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

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


	September 30, 2013
	Non-Covered Loans			Covered Loans			Total
	(Dollars in thousands)
Commercial and industrial	$	510,566		$	20,825		$	531,391
Real estate:
Commercial real estate		2,126,415			147,289			2,273,704
Construction		47,648			661			48,309
SFR mortgage		192,130			327			192,457
Dairy & livestock and agribusiness		261,638			3,659			265,297
Municipal lease finance receivables		99,188			—			99,188
Consumer and other loans		52,886			5,102			57,988

Gross loans		3,290,471			177,863			3,468,334
Less:
Purchase accounting discount		—			(14,529	)		(14,529	)
Deferred loan fees, net		(9,119	)		—			(9,119	)

Gross loans, net of deferred loan fees and discount		3,281,352			163,334			3,444,686
Less: Allowance for loan losses		(80,713	)		—			(80,713	)

Net loans	$	3,200,639		$	163,334		$	3,363,973


	December 31, 2012
	Non-Covered Loans			Covered Loans			Total
	(Dollars in thousands)
Commercial and industrial	$	547,422		$	26,149		$	573,571
Real estate:
Commercial real estate		1,990,107			179,428			2,169,535
Construction		59,721			1,579			61,300
SFR mortgage		159,288			1,415			160,703
Dairy & livestock and agribusiness		336,660			5,651			342,311
Municipal lease finance receivables		105,767			—			105,767
Consumer and other loans		60,273			6,337			66,610

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 and discount		3,252,313			195,215			3,447,528
Less: Allowance for loan losses		(92,441	)		—			(92,441	)

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

As of September 30, 2013, 65.56% of the total gross loan portfolio consisted of commercial real estate loans and 1.39% of the total gross 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 September 30, 2013, the Company held approximately $1.73 billion of fixed rate loans.

At September 30, 2013 and December 31, 2012, loans totaling $1.99 billion and $2.32 billion, respectively, were pledged to secure borrowings from the FHLB and the Federal Reserve Bank.

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 confirmed or changed, as appropriate, by Credit Management. 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. Substandard 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 achieved in the future.

The following table summarizes our internal risk grouping by loan class as of September 30, 2013 and December 31, 2012:

Credit Quality Indicators


	September 30, 2013
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	308,271	$	131,118	$	53,972	$	16,730	$	475	$	510,566
Real estate:
Commercial real estate
Owner occupied		441,739		128,887		89,475		65,455		—		725,556
Non-owner occupied		1,040,758		217,822		85,784		56,495		—		1,400,859
Construction
Speculative		7,568		—		1,538		18,020		—		27,126
Non-speculative		6,408		4,895		—		9,219		—		20,522
SFR mortgage		152,169		20,960		4,319		14,682		—		192,130
Dairy & livestock and agribusiness		44,735		39,360		102,464		72,879		2,200		261,638
Municipal lease finance receivables		51,935		19,540		21,283		6,430		—		99,188
Consumer and other loans		41,555		6,379		3,410		1,539		3		52,886

Total non-covered loans		2,095,138		568,961		362,245		261,449		2,678		3,290,471
Covered loans		35,125		67,347		23,477		51,914		—		177,863

Total gross loans	$	2,130,263	$	636,308	$	385,722	$	313,363	$	2,678	$	3,468,334


	December 31, 2012
	Pass		Watch List		Special Mention		Substandard		Doubtful & Loss		Total
	(Dollars in thousands)
Commercial and industrial	$	347,275	$	131,186	$	44,466	$	22,901	$	1,594	$	547,422
Real estate:
Commercial real estate
Owner occupied		382,111		159,653		78,087		84,116		—		703,967
Non-owner occupied		888,777		214,901		105,121		77,341		—		1,286,140
Construction
Speculative		1,417		—		15,163		21,314		—		37,894
Non-speculative		9,841		2,767		—		9,219		—		21,827
SFR mortgage		129,730		10,215		3,107		16,236		—		159,288
Dairy & livestock and agribusiness		72,113		111,393		75,316		77,721		117		336,660
Municipal lease finance receivables		72,432		20,237		11,124		1,974		—		105,767
Consumer and other loans		49,321		6,763		2,714		1,421		54		60,273

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

Allowance for Loan Losses

The Company’s Credit Management Division is responsible for regularly reviewing the allowance for loan 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, or charge off the impaired balance for collateral dependent loans 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 loan 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. As a result of improved credit quality and better economic conditions, the allowance for loan losses was reduced by $3.8 million and $10.0 million for the three and nine months ended September 30, 2013, respectively. This compares with zero provision for loan losses for the same periods of 2012.

