		113,460			169			113,629
Auto and equipment leases, net of unearned discount		17,370			—			17,370
Dairy and Livestock		343,350			199			343,549
Agribusiness		4,327			24,196			28,523

Gross loans	$	3,225,122		$	307,649		$	3,532,771
Less:
Purchase accounting discount		—			(50,780	)		(50,780	)
Deferred loan fees, net		(5,395	)		—			(5,395	)

Gross loans, net of deferred loan fees	$	3,219,727		$	256,869		$	3,476,596
Less: Allowance for credit losses		(93,964	)		—			(93,964	)

Net loans and lease finance receivables	$	3,125,763		$	256,869		$	3,382,632

As of June 30, 2012, 63.20% of the total loan portfolio consisted of commercial real estate loans and 2.20% of the total loan portfolio consisted of construction loans, respectively. Substantially all of the Company’s real estate loans and construction loans are secured by real properties located in California. At June 30, 2012, the Company held approximately $1.51 billion of fixed rate loans.

At June 30, 2012 and December 31, 2011, loans totaling $2.33 billion and $2.31 billion, respectively, were pledged to secure the borrowings from the FHLB and the Federal Reserve Bank.

The following is the activity of loans held-for-sale for the periods indicated:

Non-Covered Loans Held-for-Sale Activity


	For the Three Months Ended June 30						For the Six Months Ended June 30
	2012			2011			2012			2011
	(Dollars in thousands)
Balance, beginning of period	$	630		$	3,505		$	348		$	2,954

Originations of mortage loans		10,443			4,972			16,182			16,481
Sales of mortgage loans		(8,193	)		(5,063	)		(13,650	)		(16,021	)
Transfer of mortgage loans to held for investment		—			(417	)		—			(417	)
Sales of other loans		—			—			—			—
Transfers of other loans to held for sale		—			6,000			—			6,000
Write-down of loans held for sale		—			(1,656	)		—			(1,656	)

Balance, end of period	$	2,880		$	7,341		$	2,880		$	7,341

Covered Loans Held-for-Sale Activity


	For the Three Months Ended June 30					For the Six Months Ended June 30
	2012			2011		2012			2011
	(Dollars in thousands)
Balance, beginning of period	$	3,771		$	—	$	5,664		$	—

Originations of mortage loans		—			—		—			—
Sales of mortgage loans		—			—		—			—
Transfer of other loans to held for investment		—			—		—			—
Sales of other loans		(3,745	)		—		(3,745	)		—
Transfers of other loans to held for sale		—			—					—
Write-down of loans held for sale		—			—		(1,219	)		—
Payment on other loans		(26	)				(700	)

Balance, end of period	$	—		$	—	$	—		$	—

Occasionally, the Company may decide to retain and not sell certain mortgage loans originated and will transfer them to its held-for-investment loan portfolio. This is generally done for customer service purposes.

Credit Quality Indicators

Central to our credit risk management is our loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is reviewed and possibly changed by Credit Management, which is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.

Loans are risk rated into the following categories (Credit Quality Indicators): Pass, Pass Watch List, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:

Pass – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.

Pass Watch List – Pass Watch list loans usually require more than normal management attention. Loans which qualify for the Pass Watch List may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.

Special Mention – Loans assigned to this category are currently protected but are weak. Although concerns exist, the Company is currently protected and loss is unlikely. Such loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

Substandard – Loans classified as substandard include poor liquidity, high leverage, and erratic earnings or losses. The primary source of repayment is no longer realistic, and asset or collateral liquidation may be the only source of repayment. Loans are marginal and require continuing and close supervision by credit management. Substandard loans have the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added provision that the weaknesses make collection or the liquidation, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the assets, their classifications as losses are deferred until their more exact status may be determined.

