Edgar Filing: First California Financial Group, Inc.

firstcal-10q_06302011.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-52498

FIRST CALIFORNIA FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	38-3737811
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

3027 Townsgate Road, Suite 300 Westlake Village, California	91361
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (805) 322-9655

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

29,240,079 shares of Common Stock, $0.01 par value, as of August 10, 2011

FIRST CALIFORNIA FINANCIAL GROUP, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended June 30, 2011

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION

Item 1	Financial Statements	3

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4T	Controls and Procedures	60

PART II—OTHER INFORMATION

Item 1	Legal Proceedings	61

Item 1A	Risk Factors	61

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	62

Item 3	Defaults Upon Senior Securities	62

Item 4	(REMOVED AND RESERVED)	62

Item 5	Other Information	62

Item 6	Exhibits	62

SIGNATURES		63

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

(in thousands, except share and per share data)	June 30, 2011			December 31, 2010
Cash and due from banks	$	46,530		$	25,487
Interest bearing deposits with other banks		111,350			62,516
Securities available-for-sale, at fair value		316,496			272,439
Non-covered loans, net		900,601			930,712
Covered loans		172,621			53,870
Premises and equipment, net		18,628			19,710
Goodwill		60,720			60,720
Other intangibles, net		15,135			9,915
Deferred tax assets, net		—			4,563
Cash surrender value of life insurance		12,451			12,232
Non-covered foreclosed property		20,029			26,011
Covered foreclosed property		5,636			977
FDIC shared-loss asset		81,630			16,725
Accrued interest receivable and other assets		40,154			25,457

Total assets	$	1,801,981		$	1,521,334

Non-interest checking	$	429,528		$	331,648
Interest checking		98,695			88,638
Money market and savings		490,062			388,289
Certificates of deposit, under $100,000		89,679			84,133
Certificates of deposit, $100,000 and over		298,750			263,580

Total deposits		1,406,714			1,156,288
Securities sold under agreements to repurchase		30,000			45,000
Federal Home Loan Bank advances		97,626			86,500
Junior subordinated debentures		26,805			26,805
Deferred tax liabilities, net		11,353			—
FDIC shared-loss liability		3,643			988
Accrued interest payable and other liabilities		8,301			7,712

Total liabilities		1,584,442			1,323,293

Perpetual preferred stock; authorized 2,500,000 shares
Series A - $0.01 par value, 1,000 shares issued and outstanding as of June 30, 2011 and December 31, 2010		1,000			1,000
Series B - $0.01 par value, 25,000 shares issued and outstanding as of June 30, 2011 and December 31, 2010		23,857			23,627
Common stock, $0.01 par value; authorized 100,000,000 shares; 28,756,480 shares issued at June 30, 2011 and 28,517,161 shares issued at December 31, 2010; 28,410,079 and 28,170,760 shares outstanding at June 30, 2011 and December 31, 2010		288			282
Additional paid-in capital		175,329			175,102
Treasury stock, 346,401 shares at cost at June 30, 2011 and at December 31, 2010		(3,061	)		(3,061	)
Retained earnings		21,977			4,827
Accumulated other comprehensive loss		(1,851	)		(3,736	)

Total shareholders’ equity		217,539			198,041

Total liabilities and shareholders’ equity	$	1,801,981		$	1,521,334

See accompanying notes to consolidated financial statements.

FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (unaudited)

	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share data)	2011			2010			2011			2010
Interest and fees on loans	$	17,236		$	12,819		$	32,368		$	25,806
Interest on securities		1,680			1,508			2,991			3,097
Interest on federal funds sold and interest bearing deposits		111			59			180			79
Total interest income		19,027			14,386			35,539			28,982

Interest on deposits		2,316			1,884			4,658			4,056
Interest on borrowings		877			1,257			1,937			2,569
Interest on junior subordinated debentures		334			439			665			878
Total interest expense		3,527			3,580			7,260			7,503

Net interest income before provision for loan losses		15,500			10,806			28,279			21,479
Provision for loan losses		500			1,766			3,000			3,520
Net interest income after provision for loan losses		15,000			9,040			25,279			17,959

Service charges on deposit accounts		858			814			1,755			1,599
Net gain on sale of securities		490			130			490			262
Impairment loss on securities		—			—			(1,066	)		(18	)
Gain on transfer of foreclosed property		—			691			—			691
Gain on acquisitions		466			—			35,202			—
Other income		1,376			319			1,718			613
Total noninterest income		3,190			1,954			38,099			3,147

Salaries and employee benefits		6,572			4,889			12,640			9,859
Premises and equipment		1,603			1,517			3,142			3,054
Data processing		814			597			1,875			1,192
Legal, audit and other professional services		1,568			590			3,228			772
Printing, stationery and supplies		112			113			208			125
Telephone		208			213			374			437
Directors’ expense		100			113			206			233
Advertising, marketing and business development		428			286			797			513
Postage		65			47			121			103
Insurance and regulatory assessments		750			780			1,413			1,580
Loss on and expense of foreclosed property		486			468			5,738			546
Amortization of intangible assets		624			417			1,040			833
Other expenses		687			721			1,548			1,420
Total noninterest expense		14,017			10,751			32,330			20,667
Income before provision for income taxes		4,173			243			31,048			439
Provision for income taxes		1,756			96			13,043			175
Net income		2,417			147			18,005			264
Preferred stock dividends		(313	)		(313	)		(625	)		(625	)
Net income (loss) available to common shareholders	$	2,104		$	(166	)	$	17,380		$	(361	)

Earnings (loss) available to common shareholders per common share:
Basic	$	0.07		$	(0.01	)	$	0.61		$	(0.02	)
Diluted	$	0.07		$	(0.01	)	$	0.61		$	(0.02	)

See accompanying notes to consolidated financial statements.

FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

	Six Months Ended June 30,
(in thousands)	2011			2010
Net income	$	18,005		$	264
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		3,000			3,520
Stock-based compensation costs		232			348
Gain on acquisitions		(35,202	)		—
Gain on sales of securities		(490	)		(262	)
(Gain) loss on sale and transfer of foreclosed property		5,283			(695	)
Impairment loss on securities		1,066			18
Amortization of net premiums on securities available-for-sale		1,917			1,683
Depreciation and amortization of premises and equipment		1,017			938
Amortization of intangible assets		1,040			833
Change in FDIC shared-loss asset		(1,157	)		—
(Gain) loss on disposal of premises and equipment		(150	)		50
Increase in cash surrender value of life insurance		(219	)		(221	)
Decrease in deferred tax assets, net of acquisitions		1,446			2,235
Increase in accrued interest receivable and other assets, net of effects of acquisitions		(11,187	)		(125	)
Decrease in accrued interest payable and other liabilities, net of effects of acquisitions		(3,194	)		(998	)

Net cash (used) provided by operating activities		(18,593	)		7,588

Purchases of securities available-for-sale, net of effects of acquisitions		(85,858	)		(75,334	)
Proceeds from repayments and maturities of securities available-for-sale		63,300			62,587
Proceeds from sales of securities available-for-sale		21,011			79,917
Purchases of Federal Home Loan Bank and other stock		—			(6	)
Redemption of Federal Home Loan Bank stock		969			313
Net change in federal funds sold and interest bearing deposits, net of effects from acquisitions		13,256			(78,162	)
Loan originations and principal collections, net of effects of acquisitions		46,343			17,814
Purchases of premises and equipment, net of effects of acquisitions		(1,228	)		(375	)
Proceeds from FDIC shared-loss asset		6,545			—
Proceeds from sale of premises and equipment		1,267			—
Proceeds from sale of non-covered foreclosed property		865			1,210
Proceeds from sale of covered foreclosed property		8,828			—
Net cash acquired in acquisitions		122,119			—

Net cash provided by investing activities		197,417			7,964

Net (decrease) increase in noninterest-bearing deposits, net of effects of acquisitions		(3,371	)		23,494
Net decrease in interest-bearing deposits, net of effects of acquisitions		(103,370	)		(55,752	)
Net decrease in FHLB advances and other borrowings, net of effects of acquisitions		(50,415	)		(14,724	)
Dividends paid on preferred stock		(625	)		(625	)
Proceeds from issuance of common stock		—			38,916

Net cash used by financing activities		(157,781	)		(8,691)

Change in cash and due from banks		21,043			6,861
Cash and due from banks, beginning of period		25,487			26,757

Cash and due from banks, end of period	$	46,530		$	33,618

Supplemental cash flow information:
Cash paid for interest	$	7,109		$	7,287
Cash paid for income taxes	$	4,570		$	1,000
Supplemental disclosure of noncash items:
Net change in fair value of securities available-for-sale, net of tax	$	2,014		$	3,352
Net change in fair value of cash flow hedges, net of tax	$	(129	)	$	(86	)
Non-covered loans transferred to foreclosed property	$	229		$	24,398
Covered loans transferred to foreclosed property	$	2,752		$	—
Acquisitions:
Assets acquired	$	456,922		$	—
Liabilities assumed	$	436,498		$	—

See accompanying notes to consolidated financial statements.

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Organization and nature of operations – First California Financial Group, Inc., or First California, or the Company, is a bank holding company incorporated under the laws of the State of Delaware and headquartered in Westlake Village, California. The principal asset of the Company is the capital stock of First California Bank, or the Bank. The Bank is a full-service commercial bank headquartered in Westlake Village, California, chartered under the laws of the State of California and subject to supervision by the California Department of Financial Institutions and the Federal Deposit Insurance Corporation, or the FDIC. The FDIC insures the Bank’s deposits up to the maximum legal limit.

On November 5, 2010, the Bank assumed certain liabilities and acquired certain assets and substantially all of the operations of Western Commercial Bank, or WCB, located in Woodland Hills, California, from the FDIC. The Bank acquired, received and recognized certain assets with an estimated fair value of approximately $109 million, including $55 million of loans, $32 million of cash, $17 million of a FDIC shared-loss asset, $2 million of securities and $3 million of other assets. Liabilities with an estimated fair value of approximately $107 million were also assumed and recognized, including $105 million of deposits and $2 million of other liabilities. The Bank recorded a pre-tax bargain purchase gain of $2.3 million in connection with this transaction. This transaction increased the number of the Bank’s full-service branch locations to 18 and the Bank fully integrated the former WCB branch into its full-service branch network prior to December 31, 2010.

On February 18, 2011, the Bank assumed certain liabilities and acquired certain assets and substantially all of the operations of San Luis Trust Bank, or SLTB, located in San Luis Obispo, California, from the FDIC. The Bank acquired, received and recognized certain assets with an estimated fair value of approximately $365 million, including $139 million of loans, $99 million of cash and federal funds sold, $70 million of a FDIC shared-loss asset, $41 million of securities, $11 million of foreclosed property and $5 million of other assets. Liabilities with an estimated fair value of approximately $345 million were also assumed and recognized, including $266 million of deposits, $62 million of Federal Home Loan Bank advances, $15 million in a deferred tax liability, $3 million of a FDIC shared-loss liability and $0.4 million of other liabilities. Based upon preliminary estimates of fair values assigned to acquired assets and liabilities as compared to the acquisition price, the Bank recorded a pre-tax bargain purchase gain of $34.7 million in connection with this transaction. This transaction increased the number of the Bank’s full-service branch locations to 19 and the Bank fully integrated the former SLTB branch into its full-service branch network in June 2011.

On April 8, 2011, the Bank completed the acquisition of the Electronic Banking Solutions division of Palm Desert National Bank. The transaction included the division’s customer base, core deposits, and employees. The Electronic Payment Services Division, or the EPS division, its new name under the Bank, issues prepaid cards and sponsors merchant acquiring services for all national and regional networks, including Visa, MasterCard, and Discover throughout all 50 states and U.S. territories. The Bank acquired cash of $85.5 million, recognized intangible assets of $6.0 million, assumed $91 million of deposits and recognized a pre-tax bargain purchase gain of $0.5 million in connection with this transaction.

The Bank serves the comprehensive financial needs of businesses and consumers in Los Angeles, Orange, Riverside, San Diego, San Bernardino, San Luis Obispo and Ventura counties through 19 full-service branch locations.

Consolidation – The accompanying condensed consolidated financial statements include, in conformity with generally accepted accounting principles in the United States of America, the accounts of the Company, the Bank, Wendy Road Office Development LLC, a subsidiary of the Bank which manages and disposes of real estate, and SC Financial, an inactive subsidiary of First California. The Company does not consolidate the accounts of FCB Statutory Trust I and First California Statutory Trust I, or the Trusts, in the consolidated financial statements. The Company does include, however, the junior subordinated debentures issued by the Company to the Trusts on the consolidated balance sheets. Results of operations for the six months ended June 30, 2011 include the effects of the FDIC-assisted San Luis Trust Bank and the Electronic Payment Services division transactions from the date of the acquisition. All material intercompany transactions have been eliminated.

Basis of presentation – The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnote disclosures normally required by generally accepted accounting principles for complete financial statements. In our opinion, all normal recurring adjustments necessary for a fair presentation are reflected in the unaudited condensed consolidated financial statements. Operating results for the period ended June 30, 2011 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2011. In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2011 for potential recognition or disclosure. The unaudited condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K.

Reclassifications – Certain reclassifications have been made to the 2010 consolidated financial statements to conform to the current year presentation.

Management’s estimates and assumptions – The preparation of the condensed consolidated financial statements, in

conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported revenues and expenses for the reporting periods. Actual results could differ significantly from those estimates. Significant estimations made by management primarily involve the calculation of the allowance for loan losses, the carrying amount of deferred tax assets, the carrying amount of covered loans, the carrying amount of foreclosed property, the carrying amount of the FDIC shared-loss asset, the assessments for impairment related to goodwill and securities, the estimated fair value of financial instruments and the effectiveness of derivative instruments in offsetting changes in fair value or cash flows of hedged items.

Allowance for loan losses – The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes that the collectability of principal is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated probable losses on existing loans that may become uncollectable, based on evaluations of the collectability of loans and prior loan loss experience. The evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquent and nonaccrual loans, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national levels, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior twenty-one quarters. Individual loans are also evaluated for impairment and if a portion of a loan is impaired, the impaired amount is charged-off or a specific reserve is allocated for that loan. Various regulatory agencies, as a regular part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations. The allowance for loan losses was $18.3 million at June 30, 2011 and $17.0 million at December 31, 2010.

Foreclosed property – The Company acquires, through foreclosure or through full or partial satisfaction of a loan, real or personal property. At the time of foreclosure, the Company obtains an appraisal of the property and records the property at its estimated fair value less costs to sell. We charge the allowance for loan losses for the loan amount in excess of the fair value of the foreclosed property received; we credit earnings for the fair value amount of the foreclosed property in excess of the loan due. Subsequent to foreclosure, the Company periodically assesses our disposition efforts and the estimated fair value less costs to sell of the foreclosed property. The Company establishes a valuation allowance through a charge to earnings for estimated declines in fair value subsequent to foreclosure. Operating income and operating expense related to foreclosed property is included in earnings as are any ultimate gains or losses on the sale of the foreclosed property. Our recognition of gain is, however, dependent on the buyer’s initial investment in the purchase of the foreclosed property meeting certain criteria. The estimated fair value of covered and non-covered foreclosed property was $25.7 million at June 30, 2011 and $27.0 million at December 31, 2010.

Deferred income taxes – The Company recognizes deferred tax assets subject to our judgment that realization of such assets are more-likely-than-not. A valuation allowance is established when the Company determines that the realization of income tax benefits may not occur in future years. There was no valuation allowance at June 30, 2011 or December 31, 2010. There were net deferred tax liabilities of $11.4 million at June 30, 2011 and net deferred tax assets of $4.6 million at December 31, 2010. The significant change in the balance since year-end 2010 was due to the $14.6 million of deferred tax liabilities recorded in connection with the FDIC-assisted San Luis Trust Bank acquisition on February 18, 2011.

FDIC shared-loss asset – The FDIC shared-loss asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the shared-loss agreements. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted or amortized into non-interest income over the life of the FDIC shared-loss asset. Subsequent to initial recognition, the FDIC shared-loss asset is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolio. These adjustments are measured on the same basis as the related covered loans, at a pool level, and covered foreclosed property. Generally, any increases in cash flow of the covered assets over those previously expected will result in prospective increases in the loan pool yield and amortization of the FDIC shared-loss asset. Any decreases in cash flow of the covered assets under those previously expected will trigger impairments on the underlying loan pools and will result in a corresponding gain on the FDIC shared-loss asset. Increases and decreases to the FDIC shared-loss asset are recorded as adjustments to non-interest income.

Derivative instruments and hedging – For derivative instruments designated in cash flow hedging relationships, we assess the effectiveness of the instruments in offsetting changes in the overall cash flows of designated hedged transactions on a quarterly basis. The Company recognizes the unrealized gains or losses of derivative instruments directly in current period earnings to the extent these instruments are not effective. At June 30, 2011 the Company had $26.8 million notional interest rate caps to limit the variable interest rate payments on our $26.8 million junior subordinated debentures. Our 2011 second quarter effectiveness assessment indicated that these instruments were effective.

Assessments of impairment – Goodwill is assessed for impairment on an annual basis or at interim periods if an event occurs or circumstances change which may indicate a change in the implied fair value of the goodwill. The implied fair value of goodwill is estimated by comparing the estimated fair value of the Company to the estimated fair value of the Company’s individual assets, liabilities, and identifiable intangible assets. Impairment exists when the carrying amount of goodwill exceeds

this implied fair value.

First California uses independent data where possible in determining the fair value of the Company and in determining appropriate market factors used in the fair value calculations. At December 31, 2010, the annual assessment resulted in the conclusion that goodwill was not impaired. At June 30, 2011, an interim assessment was not performed as 2011 year-to-date results were not materially different than the estimates used in the year-end assessment and the June 30, 2011 stock price (and market capitalization) increased by 28 percent from year-end.

An impairment assessment is performed quarterly on the securities available-for-sale portfolio in accordance with Financial Accounting Standards Board, or FASB, accounting standards codification guidance related to the consideration of impairment related to certain debt and equity securities. All of the securities classified as available-for-sale are debt securities.

If the Company does not intend to sell, and it is more likely than not that the Company is not required to sell a debt security before recovery of its cost basis, other-than-temporary impairment is separated into (a) the amount representing credit loss and (b) the amount related to other factors. The amount of the other-than-temporary impairment related to credit loss is recognized in earnings and other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss). Other-than-temporary declines in fair value are assessed based on the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, the long-term financial outlook of the issuer, the expected future cash flows from the security and the Company’s ability and intent to hold the security until the fair value recovers. Please see the “Securities” section of Management’s Discussion and Analysis in this document for a detailed explanation of the impairment analysis process. The Company will continue to evaluate the securities portfolio for other-than-temporary impairment at each reporting date and can provide no assurance there will not be an other-than-temporary impairment in future periods.

For the six months ended June 30, 2011, other-than-temporary impairment related to the credit loss on three debt securities and recognized in earnings was $1.1 million. For the same period in 2010, we recognized an impairment loss of $18,000 on a $1.0 million community development-related equity investment.

NOTE 2 – RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS

In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This update clarifies that if comparative financial statements are presented in disclosure of supplementary pro forma information for a business combination, revenue and earnings of the combined entity should be disclosed as though the business combination occurred as of the beginning of the comparable annual prior annual reporting period only. Additionally, supplemental pro forma disclosures should include a description of the nature and amount of material, nonrecurring pro forma adjustments included in the reported pro forma revenue and earnings. This update is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of the ASU did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. This update provides additional guidance relating to when creditors should classify loan modifications as troubled debt restructurings. The ASU also ends the deferral issued in January 2011 of the disclosures about troubled debt restructurings required by ASU No. 2010-20. The provisions of ASU No. 2011-02 and the disclosure requirements of ASU No. 2010-20 are effective for the Company’s interim reporting period ending September 30, 2011. The guidance applies retrospectively to restructurings occurring on or after January 1, 2011. The adoption of this ASU is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 was issued concurrently with IFRS 13, Fair Value Measurements, to provide mainly identical guidance about fair value measurement and disclosure requirements. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not expect the adoption of this ASU to have a material effect on its condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. This standard eliminates the option to present components of comprehensive income as part of the statement of changes in stockholders’ equity. This standard does not change the items which must be reported in other comprehensive income, how such items are measured, or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its condensed consolidated financial statements.