Management believes that the ALLL was appropriate at September 30, 2013. 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 loan losses in the future.

The following table presents the balance and activity in the allowance for loan losses; and the recorded investment in held-for-investment loans by portfolio segment and based upon our impairment method as of September 30, 2013, and 2012:

Allowance for Loan losses and Recorded Investment in Financing Receivables


	As of and For the Three and Nine Months Ended September 30, 2013
				Real Estate
	Commercial and Industrial			Commercial Real Estate			Construction			SFR Mortgage			Dairy & Livestock and Agribusiness			Municipal Lease Finance Receivables		Consumer and Other Loans			Covered Loans (1)		Unallocated			Total
	(Dollars in thousands)
Beginning balance, July 1, 2013	$	12,586		$	44,392		$	1,172		$	3,715		$	14,225		$	2,369	$	1,052		$	—	$	5,946		$	85,457
Charge-offs		(1,235	)		—			—			(110	)		—			—		(39	)		—		—			(1,384	)
Recoveries		315			34			15			—			14			—		12			—		—			390
Provision / reallocation of ALLL		(1,022	)		(1,007	)		412			(144	)		(2,152	)		69		25			—		69			(3,750	)

Ending balance, September 30, 2013	$	10,644		$	43,419		$	1,599		$	3,461		$	12,087		$	2,438	$	1,050		$	—	$	6,015		$	80,713

Beginning balance, January 1, 2013	$	11,652		$	47,457		$	2,291		$	3,448		$	18,696		$	1,588	$	1,170		$	—	$	6,139		$	92,441
Charge-offs		(2,339	)		—			—			(252	)		—			—		(108	)		—		—			(2,699	)
Recoveries		523			100			83			133			42			—		40			—		—			921
Provision / reallocation of ALLL		808			(4,138	)		(775	)		132			(6,651	)		850		(52	)		—		(124	)		(9,950	)

Ending balance, September 30, 2013	$	10,644		$	43,419		$	1,599		$	3,461		$	12,087		$	2,438	$	1,050		$	—	$	6,015		$	80,713

Allowance for loan losses:
Individually evaluated for impairment	$	387		$	1		$	144		$	290		$	2,658		$	—	$	5		$	—	$	—		$	3,485
Collectively evaluated for impairment	$	10,257		$	43,418		$	1,455		$	3,171		$	9,429		$	2,438	$	1,045		$	—	$	6,015		$	77,228
Loans and financing receivables (2):
Balance, September 30, 2013	$	510,566		$	2,126,415		$	47,648		$	192,130		$	261,638		$	99,188	$	52,886		$	163,334	$	—		$	3,453,805
Individually evaluated for impairment	$	4,983		$	38,999		$	27,239		$	12,805		$	24,494		$	—	$	159		$	—	$	—		$	108,679
Collectively evaluated for impairment	$	505,583		$	2,087,416		$	20,409		$	179,325		$	237,144		$	99,188	$	52,727		$	—	$	—		$	3,181,792
Acquired loans with deteriorated credit quality, net of discount	$	—		$	—		$	—		$	—		$	—		$	—	$	—		$	163,334	$	—		$	163,334

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

(2)	Net of purchase accounting discount.


	As of and For the Three and Nine Months Ended September 30, 2012
				Real Estate
	Commercial and Industrial			Commercial Real Estate			Construction			SFR Mortgage			Dairy & Livestock and Agribusiness			Municipal Lease Finance Receivables			Consumer and Other Loans			Covered Loans (1)			Unallocated			Total
	(Dollars in thousands)
Beginning balance, July 1, 2012	$	12,332		$	45,319		$	3,029		$	3,039		$	16,976		$	1,656		$	1,401		$	—		$	8,140		$	91,892
Charge-offs		(294	)		(358	)		—			(168	)		—			—			(66	)		—			—			(886	)
Recoveries		106			134			77			4			9			—			3			728			—			1,061
Provision / reallocation of ALLL		(13	)		(280	)		265			366			2,861			(110	)		(52	)		(728	)		(2,309	)		—

