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

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


	December 31, 2012
	Non-Covered Loans			Covered Loans			Total
	(Dollars in thousands)
Commercial and industrial	$	547,422		$	26,149		$	573,571
Real estate:		—
Construction		59,721			1,579			61,300
Commercial real estate		1,990,107			179,428			2,169,535
SFR mortgage		159,288			1,415			160,703
Consumer		47,557			6,337			53,894
Municipal lease finance receivables		105,767			—			105,767
Auto and equipment leases, net of unearned discount		12,716			—			12,716
Dairy and livestock		327,579			—			327,579
Agribusiness		9,081			5,651			14,732

Gross loans		3,259,238			220,559			3,479,797
Less:
Purchase accounting discount		—			(25,344	)		(25,344	)
Deferred loan fees, net		(6,925	)		—			(6,925	)

Gross loans, net of deferred loan fees		3,252,313			195,215			3,447,528
Less: Allowance for credit losses		(92,441	)		—			(92,441	)

Net loans	$	3,159,872		$	195,215		$	3,355,087


	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	$	3,125,763		$	256,869		$	3,382,632

As of December 31, 2012, 62.35% of the total loan portfolio consisted of commercial real estate loans and 1.76% 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 December 31, 2012, the Company held approximately $1.53 billion of fixed rate loans.

At December 31, 2012 and December 31, 2011, loans totaling $2.32 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 Year Ended December 31,
	2012			2011
	(Dollars in thousands)
Balance, beginning of period	$	348		$	2,954
Originations of mortgage loans		25,489			37,304
Sales of mortgage loans		(22,250	)		(34,962	)
Transfer of mortgage loans to held-for-investment		(3,587	)		(3,292	)
Sales of other loans		—			(6,000	)
Transfers of other loans to held-for-sale		—			6,000
Write-down of loans held-for-sale		—			(1,656	)

Balance, end of period	$	—		$	348

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

Covered Loans Held-for-Sale Activity


	For the Year Ended December 31,
	2012			2011
	(Dollars in thousands)
Balance, beginning of period	$	5,664		$	—
Originations of mortgage loans		—			—
Sales of mortgage loans		—			—
Transfer of other loans to held-for-investment		—			—
Sales of other loans		(3,745	)		—
Transfers of other loans to held-for-sale		—			5,726
Write-down of loans held-for-sale		(1,219	)		—
Payment on other loans		(700	)		(62	)

Balance, end of period	$	—		$	5,664

During 2011, 12 covered loans with an aggregate carrying balance of $5.7 million were transferred to held-for-sale. During the second quarter ended June 30, 2011, a decision was made to sell one loan and it was transferred to held-for-sale at a fair value of $6.0 million and resulted in a charge-off against the allowance for credit losses of $619,000 at the time of transfer. This loan was subsequently sold in July, 2011 at a small gain. Also, during 2011, another loan classified as held-for-sale with a book value of $1.7 million was written-off to zero with the write-off reported as part of non-interest income. The loan was the subject of legal proceedings regarding our lien position and a preliminary decision by the court found that our lien was not in a first priority position. After careful analysis of the preliminary court decision and valuation of the subject collateral, we wrote off the remaining carrying amount. During 2012, all covered loans held-for-sale were sold.

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 December 31, 2012 and 2011:

Credit Quality Indicators


	December 31, 2012
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial & industrial	$	347,275	$	131,186	$	44,466	$	22,901	$	1,594	$	547,422
Construction—speculative		1,417		—		15,163		21,314		—		37,894
Construction—non-speculative		9,841		2,767		—		9,219		—		21,827
Commercial real estate—owner occupied		382,111		159,653		78,087		84,116		—		703,967
Commercial real estate—non-owner occupied		888,777		214,901		105,121		77,341		—		1,286,140
Residential real estate (SFR 1-4)		129,730		10,215		3,107		16,236		—		159,288
Dairy and livestock		67,144		108,087		74,510		77,721		117		327,579
Agribusiness		4,969		3,306		806		—		—		9,081
Municipal lease finance receivables		72,432		20,237		11,124		1,974		—		105,767
Consumer		40,650		3,538		1,976		1,339		54		47,557
Auto and equipment leases		8,671		3,225		738		82		—		12,716