NOTE 3 – ACQUISITIONS

On April 8, 2011, or the EPS Transaction Date, the Bank completed the acquisition of the Electronic Banking Solutions division of Palm Desert National Bank. The transaction included the division’s customer base, core deposits, and employees. The Bank paid cash consideration of $5.5 million to purchase the EPS division. The Bank acquired cash of $85.5 million, recognized intangible assets of $6.0 million, assumed $91 million of deposits and recognized a pre-tax bargain purchase gain of $0.5 million in connection with this transaction. The Bank desired this transaction to expand its product and service offerings and diversify its sources of revenue.

Under the acquisition method of accounting, the Bank recorded the assets acquired and liabilities assumed based on their estimated fair values as of the EPS Transaction Date. Results of operations for the three and six months ended June 30, 2011 include the effects of the EPS acquisition from the EPS Transaction Date.

The following table summarizes the estimated fair values of the assets acquired, received and recognized and the liabilities assumed and recognized as of the EPS Transaction Date.

	(Dollars in thousands)

Assets Acquired:
Cash	$	85,389
Intangible assets		6,005
Other assets		89
Total assets acquired	$	91,483
Liabilities Assumed:
Deposits	$	91,018
Deferred taxes		195
Total liabilities assumed		91,213
Net assets acquired (after-tax bargain purchase gain)		270
Total liabilities and net assets acquired	$	91,483

On February 18, 2011, or the SLTB Transaction Date, the Bank assumed certain liabilities and acquired certain assets and substantially all of the operations of SLTB from the FDIC, acting in its capacity as receiver of SLTB, pursuant to the terms of a purchase and assumption agreement entered into by the Bank and the FDIC, or the Purchase Agreement. The Bank acquired, received, and recognized certain assets with a fair value of approximately $365 million, including $139 million in loans, $99 million of cash and cash equivalents, $41 million of securities and $11 million of foreclosed property related to the transaction. These acquired assets represent approximately 20 percent of consolidated total assets at March 31, 2011. The Bank also assumed approximately $266 million of deposits and $62 million of FHLB advances related to the transaction. The Bank also recorded a FDIC shared-loss asset of $70 million, a core deposit intangible of $0.3 million, deferred tax liabilities of $15 million, a FDIC shared-loss liability of $2.6 million and a premium on time deposits acquired of $0.8 million related to the transaction. The Bank continues to operate the one former SLTB branch location as part of the Bank’s 19 branch locations. The Bank desired this transaction to expand its footprint into the California central coast region.

As part of the Purchase Agreement, the Bank and the FDIC entered into shared-loss agreements, whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded loan commitments), foreclosed property and accrued interest on loans for up to 90 days. We refer to the acquired assets subject to the shared-loss agreements collectively as covered assets. Under the terms of the shared-loss agreements, the FDIC will absorb 80 percent of losses and share in 80 percent of loss recoveries. The shared-loss agreements for commercial and residential mortgage loans are in effect for 5 years and 10 years, respectively, from the SLTB Transaction Date and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the SLTB Transaction Date.

In March 2021, approximately ten years following the SLTB Transaction Date, the Bank is 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 ($99.0 million) minus (ii) the sum of (a) 20 percent of the net loss amount, plus (b) 25 percent of the asset discount bid ($58.0 million), plus (c) 3.5 percent of total loss share assets at acquisition. At the SLTB Transaction Date, the Bank estimated a liability, on a present value basis, of $2.6 million under this provision.

Under the acquisition method of accounting, the Bank recorded the assets acquired and liabilities assumed based on their estimated fair values as of the SLTB Transaction Date. Results of operations for the three and six months ended June 30, 2011 include the effects of the SLTB acquisition from the SLTB Transaction Date.

The following table summarizes the estimated fair values of the assets acquired, received and recognized and the liabilities assumed and recognized as of the SLTB Transaction Date.


	(Dollars in thousands)

Assets Acquired:
Cash and cash equivalents	$	98,820
Securities		40,972
Covered loans		138,792
Covered foreclosed property		11,052
FDIC shared-loss asset		70,293
Other assets		5,510
Total assets acquired	$	365,439
Liabilities Assumed:
Deposits	$	266,149
FHLB advances		61,541
FDIC shared-loss liability		2,564
Deferred taxes		14,594
Other liabilities		437
Total liabilities assumed		345,285
Net assets acquired (after-tax bargain purchase gain)		20,154
Total liabilities and net assets acquired	$	365,439

The Bank based the allocation of the purchase price above on the fair values of the assets acquired and the liabilities assumed. The net gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed and is influenced significantly by the FDIC-assisted transaction process. Under the FDIC-assisted transaction process, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer. The Bank received a cash payment from the FDIC for $34.4 million. The book value of net assets transferred to the Bank was $23.6 million (i.e., the cost basis). The pre-tax gain of $34.7 million or the after-tax gain of $20.2 million recognized by the Company is considered a bargain purchase transaction under ASC 805 “Business Combinations” since the total acquisition-date fair value of the identifiable net assets acquired exceeded the fair value of the consideration transferred. The gain was recognized as noninterest income in the Company’s Condensed Consolidated Statements of Operations. Noninterest expense for the first quarter of 2011 included integration and conversion expenses related to the SLTB acquisition of approximately $515,000. The “Salaries and employee benefits”, “Data processing” and “Legal, audit, and other professional services” categories were affected on the Company’s Condensed Consolidated Statements of Operations.

The Bank did not immediately acquire the banking facility, leases, or furniture or equipment of SLTB as part of the Purchase Agreement. However, the Bank has the option to purchase or lease the banking facility and furniture and equipment from the FDIC. Acquisition costs of the banking facility and furniture and equipment will be based on current appraisals and determined at a later date. Currently, the banking facility and equipment are being leased from the FDIC on a month-to-month basis. Other immaterial settlements are still pending with the FDIC, and once settled, may result in adjustments to the above amounts, including the bargain purchase gain.

On November 5, 2010, or the WCB Acquisition Date, the Bank acquired certain assets and assumed certain liabilities and substantially all of the operations of WCB from the FDIC, acting in its capacity as receiver of WCB, pursuant to the terms of a purchase and assumption agreement entered into by the Bank and the FDIC, or the Purchase Agreement. The Bank acquired, received and recognized certain assets with an estimated fair value of approximately $109 million, including $55 million of loans, $32 million of cash, $17 million of a FDIC shared-loss asset, $2 million of securities and $3 million of other assets. Liabilities with an estimated fair value of approximately $107 million were also assumed and recognized, including $105 million of deposits and $2 million of other liabilities. As part of the purchase and assumption agreement, the Bank and the FDIC entered into shared-loss agreements, whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded loan commitments), foreclosed property and accrued interest on loans for up to 90 days. Under the terms of the shared-loss agreements, the FDIC will absorb 80 percent of losses and share in 80 percent of loss recoveries. The shared-loss agreements for commercial and residential mortgage loans are in effect for 5 years and 10 years, respectively, from November 5, 2010 and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from November 5, 2010. The Bank operates the one former WCB branch location as part of the Bank’s 19 branch locations. The Bank desired this transaction to increase its penetration and market share in its existing markets.

The Bank received a cash payment from the FDIC for $2.4 million. The book value of assets transferred to the Bank was $111.1 million. The pre-tax gain of $2.3 million or the after-tax gain of $1.4 million recognized by the Company is considered a bargain purchase gain and was recognized as noninterest income in the Company’s Consolidated Statements of Operations for the year ended December 31, 2010.

NOTE 4 – SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of securities available-for-sale at June 30, 2011 and December 31, 2010 are summarized as follows:

	June 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
U.S. Treasury notes/bills	$	47,738	$	35	$	(1	)	$	47,772
U.S. government agency notes		74,855		952		(3	)		75,804
U.S. government agency mortgage-backed securities		57,816		952		(86	)		58,682
U.S. government agency collateralized mortgage obligations		101,727		678		(34	)		102,371
Private label collateralized mortgage obligations		17,633		—		(4,083	)		13,550
Municipal securities		12,619		119		(86	)		12,652
Other domestic debt securities		7,195		—		(1,530	)		5,665

Securities available-for-sale	$	319,583	$	2,736	$	(5,823	)	$	316,496

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
U.S. Treasury notes/bills	$	51,118	$	44	$	(8	)	$	51,154
U.S. government agency notes		59,426		13		(522	)		58,917
U.S. government agency mortgage-backed securities		47,505		348		(528	)		47,325
U.S. government agency collateralized mortgage obligations		90,120		130		(370	)		89,880
Private label collateralized mortgage obligations		20,409		—		(3,515	)		16,894
Municipal securities		3,159		—		(157	)		3,002
Other domestic debt securities		7,244		—		(1,977	)		5,267

Securities available-for-sale	$	278,981	$	535	$	(7,077	)	$	272,439

As of June 30, 2011, securities available-for-sale with a fair value of $49.7 million were pledged as collateral for borrowings, public deposits and other purposes as required by various statutes and agreements.

The following table shows the gross unrealized losses and amortized cost of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010.

	At June 30, 2011
	Less Than 12 Months					Greater Than 12 Months					Total
	Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses
	(in thousands)
U.S. Treasury notes/bills	$	6,046	$	(1	)	$	—	$	—		$	6,046	$	(1	)
U.S. government agency notes		6,223		(3	)		—		—			6,223		(3	)
U.S. government agency mortgage-backed securities		4,261		(86	)		—		—			4,261		(86	)
U.S. government agency collateralized mortgage obligations		17,637		(34	)		—		—			17,637		(34	)
Private-label collateralized mortgage obligations		—		—			17,633		(4,083	)		17,633		(4,083	)
Municipal securities		6,644		(86	)		—		—			6,644		(86	)
Other domestic debt securities		2,500		(2	)		4,695		(1,528	)		7,195		(1,530	)

	$	43,311	$	(212	)	$	22,328	$	(5,611	)	$	65,639	$	(5,823	)

	At December 31, 2010
	Less Than 12 Months					Greater Than 12 Months					Total
	Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses
	(in thousands)
U.S. Treasury notes/bills	$	20,107	$	(8	)	$	—	$	—		$	20,107	$	(8	)
U.S. government agency notes		41,401		(522	)		—		—			41,401		(522	)
U.S. government agency mortgage-backed securities		33,584		(528	)		—		—			33,584		(528	)
U.S. government agency collateralized mortgage obligations		55,869		(370	)		—		—			55,869		(370	)
Private-label collateralized mortgage obligations		—		—			20,409		(3,515	)		20,409		(3,515	)
Municipal securities		3,069		(157	)		—		—			3,069		(157	)
Other domestic debt securities		2,500		(28)			4,744		(1,949	)		7,244		(1,977	)

	$	156,530	$	(1,613	)	$	25,153	$	(5,464	)	$	181,683	$	(7,077	)

Net unrealized holding losses were $3.1 million at June 30, 2011 and $6.5 million at December 31, 2010. As a percentage of securities, at amortized cost, net unrealized holding losses were 0.96 percent and 2.35 percent at the end of each respective period. Securities are comprised largely of U.S. Treasury bills and notes, and U.S. government agency notes, mortgage-backed securities and collateralized mortgage obligations. On a quarterly basis, we evaluate our individual available-for-sale securities in an unrealized loss position for other-than-temporary impairment. As part of this evaluation, we consider whether we intend to sell each security and whether it is more-likely-than-not that, we will be required to sell the security before the anticipated recovery of the security’s cost basis. Should a security meet either of these conditions, we recognize an impairment charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities in an unrealized loss position that meet neither of these conditions, we consider whether we expect to recover the entire amortized cost basis of the security by comparing our best estimate, on a present value basis, of the expected future cash flows from the security with the amortized cost basis of the security. If our best estimate of expected future cash flows is less than the amortized cost basis of the security, we recognize an impairment charge to earnings for this estimated credit loss.

The Company will continue to evaluate the securities portfolio for other-than-temporary impairment at each reporting date and can provide no assurance there will not be further other-than-temporary impairments in future periods.

The following table presents the other-than-temporary impairment activity related to credit loss, which is recognized in earnings, and the other-than-temporary impairment activity related to all other factors, which are recognized in other comprehensive income.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
	(in thousands)

Beginning balance	$	3,322	$	1,133	$	2,256	$	1,115
Additional increases to the amount related to the credit loss for which an other-than-temporary impairment was previously recognized		—		—		1,066		18
Ending balance	$	3,322	$	1,133	$	3,322	$	1,133

The amortized cost and estimated fair value of securities by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	At June 30, 2011
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	59,940	$	59,981
Due after one year through five years		159,088		159,500
Due after five years through ten years		56,588		55,774
Due after ten years		43,967		41,241

Total	$	319,583	$	316,496

NOTE 5 – NON-COVERED LOANS AND ALLOWANCE FOR NON-COVERED LOAN LOSSES

The loans not acquired in the SLTB and WCB acquisitions and which are not covered by the related shared-loss agreements with the FDIC are referred to as non-covered loans. The non-covered loan portfolio by type consists of the following:

(in thousands)	At June 30, 2011			At December 31, 2010
Commercial mortgage	$	392,312		$	399,642
Commercial loans and lines of credit		200,863			213,576
Home mortgage		107,509			108,076
Multifamily		134,091			135,639
Construction and land loans		49,325			55,260
Home equity loans and lines of credit		28,414			29,828
Installment and credit card		6,393			5,724
Total loans		918,907			947,745
Allowance for loan losses		(18,306	)		(17,033	)
Loans, net	$	900,601		$	930,712

At June 30, 2011, loans with a balance of $651.3 million were pledged as security for Federal Home Loan Bank of San Francisco, or FHLB, advances. Loan balances include net deferred loan costs of $0.6 million and $0.4 million at June 30, 2011 and December 31, 2010, respectively.

Most of the Company’s lending activity is with customers located in Los Angeles, Orange, Ventura, Riverside, San Bernardino, San Diego and San Luis Obispo Counties and most loans are secured by or dependent on real estate. Although the Company has no significant exposure to any individual customer, the economic conditions, particularly the recent decline in real estate values in Southern California, could adversely affect customers and their ability to satisfy their obligations under their loan agreements.

Changes in the allowance for non-covered loan losses were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2011			2010			2011			2010
	(Dollars in thousands)

Beginning balance	$	18,666		$	15,598		$	17,033		$	16,505
Provision for loan losses		500			1,766			3,000			3,520
Loans charged-off		(1,134	)		(1,111	)		(2,027	)		(3,844	)
Recoveries on loans charged-off		274			199			300			271
Ending balance	$	18,306		$	16,452		$	18,306		$	16,452

Allowance to gross non-covered loans		1.99	%		1.85	%		1.99	%		1.85	%

The following table details activity in the allowance for non-covered loan losses by portfolio segment for the three months ended June 30, 2011. Allocation of a portion of the allowance to one segment of the loan portfolio does not preclude its availability to absorb losses in other segments. At June 30, 2011, none of the allowance was associated with covered loans.

	Commercial								Construction		Home			Home
(in thousands)	Mortgage			Commercial			Multifamily		and Land		Mortgage			Equity		Installment			Total

Allowance for credit losses:
Beginning balance	$	7,592		$	5,683		$	2,335	$	829	$	1,907		$	241	$	79		$	18,666
Charge-offs		—			(1,071	)		—		—		(15	)		—		(48	)		(1,134	)
Recoveries		—			269			—		4		—			—		1			274
Provision		(573	)		588			221		41		(41	)		185		79			500
Ending balance	$	7,019		$	5,469		$	2,556	$	874	$	1,851		$	426	$	111		$	18,306
Ending balance; individually evaluated for impairment	$	—		$	1,827		$	—	$	—	$	—		$	—	$	2		$	1,829
Ending balance; collectively evaluated for impairment		7,019			3,642			2,556		874		1,851			426		109			16,477
Ending balance	$	7,019		$	5,469		$	2,556	$	874	$	1,851		$	426	$	111		$	18,306

Non-covered loan balances:

Ending balance

392,312

200,863

134,091

49,325

107,509

28,414

6,393

918,907

Ending balance; individually evaluated for impairment		$	1,436			$	12,988			$	2,078			$	133			$	1,104			$	—			$	53			$	17,792
Ending balance; collectively evaluated for impairment		$	390,876			$	187,875			$	132,013			$	49,192			$	106,405			$	28,414			$	6,340			$	901,115

The following table details activity in the allowance for non-covered loan losses by portfolio segment for the six months ended June 30, 2011. Allocation of a portion of the allowance to one segment of the loan portfolio does not preclude its availability to absorb losses in other segments. At June 30, 2011, none of the allowance was associated with covered loans.

	Commercial									Construction			Home			Home
(in thousands)	Mortgage			Commercial			Multifamily			and Land			Mortgage			Equity		Installment			Total

Allowance for credit losses:
Beginning balance	$	6,134		$	4,934		$	2,273		$	1,698		$	1,496		$	416	$	82		$	17,033
Charge-offs		(312	)		(1,192	)		(65	)		(3	)		(367	)		—		(88	)		(2,027	)
Recoveries		—			291			—			4			—			—		5			300
Provision		1,197			1,436			348			(825	)		722			10		112			3,000
Ending balance	$	7,019		$	5,469		$	2,556		$	874		$	1,851		$	426	$	111		$	18,306
Ending balance; individually evaluated for impairment	$	—		$	1,827		$	—		$	—		$	—		$	—	$	2		$	1,829
Ending balance; collectively evaluated for impairment		7,019			3,642			2,556			874			1,851			426		109			16,477
Ending balance	$	7,019		$	5,469		$	2,556		$	874		$	1,851		$	426	$	111		$	18,306

Non-covered loan balances:

Ending balance

392,312

200,863

134,091

49,325

107,509

28,414

6,393

918,907

Ending balance; individually evaluated for impairment		$	1,436			$	12,988			$	2,078			$	133			$	1,104			$	—			$	53			$	17,792
Ending balance; collectively evaluated for impairment		$	390,876			$	187,875			$	132,013			$	49,192			$	106,405			$	28,414			$	6,340			$	901,115

The following table details activity in the allowance for non-covered loan losses by portfolio segment for the twelve months ended December 31, 2010. Allocation of a portion of the allowance to one segment of the loan portfolio does not preclude its availability to absorb losses in other segments. At December 31, 2010, none of the allowance was associated with covered loans.

	Commercial									Construction			Home			Home
(in thousands)	Mortgage			Commercial			Multifamily			and Land			Mortgage			Equity			Installment			Total

Allowance for credit losses:
Beginning balance	$	4,850		$	4,796		$	3,277		$	2,460		$	605		$	453		$	64		$	16,505
Charge-offs		(648	)		(5,480	)		(1,170	)		(560	)		(422	)		(199	)		(56	)		(8,535	)
Recoveries		138			225			—			177			174			—			12			726
Provision		1,794			5,393			166			(379	)		1,139			162			62			8,337
Ending balance	$	6,134		$	4,934		$	2,273		$	1,698		$	1,496		$	416		$	82		$	17,033
Ending balance; individually evaluated for impairment	$	—		$	1,627		$	150		$	168		$	18		$	—		$	—		$	1,963
Ending balance; collectively evaluated for impairment		6,134			3,307			2,123			1,530			1,478			416			82			15,070
Ending balance	$	6,134		$	4,934		$	2,273		$	1,698		$	1,496		$	416		$	82		$	17,033

Non-covered loan balances:

Ending balance

399,642

213,576

135,639

55,260

108,076

29,828

5,724

947,745

Ending balance; individually evaluated for impairment		$	1,458			$	12,376			$	668			$	698			$	1,967			$	—			$	—			$	17,167
Ending balance; collectively evaluated for impairment		$	398,184			$	201,200			$	134,971			$	54,562			$	106,109			$	29,828			$	5,724			$	930,578

Nonaccrual loans are those loans for which management has discontinued accrual of interest because reasonable doubt exists as to the full and timely collection of either principal or interest and are also considered impaired loans. Total non-covered nonaccrual loans totaled $17.8 million at June 30, 2011 as compared to $18.2 million at December 31, 2010. The allowance for loan losses maintained for nonaccrual loans was $1.8 million and $2.0 million at June 30, 2011 and December 31, 2010, respectively. Had these loans performed according to their original terms, additional interest income of $0.7 million and $0.5 million would have been recognized in the three months ended June 30, 2011 and 2010, respectively. Had these loans performed according to their original terms, additional interest income of $1.0 million and $1.1 million would have been recognized in the six months ended June 30, 2011 and 2010, respectively.

