UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011

for the quarterly period ended: June, 30 2011

		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-10661

TriCo Bancshares

(Exact Name of Registrant as Specified in Its Charter)

CALIFORNIA (State or Other Jurisdiction of Incorporation or Organization)		94-2792841 (I.R.S. Employer Identification Number)

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.

þ Yes o No

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes o No

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:

Common stock, no par value: 15,978,958 shares outstanding as of August 5, 2011

 

 

TriCo Bancshares
FORM 10-Q
TABLE OF CONTENTS

		Page
Forward-Looking Statements			1
PART I — FINANCIAL INFORMATION			2
Item 1 — Financial Statements			2
Financial Summary			36
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3 — Quantitative and Qualitative Disclosures about Market Risk			58
Item 4 — Controls and Procedures			58
PART II — OTHER INFORMATION			59
Item 1 — Legal Proceedings			59
Item 1A — Risk Factors			59
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			60
Item 6 — Exhibits			60
Signatures			61
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements about TriCo Bancshares (the “Company”) that are subject to the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current knowledge and belief of the Company’s management (“Management”) and include information concerning the Company’s possible or assumed future financial condition and results of operations. When you see any of the words “believes”, “expects”, “anticipates”, “estimates”, or similar expressions, it may mean the Company is making forward-looking statements. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. The reader is directed to the Company’s annual report on Form 10-K for the year ended December 31, 2010, and Part II, Item 1A of this report for further discussion of factors which could affect the Company’s business and cause actual results to differ materially from those suggested by any forward-looking statement made in this report. Such Form 10-K and this report should be read to put any forward-looking statements in context and to gain a more complete understanding of the risks and uncertainties involved in the Company’s business. Any forward-looking statement may turn out to be wrong and cannot be guaranteed. The Company does not intend to update any forward-looking statement after the date of this report.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TRICO BANCSHARES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data; unaudited)

		At June 30,				At December 31,
		2011				2010
Assets:
Cash and due from banks		$	52,874			$	57,254
Cash at Federal Reserve and other banks			338,180				313,812
Cash and cash equivalents			391,054				371,066
Securities available-for-sale			264,992				277,271
Restricted equity securities			9,199				9,133
Loans held for sale			4,379				4,988
Loans			1,396,062				1,419,571
Allowance for loan losses			(43,962	)			(42,571	)
Total loans, net			1,352,100				1,377,000
Foreclosed assets, net			9,337				9,913
Premises and equipment, net			20,142				19,120
Cash value of life insurance			51,441				50,541
Accrued interest receivable			6,549				7,131
Goodwill			15,519				15,519
Other intangible assets, net			475				580
Mortgage servicing rights			4,818				4,605
Indemnification asset			4,545				5,640
Other assets			41,634				37,282
Total assets		$	2,176,184			$	2,189,789
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand		$	419,391			$	424,070
Interest-bearing			1,417,340				1,428,103
Total deposits			1,836,731				1,852,173
Accrued interest payable			1,865				2,151
Reserve for unfunded commitments			2,640				2,640
Other liabilities			29,561				29,170
Other borrowings			59,234				62,020
Junior subordinated debt			41,238				41,238
Total liabilities			1,971,269				1,989,392
Commitments and contingencies (Note 18)
Shareholders’ equity:
Common stock, no par value: 50,000,000 shares authorized; issued and outstanding:
15,978,958 at June 30, 2011			83,863
15,860,138 at December 31, 2010							81,554
Retained earnings			118,408				117,533
Accumulated other comprehensive income, net of tax			2,644				1,310
Total shareholders’ equity			204,915				200,397
Total liabilities and shareholders’ equity		$	2,176,184			$	2,189,789

The accompanying notes are an integral part of these consolidated financial statements.

TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2011				2010				2011				2010
Interest and dividend income:
Loans, including fees		$	21,735			$	22,701			$	43,457			$	45,514
Debt securities:
Taxable			2,347				2,727				4,721				5,482
Tax exempt			136				188				276				396
Dividends			7				6				14				12
Interest bearing cash at Federal Reserve and other banks			242				154				433				308
Total interest and dividend income			24,467				25,776				48,901				51,712
Interest expense:
Deposits			1,802				2,727				3,629				5,785
Other borrowings			600				602				1,193				1,196
Junior subordinated debt			312				313				622				619
Total interest expense			2,714				3,642				5,444				7,600
Net interest income			21,753				22,134				43,457				44,112
Provision for loan losses			5,561				10,000				12,562				18,500
Net interest income after provision for loan losses			16,192				12,134				30,895				25,612
Noninterest income:
Service charges and fees			6,121				6,082				11,903				11,817
Gain on sale of loans			495				577				1,220				1,162
Commissions on sale of non-deposit investment products			648				362				1,008				629
Increase in cash value of life insurance			450				426				900				852
Other			537				657				2,570				1,191
Total noninterest income			8,251				8,104				17,601				15,651
Noninterest expense:
Salaries and related benefits			10,715				9,985				21,508				20,135
Other			9,380				8,423				18,258				17,076
Total noninterest expense			20,095				18,408				39,766				37,211
Income before income taxes			4,348				1,830				8,730				4,052
Provision for income taxes			1,577				510				3,159				1,174
Net income		$	2,771			$	1,320				5,571			$	2,878
Earnings per share:
Basic		$	0.17			$	0.08			$	0.35			$	0.18
Diluted		$	0.17			$	0.08			$	0.35			$	0.18

The accompanying notes are an integral part of these consolidated financial statements.

TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share data; unaudited)

														Accumulated
		Shares of												Other
		Common				Common				Retained				Comprehensive
		Stock				Stock				Earnings				Income				Total
Balance at December 31, 2009			15,787,753			$	79,508			$	118,863			$	2,278			$	200,649
Comprehensive income:
Net income											2,878								2,878
Change in net unrealized loss on securities available for sale, net															1,854				1,854
Total comprehensive income																			4,732
Stock option vesting							275												275
Stock options exercised			146,403				1,229												1,229
Tax benefit of stock options exercised							390												390
Repurchase of common stock			(74,018	)			(373	)			(991	)							(1,364	)
Dividends paid ($0.22 per share)											(3,489	)							(3,489	)
Balance at June 30, 2010			15,860,138			$	81,029			$	117,261			$	4,132			$	202,422
Balance at December 31, 2010			15,860,138			$	81,554			$	117,533			$	1,310			$	200,397
Comprehensive income:
Net income											5,571								5,571
Change in net unrealized gain on securities available for sale, net															1,334				1,334
Total comprehensive income																			6,905
Stock option vesting							500												500
Stock options exercised			296,250				2,428												2,428
Tax benefit of stock options exercised							296												296
Repurchase of common stock			(177,430	)			(915	)			(1,830	)							(2,745	)
Dividends paid ($0.18 per share)											(2,866	)							(2,866	)
Balance at June 30, 2011			15,978,958			$	83,863			$	118,408			$	2,644			$	204,915

See accompanying notes to unaudited condensed consolidated financial statements.

TRICO BANCSHARES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands; unaudited)

		For the six months ended June 30,
		2011				2010
Operating activities:
Net income		$	5,571			$	2,878
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, and amortization			1,612				1,810
Amortization of intangible assets			105				137
Provision for loan losses			12,562				18,500
Amortization of investment securities premium, net			685				432
Originations of loans for resale			(55,579	)			(36,420	)
Proceeds from sale of loans originated for resale			56,973				37,508
Gain on sale of loans			(1,220	)			(1,162	)
Change in market value of mortgage servicing rights			222				618
Provision for losses on foreclosed assets			1,087				55
Gain on sale of foreclosed assets			(385	)			(350	)
Loss on disposal of fixed assets			15				40
Increase in cash value of life insurance			(900	)			(852	)
Stock option vesting expense			500				275
Stock option excess tax benefits			(296	)			(390	)
Bargain purchase gain			—				(232	)
Change in reserve for unfunded commitments			—				(800	)
Change in:
Interest receivable			582				291
Interest payable			(286	)			(1,127	)
Other assets and liabilities, net			(3,900	)			1,266
Net cash from operating activities			17,348				22,477
Investing activities:
Proceeds from maturities of securities available-for-sale			39,352				42,816
Purchases of securities available-for-sale			(25,456	)			(101,255	)
Redemption (purchase) of restricted equity securities, net			(66	)			447
Loan principal (increases) decreases, net			8,084				40,097
Proceeds from sale of foreclosed assets			4,145				2,497
Improvements of foreclosed assets			(17	)			—
Proceeds from sale of premises and equipment			1				2
Purchases of premises and equipment			(2,288	)			(1,691	)
Cash received from acquisitions			—				18,764
Net cash from investing activities			23,755				1,677
Financing activities:
Net decrease in deposits			(15,442	)			(33,564	)
Net change in short-term other borrowings			(2,786	)			(11,301	)
Stock option excess tax benefits			296				390
Repurchase of common stock			(753	)			(338	)
Dividends paid			(2,866	)			(3,489	)
Exercise of stock options			436				203
Net cash from financing activities			(21,115	)			(48,099	)
Net change in cash and cash equivalents			19,988				(23,945	)
Cash and cash equivalents at beginning of period			371,066				346,589
Cash and cash equivalents at end of period		$	391,054			$	322,644
Supplemental disclosure of noncash activities:
Loans transferred to other real estate owned		$	4,254			$	3,788
Unrealized net gain on securities available for sale		$	2,302			$	3,200
Market value of shares tendered by employees in-lieu of cash to pay for exercise options and/or related taxes		$	1,992			$	1,026
Supplemental disclosure of cash flow activity:
Cash paid for interest expense		$	5,730			$	8,727
Cash paid for income taxes		$	2,620			$	2,625

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — General Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The interim results are not necessarily indicative of the results expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Tri Counties Bank (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to the adequacy of the allowance for loan losses, investments, intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The allowance for loan losses, goodwill and other intangible assets, income taxes, and the valuation of mortgage servicing rights are the only accounting estimates that materially affect the Company’s consolidated financial statements.