Total non-covered loans		1,953,017		657,115		335,098		312,243		1,765		3,259,238
Covered loans		52,637		72,803		31,689		63,354		76		220,559

Total loans excluding held-for-sale		2,005,654		729,918		366,787		375,597		1,841		3,479,797
Non-covered loans held-for-sale		—		—		—		—		—		—
Covered loans held-for-sale		—		—		—		—		—		—

Total gross loans	$	2,005,654	$	729,918	$	366,787	$	375,597	$	1,841	$	3,479,797


	December 31, 2011
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
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 and 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 and 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 Company’s 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 the Bank’s overall loan portfolio. The Bank’s 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 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 year ended December 31, 2012, we adjusted the attributes used in the allowance for credit losses to account for challenges evident in the current economic environment of the dairy and livestock industry.

Management believes that the ALLL was appropriate at December 31, 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 December 31, 2012 and 2011:

Allowance for Credit Losses and Recorded Investment in Financing Receivables


	As of and For the Year Ended December 31, 2012
	Commercial and Industrial			Construction			Real Estate			Municipal Lease Finance Receivables			Dairy and Livestock/ Agribusiness			Consumer, Auto & Other			Covered Loans (1)			Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance, January 1, 2012	$	10,654		$	4,947		$	51,873		$	2,403		$	17,230		$	1,638		$	—		$	5,219	$	93,964
Charge-offs		(1,259	)		—			(2,515	)		—			(1,150	)		(283	)		(81	)		—		(5,288	)
Recoveries		1,280			1,139			406			—			166			36			738			—		3,765
Provision/reallocation of ALLL		977			(3,795	)		1,141			(815	)		2,450			(221	)		(657	)		920		—

Ending balance, December 31, 2012	$	11,652		$	2,291		$	50,905		$	1,588		$	18,696		$	1,170		$	—		$	6,139	$	92,441

Individually evaluated for impairment	$	289		$	—		$	436		$	—		$	1,596		$	11		$	—		$	—	$	2,332
Collectively evaluated for impairment	$	11,363		$	2,291		$	50,469		$	1,588		$	17,100		$	1,159		$	—		$	6,139	$	90,109
Loans and financing receivables (2):
Ending balance, December 31, 2012	$	547,422		$	59,721		$	2,149,395		$	105,767		$	336,660		$	60,273		$	195,215		$	—	$	3,454,453
Individually evaluated for impairment	$	3,689		$	30,533		$	56,981		$	263		$	16,709		$	215		$	—		$	—	$	108,390
Collectively evaluated for impairment	$	543,733		$	29,188		$	2,092,414		$	105,504		$	319,951		$	60,058		$	—		$	—	$	3,150,848
Acquired loans with deteriorated credit quality, net of discount	$	—		$	—		$	—		$	—		$	—		$	—		$	195,215		$	—	$	195,215

	As of and For the Year Ended December 31, 2011
	Commercial and Industrial			Construction			Real Estate			Municipal Lease Finance Receivables			Dairy and Livestock/ Agribusiness			Consumer, Auto & Other			Covered Loans (1)			Unallocated		Total
	(Dollars in thousands)
Allowance for loan losses:
Beginning balance, January 1, 2011	$	11,472		$	10,188		$	43,529		$	2,172		$	36,061		$	1,034		$	—		$	803	$	105,259
Charge-offs		(1,980	)		(7,976	)		(5,870	)		—			(3,291	)		(511	)		(893	)		—		(20,521	)
Recoveries		302			757			748			—			151			200			—			—		2,158
Provision/reallocation of ALLL		860			1,978			13,466			231			(15,643	)		867			893			4,416		7,068

Ending balance, December 31, 2011	$	10,654		$	4,947		$	51,873		$	2,403		$	17,278		$	1,590		$	—		$	5,219	$	93,964

