Edgar Filing: Bank of Marin Bancorp

BMRC-2013.03.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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

For the transition period from __________________ to __________________

Commission File Number 001-33572

Bank of Marin Bancorp

(Exact name of Registrant as specified in its charter)



California		20-8859754
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

504 Redwood Blvd., Suite 100, Novato, CA		94947
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code: (415) 763-4520

Indicate by check mark whether the registrant (1) has filed all reports 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 (§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).

Yes x 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b(2) of the Exchange Act.



Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller reporting company o

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

Yes o No x

As of April 30, 2013, there were 5,441,550 shares of common stock outstanding.

TABLE OF CONTENTS




PART I	FINANCIAL INFORMATION	Page-3

ITEM 1.	Financial Statements	Page-3

	Consolidated Statements of Condition	Page-3
	Consolidated Statements of Comprehensive Income	Page-4
	Consolidated Statements of Changes in Stockholders' Equity	Page-5
	Consolidated Statements of Cash Flows	Page-6
	Notes to Consolidated Financial Statements	Page-7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page-32

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	Page-50

ITEM 4.	Controls and Procedures	Page-51

PART II	OTHER INFORMATION	Page-52

ITEM 1.	Legal Proceedings	Page-52

ITEM 1A.	Risk Factors	Page-52

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page-52

ITEM 3.	Defaults Upon Senior Securities	Page-52

ITEM 4.	Mine Safety Disclosures	Page-52

ITEM 5.	Other Information	Page-52

ITEM 6.	Exhibits	Page-53

SIGNATURES		Page-54

Page-2

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF CONDITION

at March 31, 2013 and December 31, 2012



(in thousands, except share data; 2013 unaudited)	March 31, 2013		December 31, 2012
Assets
Cash and due from banks	$	31,364	$	28,349
Cash and cash equivalents	31,364		28,349
Investment securities
Held to maturity, at amortized cost	138,978		139,452
Available for sale, at fair value (amortized cost $139,414 and $150,420 at March 31, 2013 and December 31, 2012, respectively)	142,653		153,962
Total investment securities	281,631		293,414
Loans, net of allowance for loan losses of $13,434 and $13,661 at March 31, 2013 and December 31, 2012, respectively	1,058,401		1,060,291
Bank premises and equipment, net	9,358		9,344
Interest receivable and other assets	46,268		43,351
Total assets	$	1,427,022	$	1,434,749

Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing	$	485,942	$	389,722
Interest bearing
Transaction accounts	86,124		169,647
Savings accounts	95,428		93,404
Money market accounts	417,293		443,742
CDARS® time accounts	7,448		15,718
Other time accounts	139,316		141,056
Total deposits	1,231,551		1,253,289
Federal Home Loan Bank borrowings	23,200		15,000
Interest payable and other liabilities	15,428		14,668
Total liabilities	1,270,179		1,282,957

Stockholders' Equity
Preferred stock, no par value Authorized - 5,000,000 shares, none issued	—		—
Common stock, no par value Authorized - 15,000,000 shares; Issued and outstanding - 5,430,220 and 5,389,210 at March 31, 2013 and December 31, 2012, respectively	59,906		58,573
Retained earnings	95,059		91,164
Accumulated other comprehensive income, net	1,878		2,055
Total stockholders' equity	156,843		151,792
Total liabilities and stockholders' equity	$	1,427,022	$	1,434,749