Significant Group Concentration of Credit Risk

The Company grants agribusiness, commercial, consumer, and residential loans to customers located throughout the northern San Joaquin Valley, the Sacramento Valley and northern mountain regions of California. The Company has a diversified loan portfolio within the business segments located in this geographical area. The Company currently classifies all its operation into one business segment that it denotes as community banking.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold.

Investment Securities

The Company classifies its debt and marketable equity securities into one of three categories: trading, available-for-sale or held-to-maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. During the six months ended June 30, 2011 and the year ended December 31, 2010, the Company did not have any securities classified as either held-to-maturity or trading.

Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are reported as a separate component of other accumulated comprehensive income (loss) in shareholders’ equity until realized.

Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are derived from the amortized cost of the security sold.

The Company assesses an other-than-temporary impairment (“OTTI”) based on whether it intends to sell a security or if it is likely that the Company would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the amount recorded in OCI increases the

carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above. No OTTI losses were recognized in the six months ended June 30, 2011 or the year ended December 31, 2010.

Restricted Equity Securities

Restricted equity securities represent the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”) and are carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. The Company may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors of current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to noninterest income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on the sale of loans that are held for sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights.

Loans and Allowance for Loan Losses

Loans originated by the Company, i.e., not purchased or acquired in a business combination, are reported at the principal amount outstanding, net of deferred loan fees and costs. Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield over the actual life of the loan. Originated loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.

Originated loans are placed in nonaccrual status when reasonable doubt exists as to the full, timely collection of interest or principal, or a loan becomes contractually past due by 90 days or more with respect to interest or principal and is not well secured and in the process of collection. When an originated loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of Management, the loan is estimated to be fully collectible as to both principal and interest.

An allowance for loan losses for originated loans is established through a provision for loan losses charged to expense. Originated loans and deposit related overdrafts are charged against the allowance for loan losses when Management believes that the collectability of the principal is unlikely or, with respect to consumer installment loans, according to an established delinquency schedule. The allowance is an amount that Management believes will be adequate to absorb probable losses inherent in existing loans and leases, based on evaluations of the collectability, impairment and prior loss experience of loans and leases. The evaluations take into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. The Company defines an originated loan as impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired originated loans are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance.

In situations related to originated loans where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). The Company strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where the Company grants the borrower new terms that provide for a reduction of either interest or principal, the Company measures any impairment on the restructuring as noted above for impaired loans. TDR loans are classified as impaired until they are fully paid off or charged off. Loans that are in nonaccrual status at the time they become TDR loans, remain in

nonaccrual status until the borrower demonstrates a sustained period of performance which the Company generally believes to be six consecutive months of payments, or equivalent. Otherwise, TDR loans are subject to the same nonaccrual and charge-off policies as noted above with respect to their restructured principal balance.

Credit risk is inherent in the business of lending. As a result, the Company maintains an allowance for loan losses to absorb losses inherent in the Company’s originated loan portfolio. This is maintained through periodic charges to earnings. These charges are included in the Consolidated Income Statements as provision for loan losses. All specifically identifiable and quantifiable losses are immediately charged off against the allowance. However, for a variety of reasons, not all losses are immediately known to the Company and, of those that are known, the full extent of the loss may not be quantifiable at that point in time. The balance of the Company’s allowance for originated loan losses is meant to be an estimate of these unknown but probable losses inherent in the portfolio.

The Company formally assesses the adequacy of the allowance for originated loan losses on a quarterly basis. Determination of the adequacy is based on ongoing assessments of the probable risk in the outstanding originated loan portfolio, and to a lesser extent the Company’s originated loan commitments. These assessments include the periodic re-grading of credits based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment, growth of the portfolio as a whole or by segment, and other factors as warranted. Loans are initially graded when originated. They are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.

The Company’s method for assessing the appropriateness of the allowance for originated loan losses includes specific allowances for impaired originated loans and leases, formula allowance factors for pools of credits, and allowances for changing environmental factors (e.g., interest rates, growth, economic conditions, etc.). Allowance factors for loan pools are based on historical loss experience by product type. Allowances for impaired loans are based on analysis of individual credits. Allowances for changing environmental factors are Management’s best estimate of the probable impact these changes have had on the originated loan portfolio as a whole. The allowance for originated loans is included in the allowance for loan losses.