Loss – Loans classified as loss are considered uncollectible and of such little value that their continuance as active assets of the Company is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The following table summarizes our internal risk grouping by loan class as of June 30, 2012 and December 31, 2011:

Credit Quality Indicators

As of June 30, 2012 and December 31, 2011

(Dollars in thousands)

Credit Risk Profile by Internally Assigned Grade


	June 30, 2012
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
Commercial & Industrial	$	327,293	$	118,192	$	52,808	$	24,331	$	1,192	$	523,816
Construction - Speculative		3,312		—		20,123		28,770		—		52,205
Construction - Non-Speculative		5,006		1,882		—		9,219		—		16,107
Commercial Real Estate - Owner-Occupied		415,623		141,994		82,330		69,094		—		709,041
Commercial Real Estate - Non-Owner-Occupied		830,722		216,097		115,042		93,305		804		1,255,970
Residential Real Estate (SFR 1-4)		134,726		9,962		2,284		12,661		—		159,633
Dairy & Livestock		48,853		120,143		58,209		53,641		181		281,027
Agribusiness		6,225		2,168		1,010		—		—		9,403
Municipal Lease Finance Receivables		73,312		22,302		11,893		2,309		—		109,816
Consumer		40,898		3,702		2,236		1,576		48		48,460
Auto & Equipment Leases		10,469		3,464		185		1,019		—		15,137

Total Non-covered Loans		1,896,439		639,906		346,120		295,925		2,225		3,180,615
Covered Loans		61,307		69,173		33,931		82,159		79		246,649

Total Loans excluding held-for-sale		1,957,746		709,079		380,051		378,084		2,304		3,427,264
Non-covered loans held-for-sale		2,880		—		—		—		—		2,880
Covered loans held-for-sale		—		—		—		—		—		—

Total Gross Loans	$	1,960,626	$	709,079	$	380,051	$	378,084	$	2,304	$	3,430,144


	December 31, 2011
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
Commercial & Industrial	$	323,653	$	94,059	$	55,140	$	21,447	$	—	$	494,299
Construction - Speculative		2,654		—		25,610		35,191		—		63,455
Construction - Non-Speculative		1,314		137		687		10,553		—		12,691
Commercial Real Estate - Owner-Occupied		370,801		176,958		74,315		77,884		—		699,958
Commercial Real Estate - Non-Owner-Occupied		836,465		193,751		108,798		108,482		838		1,248,334
Residential Real Estate (SFR 1-4)		143,841		8,336		6,807		17,458		—		176,442
Dairy & Livestock		73,074		106,024		91,416		72,619		217		343,350
Agribusiness		2,800		860		667		—		—		4,327
Municipal Lease Finance Receivables		70,781		23,106		8,927		10,646		—		113,460
Consumer		42,295		3,474		3,906		1,740		21		51,436
Auto & Equipment Leases		11,742		39		3,506		522		1,561		17,370

Total Non-covered Loans		1,879,420		606,744		379,779		356,542		2,637		3,225,122
Covered Loans		48,440		73,718		20,728		164,198		565		307,649

Total Loans excluding held-for-sale		1,927,860		680,462		400,507		520,740		3,202		3,532,771
Non-covered loans held-for-sale		348		—		—		—		—		348
Covered loans held-for-sale		—		—		—		5,664		—		5,664

Total Gross Loans	$	1,928,208	$	680,462	$	400,507	$	526,404	$	3,202	$	3,538,783

Allowance for Credit Losses

The Credit Management Division is responsible for regularly reviewing the allowance for credit losses (“ALLL”) methodology, including loss factors and economic risk factors. The Bank’s Director Loan Committee provides Board oversight of the ALLL process and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers all loans. The systematic methodology consists of two major phases.