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

Page-3

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

for the three months ended March 31, 2013, December 31, 2012 and March 31, 2012



	Three months ended
(in thousands, except per share amounts; unaudited)	March 31, 2013			December 31, 2012		March 31, 2012
Interest income
Interest and fees on loans	$	13,635		$	14,634	$	15,328
Interest on investment securities
Securities of U.S. government agencies	625			680		967
Obligations of state and political subdivisions	638			565		387
Corporate debt securities and other	324			353		201
Interest on Federal funds sold and short-term investments	8			66		50
Total interest income	15,230			16,298		16,933
Interest expense
Interest on interest bearing transaction accounts	11			14		44
Interest on savings accounts	8			16		22
Interest on money market accounts	99			145		183
Interest on CDARS® time accounts	5			11		32
Interest on other time accounts	232			241		304
Interest on borrowed funds	79			80		147
Total interest expense	434			507		732
Net interest income	14,796			15,791		16,201
(Reversal of) provision for loan losses	(230		)	700		—
Net interest income after provision for loan losses	15,026			15,091		16,201
Non-interest income
Service charges on deposit accounts	521			529		524
Wealth Management and Trust Services	547			513		456
Debit card interchange fees	252			261		234
Merchant interchange fees	205			177		193
Earnings on Bank-owned life insurance	401			190		188
Other income	180			146		100
Total non-interest income	2,106			1,816		1,695
Non-interest expense
Salaries and related benefits	5,298			5,010		5,604
Occupancy and equipment	1,073			1,098		987
Depreciation and amortization	336			334		341
Federal Deposit Insurance Corporation insurance	214			245		233
Data processing	549			652		606
Professional services	527			720		585
Other expense	1,698			1,523		1,479
Total non-interest expense	9,695			9,582		9,835
Income before provision for income taxes	7,437			7,325		8,061
Provision for income taxes	2,571			2,623		3,121
Net income	$	4,866		$	4,702	$	4,940
Net income per common share:
Basic	$	0.90		$	0.88	$	0.93
Diluted	$	0.89		$	0.86	$	0.91
Weighted-average shares used to compute net income per common share:
Basic	5,389			5,357		5,326
Diluted	5,487			5,451		5,425
Dividends declared per common share	$	0.18		$	0.18	$	0.17
Comprehensive income:
Net income	$	4,866		$	4,702	$	4,940
Other comprehensive (loss) income
Change in net unrealized gain on available for sale securities	(303		)	16		28
Reclassification adjustment for loss on sale of securities included in net income	—			—		38
Net change in unrealized gain on available for sale securities, before tax	(303		)	16		66
Deferred tax (benefit) expense	(126		)	6		28
Other comprehensive (loss) income, net of tax	(177		)	10		38
Comprehensive income	$	4,689		$	4,712	$	4,978

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

Page-4

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

for the year ended December 31, 2012 and the three months ended March 31, 2013



(dollars in thousands; 2013 unaudited )	Common Stock				Retained Earnings			Accumulated Other Comprehensive Income, Net of Taxes			Total
(dollars in thousands; 2013 unaudited )	Shares		Amount		Retained Earnings			Accumulated Other Comprehensive Income, Net of Taxes			Total
Balance at December 31, 2011	5,336,927		$	56,854	$	77,098		$	1,599		$	135,551
Net income	—		—		17,817			—			17,817
Other comprehensive income	—		—		—			456			456
Stock options exercised	37,563		1,041		—			—			1,041
Excess tax benefit - stock-based compensation	—		42		—			—			42
Stock issued under employee stock purchase plan	700		25		—			—			25
Restricted stock granted	9,030		—		—			—			—
Restricted stock forfeited / cancelled	(380	)	—		—			—			—
Stock-based compensation - stock options	—		206		—			—			206
Stock-based compensation - restricted stock	—		202		—			—			202
Cash dividends paid on common stock	—		—		(3,751		)	—			(3,751		)
Stock purchased by directors under director stock plan	100		4		—			—			4
Stock issued in payment of director fees	5,270		199		—			—			199
Balance at December 31, 2012	5,389,210		$	58,573	$	91,164		$	2,055		$	151,792
Net income	—		—		4,866			—			4,866
Other comprehensive (loss)	—		—		—			(177		)	(177		)
Stock options exercised	36,060		1,057		—			—			1,057
Excess tax benefit - stock-based compensation	—		59		—			—			59
Stock issued under employee stock purchase plan	251		9		—			—			9
Restricted stock granted	2,200		—		—			—			—
Restricted stock forfeited / cancelled	(510	)	—		—			—			—
Stock-based compensation - stock options	—		43		—			—			43
Stock-based compensation - restricted stock	—		49		—			—			49
Cash dividends paid on common stock	—		—		(971		)	—			(971		)
Stock purchased by directors under director stock plan	160		6		—			—			6
Stock issued in payment of director fees	2,849		110		—			—			110
Balance at March 31, 2013	5,430,220		$	59,906	$	95,059		$	1,878		$	156,843