Acquired loans are valued as of acquisition date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805, Business Combinations. Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are referred to as purchased credit impaired (PCI) loans. PCI loans are accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In addition, because of the significant credit discounts associated with the loans acquired in the Granite acquisition, the Company elected to account for all loans acquired in the Granite acquisition under FASB ASC Topic 310-30, and classify them all as PCI loans. Under FASB ASC Topic 805 and FASB ASC Topic 310-30, PCI loans are recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date. Fair value is defined as the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. Default rates, loss severity, and prepayment speed assumptions are periodically reassessed and our estimate of future payments is adjusted accordingly. The difference between contractual future payments and estimated future payments is referred to as the nonaccretable difference. The difference between estimated future payments and the present value of the estimated future payments is referred to as the accretable yield. The accretable yield represents the amount that is expected to be recorded as interest income over the remaining life of the loan. If after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be more than the originally estimated, an increase in the discount rate (effective yield) would be made such that the newly increased accretable yield would be recognized, on a level yield basis, over the remaining estimated life of the loan. If after acquisition, the Company determines that the estimated future cash flows of a PCI loan are expected to be less than the previously estimated, the discount rate would first be reduced until the present value of the reduced cash flow estimate equals the previous present value however, the discount rate may not be lowered below its original level at acquisition. If the discount rate has been lowered to its original level and the present value has not been sufficiently lowered, an allowance for loan loss would be established through a provision for loan losses charged to expense to decrease the present value to the required level. If the estimated cash flows improve after an allowance has been established for a loan, the allowance may be partially or fully reversed depending on the improvement in the estimated cash flows. Only after the allowance has been fully reversed may the discount rate be increased. PCI loans are put on nonaccrual status when cash flows cannot be reasonably estimated. PCI loans are charged off when evidence suggests cash flows are not recoverable. Foreclosed assets from PCI loans are recorded in foreclosed assets at fair value with the fair value at time of foreclosure representing cash flow from the loan. ASC 310-30 allows PCI loans with similar risk characteristics and acquisition time frame to be “pooled” and have their cash flows aggregated as if they were one loan.

Loans are also categorized as “covered” or “noncovered”. Covered loans refer to loans covered by a Federal Deposit Insurance Corporation (“FDIC”) loss sharing agreement. Noncovered loans refer to loans not covered by a FDIC loss sharing agreement.

Foreclosed Assets

Foreclosed assets include assets acquired through, or in lieu of, loan foreclosure. Foreclosed assets are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other noninterest expense. Foreclosed assets that are not subject to a FDIC loss-share agreement are referred to as noncovered foreclosed assets.

Foreclosed assets acquired through FDIC-assisted acquisitions that are subject to a FDIC loss-share agreement, and all assets acquired via foreclosure of covered loans are referred to as covered foreclosed assets. Covered foreclosed assets are reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered foreclosed assets at the loan’s carrying value, inclusive of the acquisition date fair value discount.

Covered foreclosed assets are initially recorded at estimated fair value on the acquisition date based on similar market comparable valuations less estimated selling costs. Any subsequent valuation adjustments due to declines in fair value will be charged to noninterest expense, and will be mostly offset by noninterest income representing the corresponding increase to the FDIC indemnification asset for the offsetting loss reimbursement amount. Any recoveries of previous valuation adjustments will be credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to the FDIC.

Premises and Equipment

Land is carried at cost. Buildings and equipment, including those acquired under capital lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the estimated useful lives of the related assets or lease terms. Asset lives range from 3-10 years for furniture and equipment and 15-40 years for land improvements and buildings.

Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.

The Company has identifiable intangible assets consisting of core deposit intangibles (CDI) and minimum pension liability. CDI are amortized using an accelerated method over a period of ten years. Intangible assets related to minimum pension liability are adjusted annually based upon actuarial estimates.

Impairment of Long-Lived Assets and Goodwill

Long-lived assets, such as premises and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

As of December 31 of each year, goodwill is tested for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Currently, and historically, the Company is comprised of only one reporting unit that operates within the business segment it has identified as “community banking”.

Mortgage Servicing Rights

Mortgage servicing rights (MSR) represent the Company’s right to a future stream of cash flows based upon the contractual servicing fee associated with servicing mortgage loans. Our MSR arise from residential mortgage loans that we originate and sell, but retain the right to service the loans. For sales of residential mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on the fair values of the loan and the servicing right. The net gain from the retention of the servicing right is included in gain on sale of loans in noninterest income when the loan is sold. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. MSR are included in other assets. Servicing fees are recorded in noninterest income when earned.

The determination of fair value of our MSR requires management judgment because they are not actively traded. The determination of fair value for MSR requires valuation processes which combine the use of discounted cash flow models and extensive analysis of current market data to arrive at an estimate of fair value. The cash flow and prepayment assumptions used in our discounted cash flow model are based on empirical data drawn from the historical performance of our MSR, which we believe are consistent with assumptions used by market participants valuing similar MSR, and from data obtained on the performance of similar MSR. The key assumptions used in the valuation of MSR include mortgage prepayment speeds and the discount rate. These variables can, and generally will, change from quarter to quarter as market conditions and projected interest rates change. The key risks inherent with MSR are prepayment speed and changes in interest rates. The Company uses an independent third party to determine fair value of MSR.

Indemnification Asset

The Company has elected to account for amounts receivable under loss-share agreements with the FDIC as indemnification assets in accordance with FASB ASC Topic 805, Business Combinations. FDIC indemnification assets are initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the fair value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted into noninterest income over the life of the FDIC indemnification asset.