In the first phase, individual loans are reviewed to identify loans for impairment. A loan is generally considered impaired when principal and interest are deemed uncollectible in accordance with the contractual terms of the loan. A loan for which there is an insignificant delay or shortfall in the amount of payments due is not considered an impaired loan. Impairment is measured as either the expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). If we determine that the value of the impaired loan is less than the recorded investment of the loan, we either recognize an impairment reserve as a Specific Allowance to be provided for in the allowance for credit losses or charge off the impaired balance if it is determined that such amount represents a confirmed loss. Loans determined to be impaired are excluded from the formula allowance so as not to double count the loss exposure.

The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics. In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio formula allowance. In the case of the portfolio formula allowance, homogeneous portfolios, such as small business loans, consumer loans, agricultural loans, and real estate loans, are aggregated or pooled in determining the appropriate allowance. The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other behavioral characteristics of the subject portfolios.

Included in this second phase is our considerations of qualitative factors, including, all known relevant internal and external factors that may affect the collectability of a loan. This includes our estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral, and other relevant factors. These qualitative factors are used to adjust the historical loan loss rates for each pool of loans to determine the probable credit losses inherent in the portfolio.

The methodology is consistently applied across all the portfolio segments taking into account the applicable historical loss rates and the qualitative factors applicable to each pool of loans. Periodically, we assess various attributes utilized in adjusting our historical loss factors to reflect current economic conditions. During the first and second quarters of 2012, many of our dairy and livestock borrowers experienced an increase in feed costs, a decrease in milk prices, and tightened profit margins. As part of our qualitative analysis during the first and second quarters of 2012, we adjusted the attributes used in the allowance for credit losses to contemplate the current economic environment of the dairy and livestock industry.

Management believes that the ALLL was appropriate at June 30, 2012. No assurance can be given that economic conditions which adversely affect our service areas or other circumstances will not be reflected in increased provisions for credit losses in the future.

The following table presents the balance and activity in the allowance for credit losses; and the recorded investment in held-for-investment loans by portfolio segment and based upon our impairment method as of June 30, 2012 and 2011:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(Dollars in thousands)


	Commercial and Industrial			Construction			Real Estate			Municipal Lease Finance Receivables			Dairy and Livestock			Consumer, Auto & Other			Covered Loans (1)			Unallocated		Total
Three and Six Months Ended June 30, 2012
Allowance for Credit Losses:

Beginning balance, April 1, 2012	$	11,907		$	4,323		$	51,935		$	2,020		$	16,026		$	1,543		$	—		$	4,168	$	91,922
Charge-offs		(123	)		—			(1,426	)		—			—			(3	)		(50	)		—		(1,602	)
Recoveries		526			1,025			14			—			2			5			—			—		1,572
Provision/Reallocation of ALLL		22			(2,319	)		(2,165	)		(364	)		839			(35	)		50			3,972		—

Ending balance, June 30, 2012	$	12,332		$	3,029		$	48,358		$	1,656		$	16,867		$	1,510		$	—		$	8,140	$	91,892


Beginning balance, January 1, 2012	$	10,654		$	4,947		$	51,873		$	2,403		$	17,230		$	1,638		$	—		$	5,219	$	93,964
Charge-offs		(683	)		—			(1,956	)		—			(1,150	)		(88	)		(81	)		—		(3,958	)
Recoveries		588			1,052			235			—			2			9			—			—		1,886
Provision/Reallocation of ALLL		1,773			(2,970	)		(1,794	)		(747	)		785			(49	)		81			2,921		—

Ending balance, June 30, 2012	$	12,332		$	3,029		$	48,358		$	1,656		$	16,867		$	1,510		$	—		$	8,140	$	91,892

Ending balance: Individually evaluated for impairment	$	486		$	—		$	668		$	—		$	—		$	100		$	—		$	—	$	1,254

Ending balance: Collectively evaluated for impairment	$	11,846		$	3,029		$	47,690		$	1,656		$	16,867		$	1,410		$	—		$	8,140	$	90,638


Loans and financing receivables: (2)
Ending balance, June 30, 2012	$	523,816		$	68,312		$	2,124,644		$	109,816		$	281,027		$	73,000		$	210,147		$	—	$	3,390,762

