(7) Covered Assets and 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 Consolidated Statements of Financial Condition. Covered loans are reported exclusive of the expected cash flow reimbursements from the FDIC.

The following table reflects the estimated fair value of the acquired loans at the acquisition dates:

(dollars in thousands)	City Bank			North County Bank
	April 16, 2010			September 24, 2010
Gross loans acquired	$	447,959		$	200,496
Fair value discount		(126,378	)		(67,360	)
Covered loans, net	$	321,581		$	133,136

The following tables present the major types of covered loans at December 31, 2011 and 2010:

(dollars in thousands)	December 31, 2011
	City Bank			North County Bank			Total
Commercial	$	17,380		$	26,208		$	43,588
Real estate mortgages:
One-to-four family residential		4,673			11,080			15,753
Multi-family residential and commercial		163,028			67,282			230,310
Total real estate mortgages		167,701			78,362			246,063

Real estate construction:
One-to-four family residential								-
Multi-family and commercial								-
Total real estate construction		27,581			18,764			46,345

Consumer - direct		3,562			11,206			14,768
Subtotal		216,224			134,540			350,764
Fair value discount		(46,099	)		(35,584	)		(81,683	)
Total covered loans		170,125			98,956			269,081
Allowance for loan losses		(655	)		(215	)		(870	)
Total covered loans, net	$	169,470		$	98,741		$	268,211

(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

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	)		(69,680	)
Undiscounted cash flows expected to be collected		372,302			156,257
Accretable yield at acquisition		(50,721	)		(23,121	)
Estimated fair value of loans acquired at acquisition	$	321,581		$	133,136

The following tables present the changes in the accretable yield for the years ended December 31, 2011 and 2010 for each respective acquired loan portfolio:

(dollars in thousands)	December 31, 2011
	City Bank			North County Bank
Balance, beginning of period	$	56,079		$	19,626
Accretion to interest income		(24,490	)		(10,519	)
Disposals		(16,314	)		52
Reclassification (to)/from nonaccretable difference		62,729			20,415
Balance, end of period	$	78,004		$	29,574

(dollars in thousands)	December 31, 2010
	City Bank			North County Bank
Balance, beginning of period	$	-		$	-
Additions resulting from acquisition		50,721			23,121
Accretion to interest income		(16,258	)		(3,154	)
Disposals		(11,093	)		(360	)
Reclassification (to)/from nonaccretable difference		32,709			19
Balance, end of period	$	56,079		$	19,626

(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 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 loan's carrying value, inclusive of the acquisition date fair value discount.

The following tables summarize the activity related to covered OREO for the years ended December 31, 2011 and 2010:

(dollars in thousands)	December 31, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	17,906		$	11,860		$	29,766
Additions to covered OREO		16,836			1,557			18,393
Capitalized improvements		-			697			697
Dispositions of covered OREO		(15,401	)		(6,833	)		(22,234	)
Balance, end of period	$	19,341		$	7,281		$	26,622

(dollars in thousands)	December 31, 2010
	City Bank			North County Bank			Total
Balance, beginning of period	$	-		$	-		$	-
Acquisition		5,798			12,412			18,210
Additions to covered OREO		16,854			1,938			18,792
Capitalized improvements		234			48			282
Dispositions of covered OREO		(4,330	)		(2,330	)		(6,660	)
Valuation adjustments		(650	)		(208	)		(858	)
Balance, end of period	$	17,906		$	11,860		$	29,766

(c) FDIC Indemnification Asset: The following tables summarize the activity related to the FDIC indemnification asset for each respective acquired portfolio for the years ended December 31, 2011 and 2010:

(dollars in thousands)	December 31, 2010
	City Bank			North County Bank			Total
Balance, beginning of period	$	68,389		$	39,507		$	107,896
Change in FDIC indemnification asset		(9,061	)		(171	)		(9,232	)
Reduction due to loans paid in full		(8,672	)		(4,149	)		(12,821	)
Transfers to due from FDIC		(7,421	)		(12,836	)		(20,257	)
Balance, end of period	$	43,235		$	22,351		$	65,586

(dollars in thousands)	December 31, 2010
	City Bank			North County Bank		Total
Balance, beginning of period	$	-		$	-	$	-
Acquisition		84,393			39,000		123,393
Change in FDIC indemnification asset		1,426			458		1,884
Reduction due to loans paid in full		(2,096	)		-		(2,096	)
Transfers to due from FDIC		(17,163	)		49		(17,114	)
Balance, end of period	$	66,560		$	39,507	$	106,067