FDIC indemnification assets are reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolios. These adjustments are measured on the same basis as the related covered loans and covered other real estate owned. Any increases in cash flow of the covered assets over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is established through a provision for losses — unfunded commitments charged to noninterest expense. The reserve for unfunded commitments is an amount that Management believes will be adequate to absorb probable losses inherent in existing commitments, including unused portions of revolving lines of credits and other loans, standby letters of credits, and unused deposit account overdraft privilege. The reserve for unfunded commitments is based on evaluations of the collectability, and prior loss experience of unfunded commitments. The evaluations take into consideration such factors as changes in the nature and size of the loan portfolio, overall loan portfolio quality, loan concentrations, specific problem loans and related unfunded commitments, and current economic conditions that may affect the borrower’s or depositor’s ability to pay.

Income Taxes

The Company’s accounting for income taxes is based on an asset and liability approach. The Company recognizes the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the future tax consequences that have been recognized in its financial statements or tax returns. The measurement of tax assets and liabilities is based on the provisions of enacted tax laws.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Geographical Descriptions

For the purpose of describing the geographical location of the Company’s loans, the Company has defined northern California as that area of California north of, and including, Stockton; central California as that area of the state south of Stockton, to and including, Bakersfield; and southern California as that area of the state south of Bakersfield.

Reclassifications

Certain amounts reported in previous financial statements have been reclassified to conform to the presentation in this report. These reclassifications did not affect previously reported net income or total shareholders’ equity.

Recent Accounting Pronouncements

FASB issued Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This Update amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. The amendments in this Update apply to all entities, both public and nonpublic. The amendments in this Update affect all entities with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fair value. For public entities, the disclosures required by this Update as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. For nonpublic entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2011. The amendments in this Update encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. As this ASU is disclosure-related only, the adoption of this ASU did not impact the Bank’s financial condition or results of operations.

FASB issued ASU No. 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This update modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This update was effective for the Company on January 1, 2011 and is not expected have a significant impact on the Company’s financial statements.

FASB issued ASU No. 2011-02, Receivables (Topic 310): 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. This Update also ends the deferral issued in January 2010 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 Update is not expected to have a material impact on the Company’s consolidated financial statements.

FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. This Update is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on the Company’s financial statements.

FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclousre Requirements in U.S. GAAP and IFRSs. ASU 2011-04 amends Topic 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) — Presentation of Comprehensive Income. ASU 2011-05 amends Topic 220, Comprehensive Income, to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

Note 2 — Business Combinations

On May 28, 2010, the Office of the Comptroller of the Currency closed Granite Community Bank (“Granite”), Granite Bay, California and appointed the FDIC as receiver. That same date, the Bank assumed the banking operations of Granite from the FDIC under a whole bank purchase and assumption agreement with loss sharing. Under the terms of the loss sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, other real estate owned (OREO)/foreclosed assets and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the covered assets acquired from Granite. The loss sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. With this agreement, the Bank added one traditional bank branch in each of Granite Bay, Roseville and Auburn, California. This acquisition is consistent with the Bank’s community banking expansion strategy and provides further opportunity to fill in the Bank’s market presence in the greater Sacramento, California market.

The operations of Granite are included in the Company’s operating results from May 28, 2010, and through December 31, 2010 added revenue of $4,967,000, including a bargain purchase gain of $232,000, noninterest expense of $2,078,000 and a provision for loan losses of $1,608,000, that resulted in a contribution to net income after-tax of approximately $743,000. Such operating results are not necessarily indicative of future operating results. Granite’s results of operations prior to the acquisition are not included in the Company’s operating results. During the quarter ended September 30, 2010, the Company completed the conversion of Granite’s information and product delivery systems. As of December 31, 2010, nonrecurring expenses related to the Granite acquisition and systems conversion were approximately $250,000.

The assets acquired and liabilities assumed for the Granite acquisition have been accounted for under the acquisition method of accounting (formerly the purchase method). The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition dates. The fair values of the assets acquired and liabilities assumed were determined based on the requirements of the Fair Value Measurements and Disclosures topic of the FASB ASC. The tax treatment of FDIC assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date. The terms of the agreements provide for the FDIC to indemnify the Bank against claims with respect to liabilities of Granite not assumed by the Bank and certain other types of claims identified in the agreement. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $232,000 in the Granite acquisition. A summary of the net assets received in the Granite acquisition, at their estimated fair values, is presented below:

		Granite
(in thousands)		May 28, 2010
Asset acquired:
Cash and cash equivalents		$	18,764
Securities available-for-sale			2,954
Restricted equity securities			696
Covered loans			64,802
Premises and equipment			17
Core deposit intangible			562
Covered foreclosed assets			4,629
FDIC indemnification asset			7,466
Other assets			392
Total assets acquired		$	100,282
Liabilities assumed:
Deposits		$	95,001
Other borrowings			5,000
Other liabilities			49
Total liabilities assumed			100,050
Net assets acquired/bargain purchase gain		$	232

The acquired loan portfolio and foreclosed assets are referred to as “covered loans” and “covered foreclosed assets”, respectively, and these are recorded in Loans and Foreclosed assets, respectively, in the Company’s consolidated balance sheet. Collectively these balances are referred to as “covered assets”.