Ending balance, September 30, 2012	$	12,131		$	44,815		$	3,371		$	3,241		$	19,846		$	1,546		$	1,286		$	—		$	5,831		$	92,067

Beginning balance, January 1, 2012	$	10,654		$	47,841		$	4,947		$	4,032		$	17,278		$	2,403		$	1,590		$	—		$	5,219		$	93,964
Charge-offs		(977	)		(1,840	)		—			(642	)		(1,150	)		—			(154	)		(81	)		—			(4,844	)
Recoveries		694			481			1,129			(108	)		11			—			12			728			—			2,947
Provision / reallocation of ALLL		1,760			(1,667	)		(2,705	)		(41	)		3,707			(857	)		(162	)		(647	)		612			—

Ending balance, September 30, 2012	$	12,131		$	44,815		$	3,371		$	3,241		$	19,846		$	1,546		$	1,286		$	—		$	5,831		$	92,067

Allowance for loan losses:
Individually evaluated for impairment	$	481		$	25		$	—		$	348		$	1,043		$	—		$	113		$	—		$	—		$	2,010
Collectively evaluated for impairment	$	11,650		$	44,790		$	3,371		$	2,893		$	18,803		$	1,546		$	1,173		$	—		$	5,831		$	90,057
Loans and financing receivables (2):
Balance, September 30, 2012	$	525,801		$	2,012,119		$	70,740		$	158,074		$	297,932		$	109,005		$	60,071		$	207,307		$	—		$	3,441,049
Individually evaluated for impairment	$	4,457		$	41,955		$	37,794		$	13,852		$	18,708		$	471		$	364		$	—		$	—		$	117,601
Collectively evaluated for impairment	$	521,344		$	1,970,164		$	32,946		$	144,222		$	279,224		$	108,534		$	59,707		$	—		$	—		$	3,116,141
Acquired loans with deteriorated credit quality, net of discount	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	207,307		$	—		$	207,307

(1)	Represents the allowance and related loan balances 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 loan 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 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.

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 September 30, 2013, and December 31, 2012:

Non-Covered Past Due and Nonaccrual Loans


	September 30, 2013
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual (1)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	417	$	—	$	—	$	417	$	3,734	$	506,415	$	510,566
Real estate:
Commercial real estate
Owner occupied		—		—		—		—		4,180		721,376		725,556
Non-owner occupied		772		243		—		1,015		13,649		1,386,195		1,400,859
Construction
Speculative		—		—		—		—		10,368		16,758		27,126
Non-speculative		—		—		—		—		—		20,522		20,522
SFR mortgage		—		—		—		—		10,421		181,709		192,130
Dairy & livestock and agribusiness		—		—		—		—		6,973		254,665		261,638
Municipal lease finance receivables		—		—		—		—		—		99,188		99,188
Consumer and other loans		4		251		—		255		159		52,472		52,886

Total non-covered gross loans	$	1,193	$	494	$	—	$	1,687	$	49,484	$	3,239,300	$	3,290,471

(1)	As of September 30, 2013, $23.7 million of nonaccruing loans were current, $487,000 were 30-59 days past due, and $25.3 million were 90+ days past due.


	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 (1)		Current		Total Loans and Financing Receivables
	(Dollars in thousands)
Commercial and industrial	$	233	$	457	$	—	$	690	$	3,136	$	543,596	$	547,422
Real estate:
Commercial real estate
Owner occupied		—		—		—		—		5,415		698,552		703,967
Non-owner occupied		—		—		—		—		15,624		1,270,516		1,286,140
Construction
Speculative		—		—		—		—		10,663		27,231		37,894
Non-speculative		—		—		—		—		—		21,827		21,827
SFR mortgage		107		—		—		107		13,102		146,079		159,288
Dairy & livestock and agribusiness		—		—		—		—		9,842		326,818		336,660
Municipal lease finance receivables		—		—		—		—		—		105,767		105,767
Consumer and other loans		82		8		—		90		215		59,968		60,273

Total non-covered gross loans	$	422	$	465	$	—	$	887	$	57,997	$	3,200,354	$	3,259,238

(1)	As of December 31, 2012, $40.1 million of nonaccruing loans were current, $2.6 million were 30-59 days past due, and $15.3 million were 90+ days past due.