The following table sets forth the amounts and categories of our non-covered non-performing loans and the amount of non-covered foreclosed property at the dates indicated. There were no loans 90+ days past due and still accruing at either June 30, 20111 or December 31, 2010.

	At June 30, 2011		At December 31, 2010
	(in thousands)
Non-accrual loans
Aggregate loan amounts
Construction and land	$	133	$	698
Commercial mortgage		1,436		1,458
Multifamily		2,078		668
Commercial loans		12,988		13,449
Home mortgage		1,104		1,968
Installment		53		—
Total non-accrual loans	$	17,792	$	18,241
Total non-performing loans	$	17,792	$	18,241

Foreclosed property	$	20,029	$	26,011

Included in non-covered non-accrual loans at June 30, 2011 were eleven restructured loans totaling $2.3 million. The eleven loans consist of one home mortgage loan, one installment loan and nine commercial loans. Interest income recognized on these loans was $9,000 for the six months ended June 30, 2011. We had no commitments to lend additional funds to these borrowers.

Included in non-covered non-accrual loans at December 31, 2010 were eight restructured loans totaling $2.3 million. The eight loans consist of one home mortgage loan and seven commercial loans. Interest income recognized on these loans was $27,000 for the year ended December 31, 2010. We had no commitments to lend additional funds to these borrowers.

Credit Quality Indicators

Loans are risk rated based on analysis of the current state of the borrower’s credit quality. This analysis of credit quality includes a review of all sources of repayment, the borrower’s current financial and liquidity status and all other relevant information. The Company utilizes a ten grade risk rating system, where a higher grade represents a higher level of credit risk. The ten grade risk rating system can be generally classified by the following categories: Pass, Special Mention, Substandard, Doubtful and Loss. The risk ratings reflect the relative strength of the sources of repayment.

Pass loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. These borrowers may have some credit risk that requires monitoring, but full repayment is expected. Special Mention loans are considered to have potential weaknesses that warrant close attention by management. Special Mention is considered a transitory grade and generally, the Company does not have a loan stay graded Special Mention for longer than six months. If any potential weaknesses are resolved, the loan is upgraded to a Pass grade. If negative trends in the borrower’s financial status or other information is presented that indicates the repayment sources may become inadequate, the loan is downgraded to a Substandard grade. Substandard loans are considered to have well-defined weaknesses that jeopardize the full and timely repayment of the loan. Substandard loans have a distinct possibility of loss if the deficiencies are not corrected. Additionally, when management has assessed a potential for loss but a distinct possibility of loss is not recognizable, the loan is still classified as Substandard. Doubtful loans have insufficient sources of repayment and a high probability of loss. Loss loans are considered to be uncollectible and of such little value that they are no longer considered bankable assets. These internal risk ratings are reviewed continuously and adjusted due to changes in borrower status and likelihood of loan repayment. The table below presents the non-covered loan portfolio by credit quality indicator as of June 30, 2011.

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)

Commercial mortgage	$	360,533	$	21,349	$	10,430	$	—	$	—	$	392,312
Commercial loans and lines		173,400		5,229		21,680		554		—		200,863
Multifamily		121,749		5,532		6,810		—		—		134,091
Construction and land		46,719		200		2,406		—		—		49,325
Home mortgage		97,437		8,565		1,507		—		—		107,509
Home equity loans and lines		27,963		406		45		—		—		28,414
Installment		6,010		273		105		5		—		6,393
	$	833,811	$	41,554	$	42,983	$	559	$	—	$	918,907

The table below presents the non-covered loan portfolio by credit quality indicator as of December 31, 2010.


	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)

Commercial mortgage	$	372,969	$	20,899	$	5,774	$	—	$	—	$	399,642
Commercial loans and lines		188,548		4,401		20,449		178		—		213,576
Multifamily		127,549		4,187		3,903		—		—		135,639
Construction and land		46,137		133		8,990		—		—		55,260
Home mortgage		103,669		—		4,407		—		—		108,076
Home equity loans and lines		28,378		1,405		45		—		—		29,828
Installment		5,412		289		23		—		—		5,724
	$	872,662	$	31,314	$	43,591	$	178	$	—	$	947,745

Loans are tracked by the number of days borrower payments are past due. The tables below present an age analysis of nonaccrual and past due non-covered loans, segregated by class of loan, as of June 30, 2011 and December 31, 2010. There were no loans 90+ days past due and accruing at June 30, 2011 and December 31, 2010.

	At June 30, 2011
	Accruing loans 30-59 days past due		Accruing loans 60-89 days past due		Total Accruing past due loans		Nonaccrual past due loans		Current loans		Total
	(in thousands)

Commercial mortgage	$	1,011	$	—	$	1,011	$	1,436	$	389,865	$	392,312
Commercial loans and lines		3,517		1,178		4,695		12,988		183,180		200,863
Multifamily		—		—		—		2,078		132,013		134,091
Construction and land		—		—		—		133		49,192		49,325
Home mortgage		—		—		—		1,104		106,405		107,509
Home equity loans and lines		100		—		100		—		28,314		28,414
Installment		17		15		32		53		6,308		6,393
	$	4,645	$	1,193	$	5,838	$	17,792	$	895,277	$	918,907

	At December 31, 2010
	Accruing loans 30-59 days past due		Accruing loans 60-89 days past due		Total Accruing past due loans		Nonaccrual past due loans		Current loans		Total
	(in thousands)

Commercial mortgage	$	658	$	686	$	1,344	$	1,458	$	396,840	$	399,642
Commercial loans and lines		896		449		1,345		13,449		198,782		213,576
Multifamily		632		—		632		668		134,339		135,639
Construction and land		—		8,293		8,293		698		46,269		55,260
Home mortgage		—		—		—		1,968		106,108		108,076
Home equity loans and lines		—		—		—		—		29,828		29,828
Installment		7		9		16		—		5,708		5,724
	$	2,193	$	9,437	$	11,630	$	18,241	$	917,874	$	947,745

The Company considers a loan to be impaired when, based on current information and events, the Company does not expect to be able to collect all amounts due according to the loan contract, including scheduled interest payments. Impaired loans are determined by periodic evaluation on an individual loan basis. The average investment in impaired loans was $20.4 million and $34.0 million in the six months ended June 30, 2011 and 2010, respectively. The average investment in impaired loans was $19.5 million and $30.6 million in the three months ended June 30, 2011 and 2010, respectively. There was no interest income recognized on impaired loans in the three or six months ended June 30, 2011 and 2010, respectively. Impaired loans were $17.8 million and $18.2 million at June 30, 2011 and December 31, 2010, respectively. Of the $17.8 million of impaired loans at June 30, 2011, $10.2 million had specific reserves totaling $1.8 million. Of the $18.2 million of impaired loans at December 31, 2010, $12.5 million had specific reserves totaling $2.0 million.

Impaired non-covered loans as of June 30, 2011 are set forth in the following table.


(in thousands)	Unpaid Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized

Commercial loans and lines	$	15,342	$	1,740	$	11,248	$	12,988	$	1,827	$	11,640	$	—
Commercial mortgage		1,436		1,436		—		1,436		—		1,449		—
Multifamily		2,358		2,078		—		2,078		—		1,707		—
Construction and land		133		133		—		133		—		88		—
Home mortgage		1,605		1,104		—		1,104		—		918		—
Installment		53		—		53		53		2		3		—
Total	$	20,927	$	6,491	$	11,301	$	17,792	$	1,829	$	15,805	$	—

Impaired non-covered loans as of December 31, 2010 are set forth in the following table.


(in thousands)	Unpaid Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized

Commercial loans and lines	$	19,211	$	1,691	$	11,758	$	13,449	$	1,627	$	5,701	$	—
Commercial mortgage		1,458		1,458		—		1,458		—		486		—
Multifamily		905		—		668		668		150		670		—
Home mortgage		2,542		1,530		438		1,968		18		1,189		—
Construction		698		—		698		698		168		223		—
Total	$	24,814	$	4,679	$	13,562	$	18,241	$	1,963	$	8,269	$	—

The average recorded investment in impaired loans shown in the above tables represents the average investment for the period in the loans impaired at each respective period-end.

NOTE 6 – COVERED LOANS AND FDIC SHARED-LOSS ASSET

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.

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

	Western Commercial		San Luis Trust Bank
(in thousands)	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.

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

	Western Commercial			San Luis Trust Bank
(in thousands)	November 5, 2010			February 18, 2011			Total

Undiscounted contractual cash flows - Principal	$	76,069		$	218,562		$	294,631
Undiscounted contractual cash flows - Interest		5,197			115,576			120,773
Undiscounted cash flows not expected to be collected (nonaccretable differnce)		(20,094	)		(82,020	)		(102,114	)

Undiscounted cash flows expected to be collected		61,172			252,118			313,290

Accretable yield at acquisition		(5,683	)		(113,326	)		(119,009	)
Estimated fair value of loans acquired at acquisition	$	55,489		$	138,792		$	194,281

The following tables present the changes in the accretable yield for the three and six months ended June 30, 2011 for each respective acquired loan portfolio. There were no covered loans in the prior year periods.

	Three months ended June 30, 2011
(in thousands)	Western Commercial			San Luis Trust Bank			Total

Balance, beginning of period	$	4,728		$	111,506		$	116,234
Accretion to interest income		(837	)		(3,645	)		(4,482	)
Reclassifications (to)/from nonaccretable difference		—			(1,529	)		(1,529	)
Balance, end of period	$	3,891		$	106,332		$	110,223

	Six months ended June 30, 2011
(in thousands)	Western Commercial			San Luis Trust Bank			Total

Balance, beginning of period	$	5,683		$	—		$	5,683
Additions resulting from acquisition		—			113,326			113,326
Accretion to interest income		(1,792	)		(4,722	)		(6,514	)
Reclassifications (to)/from nonaccretable difference		—			(2,272	)		(2,272	)
Balance, end of period	$	3,891		$	106,332		$	110,223

The following table sets forth the composition of the covered loan portfolio by type.

Covered loans by property type (in thousands)	At June 30, 2011		At December 31, 2010
Home mortgage	$	49,588	$	2,046
Commercial mortgage		43,851		26,038
Construction and land loans		30,711		6,143
Multifamily		19,074		2,688
Commercial loans and lines of credit		15,874		16,820
Home equity loans and lines of credit		13,520		135
Installment and credit card		3		—
Total covered loans	$	172,621	$	53,870

The FDIC shared-loss asset represents the present value of the amounts we expect to receive from the FDIC under our shared-loss agreements. We accrete into noninterest income over the life of the FDIC shared-loss asset the difference between the present value and the undiscounted cash flows we expect to collect from the FDIC. The FDIC shared-loss asset was $81.6 million at June 30, 2011 and $16.7 million at December 31, 2010.

The FDIC shared-loss asset was initially recorded at fair value, which represented the present value of the estimated cash payments from the FDIC for future losses on covered assets. 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. The following table presents the changes in the FDIC shared-loss asset for the six months ended June 30, 2011.

	Six months ended June 30, 2011
(in thousands)	WCB			SLTB			Total
Balance, beginning of period	$	16,725		$	—		$	16,725
Acquisition		—			70,293			70,293
FDIC share of additional losses		330			749			1,079
Cash payments received from FDIC		(6,029	)		(516	)		(6,545	)
Net accretion		44			34			78
Balance, end of period	$	11,070		$	70,560		$	81,630

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 $3.6 million and $1.0 million at June 30, 2011 and December 31, 2010.

We evaluated the acquired covered loans and have elected to account for the loans with evidence of credit deterioration since origination under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30. In accordance with ASC 310-30 and in estimating the fair value of the covered loans at the acquisition date, we (a) estimated the contractual amount and timing of undiscounted principal and interest payments, or undiscounted contractual cash flows, and (b) estimated the amount and timing of undiscounted expected principal and interest payments, or undiscounted expected cash flows. The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The nonaccretable difference represented an estimate of the undiscounted loss exposure in the acquired loan portfolios at the acquisition dates. Of the $194.3 million of loans acquired in the FDIC-assisted SLTB and WCB acquisitions, $54.4 million were considered to have deteriorated credit quality at acquisition.

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 June 30, 2011 and December 31, 2010, there was no allowance for the covered loans accounted for under ASC 310-30 related to deterioration, as the credit quality deterioration, if any, was not beyond the acquisition date fair value amounts of the covered loans.

The following table sets forth the amounts and categories of our covered non-performing loans and the amount of covered foreclosed property at the dates indicated:

	At June 30, 2011		At December 31, 2010
	(Dollars in thousands)
Accruing loans more than 90 days past due
Aggregate loan amounts
Construction and land	$	2,238	$	—
Commercial loans		141		400
Total	$	2,379	$	400

Non-accrual loans
Aggregate loan amounts
Construction and land	$	7,949	$	1,799
Commercial mortgage		5,533		1,024
Multifamily		3,314		428
Commercial loans		1,620		1,074
Home mortgage		13,203		—
Home equity loans and lines of credit		30		—
Total non-accrual loans	$	31,649	$	4,325
Total non-performing loans	$	34,028	$	4,725

Foreclosed property	$	5,636	$	977

At June 30, 2011, covered accruing loans more than ninety days past due were $2.4 million, covered non-accrual loans were $31.6 million and covered foreclosed property was $5.6 million. The increases in these amounts since December 31, 2010 were due to the FDIC-assisted San Luis Trust Bank acquisition in February 2011. Included in covered non-accrual loans were restructured loans totaling $14.1 million.

At December 31, 2010, covered accruing loans more than ninety days past due were $0.4 million, covered non-accrual loans were $4.3 million and covered foreclosed property was $1.0 million. Included in covered non-accrual loans was one restructured commercial mortgage loan for $0.9 million. Interest income recognized on this loan was $18,000 for the year ended December 31, 2010. We had no commitment to lend additional funds to this borrower.

The table below presents the covered loan portfolio by credit quality indicator as of June 30, 2011.

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)

Home mortgage	$	11,899	$	7,535	$	30,154	$	—	$	—	$	49,588
Commercial mortgage		22,024		9,179		12,648		—		—		43,851
Construction and land		5,012		4,616		20,320		763		—		30,711
Multifamily		10,896		—		8,178		—		—		19,074
Commercial loans and lines of credit		6,455		2,157		5,926		1,336		—		15,874
Home equity loans and lines		11,258		1,439		823		—		—		13,520
Installment		3		—		—		—		—		3
	$	67,547	$	24,926	$	78,049	$	2,099	$	—	$	172,621

The table below presents the covered loan portfolio by credit quality indicator as of December 31, 2010.


	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(in thousands)

Home mortgage	$	1,210	$	—	$	836	$	—	$	—	$	2,046
Commercial mortgage		18,363		2,855		4,649		171		—		26,038
Construction and land		231		—		4,803		1,109		—		6,143
Multifamily		2,260		—		428		—		—		2,688
Commercial loans and lines of credit		9,186		1,297		4,735		1,602		—		16,820
Home equity loans and lines		135		—		—		—		—		135
Installment		—		—		—		—		—		—
	$	31,385	$	4,152	$	15,451	$	2,882	$	—	$	53,870

NOTE 7 – FORECLOSED PROPERTY

Non-covered foreclosed property at June 30, 2011 consists of a $14.9 million completed office complex project consisting of 18 buildings in Ventura County, a $3.3 million unimproved land property of 161 acres located in an unincorporated section of western Los Angeles County known as Liberty Canyon and a $1.0 million industrial property in Santa Clara County. The remainder represents one office building and three single-family residences in Southern California that together total $0.9 million.

The following table presents the activity of our non-covered foreclosed property for the periods indicated.


	Three months ended June 30,												Six months ended June 30,
	2011						2010						2011						2010
(dollars in thousands)	# of Properties			$ Amount			# of Properties			$ Amount			# of Properties			$ Amount			# of Properties			$ Amount
Beginning balance		8		$	20,855			2		$	5,997			8		$	26,011			1		$	4,893
New properties added		1			229			3			22,958			1			229			5			24,398
Valuation allowances		—			(97	)		—			(230	)		—			(5,208	)		—			(230	)
Sales proceeds received		(2	)		(958	)		(1	)		(875	)		(2	)		(1,003	)		(2	)		(1,211	)
Ending balance		7		$	20,029			4		$	27,850			7		$	20,029			4		$	27,850

Covered foreclosed property at June 30, 2011 was $5.6 million and $1.0 million at December 31, 2010. We acquired these properties as part of the FDIC-assisted Western Commercial Bank and San Luis Trust Bank acquisitions. We recorded these properties at their estimated fair value, less estimated costs to sell, at the time of acquisition. Since year-end 2010, we sold $7.0 million of properties and acquired or added $13.8 million.

The following table presents the activity of our covered foreclosed property for the periods indicated.

	Three months ended June 30,										Six months ended June 30,
	2011						2010				2011						2010
(dollars in thousands)	# of Properties			$ Amount			# of Properties		$ Amount		# of Properties			$ Amount			# of Properties		$ Amount
Beginning balance		21		$	11,096			—	$	—		2		$	977			—	$	—
New properties acquired		—			—			—		—		22			11,052			—		—
New properties added		6			1,351			—		—		7			2,752			—		—
Valuation allowances		—			(2,177	)		—		—		—			(2,177	)		—		—
Sales proceeds received		(6	)		(4,634	)		—		—		(10	)		(6,968	)		—		—
Ending balance		21		$	5,636			—	$	—		21		$	5,636			—	$	—

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $60.7 million at June 30, 2011 and at December 31, 2010. No impairment loss was recognized for the periods ended June 30, 2011 and June 30, 2010.

Core deposit intangibles, net of accumulated amortization, were $9.4 million at June 30, 2011 and $7.4 million at December 31, 2010. The increase since year end 2010 was due to the new core deposit intangibles for San Luis Trust Bank and the EPS division. Amortization expense for the three months ended June 30, 2011 and 2010 was $434,000 and $317,000, respectively. Amortization expense for the six months ended June 30, 2011 and 2010 was $750,000 and $633,000, respectively.

Trade name intangible, net of accumulated amortization, was $2.3 million at June 30, 2011 and $2.5 million at December 31, 2010. Amortization expense for the three months ended June 30, 2011 and 2010 was $100,000 in each period. Amortization expense for the six months ended June 30, 2011 and 2010 was $200,000 in each period.

A new contractual customer relationships intangible was recorded in the second quarter of 2011 related to the EPS division acquisition. The balance was $3.5 million at June 30, 2011 and amortization expense for the three and six months ended June 30, 2011 was $90,000.

NOTE 9 — DERIVATIVES AND HEDGING ACTIVITY

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable-rate loan assets and borrowings. The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated in qualifying hedging relationships.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheets as of June 30, 2011 and December 31, 2010.


	Tabular Disclosure of Fair Values of Derivative Instruments
	Asset Derivatives							Liability Derivatives
	As of June 30, 2011				As of December 31, 2010			As of June 30, 2011			As of December 31, 2010
(in thousands)	Balance Sheet Location		Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest Rate Products		Other Assets	$	474	Other Assets	$	697	Other Liabilities	$	—	Other Liabilities	$	—

Total derivatives designated as hedging instruments			$	474		$	697		$	—		$	—

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate loan assets, interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for the Company making variable payments over the life of the agreements without exchange of the underlying notional amount. For hedges of the Company’s variable-rate borrowings, interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. As of June 30, 2011, and December 31, 2010, the Company had three interest rate caps with a notional amount of $37.1 million that was designated as a cash flow hedge associated with the Company’s variable-rate borrowings. Two of the caps are forward-starting and were not effective during the three and six months ended June 30, 2011 and 2010.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2011 and 2010, such derivatives were used to hedge the forecasted variable cash outflows associated with subordinated debt related to trust preferred securities. No hedge ineffectiveness was recognized during the three and six months ended June 30, 2011 or 2010.