In FDIC-assisted transactions, 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. In the Granite acquisition, net assets with a cost basis of $4,345,000 were transferred to the Bank. In the Granite acquisition, the Company recorded a bargain purchase gain of $232,000 representing the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

The Bank did not immediately acquire all the real estate, banking facilities, furniture or equipment of Granite as part of the purchase and assumption agreement. However, the Bank had the option to purchase or lease the real estate and furniture and equipment from the FDIC. During the quarter ended September 30, 2010, the Bank elected to close the Roseville branch and assume the leases for the Granite Bay and Auburn branches. The Bank purchased the existing furniture and equipment in the Granite Bay and Auburn branches from the FDIC for approximately $100,000.

A summary of the estimated fair value adjustments resulting in the bargain purchase gain in the Granite acquisition are presented below:

		Granite
(in thousands)		May 28, 2010
Cost basis net assets acquired		$	4,345
Cash payment received from FDIC			3,940
Fair value adjustments:
Securities available-for-sale			(118	)
Loans			(13,189	)
Foreclosed assets			(2,616	)
Core deposit intangible			562
FDIC indemnification asset			7,466
Deposits			(209	)
Other			51
Bargain purchase gain		$	232

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

		Granite
(in thousands)		May 28, 2010
Principal balance loans acquired		$	77,991
Discount			(13,189	)
Covered loans, net		$	64,802

In estimating the fair value of the covered loans at the acquisition date, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments and (b) estimated the amount and timing of undiscounted expected principal and interest payments. The difference between these two amounts represents the nonaccretable difference.

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

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

		Granite
(in thousands)		May 28, 2010
Undiscounted contractual cash flows		$	99,179
Undiscounted cash flows not expected to be collected (nonaccretable difference)			(11,226	)
Undiscounted cash flows expected to be collected			87,953
Accretable yield at acquisition			(23,151	)
Estimated fair value of Loans acquired at acquisition		$	64,802

Note 3 — Investment Securities

The amortized cost and estimated fair values of investments in debt and equity securities are summarized in the following tables:

		June 30, 2011
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
						(in thousands)
Securities Available-for-Sale
Obligations of U.S. government corporations and agencies		$	242,914			$	9,918				—			$	252,832
Obligations of states and political subdivisions			11,840				395				(75	)			12,160
Total securities available-for-sale		$	254,754			$	10,313			$	(75	)		$	264,992

		December 31, 2010
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
						(in thousands)
Securities Available-for-Sale
Obligations of U.S. government corporations and agencies		$	255,884			$	8,623			$	(326	)		$	264,181
Obligations of states and political subdivisions			12,452				141				(52	)			12,541
Corporate debt securities			1,000				—				(451	)			549
Total securities available-for-sale		$	269,336			$	8,764			$	(829	)		$	277,271

No investment securities were sold during the six months ended June 30, 2011 or the year ended December 31, 2010. Investment securities with an aggregate carrying value of $121,308,000 and $140,100,000 at June 30, 2011 and December 31, 2010, respectively, were pledged as collateral for specific borrowings, lines of credit and local agency deposits.

The amortized cost and estimated fair value of debt securities at June 30, 2011 by contractual maturity are shown below. Actual maturities may 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, obligations of U.S. government corporations and agencies with a cost basis totaling $242,914,000 consist almost entirely of mortgage-backed securities whose contractual maturity, or principal repayment, will follow the repayment of the underlying mortgages. For purposes of the following table, the entire outstanding balance of these mortgage-backed securities issued by U.S. government corporations and agencies is categorized based on final maturity date. At June 30, 2011, the Company estimates the average remaining life of these mortgage-backed securities issued by U.S. government corporations and agencies to be approximately 3.3 years. Average remaining life is defined as the time span after which the principal balance has been reduced by half.

		Amortized				Estimated
		Cost				Fair Value
		(in thousands)
Investment Securities
Due in one year		$	22			$	22
Due after one year through five years			25,176				26,336
Due after five years through ten years			75,073				76,535
Due after ten years			154,483				162,099
Totals		$	254,754			$	264,992

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

		Less than 12 months								12 months or more								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
June 30, 2011										(in thousands)
Securities Available-for-Sale:
Obligations of U.S. government corporations and agencies		$	11				—				—				—			$	11				—
Obligations of states and political subdivisions			1,649				(75	)			—				—				1,649				(75	)
Total securities available-for-sale		$	1,660			$	(75	)			—				—			$	1,660			$	(75	)

		Less than 12 months								12 months or more								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
December 31, 2010										(in thousands)
Securities Available-for-Sale:
Obligations of U.S. government corporations and agencies		$	54,760			$	(326	)			—				—			$	54,760			$	(326	)
Obligations of states and political subdivisions			1,345				(22	)			513				(30	)			1,858				(52	)
Corporate debt securities			—				—				549				(451	)			549				(451	)
Total securities available-for-sale		$	56,105			$	(348	)		$	1,062			$	(481	)		$	57,167			$	(829	)

Obligations of U.S. government corporations and agencies: Unrealized losses on investments in obligations of U.S. government corporations and agencies are caused by interest rate increases. The contractual cash flows of these securities are guaranteed by U.S. Government Sponsored Entities (principally Fannie Mae and Freddie Mac). It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2011, one debt securities representing obligations of U.S. government corporations and agencies had an unrealized loss with aggregate depreciation of 0.03% from the Company’s amortized cost basis.

