(7) Covered Assets and FDIC Indemnification Asset

(a) Covered Loans: Loans acquired in an FDIC assisted acquisition that are subject to a loss share agreement are referred to as “covered loans” and reported separately in the Condensed Consolidated Statements of Financial Condition. Covered loans are reported exclusive of the expected cash flow reimbursements from the FDIC.

The following table presents the major types of covered loans at June 30, 2011 and December 31, 2010. The classification of covered loan balances presented is reported in accordance with the regulatory reporting requirements.

(dollars in thousands)	June 30, 2011
	City Bank			North County Bank			Total
Commercial	$	20,597		$	30,243		$	50,840
Real estate mortgages:
One-to-four family residential		4,823			11,084			15,907
Multi-family residential and commercial		187,279			73,830			261,109
Total real estate mortgages		192,102			84,914			277,016

Real estate construction:
One-to-four family residential		6,879			7,581			14,460
Multi-family and commercial		26,964			17,315			44,279
Total real estate construction		33,843			24,896			58,739

Consumer - direct		3,787			12,415			16,202
Subtotal		250,329			152,468			402,797
Fair value discount		(57,253	)		(46,048	)		(103,301	)
Total covered loans		193,076			106,420			299,496
Allowance for loan losses		(1,018	)		-			(1,018	)
Total covered loans, net	$	192,058		$	106,420		$	298,478

(dollars in thousands)	December 31, 2010
	City Bank			North County Bank			Total
Commercial	$	22,524		$	10,313		$	32,837
Real estate mortgages:
One-to-four family residential		7,138			10,586			17,724
Multi-family residential and commercial		237,510			44,524			282,034
Total real estate mortgages		244,648			55,110			299,758

Real estate construction:
One-to-four family residential		8,829			62,056			70,885
Multi-family and commercial		42,281			36,398			78,679
Total real estate construction		51,110			98,454			149,564

Consumer - direct		4,050			18,576			22,626
Subtotal		322,332			182,453			504,785
Fair value discount		(82,782	)		(55,850	)		(138,632	)
Total covered loans		239,550			126,603			366,153
Allowance for loan losses		(1,336	)		-			(1,336	)
Total covered loans, net	$	238,214		$	126,603		$	364,817

In estimating the fair value of the covered loans at the acquisition date, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments and (b) estimated the amount and timing of undiscounted expected principal and interest payments. The difference between these two amounts represents the nonaccretable difference.

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

The following table presents a reconciliation of the undiscounted contractual cash flows, nonaccretable difference, accretable yield and fair value of covered loans for each respective acquired loan portfolio at the acquisition dates:

(dollars in thousands)	City Bank			North County Bank
	April 16, 2010			September 24, 2010
Undiscounted contractual cash flows	$	504,721		$	225,937
Undiscounted cash flows not expected to be collected
(nonaccretable difference)		(132,419	)		(61,906	)
Undiscounted cash flows expected to be collected		372,302			164,031
Accretable yield at acquisition		(50,721	)		(30,895	)
Estimated fair value of loans acquired at acquisition	$	321,581		$	133,136

The following table presents the changes in the accretable yield for the three and six months ended June 30, 2011 and 2010, for each respective acquired loan portfolio:

(dollars in thousands)	Three Months Ended
	June 30,
	2011						2010
	City Bank			North County Bank			City Bank
Balance, beginning of period	$	45,804		$	25,463		$	-
Additions resulting from acquisition		-			-			23,964
Accretion to interest income		(5,961	)		(2,188	)		(4,927	)
Disposals		(5,480	)		-			-
Reclassification (to)/from nonaccretable difference		36,726			-			-
Balance, end of period	$	71,089		$	23,275		$	19,037

(dollars in thousands)	Six Months Ended
	June 30,
	2011						2010
	City Bank			North County Bank			City Bank
Balance, beginning of period	$	56,079		$	27,880		$	-
Additions resulting from acquisition		-			-			23,964
Accretion to interest income		(12,025	)		(4,605	)		(4,927	)
Disposals		(9,691	)		-			-
Reclassification (to)/from nonaccretable difference		36,726			-			-
Balance, end of period	$	71,089		$	23,275		$	19,037

The following table summarizes nonperforming covered assets at June 30, 2011 and December 31, 2010:

(dollars in thousands)	June 30, 2011		December 31, 2010
Covered nonaccrual loans	$	90,840	$	96,182
Covered restructured loans		-		-
Total covered nonperforming loans		90,840		96,182
Covered other real estate owned		32,690		29,766
Total covered nonperforming assets	$	123,530	$	125,948

Total covered impaired loans	$	90,840	$	96,182
Covered accruing loans past due 90
days or more		-		-

Allowance for loan losses	$	1,018	$	1,336

(b) Covered Other Real Estate Owned: All OREO acquired in FDIC-assisted acquisitions that are subject to an FDIC loss share agreement are referred to as “covered OREO” and reported separately in the Condensed Consolidated Statements of Financial Condition. Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered OREO at the lower of the loan's appraised value, less selling costs, or the carrying value

The following tables summarize the activity related to covered OREO for the three and six months ended June 30, 2011 and 2010:

(dollars in thousands)	Three Months Ended
	June 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	17,463		$	11,363		$	28,826
Additions to covered OREO		5,919			2,105			8,024
Capitalized improvements		-			673			673
Dispositions of covered OREO		(2,092	)		(2,741	)		(4,833	)
Balance, end of period	$	21,290		$	11,400		$	32,690

(dollars in thousands)	Six Months Ended
	June 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	17,906		$	11,860		$	29,766
Additions to covered OREO		11,927			2,695			14,622
Capitalized improvements		-			746			746
Dispositions of covered OREO		(8,543	)		(3,901	)		(12,444	)
Balance, end of period	$	21,290		$	11,400		$	32,690

(dollars in thousands)	Six Months Ended
	June 30, 2010
	City Bank
Balance, beginning of period	$	-
Additions resulting from acquisition		5,798
Additions to covered OREO		8,762
Dispositions of covered OREO		(382	)
Balance, end of period	$	14,178

(c) FDIC Indemnification Asset: The following table summarizes the activity related to the FDIC indemnification asset for the three and six months ended June 30, 2011 and 2010:

(dollars in thousands)	Three Months Ended
	June 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	62,007		$	34,856		$	96,863
Change in FDIC indemnification asset		(2,153	)		425			(1,728	)
Transfers to due from FDIC		(3,211	)		(2,018	)		(5,229	)
Balance, end of period	$	56,643		$	33,263		$	89,906

(dollars in thousands)	Six Months Ended
	June 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	68,389		$	39,507		$	107,896
Change in FDIC indemnification asset		(3,888	)		844			(3,044	)
Transfers to due from FDIC		(7,858	)		(7,088	)		(14,946	)
Balance, end of period	$	56,643		$	33,263		$	89,906

(dollars in thousands)	Six Months Ended
	June 30, 2010
	City Bank
Balance, beginning of period	$	-
Additions resulting from acquisition		84,393
Change in FDIC indemnification asset		786
Balance, end of period	$	85,179