Amounts reported in Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that an additional $46,471 will be reclassified as an addition to interest expense.

Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company’s derivative financial instruments on the statements of operations for the three and six months ended June 30, 2011.


	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Derivatives in Cash Flow Hedging Relationships	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011				Three Months Ended June 30, 2011			Six Months Ended June 30, 2011				Three Months Ended June 30, 2011		Six Months Ended June 30, 2011

Interest Rate Products	$	(127	)	$	(122	)	Interest income	$	(5	)	$	(7	)	Other non-interest income	$	-	$	-

Total	$	(127	)	$	(122	)		$	(5	)	$	(7	)		$	-	$	-

Credit-risk-related Contingent Features

The terms of the one effective interest rate cap at June 30, 2011 does not contain any credit-risk-related contingent features. Therefore, consideration of the counterparty’s credit risk is not applicable.

The Company has no derivatives payable, so consideration of the Company’s own credit risk is not applicable.

NOTE 10 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share, or EPS, excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if common shares were issued pursuant to the exercise of common stock options under the Company’s stock option plans and if common shares were issued from the conversion of the convertible preferred stock.

The following table illustrates the computations of basic and diluted EPS for the periods indicated:


	Three months ended June 30,												Six months ended June 30,
	2011						2010						2011						2010
(in thousands, except per share data)	Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic
Net income as reported	$	2,417		$	2,417		$	147		$	147		$	18,005		$	18,005		$	264		$	264
Less preferred stock dividend declared		(313	)		(313	)		(313	)		(313	)		(625	)		(625	)		(625	)		(625	)

Income (loss) available to common shareholders	$	2,104		$	2,104		$	(166	)	$	(166	)	$	17,380		$	17,380		$	(361	)	$	(361	)

Weighted average common shares outstanding (1)		28,373			28,745			28,182			28,182			28,275			28,636			20,588			20,588

Earnings (loss) per common share	$	0.07		$	0.07		$	(0.01	)	$	(0.01	)	$	0.61		$	0.61		$	(0.02	)	$	(0.02	)

(1)

In accordance with FASB accounting standards related to earnings per share, due to the net loss for the periods presented, the impact of securities convertible to common stock is not included as its effect would be anti-dilutive. These securities include convertible preferred stock, restricted stock and warrants to acquire common stock. The dilutive calculation excludes 323,115 weighted average shares for the three months ended June 30, 2010. The dilutive calculation excludes 321,238 weighted average shares for the six months ended June 30, 2010.

NOTE 11 – COMPREHENSIVE INCOME

Other comprehensive income is the change in equity during a period from transactions and other events and circumstances from non-owner sources. Total comprehensive income was as follows:


	Three months ended June 30,						Six months ended June 30,
(in thousands)	2011			2010			2011			2010
Other comprehensive income:
Unrealized loss on interest rate cap	$	(228	)	$	(59	)	$	(222	)	$	(148	)
Unrealized gain on securities available-for-sale		2,776			2,758			3,945			5,461
Reclassification adjustment for gains included in net income		(490	)		(130	)		(490	)		(262	)
Other comprehensive income, before tax		2,058			2,569			3,233			5,051
Income tax expense related to items of other comprehensive income		(852	)		(1,135	)		(1,348	)		(2,235	)
Other comprehensive income		1,206			1,434			1,885			2,816
Net income		2,417			147			18,005			264
Comprehensive income	$	3,623		$	1,581		$	19,890		$	3,080

NOTE 12 – FAIR VALUE MEASUREMENT

FASB accounting standards codification related to fair value measurements defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurement. This standard applies to all financial assets and liabilities that are being measured and reported at fair value on a recurring and non-recurring basis.

As defined in the FASB accounting standards codification, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2011 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. This is done primarily for available-for-sale securities and derivatives. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values, such as for loans held-for-sale, impaired loans, and foreclosed property. Fair value is also used when evaluating impairment on certain assets, including securities, goodwill, core deposit and other intangibles, for valuing assets and liabilities acquired in a business combination and for disclosures of financial instruments as required by the FASB accounting standards codification related to fair value disclosure reporting.

The following tables present information on the assets measured and recorded at fair value on a recurring and nonrecurring basis at June 30, 2011.


			Financial Assets Measured at Fair Value on a Recurring Basis at June 30, 2011, Using
	Fair value at June 30, 2011		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)

U.S. Treasury notes/bills	$	47,772	$	—	$	47,772	$	—
U.S. government agency notes		75,804		—		75,804		—
U.S. government agency mortgage-backed securities		58,682		—		58,682		—
U.S. government agency collateralized mortgage obligations		102,371		—		102,371		—
Private label collateralized mortgage obligations		13,550		—		13,550		—
Municipal securities		12,652		—		12,652		—
Other domestic debt securities		5,665		—		5,665		—
Interest rate caps		474		—		474		—
Total assets measured at fair value	$	316,970	$	—	$	316,970	$	—

			Financial Assets Measured at Fair Value on a Non-Recurring Basis at June 30, 2011, Using
	Fair value at June 30, 2011		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total gains (losses)
	(in thousands)

Non-covered impaired loans	$	8,359	$	—	$	—	$	8,359	$	(317	)
Non-covered foreclosed property		20,029		—		—		20,029		(5,208	)
Covered foreclosed property		5,636		—		—		5,636		—
Total assets measured at fair value	$	34,024	$	—	$	—	$	34,024	$	(5,525	)

The following tables present information on the assets measured and recorded at fair value on a recurring and nonrecurring basis at and for the year ended December 31, 2010.


			Financial Assets Measured at Fair Value on a Recurring Basis at December 31, 2010, Using
	Fair value at December 31, 2010		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)
U.S. Treasury notes/bills	$	51,154	$	—	$	51,154	$	—
U.S. government agency notes		58,917		—		58,917		—
U.S. government agency mortgage-backed securities		47,325		—		47,325		—
U.S. government agency collateralized mortgage obligations		89,880		—		89,880		—
Private label collateralized mortgage obligations		16,894		—		16,894		—
Municipal securities		3,002		—		3,002		—
Other domestic debt securities		5,267		—		5,267		—
Interest rate caps		697		—		697		—
Total assets measured at fair value	$	273,136	$	—	$	273,136	$	—

			Financial Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2010, Using
	Fair value at December 31, 2010		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total gains (losses)
	(in thousands)

Non-covered impaired loans	$	10,526	$	—	$	—	$	10,526	$	(4,395	)
Non-covered foreclosed property		26,011		—		—		26,011		(1,481	)
Covered foreclosed property		977		—		—		977		—
Total assets measured at fair value	$	37,514	$	—	$	—	$	37,514	$	(5,876	)

There were no significant transfers of assets into or out of Level 1, Level 2 or Level 3 of the fair value hierarchy during the quarter ended June 30, 2011. There have been no changes in valuation techniques for the quarter ended June 30, 2011 and are consistent with techniques used in prior periods.

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securities – Fair values for securities are based on quoted market prices of identical securities, where available (Level 1). When quoted prices of identical securities are not available, the fair value estimate is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. In determining the fair value of the securities categorized as Level 2, the Company obtains a report from a nationally recognized broker-dealer detailing the fair value of each security in our portfolio as of each reporting date. The broker-dealer uses observable market information to value our securities, with the primary source being a nationally recognized pricing service. The Company reviews the market prices provided by the broker-dealer for our securities for reasonableness based upon our understanding of the marketplace and we consider any credit issues related to the bonds. As the Company has not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy.

Impaired loans – Impaired loans are measured and recorded at the fair value of the loan’s collateral on a nonrecurring basis as the impaired loans shown are collateral dependent. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the estimated cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 3 measurement.

Foreclosed property – Foreclosed property is initially measured at fair value at acquisition and carried at the lower of this new cost or fair value on a nonrecurring basis. The foreclosed property shown is collateral dependent and, accordingly, is measured based on the fair value of such collateral. The fair value of collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the estimated cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 3 measurement.

FASB accounting standards codification requires that the Company disclose estimated fair values for its financial instruments during annual and interim reporting periods. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with the requirements of the disclosures regarding fair value of financial instruments. The following describes the methods and assumptions used in estimating the fair values of financial instruments, excluding financial instruments already recorded at fair value as described above.

Cash and cash equivalents – The carrying amounts of cash and interest bearing deposits at other banks is assumed to be the fair value given the liquidity and short-term nature of these deposits.

Loans – Loans are not measured at fair value on a recurring basis. Therefore, the following valuation discussion relates to estimating the fair value to be disclosed under fair value disclosure requirements. Loans were divided into four major groups. The loan groups included (1) loans that mature or re-price in three months or less, (2) loans that amortize or mature in more than three months, (3) impaired loans, and (4) loans acquired in the Western Commercial Bank and San Luis Trust Bank acquisitions. We estimated the fair value of impaired loans and loans that mature or re-price within three months, impaired loans and loans acquired in the WCB and SLTB acquisitions at their carrying value. We used discounted cash flow methodology to estimate the fair value of loans that amortize or mature in more than three months. We developed pools of these loans based on similar characteristics such as underlying type of collateral, fixed or adjustable rate of interest, payment or amortization method and other factors. We projected monthly principal and interest cash flows based on the contractual terms of the loan, adjusted for assumed prepayments, and discounted these at a rate that considered funding costs, a market participant’s required rate of return and adjusted for servicing costs and a liquidity discount. Loans are not normally purchased and sold by the Company, and there are no active trading markets for much of this portfolio.

FDIC shared-loss asset – The fair value of the FDIC shared-loss asset represents the present value of the amounts we expect to receive from the FDIC under our shared-loss agreements and is based upon estimated cash flows from our covered assets and discounted by a rate reflective of the creditworthiness of the FDIC as would be required by market.

Bank owned life insurance assets- Fair values of insurance policies owned are based on the insurance contract’s cash surrender value.

Interest rate caps – The fair value of the interest rate caps are estimated using a system that constructs a yield curve based on cash LIBOR rates and 3-year through 30-year swap rates. The yield curve determines the valuations of the interest rate caps.

Deposits – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts and fixed-term certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank advances and other borrowings – The fair value of the FHLB advances and other borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Junior subordinated debentures – The fair value of the debentures is estimated using a discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance sheet instruments – Off-balance sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.

The following table estimates fair values and the related carrying amounts of the Company’s financial instruments:


	June 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in thousands)
Financial assets:
Cash, due from banks and interest bearing deposits with other banks	$	157,880	$	157,880	$	88,003	$	88,003
Securities available-for-sale		316,496		316,496		272,439		272,439
FHLB and other stock		12,590		12,590		9,458		9,458
Bank owned life insurance assets		12,451		12,451		12,232		12,232
Non-covered loans, net		900,601		765,511		930,712		777,059
Covered loans		172,621		172,621		53,870		53,870
FDIC shared-loss asset		81,630		81,630		16,725		16,725
Interest rate cap		474		474		697		697
Financial liabilities:
Demand deposits, money market and savings	$	1,018,285	$	1,018,285	$	808,575	$	808,575
Time certificates of deposit		388,429		390,881		347,713		350,787
FHLB advances and other borrowings		127,626		131,200		131,500		137,485
Junior subordinated debentures		26,805		16,728		26,805		14,617
FDIC shared-loss liability		3,643		3,643		988		988

These fair value disclosures represent the Company’s best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.

NOTE 13— COMMITMENTS AND CONTINGENCIES

In the normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may or may not require collateral or other security to support financial instruments with credit risk, depending on its loan underwriting guidelines.

The following summarizes the Company’s outstanding commitments:

	June 30,		December 31,
	2011		2010
	(in thousands)
Financial instruments whose contract amounts contain credit risk:
Commitments to extend credit	$	176,695	$	199,937
Commercial and standby letters of credit		1,550		1,615
	$	178,245	$	201,552

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon an extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing properties.

Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary.

As of June 30, 2011 and December 31, 2010, the Company maintained a reserve for unfunded commitments of $101,000. The reserve is included in accrued interest payable and other liabilities on the balance sheets.

The nature of the Company’s business causes it to be involved in ordinary routine legal proceedings from time to time. Although the ultimate outcome and amount of liability, if any, with respect to these legal proceedings to which we are currently a party cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, except as described below, any resulting liability is not likely to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flow.

In February 2011, First California Bank was named as a defendant in a putative class action alleging that the manner in which the Bank posted charges to its consumer demand deposit accounts breached an implied obligation of good faith and fair dealing and violates the California Unfair Competition Law. The action also alleges that the manner in which the Bank posted charges to its consumer demand deposit accounts is unconscionable, constitutes conversion and unjustly enriches the Bank. The action is pending in the Superior Court of Los Angeles County. The action seeks to establish a class consisting of all similarly situated customers of the Bank in the State of California. The case is in early stages, with no responsive pleadings or motions having been filed. No class has been certified in the case. At this state of the case, the Company has not established an accrual for probable losses as the probability of a material adverse result cannot be determined and the Company cannot reasonably estimate a range of potential exposures, if any. The Company intends to defend the action vigorously.

NOTE 14— SUBSEQUENT EVENT

On July 14, 2011, the Company redeemed all 25,000 preferred stock series B shares and exited the U.S. Treasury Capital Purchase Program. The U.S. Treasury still holds a warrant to purchase 599,042 shares of our common stock at an exercise price of $6.26 exercisable through December 2018. The Company may repurchase the warrant from the Treasury or, if the Company does not repurchase, the Treasury can sell the warrant to another entity. In connection with the redemption of the preferred stock series B shares, the Company will accelerate the amortization of the remaining difference between the par amount and the initially recorded fair value of the preferred stock series B shares. This $1.1 million deemed dividend will reduce the amount of net income available to common shareholders in the 2011 third quarter.

The Company redeemed the $25 million of preferred stock series B shares with the $25 million of proceeds received in exchange for issuing 25,000 preferred stock series C shares to the U.S. Treasury as a participant in the Small Business Lending Fund program. The preferred stock series C shares will receive quarterly dividends and the initial dividend rate will be 5 percent. The dividend rate can fluctuate between 1 and 5 percent during the next nine quarters and is a function of the growth in qualified small business loans each quarter.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This discussion contains certain forward-looking statements about us; we intend these statements to fall under the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to:

●

revenues are lower than expected;

●

credit quality deterioration, which could cause an increase in the provision for loan losses;

●

competitive pressure among depository institutions increases significantly;

●

changes in consumer spending, borrowings and savings habits;

●

our ability to successfully integrate acquired entities or to achieve expected synergies and operating efficiencies within expected time-frames or at all;

●

a slowdown in construction activity;

●

technological changes;

●

the cost of additional capital is more than expected;

●

a change in the interest rate environment reduces interest margins;

●

asset/liability repricing risks and liquidity risks;

●

general economic conditions, particularly those affecting real estate values, either nationally or in the market areas in which we do or anticipate doing business are less favorable than expected;

●

legislative, accounting or regulatory requirements or changes adversely affecting our business;

●

the effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve, or the Federal Reserve Board;

●

the costs and effects of legal, accounting and regulatory developments;

●

recent volatility in the credit or equity markets and its effect on the general economy;

●

regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule; and

●

demand for the products or services of First California and the Bank, as well as their ability to attract and retain qualified people.

If any of these risks or uncertainties materializes, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A in our 2010 Annual Report on Form 10-K. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. We make these forward-looking statements as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements. All forward-looking statements contained in this document and all subsequent written and oral forward-looking statements attributable to us or any other person acting on our behalf, are expressly qualified by these cautionary statements.

Overview

First California Financial Group, Inc., or First California, or the Company, is a bank holding company which serves the comprehensive banking needs of businesses and consumers in Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Luis Obispo and Ventura counties through our wholly-owned subsidiary, First California Bank, or the Bank. The Bank is a state chartered commercial bank that provides traditional business and consumer banking products through 19 full-service branch locations. The Company also has two unconsolidated statutory business trust subsidiaries, First California Capital Trust I and FCB Statutory Trust I, which raised capital through the issuance of trust preferred securities.

At June 30, 2011, we had consolidated total assets of $1.8 billion, total loans of $1.1 billion, deposits of $1.4 billion and shareholders’ equity of $217.5 million. At December 31, 2010, we had consolidated total assets of $1.5 billion, total loans of $1.0 billion, deposits of $1.2 billion and shareholders’ equity of $198.0 million.

For the second quarter of 2011, we had net income of $2.4 million, compared with net income of $0.1 million for the second quarter of 2010. The increase in net income for the second quarter of 2011 was due principally to higher net interest revenues from improved net interest margins and higher average interest-earning assets. Our net income for the first six months of 2011 was $18.0 million, compared with net income of $0.3 million for the first six months of 2010. The increase in net income for the first six months of 2011 was due largely to the pre-tax bargain purchase gain of $34.7 million on the FDIC-assisted SLTB acquisition.

After a dividend payment on our Series B preferred shares of $312,500 in the second quarter of 2011 and 2010, we recorded income per diluted common share of $0.07 for the 2011 second quarter and a loss per diluted common share of $0.01 for the 2010 second quarter. Our net income for the first six months of 2011, after Series B preferred share dividends of $625,000, was $0.61 per diluted common share. Our net loss for the first six months of 2010, after Series B preferred dividends of $625,000, was $0.02 per diluted common share.

Critical accounting policies

We base our discussion and analysis of our consolidated results of operations and financial condition on our unaudited consolidated interim financial statements and our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, income and expense, and the related disclosures of contingent assets and liabilities at the date of these consolidated financial statements. We believe these estimates and assumptions to be reasonably accurate; however, actual results may differ from these estimates under different assumptions or circumstances. The following are our critical accounting policies and estimates.

Allowance for loan losses

We establish the allowance for loan losses through a provision charged to expense. We charge-off loan losses against the allowance when we believe that the collectability of the loan is unlikely. We perform periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectability of the loan portfolio. The allowance is an amount that we believe will be adequate to absorb estimated probable losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. We believe the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because: changes in it can materially affect the provision for loan losses and net income, it requires management to predict borrowers’ likelihood or capacity to repay, and it requires management to distinguish between losses incurred as of a balance sheet date and losses expected to be incurred in the future. Accordingly, this is a highly subjective process and requires significant judgment since it is often difficult to determine when specific loss events may actually occur. Our evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquent and nonaccrual loans, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national levels, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior sixteen quarters. We also evaluate individual loans for impairment and if a portion of a loan is impaired, we charge-off the impaired amount or allocate a specific reserve for that loan. Various regulatory agencies, as a regular part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations. The allowance for loan losses was $18.3 million at June 30, 2011 and $17.0 million at December 31, 2010.

Foreclosed property

The Company acquires, through foreclosure or through full or partial satisfaction of a loan, real or personal property. At the time of foreclosure, the Company obtains an appraisal of the property and records the property at its estimated fair value less costs to sell. We charge the allowance for loan losses for the loan amount in excess of the fair value of the foreclosed property received; we credit earnings for the fair value amount of the foreclosed property in excess of the loan due. Subsequent to foreclosure, the

Company periodically assesses our disposition efforts and the estimated fair value of the foreclosed property. The Company establishes a valuation allowance through a charge to earnings for estimated declines in fair value subsequent to foreclosure. Operating income and operating expense related to foreclosed property is included in earnings as are any ultimate gains or losses on the sale of the foreclosed property. Our recognition of gain is, however, dependent on the buyer’s initial investment in the purchase of the foreclosed property meeting certain criteria. The estimated fair value of foreclosed property was $25.7 million at June 30, 2011 and $27.0 million at December 31, 2010.