Ending balance: Individually evaluated for impairment	$	7,926		$	37,989		$	49,901		$	—		$	10,900		$	392		$	—		$	—	$	107,108

Ending balance: Collectively evaluated for impairment	$	515,890		$	30,323		$	2,074,743		$	109,816		$	270,127		$	72,608			—		$	—	$	3,073,507

Ending balance: Acquired loans with deteriorated credit quality		—			—			—			—			—			—		$	210,147			—	$	210,147


	Commercial and Industrial			Construction			Real Estate			Municipal Lease Finance Receivables			Dairy and Livestock			Consumer, Auto & Other			Covered Loans (1)			Unallocated		Total
Three and Six Months Ended June 30, 2011
Allowance for Credit Losses:

Beginning balance, April 1, 2011	$	10,443		$	6,378		$	42,790		$	2,811		$	33,427		$	1,673		$	—		$	3,545	$	101,067
Charge-offs		(194	)		(1,257	)		(1,912	)		—			(1,087	)		(132	)		(24	)		—		(4,606	)
Recoveries		29			155			102			—			39			107			2			—		434
Provision/Reallocation of ALLL		1,008			(938	)		4,285			(193	)		(8,868	)		(40	)		22			4,724		—

Ending balance, June 30, 2011	$	11,286		$	4,338		$	45,265		$	2,618		$	23,511		$	1,608		$	—		$	8,269	$	96,895


Beginning balance, January 1, 2011	$	11,472		$	10,188		$	43,529		$	2,172		$	36,061		$	1,034		$	—		$	803	$	105,259
Charge-offs		(883	)		(7,417	)		(4,383	)		—			(3,291	)		(252	)		(418	)		—		(16,644	)
Recoveries		171			403			434			—			39			160			5			—		1,212
Provision/Reallocation of ALLL		526			1,164			5,685			446			(9,298	)		666			413			7,466		7,068

Ending balance, June 30, 2011	$	11,286		$	4,338		$	45,265		$	2,618		$	23,511		$	1,608		$	—		$	8,269	$	96,895

Ending balance: Individually evaluated for impairment	$	379		$	158		$	646		$	—		$	—		$	24		$	—		$	—	$	1,207

Ending balance: Collectively evaluated for impairment	$	10,907		$	4,180		$	44,619		$	2,618		$	23,511		$	1,584		$	—		$	8,269	$	95,688


Loans and financing receivables: (2)
Ending balance, June 30, 2011	$	470,746		$	85,106		$	2,157,969		$	119,419		$	296,801		$	67,715		$	334,225		$	—	$	3,531,981

Ending balance: Individually evaluated for impairment	$	7,218		$	39,500		$	52,247		$	—		$	2,672		$	179		$	—		$	—	$	101,816

Ending balance: Collectively evaluated for impairment	$	463,528		$	45,606		$	2,105,722		$	119,419		$	294,129		$	67,536		$	—		$	—	$	3,095,940

Ending balance: Acquired loans with deteriorated credit quality		—			—			—			—			—			—		$	334,225			—	$	334,225

(1)	Represents the allowance and related loan balance determined in accordance with ASC 310-30.

(2)	Net of purchase accounting discount and deferred loan fees.

Past Due and Non-Performing Loans

We manage asset quality and control credit risk through diversification of the non-covered loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is in charge of monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of non-performing, past due non-covered loans and larger credits, designed to identify potential charges to the allowance for credit losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors.

Loans are reported as a troubled debt restructuring when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include a reduction in the loan rate, deferral of principal or accrued interest, extending the payment due dates or loan maturity date(s), or providing a lower interest rate than would be normally available for new debt of similar risk. As a result of these concessions, restructured loans are classified as impaired. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and credit losses.

Generally, when loans are identified as impaired they are moved to our Special Assets Division. When we identify a loan as impaired, we measure the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals.

