Covered assets consist of loans receivable and foreclosed property that we acquired in the FDIC-assisted SLTB and WCB acquisitions for which we entered into shared-loss agreements with the FDIC. The Bank will share in the losses with the FDIC, which begin with the first dollar of loss incurred on the loan pools (including single-family residential mortgage loans, commercial loans and foreclosed property) covered under our shared-loss agreements. We refer to all other loans not covered under our shared-loss agreements as non-covered loans.

Pursuant to the terms of the shared-loss agreements, the FDIC is obligated to reimburse the Bank for 80 percent of eligible losses with respect to covered assets. The Bank has a corresponding obligation to reimburse the FDIC for 80 percent of eligible recoveries with respect to covered loans. The shared-loss agreements for commercial and single-family residential mortgage loans are in effect for five years and ten years, respectively, from the acquisition date and the loss recovery provisions are in effect for eight years and ten years, respectively, from the acquisition date.


	Western Commercial		San Luis Trust Bank
	November 5, 2010		February 18, 2011		Total
Home mortgage	$	2,484	$	64,524	$	67,008
Commercial mortgage		25,920		15,948		41,868
Construction and land loans		7,599		23,395		30,994
Multifamily		—		18,450		18,450
Commercial loans and lines of credit		19,486		2,353		21,839
Home equity loans and lines of credit		—		13,669		13,669
Installment and credit card		—		453		453
Total	$	55,489	$	138,792	$	194,281

In estimating the fair value of the covered loans at the acquisition date, we (a) calculated the amount and timing of contractual 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.


	Western Commercial			San Luis Trust Bank
	November 5, 2010			February 18, 2011			Total
Undiscounted contractual cash flows	$	81,431		$	252,263		$	333,694
Undiscounted cash flows not expected to be collected (nonaccretable difference)		(20,094	)		(81,586	)		(101,680	)
Undiscounted cash flows expected to be collected		61,337			170,677			232,014
Accretable yield at acquisition		(5,848	)		(31,885	)		(37,733	)
Estimated fair value of loans acquired at acquisition	$	55,489		$	138,792		$	194,281


	Twelve months ended December 31, 2012
	Western Commercial			San Luis Trust Bank			Total

Balance, beginning of period	$	9,399		$	55,318		$	64,717
Accretion to interest income		(4,174	)		(14,731	)		(18,905	)
Reclassifications (to)/from nonaccretable difference		2,516			(8,009	)		(5,493	)
Balance, end of period	$	7,741		$	32,578		$	40,319

	Twelve months ended December 31, 2011
	Western Commercial			San Luis Trust Bank			Total

Balance, beginning of period	$	5,457		$	—		$	5,457
Additions resulting from acquisition		—			31,885			31,885
Accretion to interest income		(3,836	)		(10,089	)		(13,925	)
Reclassifications (to)/from nonaccretable difference		7,778			33,522			41,300
Balance, end of period	$	9,399		$	55,318		$	64,717


Covered loans by property type (in thousands)	At December 31, 2012		At December 31, 2011
Home mortgage	$	29,896	$	36,736
Commercial mortgage		28,079		37,804
Construction and land loans		19,699		22,875
Multifamily		9,699		15,944
Commercial loans and lines of credit		8,167		11,206
Home equity loans and lines of credit		6,891		10,841
Installment and credit card		—		6
Total covered loans	$	102,431	$	135,412

The FDIC shared-loss asset was $45.3 million at December 31, 2012 and $68.1 million at December 31, 2011. The ultimate collectability of this asset is dependent upon the performance of the underlying covered assets, the passage of time and claims paid by the FDIC.


	Twelve months ended December 31, 2012
(in thousands)	WCB			SLTB			Total
Balance, beginning of period	$	9,159		$	58,924		$	68,083
FDIC share of additional losses		520			1,299			1,819
Cash payments received from FDIC		(3,926	)		(17,362	)		(21,288	)
Net amortization		(287	)		(2,982	)		(3,269	)
Balance, end of period	$	5,466		$	39,879		$	45,345


	Twelve months ended December 31, 2011
(in thousands)	WCB			SLTB			Total
Balance, beginning of period	$	16,725		$	—		$	16,725
Acquisition		—			70,293			70,293
FDIC share of additional losses		740			2,189			2,929
Cash payments received from FDIC		(8,379	)		(13,672	)		(22,051	)
Net accretion		73			114			187
Balance, end of period	$	9,159		$	58,924		$	68,083

Forty-five days following the tenth anniversary of the WCB and SLTB acquisition dates, the Company will be required to perform a calculation and determine if a payment to the FDIC is necessary. The payment amount will be 50 percent of the excess, if any, of (i) 20 percent of the intrinsic loss estimate minus (ii) the sum of (a) 20 percent of the net loss amount, plus (b) 25 percent of the asset discount bid, plus (c) 3.5 percent of total loss share assets at acquisition. The Company’s estimate for the present value of this liability was $3.9 million and $3.8 million at December 31, 2012 and December 31, 2011.

We evaluated each of the acquired loans under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30, to determine loans for which 1) there was evidence of credit deterioration since origination and 2) it was probable that we would not collect all contractually required payments receivable. We determined the best indicator of such evidence was an individual loan’s accrual status. Therefore, an individual loan on nonaccrual at the acquisition date (generally 90 days or greater contractually past due) was deemed to be non-performing credit impaired and therefore within the scope of ASC 310-30. Acquired loans that were accruing at the acquisition date were separately identified and labeled performing credit impaired loans.