Deferred income taxes

We recognize deferred tax assets subject to our judgment that realization of the assets are more-likely-than-not. We establish a valuation allowance when we determine that realization of income tax benefits may not occur in future years. There was no valuation allowance at June 30, 2011 or December 31, 2010. There were net deferred tax liabilities of $11.4 million at June 30, 2011 and net deferred tax assets of $4.6 million at December 31, 2010.

FDIC shared-loss asset

We initially recorded the FDIC shared-loss asset at fair value, based on the discounted value of expected future cash flows under the shared-loss agreements. We accrete into non-interest income over the life of the FDIC shared-loss asset the difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC. Subsequent to initial recognition, we review quarterly the FDIC shared-loss asset and adjust for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolio. We measure these adjustments on the same basis as the related covered loans, at a pool level, and covered foreclosed property. Generally, any increases in cash flow of the covered assets over those previously expected will result in prospective increases in the loan pool yield and amortization of the FDIC shared-loss asset. Any decreases in cash flow of the covered assets under those previously expected will trigger impairments on the underlying loan pools and will result in a corresponding gain on the FDIC shared-loss asset. We record increases and decreases to the FDIC shared-loss asset as adjustments to non-interest income. The FDIC shared-loss asset was $81.6 million at June 30, 2011 and was $16.7 million at December 31, 2010; the increase principally reflecting the 2011 second quarter SLTB transaction.

Derivative instruments and hedging

For derivative instruments designated in cash flow hedging relationships, we assess the effectiveness of the instruments in offsetting changes in the overall cash flows of designated hedged transactions on a quarterly basis. We recognize the unrealized gains or losses directly in current period earnings to the extent these instruments are not effective. At June 30, 2011 the Company had $26.8 million notional interest rate caps to limit the variable interest rate payments on our $26.8 million junior subordinated debentures. Our 2011 second quarter effectiveness assessment indicated that these instruments were effective.

Assessments of impairment

We assess goodwill for impairment on an annual basis or at interim periods if an event occurs or circumstances change which may indicate a change in the implied fair value of the goodwill. We estimate the implied fair value of goodwill by comparing the estimated fair value of the Company to the estimated fair value of the Company’s individual assets, liabilities, and identifiable intangible assets. Impairment exists when the carrying amount of goodwill exceeds this implied fair value. Based on the results of our assessment, we concluded that the fair value of goodwill was greater than our carrying value and that no goodwill impairment existed at December 31, 2010.

At June 30, 2011, we did not perform an interim assessment as 2011 year-to-date results were not materially different than the estimates used in the year-end assessment and the June 30, 2011 stock price (and market capitalization) increased by 28 percent from year-end.

We also undertake an impairment analysis on our debt securities each quarter. When we do not intend to sell, and it is more likely than not we are not required to sell, a debt security before recovery of its cost basis, we separate other-than-temporary impairment into (a) the amount representing credit loss and (b) the amount related to other factors. We recognize in earnings the amount of the other-than-temporary impairment related to credit loss. We recognize in other comprehensive income the amount of other-than-temporary impairment related to other factors. Our assessment of other-than-temporary declines in fair value considers the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, and the long-term financial outlook of the issuer. In addition, we consider the expected cash flows from the security and our ability and intent to hold the security until the fair value recovers.

For the six months ended June 30, 2011, other-than-temporary impairment related to the credit loss on debt securities and recognized in earnings was $1.1 million. For the same period in 2010, we recognized an impairment charge of $18,000 on a $1.0 million community development-related equity investment.

Results of operations – for the three and six months ended June 30, 2011 and 2010

Net interest income

Our earnings are derived predominantly from net interest income, which is the difference between interest and fees earned on loans, securities and federal funds sold (these asset classes are commonly referred to as interest-earning assets) and the interest paid on deposits, borrowings and debentures (these liability classes are commonly referred to as interest-bearing funds). The net interest margin is net interest income divided by average interest-earning assets.

Our net interest income for the three months ended June 30, 2011 increased to $15.5 million from $10.8 million for the same period last year. For the first six months of 2011, our net interest income increased to $28.3 million from $21.5 million for the same period a year ago. The increase in net interest income reflects higher interest-earning assets and an improved net interest margin. Interest income for the 2011 second quarter was $19.0 million, up from $14.4 million for the 2010 second quarter. Interest income for the first six months of 2011 was $35.5 million, up from $29.0 million for the same period last year. The increase in interest income for both periods principally reflects the higher level of loans and loan yields. There were no covered loans in the same periods a year ago. Interest expense for the 2011 second quarter was $3.5 million, down from $3.6 million for the 2010 second quarter. Interest expense for the first half of 2011 was $7.3 million, down from $7.5 million for the same period a year ago. The decrease in interest expense for both periods was due to lower rates paid on interest-bearing deposits and borrowings.

Our net interest margin (tax equivalent) for the second quarter of 2011 was 3.95 percent compared with 3.40 percent for the same quarter last year. For the first half of 2011, our net interest margin was 3.82 percent compared with 3.39 percent for the first half of 2010. The increase in our net interest margin was primarily due to a reduction in the cost of our interest-bearing liabilities and the benefit from the addition of non-interest checking deposits, primarily from the EPS division during the second quarter. The yield on interest-earning assets for the second quarter of 2011 was 4.84 percent, up 7 basis points from 4.77 percent for the second quarter a year ago. The 38 basis point reduction in the cost of our interest-bearing liabilities positively affected our net interest margin. The rate paid on interest-bearing liabilities was 1.18 percent for the 2011 second quarter compared with 1.56 percent for the second quarter a year ago. The yield on interest-earning assets for the six months ended June 30, 2011 was up 22 basis points to 4.79 percent compared with 4.57 percent for the same period last year. Adding to the increase in our net interest margin was the decline in the cost of our interest-bearing liabilities. The rate paid on interest-bearing liabilities fell 34 basis points to 1.27 percent for the first half of 2011 compared with 1.61 percent for the same period last year.

The following table presents the distribution of our average assets, liabilities and shareholders’ equity in combination with the total dollar amounts of interest income from average interest earning assets and the resultant yields, and the dollar amounts of interest expense and average interest bearing liabilities, expressed in both dollars and rates for the three and six months ended June 30, 2011 and 2010.

Average Balance Sheet and Analysis of Net Interest Income

	Three months ended June 30,
	2011							2010
(dollars in thousands)	Average Balance		Interest Income/ Expense		Weighted Average Yield/Rate			Average Balance		Interest Income/ Expense		Weighted Average Yield/Rate
Loans1	$	1,107,772	$	17,236		6.24	%	$	913,251	$	12,819		5.63	%
Securities		314,025		1,680		2.16	%		278,395		1,508		2.22	%
Federal funds sold and deposits with banks		154,631		111		0.29	%		86,380		59		0.27	%

Total earning assets		1,576,428	$	19,027		4.84	%		1,278,026	$	14,386		4.77	%

Non-earning assets		279,720							155,955

Total average assets	$	1,856,148						$	1,433,981


Interest bearing checking	$	97,699	$	99		0.41	%	$	82,043	$	67		0.33	%
Savings and money market		473,867		1,131		0.95	%		360,668		866		0.96	%
Certificates of deposit		460,840		1,086		0.94	%		316,472		951		1.21	%

Total interest bearing deposits		1,032,406		2,316		0.90	%		759,183		1,884		1.00	%

Borrowings		138,965		877		2.53	%		130,698		1,257		3.86	%
Junior subordinated debentures		26,805		334		4.99	%		26,772		439		6.56	%

Total borrowed funds		165,770		1,211		2.92	%		157,470		1,696		4.30	%

Total interest bearing funds		1,198,176	$	3,527		1.18	%		916,653	$	3,580		1.56	%

Noninterest checking		418,406							310,943
Other liabilities		23,940							8,784
Shareholders’ equity		215,626							197,601

Total liabilities and shareholders’ equity	$	1,856,148						$	1,433,981

Net interest income			$	15,500						$	10,806
Net interest margin (tax equivalent) 2						3.95	%						3.40	%

	Six months ended June 30,
	2011							2010
(dollars in thousands)	Average Balance		Interest Income/ Expense		Weighted Average Yield/Rate			Average Balance		Interest Income/ Expense		Weighted Average Yield/Rate
Loans1	$	1,066,703	$	32,368		6.12	%	$	921,408	$	25,806		5.65	%
Securities		302,090		2,991		1.99	%		309,967		3,097		2.05	%
Federal funds sold and deposits with banks		126,268		180		0.29	%		48,976		79		0.32	%

Total earning assets		1,495,061	$	35,539		4.79	%		1,280,351	$	28,982		4.57	%

Non-earning assets		264,188							156,207

Total average assets	$	1,759,249						$	1,436,558


Interest bearing checking	$	95,266	$	189		0.40	%	$	80,859	$	130		0.32	%
Savings and money market		449,157		2,132		0.90	%		354,212		1,783		0.82	%
Certificates of deposit		447,640		2,337		0.99	%		339,574		2,143		1.27	%

Total interest bearing deposits		992,063		4,658		0.95	%		774,645		4,056		1.06	%

Borrowings		136,229		1,937		2.71	%		136,981		2,569		3.78	%
Junior subordinated debentures		26,805		665		4.96	%		26,766		878		6.56	%

Total borrowed funds		163,034		2,602		3.20	%		163,747		3,447		4.22	%

Total interest bearing funds		1,155,097	$	7,260		1.27	%		938,392	$	7,503		1.61	%

Noninterest checking		374,414							308,014
Other liabilities		21,519							9,428
Shareholders’ equity		208,219							180,724

Total liabilities and shareholders’ equity	$	1,759,249						$	1,436,558

Net interest income			$	28,279						$	21,479
Net interest margin (tax equivalent) 2						3.82	%						3.39	%

Yields and amounts earned on loans include loan fees/discount accretion of $0.8 million and $-0.2 million for the three months ended June 30, 2011 and 2010, respectively, and $0.8 million and $-0.4 million for the six months ended June 30, 2011 and 2010, respectively. The average loan balance includes loans held-for-sale and nonaccrual loans; however, there is no interest income related to nonaccrual loans in the amount earned on loans. Average nonaccrual loans were $48.6 million for the six months ended June 30, 2011and $34.0 million for the six months ended June 30, 2010.

2	Includes tax equivalent adjustments primarily related to tax-exempt income on securities.

Our net interest income changes with the level and mix of average interest-earning assets and average interest-bearing funds. We call the changes between periods in interest-earning assets and interest-bearing funds balance changes. We measure the effect on our net interest income from balance changes by multiplying the change in the average balance between the current period and the prior period by the prior period average rate.

Our net interest income also changes with the average rate earned or paid on interest-earning assets and interest-bearing funds. We call the changes between periods in average rates earned and paid rate changes. We measure the effect on our net interest income from rate changes by multiplying the change in average rates earned or paid between the current period and the prior period by the prior period average balance.

We allocate the change in our net interest income attributable to both balance and rate on a pro rata basis to the change in average balance and the change in average rate. The following table presents the change in our interest income and interest expense.

Increase (Decrease) in Net Interest Income/Expense Due to Change in Average Volume and Average Rate (1)


	Three months ended June 30, 2011 to 2010 due to:
(in thousands)	Rate			Volume		Total
Interest income
Interest on loans	$	1,687		$	2,730	$	4,417
Interest on securities		(21	)		193		172
Interest on Federal funds sold and deposits with banks		5			47		52
Total interest income		1,671			2,970		4,641

Interest expense
Interest on deposits		(246	)		678		432
Interest on borrowings		(460	)		80		(380	)
Interest on junior subordinated debentures		(105	)		—		(105	)
Total interest expense		(811	)		758		(53	)
Net interest income	$	2,482		$	2,212	$	4,694

	Six months ended June 30, 2011 to 2010 due to:
(in thousands)	Rate			Volume			Total
Interest income
Interest on loans	$	2,493		$	4,069		$	6,562
Interest on securities		(27	)		(79	)		(106	)
Interest on Federal funds sold and deposits with banks		(24	)		125			101
Total interest income		2,442			4,115			6,557

Interest expense
Interest on deposits		(554	)		1,156			602
Interest on borrowings		(618	)		(14	)		(632	)
Interest on junior subordinated debentures		(214	)		1			(213	)
Total interest expense		(1,386	)		1,143			(243	)
Net interest income	$	3,828		$	2,972		$	6,800

(1)	The change in interest income or interest expense that is attributable to both changes in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of changes in each.

(2)	Tables do not include interest income that would have been earned on nonaccrual loans.

Provision for loan losses

The provision for loan losses was $0.5 million for the three months ended June 30, 2011 compared with $1.8 million for the three months ended June 30, 2010. For the first six months of 2011, the provision for loan losses was $3.0 million compared with $3.5 million for the same period last year. Our provision for loan losses relates to the non-covered loan portfolio; there was no provision for the covered loan portfolio for the three and six months ended June 30, 2011 as there was no credit deterioration beyond that estimated at the date of acquisition.

Noninterest income

Noninterest income was $3.2 million for the 2011 second quarter compared with $2.0 million for the same period a year ago. Noninterest income was $38.1 million for the first six months of 2011 compared with $3.1 million for the same period last year. The increase for the quarterly period is largely due to increased fee income from the new EPS division. The increase for the six-month period is largely due to the pre-tax bargain purchase gain of $34.7 million on the FDIC-assisted SLTB acquisition.

The following table presents a summary of noninterest income:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011			2010
	(in thousands)
Service charges on deposit accounts	$	858	$	814	$	1,755		$	1,599
Net gain on sale of securities		490		130		490			262
Impairment loss on securities		—		—		(1,066	)		(18	)
Market gain on foreclosed assets		—		691		—			691
Gain on acquisitions		466		—		35,202			—
Other income		1,376		319		1,718			613

Total noninterest income	$	3,190	$	1,954	$	38,099		$	3,147

Our service charges on deposit accounts for the three months ended June 30, 2011 were $0.9 million, up from $0.8 million in the same period in 2010. Service charges on deposit accounts for the six months ended June 30, 2011 were $1.8 million, up from the $1.6 million in the six months ended June 30, 2010. The increases reflect the growth of our transactional deposit accounts over the last twelve months.

We recognized an impairment loss of $1.1 million on two private-label CMO securities in the first quarter of 2011. In the same year ago period, we recognized an impairment loss of $18,000 on a $1.0 million community development-related equity investment. We will continue to evaluate our securities portfolio for other-than-temporary impairment at each reporting date and we can provide no assurance there will not be other impairment losses in future periods.

In the second quarter of 2011 and for the six months then ended, we sold $21.0 million of securities and realized net gains of $490,000. For the second quarter of 2010, we sold $44.5 million of securities and realized net gains of $130,000. For the first six months of 2010, we sold $79.9 million of securities and realized net gains of $262,000.

Our other income for the three months ended June 30, 2011 was $1.4 million, up from $0.3 million in the same period in 2010. Other income for the six months ended June 30, 2011 was $1.7 million, up from the $0.6 million in the six months ended June 30, 2010. The increases reflect the increase in fee income from the new EPS division acquired on April 8, 2011.

Noninterest expense

Our noninterest expense for the three months ended June 30, 2011 was $14.0 million, up from $10.8 million for the three months ended June 30, 2010. For the first half of 2011, noninterest expense was $32.3 million, up from $20.7 million for the same period last year. The increase in noninterest expense reflects the growth in the Company’s workforce in association with the acquisitions of Western Commercial Bank, San Luis Trust Bank and the EPS division, as well as the addition of three lending teams. Employees at June 30, 2011 numbered 293 compared with 245 at the end of the same period a year ago. In addition, professional expenses were higher due to ongoing loan collection and resolution efforts. Loss on and expense of foreclosed property had the largest increase period over period and totaled $5.7 million in the first six months of 2011 compared with $0.5 million for the same period a year ago due to valuation allowances recorded on the two largest properties owned by the Company.

The following table presents a summary of noninterest expense:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
	(in thousands)
Salaries and employee benefits	$	6,572	$	4,889	$	12,640	$	9,859
Premises and equipment		1,603		1,517		3,142		3,054
Data processing		814		597		1,875		1,192
Legal, audit, and other professional services		1,568		590		3,228		772
Printing, stationery, and supplies		112		113		208		125
Telephone		208		213		374		437
Directors’ expense		100		113		206		233
Advertising, marketing and business development		428		286		797		513
Postage		65		47		121		103
Insurance and regulatory assessments		750		780		1,413		1,580
Loss on and expense of foreclosed property		486		468		5,738		546
Amortization of intangible assets		624		417		1,040		833
Other expenses		687		721		1,548		1,420

Total noninterest expense	$	14,017	$	10,751	$	32,330	$	20,667

Salaries and benefits increased to $6.6 million for the 2011 second quarter from $4.9 million for the same period last year. For the first half of 2011, salaries and benefits increased 28 percent to $12.6 million from $9.9 million for the same period last year. The increase reflects the growth in the Company’s workforce from the acquisitions of Western Commercial Bank, San Luis Trust Bank and the EPS division. Our workforce increased approximately 20 percent to 293 full-time equivalent employees at June 30, 2011 from 245 a year ago.

Legal, audit and professional services expense increased to $1.6 million for the 2011 second quarter from $0.6 million for the same period last year. For the first half of 2011, legal, audit and professional services expense increased to $3.2 million from $0.8 million for the same period last year. The increase largely reflects increased legal expense due to ongoing loan collection and resolution efforts.

Loss on and expense of foreclosed property was $0.5 million for both the second quarter of 2011 and 2010. For the first half of 2011, loss on and expense of foreclosed property increased to $5.7 million from $0.5 million in the same period a year ago primarily due to valuation allowances recorded on the two largest properties owned by the Company.

Our efficiency ratio was 71 percent for the second quarter of 2011 compared with 83 percent for the second quarter of 2010. Our efficiency ratio for the first half of 2011 was 80 percent compared with 81 percent for the same period last year. The efficiency ratio is the percentage relationship of noninterest expense, excluding amortization of intangibles, loss on and expense of foreclosed property and integration/conversion expenses to the sum of net interest income and noninterest income, excluding gains or losses on security sales and gains on acquisitions. The improvement in the efficiency ratio for the 2011 periods as compared to the 2010 periods was due primarily to revenues growing at a faster pace than operating expenses.

Income taxes

The income tax provision was $13.0 million for the six months ended June 30, 2011 compared with $0.2 million for the same period in 2010. The combined federal and state effective tax rate for the six months ended June 30, 2011 was 42.0 percent

compared with 39.9 percent for the same period in 2010.

Financial position – June 30, 2011 compared with December 31, 2010

Lending and credit risk

We provide a variety of loan and credit-related products and services to meet the needs of borrowers primarily located in the seven Southern California counties where our branches are located. Business loans, represented by commercial real estate loans, commercial loans and construction loans comprise the largest portion of the loan portfolio. Consumer or personal loans, represented by home mortgage, home equity and installment loans, comprise a smaller portion of the loan portfolio. We attempt to avoid the risk of an undue concentration of credits in a particular property type or with an individual customer.

Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with us or otherwise to perform as agreed. All activities in which success depends on counterparty, issuer, or borrower performance have credit risk. Credit risk is present any time we extend, commit or invest funds; whenever we enter into actual or implied contractual agreements for funds, whether on or off the balance sheet, credit risk is present.

All categories of loans present credit risk. Major risk factors applicable to all loan categories include changes in international, national and local economic conditions such as interest rates, inflation, unemployment levels, consumer and business confidence and the supply and demand for goods and services.

Commercial real estate loans rely upon the cash flow originating from the underlying real property. Commercial real estate is a cyclical industry; general economic conditions and local supply and demand affect the commercial real estate industry. In the office sector, the demand for office space is highly dependent on employment levels. Consumer spending and confidence affect the demand for retail space and the levels of retail rents in the retail sector. The industrial sector has exposure to the level of exports, defense spending and inventory levels. Vacancy rates, location and other factors affect the amount of rental income for commercial property. Tenants may relocate, fail to honor their lease or go out of business. In the multifamily residential sector, the affordability of ownership housing, employment conditions and the vacancy of existing inventory heavily influences the demand for apartments. Population growth or decline and changing demographics, such as increases in the level of immigrants or retirees, are also factors influencing the multifamily residential sector.