Obligations of states and political subdivisions: The unrealized losses on investments in obligations of states and political subdivisions are caused by increases in required yields by investors in these types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2011, three debt securities representing obligations of states and political subdivisions had unrealized losses with aggregate depreciation of 4.35% from the Company’s amortized cost basis.

Corporate debt securities: The unrealized losses on investments in corporate debt securities were caused by increases in required yields by investors in similar types of securities. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and more likely than not will not be required to sell, these investments are not considered other-than-temporarily impaired. At June 30, 2011, the Company had no corporate debt securities.

Note 4 — Loans

A summary of the balances of loans follows (in thousands):

		June 30, 2011												December 31, 2010
		Originated				PCI				Total				Originated				PCI				Total
Mortgage loans on real estate:
Residential 1-4 family		$	121,474			$	6,398			$	127,872			$	123,623			$	7,597			$	131,220
Commercial			679,922				24,661				704,583				682,103				25,739				707,842
Total mortgage loan on real estate			801,396				31,059				832,455				805,726				33,336				839,062
Consumer:
Home equity lines of credit			324,662				6,302				330,964				329,080				7,072				336,152
Home equity loans			14,830				—				14,830				17,588				—				17,588
Auto Indirect			16,741				—				16,732				24,577				—				24,577
Other			18,601				—				18,610				15,622				—				15,622
Total consumer loans			374,834				6,302				381,136				386,867				7,072				393,939
Commercial			132,487				8,037				140,524				133,032				10,364				143,396
Construction:
Residential			18,042				4,445				22,435				19,459				4,463				23,922
Commercial			21,433				—				21,485				21,029				—				21,029
Total construction			39,475				4,445				43,920				40,488				4,463				44,951
Total loans			1,348,192				49,843				1,398,035				1,366,113				55,235				1,421,348
Net deferred loan (fees) costs			(1,973	)			—				(1,973	)			(1,777	)			—				(1,777	)
Total loans, net of deferred loan fees		$	1,346,219			$	49,843			$	1,396,062			$	1,364,336			$	55,235			$	1,419,571
Noncovered loans		$	1,346,192				—			$	1,346,219			$	1,364,336				—			$	1,364,336
Covered loans			—				49,843				49,843				—				55,235				55,235
Total loans		$	1,346,192			$	49,843			$	1,396,062			$	1,364,336			$	55,235			$	1,419,571
Allowance for loan loss		$	(41,592	)		$	(2,370	)		$	(43,962	)		$	(40,963	)		$	(1,608	)		$	(42,571	)

The following is a summary of the change in accretable yield for PCI loans during the periods indicated (in thousands):

		Three months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010
Change in accretable yield:
Balance at beginning of period		$	14,399				—			$	17,717				—
Acquisitions			—			$	23,151							$	23,151
Accretion to interest income			(994	)			(369	)			(2,028	)			(369	)
Reclassification (to) from Nonaccretable difference			52				—				(2,232	)			—
Balance at end of period		$	13,457			$	22,782			$	13,457			$	22,782

Throughout these financial statements, and in particular in this Note 4 and Note 5, when we refer to “Loans” or “Allowance for loan losses” we mean all categories of loans, including originated and PCI. When we are not referring to all categories of loans, we will indicate which we are referring to — originated or PCI.

Note 5 — Allowance for Loan Losses

The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the periods indicated.

		Allowance for Loan Losses — Three months ended June 30, 2011
		RE Mortgage								Home Equity								Auto				Other								Construction
(in thousands)		Resid.				Comm.				Lines				Loans				Indirect				Consum.				C&I				Resid.				Comm.				Total
Beginning balance		$	3,544			$	12,027			$	16,296			$	911			$	481			$	704			$	6,967			$	1,395			$	899			$	43,224
Charge-offs			(321	)			(1,621	)			(1,928	)			(264	)			(100	)			(304	)			(202	)			(395	)			(95	)			(5,230	)
Recoveries			—				38				86				—				56				165				41				20				1				407
Provision			(702	)			2,975				2,026				524				(53	)			257				6				677				(149	)			5,561
Ending balance		$	2,521			$	13,419			$	16,480			$	1,171			$	384			$	822			$	6,812			$	1,697			$	656			$	43,962