Pursuant to an AICPA letter dated December 18, 2009, the AICPA summarized the SEC Staff’s view regarding the accounting in subsequent periods for discount accretion associated with non-credit impaired loans acquired in a business combination or asset purchase. Regarding the accounting for such loans, in the absence of further standard setting, the AICPA understands that the SEC Staff would not object to an accounting policy based on contractual cash flows or an accounting policy based on expected cash flows. We believe analogizing to ASC 310-30 is an appropriate method to follow in accounting for the credit-related portion of the fair value discount on the performing credit impaired loans. By doing so, these loans, which are labeled performing credit impaired, are only being accreted up to the cash flows that we expected to receive at acquisition of the loan. Given the lending practices of the institution from which the loans were acquired, and in estimating the expected cash flows for each designated pool, all loans acquired were recognized to have some degree of credit impairment.

On the acquisition dates, the amounts by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the accretable yield. The accretable yield is taken into interest income over the life of the loans using the effective yield method. The accretable yield changes over time due to both accretion and as actual and expected cash flows vary from the acquisition date estimated cash flows. 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 remaining undiscounted expected cash flows are calculated at each financial reporting date based on information then currently available. Increases in expected cash flows over those originally estimated increase the carrying value of the pool and are recognized as interest income prospectively. Decreases in expected cash flows compared to those originally estimated decrease the carrying value of the pool and are recognized by recording a provision for credit losses and establishing an allowance for credit losses. As the accretable yield increases due to cash flow expectations, the offset is a change to the nonaccretable difference.

The acquired covered loans are and will continue to be subject to the Bank’s internal and external credit review and monitoring practices. The covered loans have the same credit quality indicators, such as risk grade and classification, as the non-covered loans, to enable the monitoring of the borrower’s credit and the likelihood of repayment. If credit deteriorates beyond the respective acquisition date fair value amount of covered loans under ASC 310-30, such deterioration will be reserved for and a provision for credit losses will be charged to earnings with a partially offsetting noninterest income item reflected in the increase of the FDIC shared-loss asset.

At December 31, 2012 and December 31, 2011, there was no allowance for the covered loans accounted for under ASC 310-30 related to deterioration, as the credit quality deterioration was not beyond the acquisition date fair value amounts of the covered loans.


	At December 31, 2012
	Accruing loans 30-59 days past due		Accruing loans 60-89 days past due		Accruing loans 90+ days past due		Total Accruing past due loans		Nonaccrual past due loans		Current loans		Total
	(in thousands)
Commercial loans and lines	$	38	$	—	$	—	$	38	$	1,537	$	6,592	$	8,167
Commercial mortgage		163		1,244		—		1,407		860		25,812		28,079
Multifamily		149		—		—		149		867		8,683		9,699
Construction and land		146		—		—		146		5,642		13,911		19,699
Home mortgage		270		—		—		270		5,187		24,439		29,896
Home equity loans and lines		368		—		—		368		86		6,437		6,891
Total	$	1,134	$	1,244	$	—	$	2,378	$	14,179	$	85,874	$	102,431


	At December 31, 2011
	Accruing loans 30-59 days past due		Accruing loans 60-89 days past due		Accruing loans 90+ days past due		Total Accruing past due loans		Nonaccrual past due loans		Current loans		Total
	(in thousands)
Commercial loans and lines	$	109	$	—	$	—	$	109	$	1,338	$	9,759	$	11,206
Commercial mortgage		—		—		—		—		3,043		34,761		37,804
Multifamily		97		—		—		97		3,670		12,177		15,944
Construction and land		755		—		—		755		3,920		18,200		22,875
Home mortgage		793		909		511		2,213		6,389		28,134		36,736
Home equity loans and lines		243		—		—		243		187		10,411		10,841
Installment		—		—		—		—		—		6		6
Total	$	1,997	$	909	$	511	$	3,417	$	18,547	$	113,448	$	135,412

At December 31, 2012, included in covered non-accrual loans were restructured loans totaling $5.6 million. No interest income was recognized on these loans for the year ended December 31, 2012. We had no commitments to lend additional funds to these borrowers.

At December 31, 2011, included in covered non-accrual loans were restructured loans totaling $9.6 million. No interest income was recognized on these loans for the year ended December 31, 2011. We had no commitments to lend additional funds to these borrowers.


	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)
Home mortgage	$	8,675	$	3,718	$	17,503	$	—	$	—	$	29,896
Commercial mortgage		17,067		5,022		5,942		48		—		28,079
Construction and land		3,580		7,121		8,998		—		—		19,699
Multifamily		5,109		—		4,590		—		—		9,699
Commercial loans and lines of credit		4,429		1,162		2,576		—		—		8,167
Home equity loans and lines		5,199		647		1,045		—		—		6,891
	$	44,059	$	17,670	$	40,654	$	48	$	—	$	102,431


	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)
Home mortgage	$	11,213	$	5,953	$	19,570	$	—	$	—	$	36,736
Commercial mortgage		17,888		10,737		9,179		—		—		37,804
Construction and land		4,447		4,129		14,299		—		—		22,875
Multifamily		9,247		—		6,697		—		—		15,944
Commercial loans and lines of credit		3,076		2,057		5,952		121		—		11,206
Home equity loans and lines		8,513		1,327		1,001		—		—		10,841
Installment		2		—		4		—		—		6
	$	54,386	$	24,203	$	56,702	$	121	$	—	$	135,412