Construction loans provide developers or owners with funds to build or improve properties; developers ultimately sell or lease these properties. Generally, construction loans involve a higher degree of risk than other loan categories because they rely upon the developer’s or owner’s ability to complete the project within specified cost and time limits. Cost overruns can cause the project cost to exceed the project sales price or exceed the amount of the committed permanent funding. Any number of reasons, such as poor weather, material or labor shortages, labor difficulties, or redoing substandard work to pass inspection, can delay construction projects. Furthermore, changes in market conditions or credit markets may affect a project’s viability once completed.

Commercial loans rely upon the cash flow originating from the underlying business activity of the enterprise. The manufacture, distribution or sale of goods or sale of services are not only affected by general economic conditions but also by the ability of the enterprise’s management to adjust to local supply and demand conditions, maintain good labor, vendor and customer relationships, as well as market, price and sell their goods or services for a profit. Customer demand for goods and services of the enterprise may change because of competition or obsolescence.

Home mortgages and home equity loans and lines of credit use first or second trust deeds on a borrower’s real estate property, typically their principal residence, as collateral. These loans depend on a person’s ability to regularly pay the principal and interest due on the loan and, secondarily, on the value of real estate property that serves as collateral for the loan. Generally, home mortgages involve a lower degree of risk than other loan categories because of the relationship of the loan amount to the value of the residential real estate and a person’s reluctance to forego their principal place of residence. General economic conditions and local supply and demand, however, affect home real estate values. Installment loans and credit card lines also depend on a person’s ability to pay principal and interest on a loan; however, generally these are unsecured loans or, if secured, the collateral value can rapidly decline, as is the case for automobiles. A person’s ability to service debt is highly dependent upon their continued employment or financial stability. Job loss, divorce, illness and bankruptcy are just a few of the risks that may affect a person’s ability to service their debt.

We obtain appraisals when extending credit for real estate secured loans as follows:

All business loans in excess of $1,000,000 where real estate was taken as collateral but where the sale or rental of the real estate is not the primary source of repayment;

All business loans in excess of $250,000 where real estate was taken as collateral and where the sale or rental of the real estate is the primary source of repayment; and

All other real estate secured loans in excess of $250,000.

All real estate secured loans, at the time of origination, renewal or extension, require a current appraisal. A current appraisal is an appraisal with an “as of” date not more than six months before the date of funding or renewal or extension. We also obtain updated appraisals when the useful life of the appraisal ceases. Under the Uniform Standards of Professional Appraisal Practice guidelines, the useful life of an appraisal, regardless of the dollar amount, is the life of the loan. However, useful life ends when (a) there has been a deterioration in the borrower’s performance and there is an increasing likelihood of a forced liquidation of the property and the existing appraisal is older than two years old, or (b) there has been deterioration in the property’s value due to a significant depreciation in local real estate values, lack of maintenance, change in zoning, environmental contamination or other circumstances.

Since the risks in each category of loan changes based on a number of factors, it is not possible to state whether a particular type of lending carries with it a greater or lesser degree of risk at any specific time in the economic cycle. Generally, in a stabilized economic environment, home mortgage loans have the least risk, followed by home equity loans, multifamily property loans, commercial property loans, commercial loans and lines and finally construction loans. However, this ordering may vary from time to time and the degree of risk from the credits with the least risk to those with the highest risk profile may expand or contract with the general economy.

We manage credit risk through Board-approved policies and procedures. At least annually, the Board of Directors reviews and approves these policies. Lending policies provide us with a framework for consistent loan underwriting and a basis for sound credit decisions. Lending policies specify, among other things, the parameters for the type or purpose of the loan, the required debt service coverage and the required collateral requirements. Credit limits are also established and performance of our loan portfolio reviewed by the Directors’ Credit Review Committee. In addition, we have a well-defined set of standards for evaluating the loan portfolio, and management utilizes a comprehensive loan grading system to determine the risk potential in the portfolio. The Directors’ Audit Committee also engages a third party to perform an independent review of the loan portfolio to review credit quality, adequacy of documentation, appropriate loan grading administration, compliance with lending policies and assist in the evaluation of the credit risk inherent in the loan portfolio.

Non-covered Loans

Non-covered loans decreased $28.8 million, or 3 percent, to $918.9 million at June 30, 2011 from $947.7 million at December 31, 2010. The decline in commercial loans and lines of credit since year-end 2010 includes the payoff of two motion picture and video production shared national credit loans totaling $2.6 million. The decline in the remainder of non-covered loans since year-end 2010 was due to payoffs and paydowns outpacing new originations for the period.

(in thousands)	At June 30, 2011			At December 31, 2010
Commercial mortgage	$	392,312		$	399,642
Commercial loans and lines of credit		200,863			213,576
Multifamily mortgage		134,091			135,639
Construction and land development		49,325			55,260
Home mortgage		107,509			108,076
Home equity loans and lines of credit		28,414			29,828
Installment and credit card		6,393			5,724

Total loans		918,907			947,745
Allowance for loan losses		(18,306	)		(17,033	)

Loans, net	$	900,601		$	930,712

The loan categories above are derived from bank regulatory reporting standards for loans secured by real estate; however, a portion of the mortgage loans above are loans that we consider to be a commercial loan for which we have taken real estate collateral as additional support or from an abundance of caution. In these instances, we are not looking to the real property as its primary source of repayment, but rather as a secondary or tertiary source of repayment.

Commercial mortgage loans, the largest segment of our non-covered portfolio, were 43 percent of non-covered loans at June 30, 2011 compared with 42 percent at December 31, 2010. We had 365 commercial mortgage loans with an average balance of $1,076,000 at June 30, 2011. Many different commercial property types collateralize our commercial mortgage loans. Our top three categories have been industrial, office, and retail, representing approximately 68 percent of commercial mortgage loans. In addition, most of our commercial property lending is in the seven Southern California counties where our branches are located. The following is a table of our non-covered commercial mortgage lending by county.

Commercial mortgage loans by region/county (in thousands)	At June 30, 2011		At December 31, 2010
Southern California
Los Angeles	$	187,582	$	199,110
Orange		28,547		29,788
Ventura		115,792		109,684
Riverside		19,086		19,835
San Bernardino		15,978		16,233
San Diego		15,392		15,859
Santa Barbara		228		230

Total Southern California		382,605		390,739

Northern California
Alameda		349		344
Alpine		1,091		—
Contra Costa		368		383
Fresno		2,424		2,443
Imperial		344		352
Kern		715		920
Madera		529		536
Placer		609		613
Sacramento		340		348
San Mateo		2,382		2,401
Solano		268		272
Tulare		288		291

Total Northern California		9,707		8,903

Total non-covered commercial mortgage loans	$	392,312	$	399,642

The following table shows the distribution of our commercial mortgage loans by property type.

Commercial mortgage loans by property type (in thousands)	At June 30, 2011		At December 31, 2010
Industrial/warehouse	$	108,444	$	108,860
Office		97,376		98,277
Retail		60,311		65,917
Hotel		24,090		24,429
Self storage		19,575		19,409
Mixed use		14,241		10,388
Medical		12,562		14,528
Restaurant		9,071		9,419
Assisted living		5,709		5,768
All other		40,933		42,647

Total non-covered commercial mortgage loans	$	392,312	$	399,642

The following table shows the maturity of our non-covered commercial mortgage loans by origination year.

Commercial mortgage loans by origination year/maturity year
(in thousands)

	Year of maturity
Origination									2015 and
Year	2011		2012		2013		2014		Thereafter		Total

2005 and earlier	$	3,704	$	1,534	$	1,795	$	12,120	$	84,738	$	103,891

2006		1,236		—		6,323		—		39,585		47,144

2007		7,671		14,006		743		—		31,408		53,828

2008		2,196		11,132		1,918		—		60,835		76,081

2009		551		1,015		—		6,119		51,951		59,636

2010		60		115		510		—		30,700		31,385

2011		158		—		—		—		20,189		20,347

Total	$	15,576	$	27,802	$	11,289	$	18,239	$	319,406	$	392,312

We generally underwrite commercial mortgage loans with a maximum loan-to-value of 60 percent and a minimum debt service coverage ratio of 1.35. Before the the third quarter of 2009, our maximum loan-to-value was 70 percent and the minimum debt service coverage ratio was 1.25. We believe these changes to our loan origination policies were prudent given the current economic environment. The weighted average loan-to-value percentage of our commercial real estate portfolio was 58.9 percent and the weighted average debt service coverage ratio was 1.65 at June 30, 2011. We focus on cash flow; consequently, regardless of the value of the collateral, the commercial real estate project must provide sufficient cash flow, or alternatively the principals must supplement the project with other cash flow, to service the debt. We generally require the principals to guarantee the loan. We also “stress-test” commercial mortgage loans to determine the potential effect changes in interest rates, vacancy rates, and lease or rent rates would have on the cash flow of the project. Additionally, at least on an annual basis, we require updates on the cash flow of the project and, where practicable, we visit the properties.

Commercial loans represent the next largest category of loans and were 22 percent of total non-covered loans at June 30, 2011, down from 23 percent at December 31, 2010. We had 776 commercial loans with an average balance of $258,000 at June 30, 2011. Unused commitments on commercial loans were $108.7 million at June 30, 2011 compared with $134.9 million at December 31, 2010. Working capital, equipment purchases or business expansion are the typical purposes for commercial loans. Commercial loans may be unsecured or secured by assets such as equipment, inventory, accounts receivables, and real property. Personal guarantees of the business owner may also be present. These loans may also have partial guarantees from the U.S. Small Business Administration, or SBA, or other federal or state agencies. Broadly diversified business sectors with the largest sectors in real estate/construction, finance and insurance, healthcare, manufacturing and professional services comprise the commercial loan portfolio. We also participate in larger credit facilities known as shared national credits. At June 30, 2011, six loans under these facilities had outstanding balances of $17.6 million. These loans consist of five motion picture and video production loan participations and a $0.9 million healthcare facility loan participation. At June 30, 2011, we also have commitments of $12.1 million for two other motion picture and video production facilities with no outstanding balances. Below is a table of our non-covered loans by business sector.

Commercial loans by industry/sector (in thousands)	At June 30, 2011		At December 31, 2010
Services	$	56,575	$	53,549
Real estate		49,259		54,387
Information		34,611		44,193
Trade		23,752		22,488
Manufacturing		16,916		18,722
Healthcare		15,150		16,593
Transportation and warehouse		3,888		3,644
Other		712		—

Total non-covered commercial loans	$	200,863	$	213,576

We underwrite commercial loans with maturities not to exceed seven years and we generally require full amortization of the loan within the term of the loan. We underwrite traditional working capital lines for a 12 month period and have a 30-day out-of-debt requirement. Accounts receivable and inventory financing revolving lines of credit have an annual maturity date, a maximum advance rate, and an annual field audit for lines of $200,000 or more. Third-party vendors perform field audits for our accounts receivable and inventory financing revolving lines of credit. The maximum advance rate for accounts receivable is 80 percent and the maximum advance rate for eligible inventory is 25 percent.

Construction and land loans represent 5 percent of total non-covered loans at June 30, 2011, down from 6 percent at December 31, 2010. At June 30, 2011, we had 27 projects with an average commitment of $2,635,000. Construction loans represent single-family, multifamily and commercial building projects as well as land development loans. At June 30, 2011, 16 percent of these loans, or $7.8 million, represented residential construction projects; 16 percent, or $8.1 million, were commercial projects; and, 68 percent, or $33.4 million, were land development projects.

Construction loans are typically short term, with maturities ranging from 12 to 18 months. For commercial projects, we have had a maximum loan-to-value requirement of 75 percent of the appraised value. For residential projects, the maximum loan-to-value has been 80 percent. Beginning in the third quarter of 2009 we changed the maximum loan-to-value to 70 percent for both commercial and residential projects. The weighted average loan-to-value ratio for our construction and land portfolio was 56.2 percent at June 30, 2011. At the borrower’s expense, we use a third party vendor for funds control, lien releases and inspections. In addition, we regularly monitor the marketplace and the economy for evidence of deterioration in real estate values.

Below is a table of our non-covered construction and land loans by county.

	At June 30, 2011				At December 31, 2010
Construction and land loans by county (in thousands)	Commitment		Outstanding		Commitment		Outstanding
Los Angeles	$	30,901	$	16,380	$	27,168	$	21,786
Orange		15,019		14,065		15,019		14,239
Ventura		18,404		12,159		16,194		12,506
Riverside		3,983		3,891		3,983		3,906
Santa Barbara		2,840		2,830		2,840		2,823

Total non-covered construction and land loans	$	71,147	$	49,325	$	65,204	$	55,260

We are mindful of the economic disruption in our marketplace and have supplemented our regular monitoring practices with updated project appraisals, re-evaluation of estimated project marketing time and re-evaluation of the sufficiency of the original loan commitment to absorb interest charges (i.e., interest reserves) when necessary. We also re-evaluate the ability of the project sponsor, where applicable, to successfully complete other projects funded by other institutions. In circumstances where the interest reserve was not sufficient, we request the project sponsor to make payments to us from their general resources or request the project sponsor to place with us the proceeds from a portion of the project sales. While we believe that our monitoring practices are adequate, we cannot assure you that there will not be further delinquencies, lengthened project marketing time or declines in real estate values.

Multifamily residential mortgage loans were 15 percent of total non-covered loans at June 30, 2011, up from 14 percent at December 31, 2010. We had approximately 155 multifamily loans with an average balance of $867,000 at June 30, 2011. Apartments mostly located in our seven-county market area serve as collateral for our multifamily mortgage loans. We underwrite multifamily mortgage loans in a fashion similar to commercial mortgage loans previously described. The weighted average loan-to-value percentage was 59.3 percent and the weighted average debt service coverage ratio was 1.38 for our multifamily portfolio at June 30, 2011. Below is a table of our non-covered multifamily mortgage loans by county.

Multifamily mortgage loans by region/county (in thousands)	At June 30, 2011		At December 31, 2010
Southern California
Los Angeles	$	89,421	$	92,897
Orange		15,801		15,948
Ventura		10,359		7,495
Riverside		499		502
San Bernardino		3,913		3,979
San Diego		4,966		4,999
Santa Barbara		1,861		1,876

Total Southern California		126,820		127,696

Northern California
Alameda		782		787
Calaveras		1,346		1,357
Fresno		242		245
Kern		2,572		2,609
Merced		656		664
Monterey		376		379
Mono		226		228
San Francisco		732		1,329
Santa Cruz		339		345

Total Northern California		7,271		7,943

Total non-covered multifamily mortgage	$	134,091	$	135,639

The following table shows the maturity of our non-covered multifamily mortgage loans by origination year.

Multifamily mortgage loans by origination year/maturity year
(in thousands)
	Year of maturity
Origination									2015 and
Year	2011		2012		2013		2014		Thereafter		Total

2005 and earlier	$	—	$	1,165	$	1,134	$	—	$	11,745	$	14,044

2006		—		—		—		—		1,346		1,346

2007		—		—		—		—		9,721		9,721

2008		—		—		—		—		48,192		48,192

2009		251		—		—		—		49,479		49,730

2010		—		—		—		—		6,914		6,914

2011		—		—		—		—		4,144		4,144

Total	$	251	$	1,165	$	1,134	$	—	$	131,541	$	134,091

The table below illustrates the weighted average distribution of our non-covered loan portfolio by loan size at June 30, 2011. We distributed all loans by loan balance outstanding except for construction loans, which we distributed by loan commitment. At June 30, 2011, 33 percent of our loans were less than $1 million and 75 percent of our loans were less than $5 million. We believe the high number of smaller-balance loans aids in the mitigation of credit risk; however, a prolonged and deep recession can affect a greater number of borrowers.

	June 30, 2011
	Less than $500,000			$500,000 to $999,999			$1,000,000 to $2,999,999			$3,000,000 to $4,999,999			$5,000,000 to $9,999,999			$10,000,000 to $12,500,000
Commercial mortgage		10	%		13	%		31	%		14	%		21	%		11	%
Commercial loans and lines of credit		28	%		12	%		34	%		8	%		18	%		0	%
Construction and land development		3	%		2	%		42	%		18	%		13	%		22	%
Multifamily mortgage		15	%		27	%		40	%		3	%		15	%		0	%
Home mortgage		23	%		22	%		29	%		7	%		19	%		0	%
Home equity loans and lines of credit		46	%		17	%		7	%		30	%		0	%		0	%
Installment and credit card		88	%		12	%		0	%		0	%		0	%		0	%

Weighted average totals		18	%		15	%		32	%		11	%		18	%		6	%
Number		1,656			205			190			26			27			5

Allowance for non-covered loan losses

We maintain an allowance for loan losses to provide for inherent losses in the non-covered loan portfolio. We establish the allowance through a provision charged to expense. We charge-off all loans judged uncollectible against the allowance while we credit any recoveries on loans to the allowance. We charge-off commercial and real estate loans – construction, commercial mortgage, and home mortgage – by the time their principal or interest becomes 120 days delinquent unless the loan is well secured and in the process of collection. We charge-off consumer loans by the time they become 90 days delinquent unless they too are well secured and in the process of collection. We also charge-off deposit overdrafts when they become more than 60 days old. We evaluate impaired loans on a case-by-case basis to determine the ultimate loss potential to us after considering the proceeds realizable from a sale of the collateral, less costs to sell. In those cases where the net realizable value is less than the loan, we charge-off the loan to reduce the balance to a level equal to the net realizable value of the collateral. We consider a loan impaired when, based on current information and events, we do not expect to be able to collect all amounts due according to the loan contract, including scheduled interest payments.

Our loan policy provides procedures designed to evaluate and assess the risk factors associated with our loan portfolio, to enable us to assess such risk factors prior to granting new loans and to evaluate the sufficiency of the allowance for loan losses. We assess the allowance on a monthly basis and undertake a more critical evaluation quarterly. At the time of the monthly review, the Board of Directors examines and formally approves the adequacy of the allowance. The quarterly evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquency and nonaccruals, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national level, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior twenty-one quarters.

Our evaluation of the adequacy of the allowance for non-covered loan losses includes a review of individual non-covered loans to identify specific probable losses and assigns estimated loss factors to specific groups or types of non-covered loans to calculate possible losses. In addition, we estimate the probable loss on previously accrued but unpaid interest. We refer to these as quantitative considerations. Our evaluation also considers subjective factors such as changes in local and regional economic and business conditions, financial improvement or deterioration in business sectors and industries, changes in lending practices, changes in personnel, changes in the volume and level of past due and nonaccrual loans and concentrations of credit. We refer to these as qualitative considerations.

Our 2011 second quarter evaluation of the adequacy of the allowance for non-covered loan losses considered, among other things, estimated loss factors assigned to specific types of loans, changes and trends in the level of delinquencies, non-covered loans classified as substandard, doubtful and loss, non-covered nonaccrual loans and non-covered loan charge-offs, changes in the value of collateral, changes in the local and regional economic and business conditions, and the judgment of the bank regulatory agencies at the conclusion of their examination process with respect to information available to them during such examination process. Finally, we considered the possible length and depth of the economic recession and the impact it might have on our borrowers, especially our small business borrowers. More specifically, we revised upward our estimated loss factors in our quantitative considerations.

As a result, the allowance for non-covered loan losses increased to $18.3 million or 1.99 percent of non-covered loans at June 30, 2011 compared with $17.0 million or 1.80 percent of non-covered loans at December 31, 2010. We believe that our allowance for non-covered loan losses was adequate at June 30, 2011; however, the determination of the allowance for non-covered loan losses is a highly judgmental process and we cannot assure you that we will not further increase or decrease the allowance in future periods.