Individually evaluated for impairment	$	165		$	—		$	1,339		$	—		$	1,371		$	93		$	—		$	—	$	2,968
Collectively evaluated for impairment	$	10,489		$	4,947		$	50,534		$	2,403		$	15,907		$	1,497		$	—		$	5,219	$	90,996
Loans and financing receivables (2):
Ending balance, December 31, 2011	$	494,299		$	76,146		$	2,124,734		$	113,460		$	347,677		$	68,806		$	256,869		$	—	$	3,481,991
Individually evaluated for impairment	$	4,954		$	33,402		$	52,141		$	—		$	10,251		$	478		$	—		$	—	$	101,226
Collectively evaluated for impairment	$	489,345		$	42,744		$	2,072,593		$	113,460		$	337,426		$	68,328		$	—		$	—	$	3,123,896
Acquired loans with deteriorated credit quality, net of discount	$	—		$	—		$	—		$	—		$	—		$	—		$	256,869		$	—	$	256,869

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

(2)	Net of purchase accounting discount.

Past Due and Nonperforming Loans

We seek to 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 nonperforming, 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 the Bank would not otherwise consider. Examples of such concessions include a reduction in the interest 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 or more 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 December 31, 2012 and 2011:

Non-Covered Past Due and Nonaccrual Loans


	December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	233	$	457	$	—	$	690	$	3,136	$	543,596	$	547,422
Construction—speculative		—		—		—		—		10,663		27,231		37,894
Construction—non-speculative		—		—		—		—		—		21,827		21,827
Commercial real estate—owner occupied		—		—		—		—		5,415		698,552		703,967
Commercial real estate—non-owner occupied		—		—		—		—		15,624		1,270,516		1,286,140
Residential real estate (SFR 1-4)		107		—		—		107		13,102		146,079		159,288
Dairy and livestock		—		—		—		—		9,842		317,737		327,579
Agribusiness		—		—		—		—		—		9,081		9,081
Municipal lease finance receivables		—		—		—		—		—		105,767		105,767
Consumer		74		8		—		82		215		47,260		47,557
Auto and equipment leases		8		—		—		8		—		12,708		12,716

Total non-covered loans excluding held-for-sale		422		465		—		887		57,997		3,200,354		3,259,238
Loans held-for-sale		—		—		—		—		—		—		—

Total	$	422	$	465	$	—	$	887	$	57,997	$	3,200,354	$	3,259,238


	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and 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 and 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 and 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		—		—		—		—		—		348		348

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

Non-Covered Impaired Loans

At December 31, 2012, the Company had non-covered impaired loans of $108.4 million. Of this amount, $10.7 million in nonaccrual commercial construction loans, $13.1 million of nonaccrual single family mortgage loans, $21.0 million of nonaccrual commercial real estate loans, $3.1 million of nonaccrual commercial and industrial loans, $9.8 million of nonaccrual dairy and livestock loans and $215,000 of other loans. These non-covered impaired loans included $81.7 million of loans whose terms were modified in a troubled debt restructure, of which $31.3 million are classified as nonaccrual. The remaining balance of $50.4 million consists of 34 loans performing according to the restructured terms. The impaired loans had a specific allowance of $2.3 million at December 31, 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 December 31, 2012 and 2011:

Non-Covered Impaired Loans


	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	3,385	$	4,215	$	—	$	3,766	$	43
Construction—speculative		21,314		21,607		—		21,650		311
Construction—non-speculative		9,219		9,219		—		9,219		574
Commercial real estate—owner occupied		13,478		14,569		—		14,459		397
Commercial real estate—non-owner occupied		28,639		38,633		—		29,801		670
Residential real estate (SFR 1-4)		11,079		14,342		—		11,292		54
Dairy and livestock		12,406		13,756		—		11,834		173
Municipal lease finance receivables		263		263		—		443		5
Consumer		142		196		—		145		—
Auto and equipment leases		—		—		—		—		—