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

Page-5

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the three months ended March 31, 2013 and 2012



(in thousands, unaudited)	March 31, 2013			March 31, 2012
Cash Flows from Operating Activities:
Net income	$	4,866		$	4,940
Adjustments to reconcile net income to net cash provided by operating activities:
(Reversal of) provision for loan losses	(230		)	—
Compensation expense--common stock for director fees	55			50
Stock-based compensation expense	92			86
Excess tax benefits from exercised stock options	(36		)	(10		)
Amortization of investment security premiums, net of accretion of discounts	819			356
Accretion of discount on acquired loans	(368		)	(713		)
Decrease in deferred loan origination fees, net	(333		)	(292		)
Loss on sale of investment securities	—			38
Depreciation and amortization	336			341
(Gain) loss on sale of repossessed assets	(4		)	3
Earnings on bank owned life insurance policies	(401		)	(188		)
Net change in operating assets and liabilities:
Interest receivable	(251		)	(271		)
Interest payable	(9		)	(97		)
Deferred rent and other rent-related expenses	28			42
Other assets	(1,982		)	213
Other liabilities	1,547			1,631
Total adjustments	(737		)	1,189
Net cash provided by operating activities	4,129			6,129
Cash Flows from Investing Activities:
Purchase of securities held to maturity	—			(15,372		)
Purchase of securities available for sale	—			(14,414		)
Proceeds from sale of securities available for sale	1,082			2,181
Proceeds from paydowns/maturity of securities held to maturity	—			1,000
Proceeds from paydowns/maturity of securities available for sale	9,579			12,764
Loans originated and principal collected, net	1,937			(1,794		)
Purchase of bank owned life insurance policies	—			(364		)
Purchase of premises and equipment	(350		)	(26		)
Proceeds from sale of repossessed assets	39			22
Net cash provided by (used in) investing activities	12,287			(16,003		)
Cash Flows from Financing Activities:
Net (decrease) increase in deposits	(21,738		)	42,669
Proceeds from stock options exercised	1,057			190
Advance on Federal Home Loan Bank borrowings	8,200			—
Repayment of Federal Home Loan Bank borrowings	—			(20,000		)
Cash dividends paid on common stock	(971		)	(908		)
Stock issued under employee and director stock purchase plans	15			9
Excess tax benefits from exercised stock options	36			10
Net cash (used in) provided by financing activities	(13,401		)	21,970
Net increase in cash and cash equivalents	3,015			12,096
Cash and cash equivalents at beginning of period	28,349			129,743
Cash and cash equivalents at end of period	$	31,364		$	141,839
Supplemental disclosure of cash flow information:
Cash paid in interest	$	444		$	829
Cash paid in income taxes	$	1,954		$	253
Supplemental disclosure of non-cash investing and financing activities:
Change in unrealized gain on available-for- sale securities	$	(303	)	$	66
Loans transferred to repossessed assets	$	192		$	—
Stock issued in payment of director fees	$	110		$	100

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

Page-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Introductory Explanation

References in this report to “Bancorp” mean the Bank of Marin Bancorp as the parent holding company for Bank of Marin, the wholly-owned subsidiary (the “Bank”). References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes.

Note 1: Basis of Presentation

The consolidated financial statements include the accounts of Bancorp and its only wholly-owned bank subsidiary, the Bank. All material intercompany transactions have been eliminated. In the opinion of Management, the unaudited interim consolidated financial statements contain all adjustments necessary to present fairly our financial position, results of operations, changes in stockholders' equity and cash flows. All adjustments are of a normal, recurring nature. Management has evaluated subsequent events through the date of filing, and has determined that there are no subsequent events that require recognition or disclosure.

Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in the interim consolidated financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with our 2012 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full year.

The following table shows: 1) weighted average basic shares, 2) potential common shares related to stock options, unvested restricted stock and stock warrant, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock. Diluted EPS are calculated using the weighted average diluted shares. The number of potential common shares included in quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potential common shares included in year-to-date diluted EPS is a year-to-date weighted average of potential common shares included in each quarterly diluted EPS computation. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings.



	Three months ended
(in thousands; except per share data; unaudited)	March 31, 2013		December 31, 2012		March 31, 2012
Weighted average basic shares outstanding	5,389		5,357		5,326
Add: Potential common shares related to stock options	43		44		49
Potential common shares related to unvested restricted stock	7		5		5
Potential common shares related to warrant	48		45		45
Weighted average diluted shares outstanding	5,487		5,451		5,425

Net income	$	4,866	$	4,702	$	4,940
Basic EPS	$	0.90	$	0.88	$	0.93
Diluted EPS	$	0.89	$	0.86	$	0.91

Weighted average anti-dilutive shares not included in the calculation of diluted EPS	45		49		32

Page-7

Note 2: Recently Issued Accounting Standards

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11 Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities. The ASU enhances disclosures in order to improve the comparability of offsetting (netting) assets and liabilities reported in accordance with U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”) by requiring entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statements of condition and instruments and transactions subject to an agreement similar to a master netting arrangement.

In January 2013, the FASB issued ASU No. 2013-01 Balance Sheet (Topic 210) Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies that ordinary trade receivables and receivables are not in the scope of ASU 2011-11. It further clarifies that the scope of ASU No. 2011-11 applies to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification^® or subject to a master netting arrangement or similar agreement. Both ASU 2011-11 and ASU 2013-1 are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. We have adopted these ASUs in the first quarter of 2013.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires entities to provide enhanced disclosures to present separately by component reclassifications out of accumulated other comprehensive income. An entity is required to disclose in the notes of the financial statements or parenthetically on the face of the financial statements the effect of significant items reclassified out of accumulated other comprehensive income on the respective line items of net income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety. ASU 2013-02 is effective for fiscal years, and interim periods beginning on or after December 15, 2012 for public entities. We have adopted this ASU in the first quarter of 2013.

Page-8

Note 3: Fair Value of Assets and Liabilities

Fair Value Hierarchy and Fair Value Measurement

We group our assets and liabilities that are measured at fair value in three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not involve a significant degree of judgment.

Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and include management judgment and estimation which may be significant.

The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.



(in thousands) Description of Financial Instruments	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At March 31, 2013 (unaudited):
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	102,561	$	—	$	102,561	$	—
Debentures of government-sponsored agencies	$	20,685	$	—	$	20,685	$	—
Privately-issued collateralized mortgage obligations	$	19,407	$	—	$	19,407	$	—
Derivative financial assets (interest rate contracts)	$	80	$	—	$	80	$	—
Derivative financial liabilities (interest rate contracts)	$	4,671	$	—	$	4,671	$	—
At December 31, 2012:
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	111,797	$	—	$	111,797	$	—
Debentures of government-sponsored agencies	$	20,589	$	—	$	20,589	$	—
Privately-issued collateralized mortgage obligations	$	21,576	$	—	$	21,576	$	—
Derivative financial assets (interest rate contracts)	$	1	$	—	$	1	$	—
Derivative financial liabilities (interest rate contracts)	$	5,240	$	—	$	5,240	$	—

Page-9

Securities available-for-sale are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of securities available-for-sale. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include U.S. agencies or government sponsored agencies' debt securities, mortgage-backed securities, government agency-issued and privately-issued collateralized mortgage obligations. As of March 31, 2013 and December 31, 2012, there are no securities that are considered Level 1 or Level 3 securities.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit quality in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate (“LIBOR”) cash rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. Key inputs for interest rate valuations are used to project spot rates at resets specified by each swap, as well as to discount those future cash flows to present value at the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, the interest rate liability position is further discounted to reflect our potential credit risk to counterparties. We have used the spread between the Standard & Poors BBB rated U.S. Bank Composite rate and LIBOR with maturity term corresponding to the duration of the swaps to calculate this credit-risk-related discount of future cash flows.

