(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 tables present the major types of covered loans at December 31, 2012 and 2011:

(dollars in thousands)	December 31, 2012
	City Bank			North County Bank			Total
Commercial	$	13,863		$	15,148		$	29,011
Real estate mortgages:
One-to-four family residential		3,783			10,412			14,195
Multi-family residential and commercial		132,280			52,303			184,583
Total real estate mortgages		136,063			62,715			198,778

Real estate construction:
One-to-four family residential		4,764			3,000			7,764
Multi-family and commercial		12,369			6,374			18,743
Total real estate construction		17,133			9,374			26,507

Consumer - direct		2,698			7,521			10,219
Subtotal		169,757			94,758			264,515
Fair value discount		(28,980	)		(18,196	)		(47,176	)
Total covered loans		140,777			76,562			217,339
Allowance for loan losses		(2,727	)		(525	)		(3,252	)
Total covered loans, net	$	138,050		$	76,037		$	214,087

(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		6,102			5,773			11,875
Multi-family and commercial		21,479			12,991			34,470
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

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, 2012 and 2011 for each respective acquired loan portfolio:

(dollars in thousands)	December 31, 2012
	City Bank			North County Bank
Balance, beginning of period	$	78,004		$	29,574
Accretion to interest income		(21,282	)		(14,905	)
Disposals		(8,866	)		(6,546	)
Reclassification (to) from nonaccretable difference		1,312			11,444
Balance, end of period	$	49,168		$	19,567

(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

(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, 2012 and 2011:

(dollars in thousands)	December 31, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	19,341		$	7,281		$	26,622
Additions to covered OREO		2,515			7,201			9,716
Capitalized improvements		-			-			-
Dispositions of covered OREO, net		(11,991	)		(7,183	)		(19,174	)
Valuation adjustments		(2,466	)		(1,238	)		(3,704	)
Balance, end of period	$	7,399		$	6,061		$	13,460

(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		23,490			1,575			25,065
Capitalized improvements		-			697			697
Dispositions of covered OREO, net		(15,401	)		(6,833	)		(22,234	)
Valuation adjustments		(6,654	)		(18	)		(6,672	)
Balance, end of period	$	19,341		$	7,281		$	26,622

(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, 2012 and 2011:

(dollars in thousands)	December 31, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	43,235		$	22,351		$	65,586
Change in FDIC indemnification asset		(8,704	)		(422	)		(9,126	)
Reduction due to loans paid in full		(2,987	)		(2,597	)		(5,584	)
Transfers to (due from) FDIC		(11,154	)		(5,151	)		(16,305	)
Balance, end of period	$	20,390		$	14,181		$	34,571

(dollars in thousands)	December 31, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	66,560		$	39,507		$	106,067
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		(5,592	)		(12,836	)		(18,428	)
Balance, end of period	$	43,235		$	22,351		$	65,586