Total		99,925		116,800		—		102,609		2,227
With a related allowance recorded:
Commercial and industrial		304		327		289		387		—
Construction—speculative		—		—		—		—		—
Construction—non-speculative		—		—		—		—		—
Commercial real estate—owner occupied		19		19		2		28		—
Commercial real estate—non-owner occupied		—		—		—		—		—
Residential real estate (SFR 1-4)		3,766		4,071		434		3,363		—
Dairy and livestock		4,303		4,340		1,596		4,017		73
Municipal lease finance receivables		—		—		—		—		—
Consumer		73		74		11		75		—
Auto and equipment leases		—		—		—		—		—

Total		8,465		8,831		2,332		7,870		73

Total non-covered impaired loans	$	108,390	$	125,631	$	2,332	$	110,479	$	2,300


	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and 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 and livestock		8,879		10,358		—		10,535		446
Municipal lease finance receivables		—		—		—		—		—
Consumer		104		150		—		127		—
Auto and equipment leases		—		—		—		—		—

Total		90,022		106,021		—		95,339		2,225
With a related allowance recorded:
Commercial and 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 and livestock		1,372		3,324		1,372		2,402		—
Municipal lease finance receivables		—		—		—		—		—
Consumer		270		278		77		276		—
Auto and equipment leases		104		110		15		141		—

Total		11,204		13,476		2,968		12,326		—

Total non-covered impaired loans	$	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 December 31, 2012 and 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 2012 due to a participating interest in the Company’s only Shared National Credit loan that was transferred to nonaccrual status. The outstanding balance was $10.6 million as of December 31, 2012.

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 a reduction of $1.0 million in reserve for unfunded commitments for the year ended December 31, 2012, compared to a decrease of $918,000 in the reserve for the year ended December 31, 2011. As of December 31, 2012 and December 31, 2011, the balance in this reserve was $8.6 million and $9.6 million, respectively, and was included in other liabilities.

Troubled Debt Restructurings (“TDR”)

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 charge-off amounts are taken 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. Refer to Note 3 – Summary of Significant Accounting Policies, Troubled Debt Restructurings, included herein.

As of December 31 2012, we had loans of $81.7 million classified as a troubled debt restructured, of which $31.3 million are nonperforming and $50.4 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 December 31, 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 $1.4 million and $27,000 specific allowance to TDRs as of December 31, 2012 and December 31, 2011.

The following are the loans modified as troubled debt restructurings for the years ended December 31, 2012 and 2011:

Modifications


	For the Year Ended December 31, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at December 31, 2012
	(Dollars in thousands)
Commercial and industrial		9	$	2,381	$	2,381	$	1,883
Construction—speculative		1		10,966		10,966		10,663
Construction—non-speculative		—		—		—		—
Commercial real estate—owner occupied		6		4,225		4,225		3,903
Commercial real estate—non-owner occupied		5		9,284		9,284		8,662
Residential real estate (SFR 1-4)		1		399		399		398
Dairy and livestock		7		9,447		9,447		9,184
Municipal lease finance receivables		2		519		519		263

Total non-covered loans		31		37,221		37,221		34,956
Covered loans		1		905		905		891

Total gross loans		32	$	38,126	$	38,126	$	35,847


	For the Year Ended December 31, 2011
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Outstanding Recorded Investment at December 31, 2011
	(Dollars in thousands)
Commercial and industrial		5	$	1,673	$	1,372	$	1,224
Construction—speculative		2		16,886		16,886		15,394
Construction—non-speculative		1		9,219		9,219		9,219
Commercial real estate—owner occupied		3		3,195		3,195		3,067
Commercial real estate—non-owner occupied		3		11,707		11,707		10,236
Residential real estate (SFR 1-4)		6		2,162		2,161		2,049
Dairy and livestock		5		11,750		11,750		8,662

Total non-covered loans		25		56,592		56,290		49,851
Covered loans		—		—		—		—

Total gross loans		25	$	56,592	$	56,290	$	49,851

As of December 31 2012, there was one construction loan with an outstanding balance of $10.7 million and one commercial real estate loan with an outstanding balance of $2.4 million that were previously modified as a troubled debt restructuring within the previous 12 months that subsequently defaulted during the year ended December 31, 2012.