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as other real estate owned. For example, when a loan is identified as impaired, it is reported at the lower of cost or fair value, measured based on the loan's observable market price (Level 1) or the current net realizable value of the underlying collateral securing the loan, if the loan is collateral dependent (Level 3). Significant unobservable inputs such as appraisals, recent comparable sales or offered prices are factored in when valuing the collateral. Securities held-to-maturity may be written down to fair value (determined using the same techniques discussed above for securities available-for-sale) as a result of an other-than-temporary impairment, if any.

The following table presents the carrying value of financial instruments that were measured at fair value on a nonrecurring basis and that were still held in the statements of condition at each respective period end, by level within the fair value hierarchy as of March 31, 2013 and December 31, 2012.



(in thousands) Description of Financial Instruments	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3) ¹
At March 31, 2013 (unaudited):
Impaired loans carried at fair value	$	5,799	$	—	$	—	$	5,799

At December 31, 2012:
Impaired loans carried at fair value	$	9,908	$	—	$	—	$	9,908

¹ Represents collateral-dependent loan principal balances that had been generally written down to the values of the underlying collateral, net of specific valuation allowance of $411 thousand and $729 thousand at March 31, 2013 and December 31, 2012, respectively. The carrying value of loans fully charged-off, which includes unsecured lines of credit, overdrafts and all other loans, is zero.

Page-10

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of March 31, 2013 and December 31, 2012, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. We have excluded non-financial assets and non-financial liabilities defined by the Codification (ASC 820-10-15-1A), such as Bank premises and equipment, deferred taxes and other liabilities. In addition, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of the Financial Instruments Topic of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies.



	March 31, 2013					December 31, 2012
(in thousands; 2013 unaudited)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets
Cash and cash equivalents	$	31,364	$	31,364	Level 1	$	28,349	$	28,349	Level 1
Investment securities held-to-maturity	138,978		141,981		Level 2	139,452		142,231		Level 2
Loans, net	1,058,401		1,100,982		Level 3	1,060,291		1,111,355		Level 3
Interest receivable	5,324		5,324		Level 2	5,073		5,073		Level 2
Financial liabilities
Deposits	1,231,551		1,232,980		Level 2	1,253,289		1,254,713		Level 2
Federal Home Loan Bank short-term borrowings	8,200		8,200		Level 1	—		—		Level 1
Federal Home Loan Bank borrowings	15,000		15,955		Level 2	15,000		15,989		Level 2
Interest payable	216		216		Level 2	225		225		Level 2

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument not recorded at fair value but required for disclosure purposes:

Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents approximate their fair value because of the short-term nature of these instruments.

Held-to-maturity Securities - Held-to-maturity securities, which generally consist of obligations of state and political subdivisions and corporate bonds, are recorded at their amortized cost. Their fair value for disclosure purposes is determined using methodologies similar to those described above for available-for-sale securities using Level 2 inputs. If Level 2 inputs are not available, we may utilize pricing models that incorporate unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities (Level 3). As of March 31, 2013 and December 31, 2012, we did not hold any securities whose fair value was measured using significant unobservable inputs.

Loans - The fair value of loans with variable interest rates approximates their current carrying value, because their rates are regularly adjusted to current market rates. The fair value of fixed rate loans or variable loans at negotiated interest rate floors or ceilings with remaining maturities in excess of one year is estimated by discounting the future cash flows using current market rates at which similar loans would be made to borrowers with similar credit worthiness and similar remaining maturities. The allowance for loan losses (“ALLL”) is considered to be a reasonable estimate of loan discount due to credit risks.

Interest Receivable and Payable - The interest receivable and payable balances approximate their fair value due to the short-term nature of their settlement dates.