The following table presents activity in the allowance for non-covered loan losses:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars in thousands)

Beginning balance	$	18,666		$	15,598		$	17,033		$	16,505
Provision for loan losses		500			1,766			3,000			3,520
Loans charged-off		(1,134	)		(1,111	)		(2,027	)		(3,844	)
Recoveries on loans charged-off		274			199			300			271
Ending balance	$	18,306		$	16,452		$	18,306		$	16,452

Allowance to gross non-covered loans		1.99	%		1.85	%		1.99	%		1.85	%
Net loans charged-off to average loans, annualized		0.36	%		0.40	%		0.37	%		0.78	%

The following table presents the net non-covered loan charge-offs by loan type and the percentage of net non-covered loans charged-off to average non-covered loans by type for the periods indicated.

	Six Months Ended June 30, 2011									Six Months Ended June 30, 2010
(in thousands)	Net Charge-offs			Net Charge-offs to average loans, for period			Net Charge-offs to Average loans, annualized			Net Charge-offs		Net Charge-offs to average loans, for period			Net Charge-offs to Average loans, annualized
Construction and land development	$	(1	)		0.00	%		0.00	%	$	350		0.45	%		0.91	%
Home mortgage		367			0.27	%		0.54	%		158		0.31	%		0.62	%
Commercial loans & lines		900			0.44	%		0.88	%		1,205		0.58	%		1.15	%
Commercial real estate		377			0.07	%		0.14	%		1,639		0.30	%		0.61	%
Home equity loans & lines		—			0.00	%		0.00	%		199		0.50	%		1.01	%
Installment		84			1.74	%		3.48	%		22		0.41	%		0.81	%

Total	$	1,727			0.18	%		0.37	%	$	3,573		0.40	%		0.78	%

Net non-covered loan charge-offs for the six months ended June 30, 2011 were $1.7 million compared with $3.6 million for the same period last year. In the first six months of 2010, a significant charge-off consisted of a $1.2 million charge-off on a $1.7 million nonaccrual multifamily loan for which we had a specific loss allowance of $1.7 million at December 31, 2009. We collected the remaining balance in the 2010 second quarter. Net annualized non-covered loan charge-offs to average non-covered loans for the six months ended June 30, 2011 were 0.37 percent compared with 0.78 percent for the first six months of 2010.

The following table presents the allocation of the allowance for loan losses to each non-covered loan category and the percentage relationship of loans in each category to total loans:

	June 30, 2011					December 31, 2010
(in thousands)	Allocation of the allowance by loan category		Percent of Loans in Category to Total loans			Allocation of the allowance by loan category		Percent of Loans in Category to Total loans
Commercial mortgage	$	7,019		43	%	$	6,134		42	%
Multifamily mortgage		2,556		15	%		2,273		14	%
Commercial loans		5,469		22	%		4,934		23	%
Construction loans		874		5	%		1,698		6	%
Home equity loans and lines		426		2	%		416		3	%
Home mortgage		1,851		12	%		1,496		11	%
Installment and credit card		111		1	%		82		1	%

Total	$	18,306		100	%	$	17,033		100	%

The amounts or proportions displayed above do not imply that charges to the allowance will occur in those amounts or proportions.

The allowance for losses on undisbursed commitments was $101,000 at June 30, 2011, and December 31, 2010, respectively. The allowance for losses on undisbursed commitments is included in “accrued interest payable and other liabilities” on the consolidated balance sheets.

The following table presents non-covered past due loans, nonaccrual loans and foreclosed assets. We had thirteen non-covered restructured loans for $4.1 million at June 30, 2011; two restructured loans for $1.8 million are included in the $5.8 million accruing loans past due 30 to 89 days total shown below and eleven restructured loans for $2.3 million are included in the $17.8 million nonaccrual loan total shown below. We had twelve non-covered restructured loans for $4.2 million at December 31, 2010; three restructured loans for $1.3 million were current at December 31, 2010, one restructured loan for $0.7 million is included in the $11.6 million accruing loans past due 30 to 89 days total shown below and eight restructured loans for $2.3 million are included in the $18.2 million nonaccrual loan total shown below.

(dollars in thousands)	At June 30, 2011			At December 31, 2010
Accruing loans past due 30 - 89 days	$	5,838		$	11,630
Accruing loans past due 90 days or more	$	—		$	—
Nonaccrual loans	$	17,792		$	18,241
Foreclosed assets	$	20,029		$	26,011
Ratios:
Accruing loans past due 90 days or more to non-covered loans		—			—
Nonaccrual loans to non-covered loans		1.93	%		1.92	%

Non-covered accruing loans past due 30 to 89 days decreased to $5.8 million at June 30, 2011 from $11.6 million at December 31, 2010. This category of loans historically has had the most fluctuation from period to period.

Non-covered nonaccrual loans and loans past due 90 days or more and accruing decreased to $17.8 million at June 30, 2011 from $18.2 million at December 31, 2010. These non-performing non-covered loans, as a percentage of total non-covered loans, were 1.93 percent at the end of the second quarter compared with 1.92 percent at December 31, 2010.

Our largest non-covered nonaccrual facility was a revolving credit facility to purchase and develop a film library with a balance of $8.7 million at June 30, 2011. This balance is after charge-offs of $3.4 million. The charge-off represented the excess of the loan advances over the estimated value of the film library. This loan is a participation in a credit facility also known as a shared national credit. We estimated at June 30, 2011 a specific loss allowance of $1.2 million for this loan.

Our next largest non-covered nonaccrual loan was a $1.4 million office building in Costa Mesa, California. The loan was over 90 days past due at June 30, 2011. Our most current appraisal indicates a loan-to-value ratio of 68 percent. We have no specific loss allowance for this loan at June 30, 2011.

Our third largest nonaccrual loan was a $1.2 million entertainment-related commercial loan and a related $0.5 million loan, totaling $1.7 million. A legal dispute regarding royalty payments has affected our borrower’s ability to pay. A third party holds the royalty payments pending resolution of the dispute between our borrower and another party. These funds and continuing payments are more than sufficient to service our loans. We have no specific loss allowance for these loans at June 30, 2011. As discussed above, among the factors we consider in evaluating potential impairments of our loans is the view of our regulators. Due to an event occurring subsequent to June 30 and the uncertainty as to when this legal dispute will be resolved, while we await recovery pending resolution of the dispute or seek other possible alternative repayment sources, we may charge-off these loans.

All other nonaccrual loans were individually under $1 million at June 30, 2011.

The following table presents the activity in our nonaccrual non-covered loan category for the periods indicated.

	Three months ended June 30,												Six months ended June 30,
	2011						2010						2011						2010
(dollars in thousands)	# of Loans			$ Amount			# of Loans			$ Amount			# of Loans			$ Amount			# of Loans			$ Amount
Beginning balance		39		$	21,186			26		$	37,034			28		$	18,241			21		$	39,958
New loans added		10			163			5			1,297			24			4,327			17			6,510
Advances on existing loans		—			—			—			317			—			—			—			317
Loans transferred to foreclosed property		(1	)		(410	)		(3	)		(22,225	)		(1	)		(410	)		(4	)		(23,676	)
Loans returned to accrual status		(4	)		(588	)		(2	)		(1,394	)		(6	)		(1,285	)		(3	)		(2,039	)
Payoffs of existing loans		(3	)		(1,913	)		(2	)		(517	)		(3	)		(1,912	)		(3	)		(3,616	)
Loans sold		—			—			(1	)		(490	)		—			—			(1	)		(490	)
Payments on existing loans		—			(154	)		—			(4	)		—			(407	)		—			(1,162	)
Charge offs on existing loans		(1	)		(492	)		—			—			(2	)		(522	)		(4	)		(375	)
Partial charge-offs on existing loans		—			—			—			(826	)		—			(240	)		—			(2,235	)
Ending balance		40		$	17,792			23		$	13,192			40		$	17,792			23		$	13,192

We consider a loan impaired when, based on current information and events, we do not expect to be able to collect all amounts due according to the loan contract, including scheduled interest payments. Due to the size and nature of the loan portfolio, we determine impaired loans by periodic evaluation on an individual loan basis. The average investment in impaired loans was $20.4 million for the six months ended June 30, 2011 and $34.0 million for the six months ended June 30, 2010. Impaired loans were $17.8 million at June 30, 2011 and $18.2 million at December 31, 2010. Allowances for loan losses for individually impaired loans are computed in accordance with accounting standards related to accounting by creditors for impairment of a loan and are based on either the estimated collateral value less estimated selling costs (if the loan is a collateral-dependent loan), or the present value of expected future cash flows discounted at the loan’s effective interest rate. Of the $17.8 million of impaired loans at June 30, 2011, $10.2 million had specific allowances of $1.8 million. Of the $18.2 million of impaired loans at December 31, 2010, $12.5 million had specific allowances of $2.0 million.

Non-covered foreclosed property

Non-covered foreclosed property at June 30, 2011 consists of a $14.9 million office complex project consisting of 18 buildings in Ventura County, a $3.3 million unimproved land property of 161 acres located in an unincorporated section of western Los Angeles County known as Liberty Canyon, a $1.0 million industrial property in Santa Clara County. The remainder represents one office building and three single-family residences in Southern California that together total $0.9 million.

The following table presents the activity of our non-covered foreclosed property for the periods indicated.

	Three months ended June 30,												Six months ended June 30,
	2011						2010						2011						2010
(dollars in thousands)	# of Properties			$ Amount			# of Properties			$ Amount			# of Properties			$ Amount			# of Properties			$ Amount
Beginning balance		8		$	20,855			2		$	5,997			8		$	26,011			1		$	4,893
New properties added		1			229			3			22,958			1			229			5			24,398
Valuation allowances		—			(97	)		—			(230	)		—			(5,208	)		—			(230	)
Sales proceeds received		(2	)		(958	)		(1	)		(875	)		(2	)		(1,003	)		(2	)		(1,211	)
Ending balance		7		$	20,029			4		$	27,850			7		$	20,029			4		$	27,850

Covered loans

We acquired loans in the WCB and SLTB acquisitions for which we entered into shared-loss agreements with the FDIC, or covered loans. We will share in the losses, 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 (“covered assets”) under the shared-loss agreements. We refer to all other loans in our loan portfolio not acquired from WCB or SLTB as non-covered loans.

Pursuant to the terms of the shared-loss agreements, the FDIC is obligated to reimburse us for 80 percent of eligible losses with respect to covered assets. We have a corresponding obligation to reimburse the FDIC for 80 percent of eligible recoveries with respect to covered assets. 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 dates and the loss recovery provisions are in effect for eight years and ten years, respectively, from the acquisition dates.

The covered loan portfolio increased to $172.6 million at June 30, 2011 from $53.9 million at December 31, 2010 because of the FDIC-assisted SLTB acquisition in February 2011. The following table sets forth the composition of the covered loan portfolio by type.


Covered loans by property type (in thousands)	At June 30, 2011		At December 31, 2010
Home mortgage	$	49,588	$	2,046
Commercial mortgage		43,851		26,038
Construction and land loans		30,711		6,143
Commercial loans and lines of credit		15,874		16,820
Multifamily		19,074		2,688
Home equity loans and lines of credit		13,520		135
Installment and credit card		3		—
Total covered loans	$	172,621	$	53,870

The FDIC shared-loss asset represents the present value of the amounts we expect to receive from the FDIC under the shared-loss agreements. The FDIC shared-loss asset was $81.6 million at June 30, 2011 and $16.7 million at December 31, 2010. The increase was due to the initial FDIC shared-loss asset recorded in conjunction with the FDIC-assisted SLTB acquisition on February 18, 2011.

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 we will establish an allowance for credit losses through a charge to earnings.

At June 30, 2011 and December 31, 2010, we had no allowance for the covered loans because there was credit quality deterioration not beyond the acquisition date fair value amounts of the covered loans.

Investing, funding and liquidity risk

Liquidity risk is the risk to earnings or capital arising from the inability to meet obligations when they come due without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources as well as the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.

We manage bank liquidity risk through Board-approved policies and procedures. The Board of Directors reviews and approves these policies at least annually. Liquidity risk policies provide us with a framework for consistent evaluation of risk and establish risk tolerance parameters. Management’s Asset and Liability Committee meets regularly to evaluate liquidity risk, review and establish deposit interest rates, review loan and deposit in-flows and out-flows and reports quarterly to the Directors’ Balance Sheet Management Committee on compliance with policies. The Directors’ Audit Committee also engages a third party to perform a review of management’s asset and liability practices to ensure compliance with policies.

We enjoy a large base of core deposits (representing checking, savings and small balance retail certificates of deposit). At June 30, 2011, core deposits were $1.1 billion. At December 31, 2010, core deposits were $892.7 million. Core deposits represent a significant low-cost source of funds that support our lending activities and represent a key part of our funding strategy. We seek and stress the importance of both loan and deposit relationships with customers in our business plans. The EPS division also contributed to the increase in core deposits.

Alternative funding sources include large balance certificates of deposits, brokered deposits, federal funds purchased from other institutions, securities sold under agreements to repurchase and borrowings. Total alternative funds used at June 30, 2011 increased to $426.5 million from $395.1 million at December 31, 2010. The increase in alternative funds was due to the wholesale time deposits and FHLB advances assumed in the SLTB acquisition.

In addition, we have lines of credit with other financial institutions providing for federal funds facilities up to a maximum of $30.0 million. The lines of credit support short-term liquidity needs and we cannot use them for more than 30 consecutive days.

These lines are unsecured, have no formal maturity date and can be revoked at any time by the granting institutions. There were no borrowings under these lines of credit at June 30, 2011 or December 31, 2010. We also have a $15.1 million secured borrowing facility with the Federal Reserve Bank of San Francisco, or the Reserve Bank, which had no balance outstanding at June 30, 2011 or December 31, 2010. In addition, we had approximately $196.0 million of available borrowing capacity on the Bank’s secured FHLB borrowing facility at June 30, 2011.

The primary sources of liquidity for the Company, on a stand-alone basis, include the dividends from the Bank and, historically, our ability to issue trust preferred securities and secure outside borrowings. The ability of the Company to obtain funds for its cash requirements, including payments on the junior subordinated debentures underlying our outstanding trust preferred securities and the dividend on our series B preferred stock, is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations which limit its ability to transfer funds to the Company through intercompany loans, advances or cash dividends. The California Department of Financial Institutions, or DFI, under its general supervisory authority as it relates to a bank’s capital requirements regulates dividends paid by state banks, such as the Bank. A state bank may declare a dividend without the approval of the DFI as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net profits for three previous fiscal years less any dividends paid during such period. At June 30, 2011, there were $6.9 million of dividends available for payment under the method described. We received no dividends from the Bank in the year ended December 31, 2010 or in the six months ended June 30, 2011. The Company has $4.8 million in cash on deposit with the Bank at June 30, 2011.

In order to meet our deposit, borrowing and loan obligations when they come due, we maintain a portion of our funds in liquid assets. Liquid assets include cash balances at the Reserve Bank, interest bearing deposits with other financial institutions, and federal funds sold to other financial institutions. We also manage liquidity risk with readily saleable debt securities and debt securities that serve as collateral for borrowings.

At June 30, 2011, we had cash balances at the Reserve Bank of $40.0 million compared with $19.9 million at December 31, 2010. Interest bearing deposits with other financial institutions increased to $111.4 million at June 30, 2011 from $62.5 million at December 31, 2010. The higher balance reflects the liquidity acquired in the SLTB and EPS division acquisitions.

As disclosed in the Condensed Consolidated Statements of Cash Flows, net cash used by operating activities was $18.6 million during the six months ended June 30, 2011. The difference between cash used by operating activities and net income largely consisted of non-cash items including a $35.2 million gain on acquisitions.

Net cash of $197.4 million provided by investing activities consisted principally of $94.3million of proceeds from securities available-for-sale, $112.1million of cash acquired in the SLTB and EPS division acquisitions, $46.3 million of proceeds from net loan paydowns partially offset by $85.9 million of purchases of securities available-for-sale and $1.2 million of purchases of premises and equipment.

Net cash of $157.8 million used by financing activities primarily consisted of a $50.4 million decrease in borrowings, a $106.7 million decrease in net deposits and $0.6 million of dividends paid on preferred stock.

Securities

We classify securities as “available-for-sale” for accounting purposes and, as such, report them at their fair, or market, values in our balance sheets. We use quoted market prices for fair values. We report as “other comprehensive income or loss”, net of tax changes in the fair value of our securities (that is, unrealized holding gains or losses) and carry these cumulative changes as accumulated comprehensive income or loss within shareholders’ equity until realized.

Securities, at amortized cost, increased by $40.6 million, or 15 percent, from $279.0 million at December 31, 2010 to $319.6 million at June 30, 2011. The increase is partly due to the $35.0 million of securities acquired in the FDIC-assisted SLTB acquisition.

Net unrealized holding losses were $3.1 million at June 30, 2011 and were $6.5 million at December 31, 2010. As a percentage of securities, at amortized cost, unrealized holding losses were 0.96 percent and 2.35 percent at the end of each respective period. Securities are comprised largely of U.S. Treasury notes and bills and U.S. government agency notes, mortgage-backed securities and collateralized mortgage obligations, or CMOs. On a quarterly basis, we evaluate our individual available-for-sale securities in an unrealized loss position for other-than-temporary impairment. As part of this evaluation, we consider whether we intend to sell each security and whether it is more likely than not that we will be required to sell the security before the anticipated recovery of the security’s amortized cost basis. Should a security meet either of these conditions, we recognize an impairment charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities in an unrealized loss position that meet neither of these conditions, we consider whether we expect to recover the entire amortized cost basis of the security by comparing our best estimate, on a present value basis, of the expected future cash flows from the security with the amortized cost basis of the security. If our best estimate of expected future cash flows is less than the amortized cost basis of the security, we recognize an impairment charge to earnings for this estimated credit loss.

The following table presents, at June 30, 2011 and December 31, 2010, the gross unrealized losses and amortized cost of securities and the length of time that individual securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010.

	At June 30, 2011
	Less Than 12 Months					Greater Than 12 Months					Total
	Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses
	(in thousands)
U.S. Treasury notes/bills	$	6,046	$	(1	)	$	—	$	—		$	6,046	$	(1	)
U.S. government agency notes		6,223		(3	)		—		—			6,223		(3	)
U.S. government agency mortgage-backed securities		4,261		(86	)		—		—			4,261		(86	)
U.S. government agency collateralized mortgage obligations		17,637		(34	)		—		—			17,637		(34	)
Private-label collateralized mortgage obligations		—		—			17,633		(4,083	)		17,633		(4,083	)
Municipal securities		6,644		(86	)		—		—			6,644		(86	)
Other domestic debt securities		2,500		(2	)		4,695		(1,528	)		7,195		(1,530	)

	$	43,311	$	(212	)	$	22,328	$	(5,611	)	$	65,639	$	(5,823	)

	At December 31, 2010
	Less Than 12 Months					Greater Than 12 Months					Total
	Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses			Amortized Cost		Unrealized Losses
	(in thousands)
U.S. Treasury notes/bills	$	20,107	$	(8	)	$	—	$	—		$	20,107	$	(8	)
U.S. government agency notes		41,401		(522	)		—		—			41,401		(522	)
U.S. government agency mortgage-backed securities		33,584		(528	)		—		—			33,584		(528	)
U.S. government agency collateralized mortgage obligations		55,869		(370	)		—		—			55,869		(370	)
Private-label collateralized mortgage obligations		—		—			20,409		(3,515	)		20,409		(3,515	)
Municipal securities		3,069		(157	)		—		—			3,069		(157	)
Other domestic debt securities		2,500		(28	)		4,744		(1,949	)		7,244		(1,977	)

	$	156,530	$	(1,613	)	$	25,153	$	(5,464	)	$	181,683	$	(7,077	)

We determined that, as of June 30, 2011, our U.S. Treasury notes and bills, and U.S. government agency notes, mortgage-backed securities and CMOs were temporarily impaired because these securities were in a continuous loss position for less than 12 months. We believe the cause of the gross unrealized losses was movements in interest rates and not the deterioration of the issuers’ creditworthiness.