The accrual of interest on loans is discontinued when the loan becomes 90 days past due based on the contractual term of the loan, or when the full collection of principal and interest is in doubt. When an asset is placed on nonaccrual status, previously accrued but unpaid interest is reversed against income. Subsequent collections of cash are applied as reductions to the principal balance unless the loan is returned to accrual status. Nonaccrual loans may be restored to accrual status when principal and interest become current and full payment of principal and interest is expected.

Speculative construction loans are generally for properties where there is no identified buyer or renter.

The following table presents the recorded investment in non-covered past due and nonaccrual loans and loans past due by class of loans as of June 30, 2012 and December 31, 2011:

Non-Covered Past Due and Nonaccrual Loans

As of June 30, 2012 and December 31, 2011

(Dollars in Thousands)


June 30, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual		Current		Total Loans and Financing Receivables
Commercial & Industrial	$	176	$	—	$	—	$	176	$	4,622	$	519,018		523,816
Construction - Speculative		—		—		—		—		17,904		34,301		52,205
Construction - Non-Speculative		—		—		—		—		—		16,107		16,107
Commercial Real Estate - Owner-Occupied		129		—		—		129		6,014		702,898		709,041
Commercial Real Estate - Non-Owner-Occupied		912		—		—		912		17,070		1,237,988		1,255,970
Residential Real Estate (SFR 1-4)		—		—		—		—		12,469		147,164		159,633
Dairy & Livestock		—		—		—		—		3,394		277,633		281,027
Agribusiness		—		—		—		—		—		9,403		9,403
Municipal Lease Finance Receivables		—		—		—		—		—		109,816		109,816
Consumer		19		17		—		36		388		48,036		48,460
Auto & Equipment Leases		—		—		—		—		4		15,133		15,137

Total Non-covered Loans excluding held-for-sale		1,236		17		—		1,253		61,865		3,117,497		3,180,615
Loans Held-for-Sale Residential Real Estate (SFR 1-4)		—		—		—		—		—		2,880		2,880

Total	$	1,236	$	17	$	—	$	1,253	$	61,865	$	3,120,377	$	3,183,495


December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual		Current		Total Loans and Financing Receivables
Commercial & Industrial	$	2,872	$	150	$	—		3,022	$	3,432	$	487,845	$	494,299
Construction - Speculative		—		—		—		—		13,317		42,203		55,520
Construction - Non-Speculative		—		—		—		—		—		20,626		20,626
Commercial Real Estate - Owner-Occupied		133		280		—		413		9,474		690,071		699,958
Commercial Real Estate - Non-Owner-Occupied		374		—		—		374		16,518		1,231,442		1,248,334
Residential Real Estate (SFR 1-4)		1,568		—		—		1,568		16,970		157,904		176,442
Dairy & Livestock		—		—		—		—		2,475		340,875		343,350
Agribusiness		—		—		—		—		—		4,327		4,327
Municipal Lease Finance Receivables		—		—		—		—		—		113,460		113,460
Consumer		59		—		—		59		382		50,995		51,436
Auto & Equipment Leases		14		6		—		20		104		17,246		17,370

Total Non-covered Loans excluding held-for-sale		5,020		436		—		5,456		62,672		3,156,994		3,225,122
Loans Held-for-Sale Residential Real Estate (SFR 1-4)		—		—		—		—		—		348		348

Total	$	5,020	$	436	$	—	$	5,456	$	62,672	$	3,157,342	$	3,225,470

Non-covered Impaired Loans

At June 30, 2012, the Company had non-covered impaired loans of $107.1million. Of this amount, $17.9 million in nonaccrual commercial construction loans, $12.5 million of nonaccrual single family mortgage loans, $23.1million of nonaccrual commercial real estate loans, $4.6 million of nonaccrual commercial and industrial loans, $3.4 million of nonaccrual dairy and livestock loans and $392,000 of other loans. These non-covered impaired loans included $77.0 million of loans whose terms were modified in a troubled debt restructure, of which $31.8 million are classified as nonaccrual. The remaining balance of $45.2 million consists of 28 loans performing according to the restructured terms. The impaired loans had specific allowance of $1.3 million at June 30, 2012. At December 31, 2011, the Company had classified as impaired, non-covered loans with a balance of $101.2 million with a related allowance of $3.0 million.