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Deposits - The fair value of non-interest bearing deposits, interest bearing transaction accounts, savings accounts and money market accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the future cash flows using current rates offered for deposits of similar remaining maturities.

Federal Home Loan Bank Short-term Borrowings - The balance represents its fair value as these borrowings settle overnight.

Federal Home Loan Bank Borrowings - The fair value is estimated by discounting the future cash flows using current rates offered by the Federal Home Loan Bank of San Francisco ("FHLB") for similar credit advances corresponding to the remaining duration of our fixed-rate credit advances.

Commitments - Loan commitments and standby letters of credit generate ongoing fees, which are recognized over the term of the commitment period. In situations where the borrower's credit quality has declined, we record a reserve for these off-balance sheet commitments. Given the uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of the fair value of these commitments is the carrying value of the related unamortized loan fees plus the reserve, which is not material.

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Note 4: Investment Securities

Our investment securities portfolio consists of obligations of state and political subdivisions, corporate bonds, U.S. government agency securities, including mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) issued or guaranteed by FNMA, FHLMC, or GNMA, debentures issued by government-sponsored agencies such as FNMA and FHLMC, as well as privately issued CMOs, as reflected in the table below:




	March 31, 2013									December 31, 2012
	Amortized		Fair		Gross Unrealized					Amortized		Fair		Gross Unrealized
(in thousands; 2013 unaudited)	Cost		Value		Gains		(Losses)			Cost		Value		Gains		(Losses)
Held-to-maturity
Obligations of state and political subdivisions	$	96,552	$	99,072	$	2,828	$	(308	)	$	96,922	$	99,350	$	2,855	$	(427	)
Corporate bonds	42,426		42,909		532		(49		)	42,530		42,881		458		(107		)
Total held-to-maturity	138,978		141,981		3,360		(357		)	139,452		142,231		3,313		(534		)

Available-for-sale
Securities of U. S. government agencies:
MBS pass-through securities issued by FNMA and FHLMC	50,095		51,347		1,396		(144		)	52,042		53,713		1,711		(40		)
CMOs issued by FNMA	3,447		3,546		99		—			4,447		4,550		105		(2		)
CMOs issued by FHLMC	11,865		12,040		176		(1		)	13,527		13,778		251		—
CMOs issued by GNMA	34,731		35,628		897		—			38,871		39,756		886		(1		)
Debentures of government- sponsored agencies	20,430		20,685		255		—			20,462		20,589		228		(101		)
Privately issued CMOs	18,846		19,407		594		(33		)	21,071		21,576		595		(90		)
Total available-for-sale	139,414		142,653		3,417		(178		)	150,420		153,962		3,776		(234		)

Total investment securities	$	278,392	$	284,634	$	6,777	$	(535	)	$	289,872	$	296,193	$	7,089	$	(768	)

The amortized cost and fair value of investment debt securities by contractual maturity at March 31, 2013 are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



	March 31, 2013
	Held-to-Maturity				Available-for-Sale
(in thousands; unaudited)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	762	$	762	$	—	$	—
After one but within five years	98,343		99,588		27,068		27,658
After five years through ten years	29,595		31,333		22,167		22,235
After ten years	10,278		10,298		90,179		92,760
Total	$	138,978	$	141,981	$	139,414	$	142,653

Two available-for-sale securities were sold in January 2013 with proceeds of $1.1 million and a slight net gain of $339. One available-for-sale security was sold in February 2012 with proceeds of $2.2 million and loss of $38 thousand.

Investment securities carried at $47.5 million and $47.7 million at March 31, 2013 and December 31, 2012, respectively, were pledged with the State of California: $46.8 million and $47 million to secure public deposits in compliance with the Local Agency Security Program at March 31, 2013 and December 31, 2012, respectively, and $722 thousand and $719 thousand to provide collateral for trust deposits at March 31, 2013 and December 31, 2012, respectively. In addition, investment securities carried at $1.1 million were pledged to collateralize an internal Wealth Management and Trust Services (“WMTS”) checking account at both March 31, 2013 and December 31, 2012.