Non-Covered Impaired Loans

At September 30, 2013, the Company had non-covered impaired loans of $108.7 million. Of this amount, there was $10.4 million in nonaccrual commercial construction loans, $10.4 million of nonaccrual SFR mortgage loans, $17.8 million of nonaccrual commercial real estate loans, $3.7 million of nonaccrual commercial and industrial loans, $7.0 million of nonaccrual dairy & livestock loans and $159,000 of other loans. These non-covered impaired loans included $87.2 million of loans whose terms were modified in a troubled debt restructure, of which $28.0 million are classified as nonaccrual. The remaining balance of $59.2 million consists of 41 loans performing according to the restructured terms. The impaired loans had a specific allowance of $3.5 million at September 30, 2013. At December 31, 2012, the Company had classified as impaired, non-covered loans with a balance of $108.4 million with a related allowance of $2.3 million.

The following table presents held-for-investment, individually evaluated for impairment by class of loans, as of September 30, 2013 and December 31, 2012:

Non-Covered Impaired Loans


	September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	4,595	$	6,020	$	—	$	5,131	$	161
Real estate:
Commercial real estate
Owner occupied		13,361		14,412		—		13,635		494
Non-owner occupied		25,631		36,851		—		26,838		553
Construction
Speculative		10,369		10,956		—		10,522		—
Non-speculative		9,219		9,219		—		9,219		428
SFR mortgage		10,156		11,838		—		9,487		75
Dairy & livestock and agribusiness		17,553		18,515		—		19,308		445
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		142		214		—		149		—

Total		91,026		108,025		—		94,289		2,156
With a related allowance recorded:
Commercial and industrial		388		408		387		417		—
Real estate:
Commercial real estate
Owner occupied		7		9		1		11		—
Non-owner occupied		—		—		—		—		—
Construction
Speculative		7,651		7,651		144		7,651		232
Non-speculative		—		—		—		—		—
SFR mortgage		2,649		2,764		290		2,636		5
Dairy & livestock and agribusiness		6,941		7,654		2,658		7,571		—
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		17		19		5		19		—

Total		17,653		18,505		3,485		18,305		237

Total non-covered impaired loans	$	108,679	$	126,530	$	3,485	$	112,594	$	2,393


	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
Real estate:
Commercial real estate
Owner occupied		13,478		14,569		—		14,459		397
Non-owner occupied		28,639		38,633		—		29,801		670
Construction
Speculative		21,314		21,607		—		21,650		311
Non-speculative		9,219		9,219		—		9,219		574
SFR mortgage		11,079		14,342		—		11,292		54
Dairy & livestock and agribusiness		12,406		13,756		—		11,834		173
Municipal lease finance receivables		263		263		—		443		5
Consumer and other loans		142		196		—		145		—

Total		99,925		116,800		—		102,609		2,227
With a related allowance recorded:
Commercial and industrial		304		327		289		387		—
Real estate:
Commercial real estate
Owner occupied		19		19		2		28		—
Non-owner occupied		—		—		—		—		—
Construction
Speculative		—		—		—		—		—
Non-speculative		—		—		—		—		—
SFR mortgage		3,766		4,071		434		3,363		—
Dairy & livestock and agribusiness		4,303		4,340		1,596		4,017		73
Municipal lease finance receivables		—		—		—		—		—
Consumer and other loans		73		74		11		75		—

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

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 September 30, 2013 and December 31, 2012 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 mortgage loans where there is a potential modification in process, or on smaller balance non-collateral dependent loans.

Impaired construction speculative loans increased in the third quarter of 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 $10.4 million as of September 30, 2013.

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 $500,000 and zero provision for unfunded commitments for the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013 and December 31, 2012, the balance in this reserve was $9.1 million 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 September 30, 2013, we had loans of $87.2 million classified as TDR, of which $28.0 million are nonperforming and $59.2 million are performing. TDRs on accrual status are comprised of loans that were accruing interest 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. At September 30, 2013, performing TDRs were comprised of 15 commercial real estate loans of $21.2 million, two construction loans of $16.9 million, nine dairy & livestock loans of $17.5 million, eight single-family residential loans of $2.4 million, and seven commercial and industrial loans of $1.2 million. There were no loans removed from TDR classification for the nine months ended September 30, 2013 and 2012.