We own one pooled trust preferred security, rated triple-A at purchase, with an amortized cost basis of $4.7 million and an unrealized loss of $1.5 million at June 30, 2011. At December 31, 2010, the unrealized loss was $1.9 million. The gross unrealized loss is mainly due to extraordinarily high investor yield requirements resulting from an illiquid market, causing this security to be valued at a discount to its acquisition cost. One credit rating agency has now rated the security triple-C while another has rated the security Baa3. The senior tranche owned by us has a collateral balance well in excess of the amortized cost basis of the tranche at June 30, 2011. Sixteen of the fifty-six issuers in the security have deferred or defaulted on their interest payments as of June 30, 2011. Our analysis determined that approximately half of the issuers would need to default on their interest payments before the senior tranche owned by us would be at risk of loss. As our estimated present value of expected cash flows to be collected was in excess of our amortized cost basis and we have the intent and ability to hold this security until the anticipated recovery of the remaining amortized cost basis, we concluded that the gross unrealized loss on this security was temporary.

The majority of unrealized losses at June 30, 2011 relate to a type of mortgage-backed security also known as private-label CMOs. As of June 30, 2011, the par value of these securities was $19.7 million and the amortized cost basis, net of other-than-temporary impairment charges, was $17.6 million. At June 30, 2011, the fair value of these securities was $13.6 million,

representing 4 percent of our securities portfolio. Gross unrealized losses related to these securities were $4.1 million, or 23 percent of the aggregate cost basis of these securities as of June 30, 2011.

The gross unrealized losses associated with these securities were primarily due to extraordinarily high investor yield requirements resulting from an extremely illiquid market, significant uncertainty about the future condition of the mortgage market and the economy, and continued deterioration in the credit performance of loan collateral underlying these securities, causing these securities to be valued at significant discounts to their acquisition cost. Three of our four private-label CMOs, approximately 98 percent of amortized cost, had credit agency ratings of less than investment grade at June 30, 2011. We performed discounted cash flow analyses for these three securities using the current month, last three month and last twelve month historical prepayment speed, the cumulative default rate and the loss severity rate to determine if there was other-than-temporary impairment as of June 30, 2011. Based upon this analysis, we determined there was no additional other-than-temporary impairment at June 30, 2011. We do not intend to sell these securities and we do not believe it likely that we will be required to sell these securities before the anticipated recovery of the remaining amortized cost basis. If current conditions in the mortgage markets and general business conditions continue to deteriorate, the fair value of our private-label CMOs may decline further and we may experience further impairment losses.

Deposits

Deposits represent our primary source of funds for our lending activities. The following table presents the balance of each deposit category for the periods indicated:

	June 30,		December 31,
(in thousands)	2011		2010


Core deposits:
Non-interest bearing checking	$	429,528	$	331,648
Interest checking		98,695		88,638
Savings and money market accounts		490,062		388,289
Retail time deposits less than $100,000		89,570		84,133
Total core deposits		1,107,855		892,708
Noncore deposits:
Retail time deposits $100,000 or more		174,324		144,974
Wholesale time deposits		24,535		18,606
State of California time deposits		100,000		100,000
Total noncore deposits		298,859		263,580
Total core and noncore deposits	$	1,406,714	$	1,156,288

The $250.4 million increase in deposits from the 2010 year-end was due principally to the deposits assumed in the SLTB and EPS division acquisitions. Core deposits increased $215.1 million since year-end 2010. Core deposits represent 79 percent of deposits at June 30, 2011, up from 77 percent at December 31, 2010. The increase in core deposits resulted in a decrease in the cost of deposits in 2011 which in turn resulted in an improved net interest margin.

Large balance certificates of deposit (that is, balances of $100,000 or more) were $298.8 million at June 30, 2011. Large balance certificates of deposit were $263.6 million at December 31, 2010. A portion of these large balance time deposits represent time deposits placed by the State Treasurer of California with the Bank. The time deposit program is one element of a pooled

investment account managed by the State Treasurer for the benefit of the State of California and all participating local agencies. The pooled investment account has approximately $68.2 billion of investments, of which approximately $4.0 billion represent time deposits placed at various financial institutions. At June 30, 2011, and December 31, 2010, State of California time deposits placed with us, with original maturities of three months, were $100.0 million at each date. We believe that the State Treasurer will continue this program; we also believe, if it becomes necessary to replace these deposits, that we have sufficient alternative funding capacity or the ability to establish large balance certificates of deposit rates that will enable us to attract deposits in sufficient amounts. The remainder of time deposits represents time deposits accepted from customers in our market area.

From time to time we use brokered time deposits, categorized as wholesale time deposits in the table above, to supplement our liquidity and achieve other asset-liability management objectives. Brokered deposits are wholesale certificates of deposits accepted by us from brokers whose customers do not have any other significant relationship with us. As a result, we believe these funds are very sensitive to credit risk and interest rates, and pose greater liquidity risk to us. These customers may refuse to renew the certificates of deposits at maturity if higher rates are available elsewhere or if they perceive that our creditworthiness is deteriorating. At June 30, 2011 and December 31, 2010, we had no brokered deposits.

We also use the Certificate of Deposit Account Registry System, or CDARS, for our deposit customers who wish to obtain FDIC insurance on their deposits beyond that available from a single institution. We categorize these deposits as wholesale time deposits in the table above. We place these deposits into the CDARS network and accept in return other customers’ certificates of deposits in the same amount and at the same interest rate. We had $5.2 million of these reciprocal deposits, included in time deposits of $100,000 or more, at June 30, 2011 and $7.0 million at December 31, 2010.

At June 30, 2011, the scheduled maturities of time certificates of deposit in denominations of $100,000 or more were as follows:

(Dollars in thousands)
Three months or less	$	161,591
Over three months to twelve months		76,013
Over twelve months		61,146

	$	298,750

Borrowings

Borrowings are comprised of federal funds purchased from other financial institutions, FHLB advances and securities sold under agreements to repurchase. At June 30, 2011, we had $127.6 million of borrowings outstanding, of which $30.0 million was comprised of securities sold under agreements to repurchase and $97.6 million of FHLB advances. For our FHLB advances, the following table presents the amounts and weighted average interest rates outstanding.

	Six Months Ended June 30, 2011					Year Ended December 31, 2010
(in thousands)	Federal Home Loan Bank Advances		Weighted average Interest rate			Federal Home Loan Bank Advances		Weighted average Interest rate
Amount outstanding at end of period	$	97,626		3.03	%	$	86,500		3.11	%
Maximum amount outstanding at any month-end during the period	$	138,750		2.69	%	$	122,000		3.88	%
Average amount outstanding during the period	$	104,904		2.62	%	$	88,995		3.69	%

The higher levels of liquid assets and slow loan demand allowed these borrowings to mature and not be renewed.

The following table presents the maturities of FHLB term advances:

	At June 30, 2011							At December 31, 2010
(dollars in thousands)	Amount		Maturity Year		Weighted Average Interest Rate			Amount		Maturity Year		Weighted Average Interest Rate
	$	9,798		2011		3.26	%	$	13,000		2011		3.21	%
		25,604		2012		3.55	%		18,500		2012		4.03	%
		7,224		2013		2.86	%		—
		32,500		2014		2.95	%		32,500		2014		2.95	%
		15,000		2015		1.76	%		15,000		2015		1.76	%
		7,500		2017		4.07	%		7,500		2017		4.07	%
	$	97,626						$	86,500

The following table presents maturities of securities sold under agreements to repurchase:

	At June 30, 2011							At December 31, 2010
(dollars in thousands)	Amount		Maturity Year		Weighted Average Interest Rate			Amount		Maturity Year		Weighted Average Interest Rate
	$	—						$	15,000		2011		3.64	%
		20,000		2013		3.60	%		20,000		2013		3.60	%
		10,000		2014		3.72	%		10,000		2014		3.72	%

	$	30,000						$	45,000

Junior Subordinated Debentures

As of June 30, 2011 and December 31, 2010, we had $26.8 million of junior subordinated debentures outstanding from two issuances of trust preferred securities. First California Capital Trust I’s capital securities have an outstanding balance of $16.5 million, mature on March 15, 2037, and are redeemable, at par, at the Company’s option at any time on or after March 15, 2012. The securities have a fixed annual rate of 6.80% until March 15, 2012, and a variable annual rate thereafter, which resets quarterly, equal to the 3-month LIBOR rate plus 1.60% per annum. FCB Statutory Trust I’s capital securities have an outstanding balance of $10.3 million, mature on December 15, 2035, and are redeemable, at par, at the Company’s option at any time on or after December 15, 2010. The securities have a variable annual rate, which resets quarterly, equal to the 3-month LIBOR rate plus 1.55% per annum. At June 30, 2011, the rate was 1.80%.

Capital resources

We have 1,000 issued shares of preferred stock series A, $0.01 par value, with a liquidation preference of $1,000 per share. Redemption of the preferred stock series A is at our option subject to certain restrictions imposed by our preferred stock series B. The redemption amount is computed at the per-share liquidation preference plus unpaid dividends at a rate of 8.5%. Each holder of preferred stock series A has the right, exercisable at the option of the holder, to convert all or some of such holder’s series A shares into common stock. The sum of each share’s liquidation preference plus unpaid dividends divided by the conversion factor of $5.63 per share represents the number of common shares issuable upon the conversion of each share of preferred stock series A. As of June 30, 2011, we reserved 321,823 of common shares for the conversion of the preferred stock series A.

On December 19, 2008, we participated in the U.S. Treasury Capital Purchase Program, or the CPP, under which we received $25 million in exchange for issuing 25,000 preferred stock series B shares and a warrant to purchase common stock to the Treasury. The common stock warrant entitles the Treasury to purchase 599,042 shares of our common stock at an exercise price of $6.26 for a term of ten years. On July 14, 2011, we redeemed all 25,000 preferred stock series B shares and exited the CPP program. The warrant is still outstanding and the Company may repurchase the warrant from the Treasury or, if the Company does not repurchase, the Treasury can sell the warrant to a new entity. In connection with the redemption of the preferred stock series B shares, the Company will accelerate the amortization of the remaining difference between the par amount and the initially recorded fair value of the preferred stock series B shares. This $1.1 million deemed dividend will reduce the amount of net income available to common shareholders in the 2011 third quarter.

We redeemed the $25 million of preferred stock series B shares with the $25 million of proceeds received in exchange for issuing 25,000 preferred stock series C shares to the Treasury as a participant in the Small Business Lending Fund (SBLF) program. The preferred stock series C shares will receive quarterly dividends and the initial dividend rate will be 5 percent. The

dividend rate can fluctuate between 1 percent and 5 percent during the next nine quarters and is a function of the growth in qualified small business loans each quarter.

The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on a company’s financial statements. Under capital adequacy guidelines, bank holding companies must meet specific capital guidelines that involve quantitative measures of the company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The following tables present the capital amounts and ratios of the Company with a comparison to the minimum ratios for the periods indicated:

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
	(in thousands)
June 30, 2011
Total capital	$	188,162		17.14	%	$	87,828		> 8.00	%
(to risk weighted assets)
Tier I capital	$	174,383		15.88	%	$	43,914		> 4.00	%
(to risk weighted assets)
Tier I capital	$	174,383		9.77	%	$	71,406		> 4.00	%
(to average assets)
	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
	(in thousands)
December 31, 2010
Total capital	$	172,599		16.79	%	$	82,242		> 8.00	%
(to risk weighted assets)
Tier I capital	$	159,695		15.53	%	$	41,121		> 4.00	%
(to risk weighted assets)
Tier I capital	$	159,695		11.00	%	$	58,052		> 4.00	%
(to average assets)

The Bank is also subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on a company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of June 30, 2011, that the Bank meets all capital adequacy requirements to which it is subject.

As of June 30, 2011, the Bank exceeded the minimum ratios to be well-capitalized under the prompt corrective action provisions. There are no conditions or events since June 30, 2011 that we believe would change the Bank’s category.

The following tables present the capital amounts and ratios of the Bank with a comparison to the minimum ratios for the periods indicated:

	Actual					For Capital Adequacy Purposes					To be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(in thousands)
June 30, 2011
Total capital	$	183,997		16.76	%	$	87,823		> 8.00	%	$	109,779		> 10.00	%
(to risk weighted assets)
Tier I capital	$	170,407		15.52	%	$	43,912		> 4.00	%	$	65,868		> 6.00	%
(to risk weighted assets)
Tier I capital	$	170,407		9.54	%	$	71,480		> 4.00	%	$	89,350		> 5.00	%
(to average assets)

	Actual					For Capital Adequacy Purposes					To be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(in thousands)
December 31, 2010
Total capital	$	167,395		16.31	%	$	82,090		> 8.00	%	$	102,613		> 10.00	%
(to risk weighted assets)
Tier I capital	$	154,515		15.06	%	$	41,045		> 4.00	%	$	61,568		> 6.00	%
(to risk weighted assets)
Tier I capital	$	154,515		10.63	%	$	58,134		> 4.00	%	$	72,668		> 5.00	%
(to average assets)

We recognize that a strong capital position is vital to growth, continued profitability, and depositor and investor confidence. Our policy is to maintain sufficient capital at not less than the well-capitalized thresholds established by banking regulators.

Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, we make commitments to extend credit or issue letters of credit to customers. We generally do not recognize these commitments in our balance sheet. These commitments involve, to varying degrees, elements of credit risk; however, we use the same credit policies and procedures as we do for on-balance sheet credit facilities.

The following summarizes our outstanding commitments at June 30, 2011 and December 31, 2010:

(in thousands)	June 30, 2011		December 31, 2010
Financial instruments whose contract amounts contain credit risk:
Commitments to extend credit	$	176,695	$	199,937
Commercial and standby letters of credit		1,550		1,615

	$	178,245	$	201,552

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Total commitment amounts do not necessarily represent future cash requirements because many expire without use. We may obtain collateral for the commitment based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing properties.

Letters of credit written are conditional commitments issued by us to guarantee the performance of a customer to a third party. These guarantees support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Credit risk for letters of credit is essentially the same as that for loan facilities to customers. When we deem collateral necessary, we will hold cash, marketable securities, or real estate as collateral supporting those commitments.

Interest Rate Risk

Interest rate risk is the risk to earnings or capital arising from movements in interest rates. Interest rate risk arises from

differences between the timing of rate changes and the timing of cash flows (re-pricing risk), from changing rate relationships among different yield curves affecting bank activities (basis risk), from changing rate relationships across the spectrum of maturities (yield curve risk), and from interest-related options embedded in loans and products (options risk).

We manage bank interest risk through Board-approved policies and procedures. The Board of Directors reviews and approves these policies at least annually. Interest rate risk policies provide management with a framework for consistent evaluation of risk and establish risk tolerance parameters. Management’s Asset and Liability Committee meets regularly to evaluate interest rate risk, engages a third party to assist in the measurement and evaluation of risk and reports quarterly to the Directors’ Balance Sheet Management Committee on compliance with policies. The Directors’ Audit Committee also engages a third party to perform a review of management’s asset and liability practices to ensure compliance with policies.

We use simulation-modeling techniques that apply alternative interest rate scenarios to periodic forecasts of future business activity and assess the potential changes to net interest income. Our base scenario examines our balance sheet where we assume rate changes occur ratably over an initial 12-month horizon based upon a parallel shift in the yield curve and then is maintained at that level over the remainder of the simulation horizon. We also create alternative scenarios where we assume different types of yield curve movements. In our most recent base simulation, we estimated that net interest income would decrease approximately 0.67% within a 12-month time horizon for an assumed 100 basis point decrease in prevailing interest rates or increase approximately 0.02% for an assumed 100 basis point increase in prevailing interest rates. In addition, we estimated that net interest income would increase approximately 0.16% within a 12-month time horizon for an assumed 200 basis point increase in prevailing rates. These estimated changes were within the policy limits established by the Board. The table below illustrates the estimated percentage change in our net interest income in our base scenario over hypothetical 1, 2, and 3 year horizons.

	Time Horizon
Percentage Change	1 Year			2 Years			3 Years
-100 bps		-0.67	%		1.17	%		1.90	%
+100 bps		0.02	%		3.21	%		7.18	%
+200 bps		0.16	%		1.72	%		6.74	%
+400 bps		0.17	%		4.51	%		11.46	%

All interest-earning assets, interest-bearing liabilities and related derivative contracts are included in the interest rate sensitivity analysis at June 30, 2011. In our most recent analysis, approximately 45 percent of our loans had a fixed rate of interest and approximately 55 percent had a variable interest rate. Of loans with a variable rate of interest, approximately 38 percent use an interest rate that floats with a specified interest rate such as the Wall Street Journal Prime Rate or 3-month LIBOR rate. Approximately 21 percent of our variable rate loans use an interest rate that adjusts periodically, such as monthly, quarterly or annually, with a specified index rate. Finally, approximately 41 percent of our variable interest rate loans have an interest rate that remains fixed for a period of time, such as 1, 2 3 or 5 years, then adjusts periodically with a specified index rate. In addition, approximately 83 percent of our variable interest rate loans have a minimum, or floor, rate of interest. Of these, 42 percent were at their minimum, or floor rate of interest. In a declining rate environment, the interest rate floors contribute to the favorable impact on our net interest income. However, in a rising rate environment, these interest rate floors serve to lessen the full benefit of higher interest rates. In our most recent base simulation, an assumed 200 basis point increase in prevailing interest rates would cause 73 percent of loans at their minimum rate of interest not to be at their floor rate of interest.

Our simulation model includes assumptions about anticipated prepayments on mortgage-related instruments, the estimated cash flow on loans and deposits, and our future business activity. These assumptions are inherently uncertain and, as a result, our modeling techniques cannot precisely estimate the effect of changes in net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, cash flow and business activity.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Please see the section above titled “Interest Rate Risk” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which provides an update to our quantitative and qualitative disclosure about market risk. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure above under “Forward Looking Statements” in Item 2 regarding such forward-looking information.

Item 4T. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective.

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter ending June 30, 2011 that have materially affected, or are

reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The nature of our business causes us to be involved in routine legal proceedings from time to time. We are not aware of any pending or threatened legal proceedings expected to have a material adverse effect on our business, financial condition, results of operations or cash flow that arose during the fiscal quarter ended June 30, 2011 or any material developments in our legal proceedings previously reported in Item 3 to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes from risk factors as previously disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the period ended December 31, 2010, filed with the SEC on March 30, 2011.

We are subject to extensive regulation which could adversely affect our business.

Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was recently signed into law. The Dodd-Frank Act will have a broad impact on the financial services industry, including significant regulatory and compliance changes, such as: (1) enhanced resolution authority of troubled and failing banks and their holding companies; (2) enhanced lending limits strengthening the existing limits on a depository institution’s credit exposure to one borrower; (3) increased capital and liquidity requirements; (4) increased regulatory examination fees; (5) changes to assessments to be paid to the FDIC for federal deposit insurance; (6) prohibiting bank holding companies, such as us, from including in regulatory Tier 1 capital future issuances of trust preferred securities or other hybrid debt and equity securities; and (7) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC. Further, the Dodd-Frank Act addresses many corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including us. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others:

●

a reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;

●

increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;

●

the limitation on our ability to raise capital through the use of trust preferred securities as these securities will no longer be included as Tier 1 capital going forward; and

●

the limitation on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations.

Further, we may be required to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.

In addition, there are other currently proposed laws, rules and regulations that, if adopted, would impact our operations. For example, federal bank regulators are required, within nine months of the enactment of the Dodd-Frank Act, to jointly prescribe regulations to (1) require banking organizations to report the structures of all incentive-based compensation arrangements and (2) prohibit incentive-based payment arrangements that encourage inappropriate risks by providing employees, directors, or principal shareholders with excessive compensation or that could lead to material financial loss to the organization.

Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us. For more information, please see the section entitled “Business-Supervision and Regulation” under Part I, Item 1 in our 2009 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following Exhibits are filed as a part of this report:

Exhibit Number		Description
31.1		Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	First California Financial Group, Inc.

Date: August 15 2011	By:	/s/ Romolo Santarosa
		Romolo Santarosa (Principal Financial Officer and Duly Authorized Officer)