The following table presents held-for-investment and held-for-sale loans, individually evaluated for impairment by class of loans, as of June 30, 2012 and December 31, 2011:

Non-Covered Impaired Loans

As of June 30, 2012 and December 31, 2011

(Dollars in Thousands)


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2012
With no related allowance recorded:
Commercial & Industrial	$	6,360	$	7,467	$	—	$	6,784	$	62
Held for Sale Construction - Speculative		—		—		—		—		—
Construction - Speculative		17,904		19,530		—		18,397		—
Construction - Non-Speculative		20,086		20,086		—		20,086		563
Commercial Real Estate - Owner-Occupied		18,113		18,668		—		18,896		493
Commercial Real Estate - Non-Owner-Occupied		16,972		25,278		—		18,165		1
Residential Real Estate (SFR 1-4)		10,630		13,550		—		10,901		31
Dairy & Livestock		10,900		12,413		—		11,150		209
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		146		196		—		148		—
Auto & Equipment Leases		—		—		—		—		—

		101,111		117,188		—		104,527		1,359

With a related allowance recorded:
Commercial & Industrial	$	1,500	$	1,546	$	486	$	1,543	$	—
Construction - Speculative		—		—		—		—		—
Construction - Non-Speculative		—		—		—		—		—
Commercial Real Estate - Owner-Occupied		636		636		356		641		—
Commercial Real Estate - Non-Owner-Occupied		97		97		6		98		—
Residential Real Estate (SFR 1-4)		3,517		3,837		306		3,530		—
Dairy, Livestock & Agribusiness		—		—		—		—		—
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		243		250		99		244		—
Auto & Equipment Leases		4		4		1		4		—

		5,997		6,370		1,254		6,060		—

Total	$	107,108	$	123,558	$	1,254	$	110,587	$	1,359


December 31, 2011
With no related allowance recorded:
Commercial & Industrial	$	3,566	$	4,630	$	—	$	4,649	$	93
Held for Sale Construction - Speculative		—		—		—		—		—
Construction - Speculative		13,317		15,718		—		15,434		—
Construction - Non-Speculative		20,085		20,085		—		16,437		1,123
Commercial Real Estate - Owner-Occupied		13,567		14,013		—		11,941		449
Commercial Real Estate - Non-Owner-Occupied		16,435		23,656		—		21,096		67
Residential Real Estate (SFR 1-4)		14,069		17,411		—		15,120		47
Dairy & Livestock		8,879		10,358		—		10,535		446
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		104		150		—		127		—
Auto & Equipment Leases		—		—		—		—		—

		90,022		106,021		—		95,339		2,225

With a related allowance recorded:
Commercial & Industrial	$	1,388	$	1,410	$	165	$	1,554	$	—
Construction - Speculative		—		—		—		—		—
Construction - Non-Speculative		—		—		—		—		—
Commercial Real Estate - Owner-Occupied		3,900		3,900		928		3,900		—
Commercial Real Estate - Non-Owner-Occupied		83		85		5		86		—
Residential Real Estate (SFR 1-4)		4,087		4,369		406		3,967		—
Dairy, Livestock & Agribusiness		1,372		3,324		1,372		2,402		—
Municipal Lease Finance Receivables		—		—		—		—		—
Consumer		270		278		77		276		—
Auto & Equipment Leases		104		110		15		141		—

		11,204		13,476		2,968		12,326		—

Total	$	101,226	$	119,497	$	2,968	$	107,665	$	2,225

The Company recognizes the charge-off of impairment allowance on impaired loans in the period it arises for collateral dependent loans. Therefore, the majority of the nonaccrual loans as of June 30, 2012 and December 31, 2011 have already been written down to their estimated net realizable value. The impaired loans with a related allowance recorded are on nonaccrual loans where a charge-off is not yet processed, on nonaccrual SFR loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

Impaired construction speculative loans increased in the second quarter of 2012 due to a $10.9 million participating interest in the Company’s only Shared National Credit loan that was transferred to nonaccrual status.

