(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 September 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)	September 30, 2011
	City Bank			North County Bank			Total
Commercial	$	18,205		$	27,427		$	45,632
Real estate mortgages:
One-to-four family residential		4,892			11,013			15,905
Multi-family residential and commercial		171,714			69,953			241,667
Total real estate mortgages		176,606			80,966			257,572

Real estate construction:
One-to-four family residential		31,993			20,031			52,024
Multi-family and commercial								-
Total real estate construction		31,993			20,031			52,024

Consumer - direct		3,686			11,622			15,308
Subtotal		230,490			140,046			370,536
Fair value discount		(50,060	)		(43,010	)		(93,070	)
Total covered loans		180,430			97,036			277,466
Allowance for loan losses		(1,018	)		-			(1,018	)
Total covered loans, net	$	179,412		$	97,036		$	276,448

(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 nine months ended September 30, 2011 and 2010, for each respective acquired loan portfolio:

(dollars in thousands)	Three Months Ended
	September 30,
	2011						2010
	City Bank			North County Bank			City Bank			North County Bank
Balance, beginning of period	$	71,089		$	23,275		$	19,037		$	-
Additions resulting from acquisition		-			-			-			30,895
Accretion to interest income		(6,466	)		(2,109	)		(5,369	)		(110	)
Disposals		(3,727	)		-			(1,087	)		-
Reclassification (to)/from nonaccretable difference		-			-			-			-
Balance, end of period	$	60,896		$	21,166		$	12,581		$	30,785

(dollars in thousands)	Nine Months Ended
	September 30,
	2011						2010
	City Bank			North County Bank			City Bank			North County Bank
Balance, beginning of period	$	56,079		$	27,880		$	-		$	-
Additions resulting from acquisition		-			-			23,964			30,895
Accretion to interest income		(18,493	)		(6,714	)		(10,296	)		(110	)
Disposals		(13,416	)		-			(1,087	)		-
Reclassification (to)/from nonaccretable difference		36,726			-			-			-
Balance, end of period	$	60,896		$	21,166		$	12,581		$	30,785

(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 nine months ended September 30, 2011 and 2010:

(dollars in thousands)	Three Months Ended
	September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	21,290		$	11,400		$	32,690
Additions to covered OREO		4,972			(36	)		4,936
Capitalized improvements		-			-			-
Dispositions of covered OREO		(9,527	)		(2,326	)		(11,853	)
Balance, end of period	$	16,735		$	9,038		$	25,773

(dollars in thousands)	Nine Months Ended
	September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	17,906		$	11,860		$	29,766
Additions to covered OREO		16,899			2,659			19,558
Capitalized improvements		-			746			746
Dispositions of covered OREO		(18,070	)		(6,227	)		(24,297	)
Balance, end of period	$	16,735		$	9,038		$	25,773

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

(dollars in thousands)	Three Months Ended
	September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	56,643		$	33,263		$	89,906
Change in FDIC indemnification asset		(6,225	)		-			(6,225	)
Transfers to due from FDIC		(532	)		(4,851	)		(5,383	)
Balance, end of period	$	49,886		$	28,412		$	78,298

(dollars in thousands)	Nine Months Ended
	September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	68,389		$	39,507		$	107,896
Change in FDIC indemnification asset		(13,753	)		1,301			(12,452	)
Transfers to due from FDIC		(4,750	)		(12,396	)		(17,146	)
Balance, end of period	$	49,886		$	28,412		$	78,298