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 $2.9 million and $1.4 million of specific allowance to TDRs as of September 30, 2013 and December 31, 2012, respectively.

The following tables provide a summary of the activity related to TDRs for the three and nine months ended September 30, 2013, and 2012:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Performing TDRs:
Beginning balance	$	61,566		$	45,243		$	50,392		$	38,554
New modifications		—			9,506			21,364			20,106
Payoffs and payments, net		(2,481	)		(480	)		(13,820	)		(2,384	)
TDRs returned to accrual status		110			—			1,259			517
TDRs placed on nonaccrual status		—			(2,656	)		—			(5,180	)

Ending balance	$	59,195		$	51,613		$	59,195		$	51,613


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Nonperforming TDRs:
Beginning balance	$	26,497		$	31,753		$	31,309		$	23,844
New modifications		3,676			1,612			3,804			14,563
Charge-offs		(68	)		—			(68	)		—
Payoffs and payments, net		(1,950	)		(2,922	)		(5,741	)		(9,971	)
TDRs returned to accrual status		(110	)		—			(1,259	)		(517	)
TDRs placed on nonaccrual status		—			2,656			—			5,180

Ending balance	$	28,045		$	33,099		$	28,045		$	33,099

The following tables summarize loans modified as troubled debt restructurings during the three and nine months ended September 30, 2013, and 2012.

Modifications (1)


	For the Three Months Ended September 30, 2013
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2013		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		1		34		34		34		—
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		2		3,642		3,642		3,556		—

Total non-covered loans		3		3,676		3,676		3,590		—

Covered loans		—		—		—		—		—

Total gross loans		3	$	3,676	$	3,676	$	3,590	$	—


	For the Nine Months Ended September 30, 2013
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2013		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		4		265		265		223		122
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		1		168		168		143		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		7		18,848		18,848		16,068		—

Total non-covered loans		12		19,281		19,281		16,434		122

Covered loans		—		—		—		—		—

Total gross loans		12	$	19,281	$	19,281	$	16,434	$	122

(1)	The tables exclude modified loans that were paid off prior to the end of the period.

(2)	Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.


	For the Three Months Ended September 30, 2012
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2012		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		—	$	—	$	—	$	—	$	—
Change in amortization period or maturity		2		268		135		121		102
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		1		853		853		853		—
Non-owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		2		2,631		2,631		2,588		—
Construction:
Speculative
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		—		—		—		—		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		4		5,060		5,560		6,797		—
Municipal lease finance receivables
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		2		519		519		472		—

Total non-covered loans		11		9,331		9,698		10,831		102

Covered loans		—		—		—		—		—

Total gross loans		11	$	9,331	$	9,698	$	10,831	$	102


	For the Nine Months Ended September 30, 2012
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Outstanding Recorded Investment at September 30, 2012		Financial Effect Resulting From Modifications (2)
	(Dollars in thousands)
Commercial and industrial:
Interest rate reduction		1	$	80	$	80	$	74	$	—
Change in amortization period or maturity		8		1,890		1,757		1,270		105
Real estate:
Commercial real estate:
Owner occupied
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		4		3,921		3,921		3,916		—
Non-owner occupied
Interest rate reduction		2		3,891		3,891		3,865		—
Change in amortization period or maturity		2		2,766		2,766		2,325		—
Construction:
Speculative
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		1		10,966		10,966		10,618		—
Dairy & livestock and agribusiness:
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		8		9,447		9,947		10,804		—
Municipal lease finance receivables
Interest rate reduction		—		—		—		—		—
Change in amortization period or maturity		2		519		519		472		—

Total non-covered loans		28		33,480		33,847		33,344		105

Covered loans		—		—		—		—		—

Total gross loans		28	$	33,480	$	33,847	$	33,344	$	105

(1)	The tables exclude modified loans that were paid off prior to the end of the period.

(2)	Financial effects resulting from modifications represent charge-offs and specific allowance recorded at modification date.

As of September 30, 2013, there was one commercial real estate loan with an outstanding balance of $2.2 million that was previously modified as a troubled debt restructuring within the previous 12 months that subsequently defaulted during the nine months ended September 30, 2013.