The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet commitments at the same time it evaluates credit risk associated with the loan and lease portfolio. The Company recorded zero provision for unfunded commitments for the first six months ended June 30, 2012, compared to an increase of $732,000 in the provision for the same period of 2011. As of June 30, 2012 and December 31, 2011, the balance in this reserve was $9.6 million and was included in other liabilities.

As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings. Loans that are reported as TDRs are considered impaired and charged off on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal.

As of June 30, 2012, we had loans of $77.0 million classified as a troubled debt restructured, of which $31.8 million are non-performing and $45.2 million are performing. TDRs on accrual status are comprised of loans that were accruing at the time of restructuring or have demonstrated repayment performance in compliance with the restructured terms for a sustained period and for which the Company anticipates full repayment of both principal and interest. TDRs on accrual status at June 30, 2012 were mainly comprised of commercial real estate loans including construction loans.

The majority of TDRs have no specific allowance allocated as any impairment amount is normally charged off at the time a probable loss is determined. We have allocated $23,000 and $27,000 specific allowance to TDRs as of June 30, 2012 and December 31, 2011.

The following are the loans modified as troubled debt restructuring for the six months ended June 30, 2012:

Modifications

(Dollars in thousands)


	For the Three Months Ended June 30, 2012
	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2012
Troubled Debt Restructurings

Commercial & Industrial		7	$	1,677	$	1,677	$	1,350
Construction - Speculative		1		10,966		10,966		10,916
Construction - Non-Speculative		—		—		—		—
Commercial Real Estate - Owner-Occupied		1		307		307		306
Commercial Real Estate - Non-Owner-Occupied		2		4,026		4,026		3,668
Residential Real Estate (SFR 1-4)		—		—		—		—
Dairy & Livestock		4		3,221		3,221		3,221
Agribusiness		—		—		—		—
Municipal Lease Finance Receivables		—		—		—		—
Consumer		—		—		—		—
Auto & Equipment Leases		—		—		—		—

Total Non-Covered Loans		15		20,197		20,197		19,461
Covered Loans		—		—		—		—

Total Gross Loans		15	$	20,197	$	20,197	$	19,461


	For the Six Months Ended June 30, 2012
	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at June 30, 2012
Troubled Debt Restructurings

Commercial & Industrial		9	$	4,211	$	4,211	$	3,882
Construction - Speculative		1		10,966		10,966		10,916
Construction - Non-Speculative		—		—		—		—
Commercial Real Estate - Owner-Occupied		2		614		614		610
Commercial Real Estate - Non-Owner-Occupied		3		4,539		4,539		4,181
Residential Real Estate (SFR 1-4)		—		—		—		—
Dairy & Livestock		4		3,221		3,221		3,221
Agribusiness		—		—		—		—
Municipal Lease Finance Receivables		—		—		—		—
Consumer		—		—		—		—
Auto & Equipment Leases		—		—		—		—

Total Non-Covered Loans		19		23,551		23,551		22,810
Covered Loans		—		—		—		—

Total Gross Loans		19	$	23,551	$	23,551	$	22,810

As of June 30, 2012, there was one commercial and industrial loan with an outstanding balance of $52,000 and one construction loan with an outstanding balance of $10.9 million that were previously modified as a troubled debt restructuring within the previous 12 months that subsequently defaulted during the six months ended June 30, 2012.