		Allowance for Loan Losses — Six months ended June 30, 2011
		RE Mortgage								Home Equity								Auto				Other								Construction
(in thousands)		Resid.				Comm.				Lines				Loans				Indirect				Consum.				C&I				Resid.				Comm.				Total
Beginning balance		$	3,007			$	12,700			$	15,054			$	795			$	1,229			$	701			$	5,991			$	1,824			$	1,270			$	42,571
Charge-offs			(1,446	)			(1,989	)			(5,529	)			(264	)			(235	)			(533	)			(1,758	)			(430	)			(95	)			(12,279	)
Recoveries			112				66				247				2				183				374				62				22				40				1,108
Provision			848				2,642				6,708				638				(793	)			280				2,517				281				(559	)			12,562
Ending balance		$	2,521			$	13,419			$	16,480			$	1,171			$	384			$	822			$	6,812			$	1,697			$	656			$	43,962
Ending balance:
Individ. evaluated for impairment		$	955			$	2,181			$	1,408			$	129			$	113			$	22			$	206			$	286			$	509			$	5,809
Loans pooled for evaluation		$	1,552			$	11,224			$	14,629			$	1,042			$	271			$	800			$	4,968			$	1,150			$	147			$	35,783
Loans acquired with deteriorated credit quality		$	14			$	14			$	443				—				—				—			$	1,638			$	261				—			$	2,370

		Loans, net of unearned fees — As of June 30, 2011
		RE Mortgage								Home Equity								Auto				Other								Construction
(in thousands)		Resid.				Comm.				Lines				Loans				Indirect				Consum.				C&I				Resid.				Comm.				Total
Ending balance:
Total loans		$	127,083			$	701,674			$	332,532			$	14,905			$	16,767			$	18,660			$	140,531			$	22,479			$	21,431			$	1,396,062
Individ. evaluated for impairment		$	11,292			$	65,734			$	8,271			$	492			$	936			$	93			$	5,385			$	6,250			$	7,329			$	105,782
Loans pooled for evaluation		$	109,393			$	611,279			$	317,959			$	14,413			$	15,831			$	18,567			$	127,109			$	11,784			$	14,102			$	1,240,437
Loans acquired with deteriorated credit quality		$	6,398			$	24,661			$	6,302				—				—				—			$	8,037			$	4,445				—			$	49,843

Note 5 — Allowance for Loan Losses (Continued)

The following tables summarize the activity in the allowance for loan losses, and ending balance of loans, net of unearned fees for the periods indicated.

		Allowance for Loan Losses — Three months ended June 30, 2010
		RE Mortgage								Home Equity								Auto				Other								Construction
(in thousands)		Resid.				Comm.				Lines				Loans				Indirect				Consum.				C&I				Resid.				Comm.				Total
Beginning balance		$	2,131			$	6,679			$	14,428			$	907			$	1,645			$	657			$	7,067			$	304			$	2,522			$	36,340
Charge-offs			(293	)			(1,497	)			(3,095	)			(303	)			(337	)			(543	)			(535	)			(1,782	)			(39	)			(8,424	)
Recoveries			—				28				24				7				167				182				103				3				—				514
Provision			1,002				4,153				2,551				1,305				(13	)			302				(455	)			1,748				(593	)			10,000
Ending balance		$	2,840			$	9,363			$	13,908			$	1,916			$	1,462			$	598			$	6,180			$	273			$	1,890			$	38,430
Ending balance:

		Allowance for Loan Losses — Six months ended June 30, 2010
		RE Mortgage								Home Equity								Auto				Other								Construction
(in thousands)		Resid.				Comm.				Lines				Loans				Indirect				Consum.				C&I				Resid.				Comm.				Total
Beginning balance		$	2,618			$	5,071			$	13,483			$	940			$	1,986			$	616			$	6,958			$	2,067			$	1,734			$	35,473
Charge-offs			(748	)			(4,064	)			(5,337	)			(711	)			(863	)			(883	)			(1,061	)			(2,819	)			(39	)			(16,525	)
Recoveries			—				55				68				7				327				384				117				24				—				982
Provision			970				8,301				5,694				1,680				12				481				166				1,001				195				18,500
Ending balance		$	2,840			$	9,363			$	13,908			$	1,916			$	1,462			$	598			$	6,180			$	273			$	1,890			$	38,430
Ending balance:
Individ. evaluated for impairment		$	494			$	857			$	2,977			$	368			$	461			$	67			$	1,147			$	46			$	511			$	6,928
Loans pooled for evaluation		$	2,346			$	8,506			$	10,931			$	1,548			$	1,001			$	531			$	5,033			$	227			$	1,379			$	31,502
Loans acquired with deteriorated credit quality			—				—				—				—				—				—				—				—				—				—

		Loans, net of unearned fees — As of June 30, 2010
		RE Mortgage								Home Equity								Auto				Other								Construction
(in thousands)		Resid.				Comm.				Lines				Loans				Indirect				Consum.				C&I				Resid.				Comm.				Total
Ending balance:
Total loans		$	121,638			$	729,218			$	346,795			$	46,580			$	34,189			$	15,143			$	162,503			$	10,320			$	34,554			$	1,500,940
Individ. evaluated for impairment		$	7,556			$	57,485			$	9,960			$	1,026			$	1,759			$	190			$	3,351			$	1,252			$	12,397			$	94,976
Loans pooled for evaluation		$	106,304			$	641,933			$	328,109			$	45,554			$	32,430			$	14,953			$	147,786			$	4,330			$	22,157			$	1,343,556
Loans acquired with deteriorated credit quality		$	7,778			$	29,800			$	8,726				—				—				—			$	11,366			$	4,738				—			$	62,408