Other-Than-Temporarily Impaired Debt Securities

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We do not have the intent to sell the securities that are temporarily impaired, and it is more likely than not that we will not have to sell those securities before recovery of the cost basis. Additionally, we have evaluated the credit ratings of our investment securities and their issuers and/or insurers, if applicable. Based on our evaluation, Management has determined that no investment security in our investment portfolio is other-than-temporarily impaired.

Thirty-eight and fifty-five investment securities were in unrealized loss positions at March 31, 2013 and December 31, 2012, respectively. They are summarized and classified according to the duration of the loss period as follows:



March 31, 2013	< 12 continuous months					> 12 continuous months					Total Securities in a loss position
(In thousands; unaudited)	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
Held-to-maturity
Obligations of state & political subdivisions	$	24,823	$	(308	)	$	—	$	—		$	24,823	$	(308	)
Corporate bonds	13,673		(49		)	—		—			13,673		(49		)
Total held-to-maturity	38,496		(357		)	—		—			38,496		(357		)
Available-for-sale
MBS pass-through securities issued by FNMA and FHLMC	8,664		(144		)	—		—			8,664		(144		)
CMOs issued by FHLMC	2,868		(1		)	—		—			2,868		(1		)
Privately issued CMOs	1,740		(32		)	194		(1		)	1,934		(33		)
Total available-for-sale	13,272		(177		)	194		(1		)	13,466		(178		)
Total temporarily impaired securities	$	51,768	$	(534	)	$	194	$	(1	)	$	51,962	$	(535	)



December 31, 2012	< 12 continuous months					> 12 continuous months					Total Securities in a loss position
(In thousands)	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
Held-to-maturity
Obligations of state & political subdivisions	$	33,196	$	(427	)	$	—	$	—		$	33,196	$	(427	)
Corporate bonds	15,649		(107		)	—		—			15,649		(107		)
Total held-to-maturity	48,845		(534		)	—		—			48,845		(534		)
Available-for-sale
MBS pass-through securities issued by FNMA and FHLMC	3,569		(40)			—		—			3,569		(40)
CMOs issued by FNMA	3,185		(2)			—		—			3,185		(2)
CMOs issued by GNMA	1,550		(1)			—		—			1,550		(1)
Debentures of government- sponsored agencies	9,899		(101)			—		—			9,899		(101)
Privately issued CMOs	4,214		(89)			203		(1)			4,417		(90)
Total available-for-sale	22,417		(233)			203		(1)			22,620		(234)
Total temporarily impaired securities	$	71,262	$	(767	)	$	203	$	(1	)	$	71,465	$	(768	)

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Twenty-six obligations of U.S. states and political subdivisions, five corporate bonds, one CMO issued by FHLMC, two MBS pass-through securities issued by FNMA and FHLMC, and three privately issued CMOs in our portfolio were in a temporary loss position for less than twelve months as of March 31, 2013. Securities issued by GNMA and FNMA have the guarantee of the full faith and credit of the U.S. Federal Government. The other temporarily impaired securities are deemed credit worthy after our periodic impairment analysis and are all rated as investment grade by at least one major rating agency. We also monitor the financial information of the issuers of obligations of U.S. states and political subdivisions as part of our ongoing impairment analysis. As a result of this impairment analysis, we concluded that these securities were not other-than-temporarily impaired March 31, 2013.

As of March 31, 2013, there was one CMO privately issued by a financial institution (with no guarantee from government sponsored agencies) in a continuous loss position for more than twelve months. It is collateralized by residential mortgages with low loan-to-value ratios and delinquency ratios and may be prepaid at par prior to maturity. We reviewed the loans collateralizing the security, credit scores of the borrowers, expected default rates and loss severities. Based upon our assessment of expected credit losses of the security given the performance of the underlying collateral and the credit enhancements, we concluded that the security was not other-than-temporarily impaired at March 31, 2013. In addition, the security was rated as investment grade by at least one major rating agency.

Securities Carried at Cost

As a member of the FHLB, we are required to maintain a minimum investment in the FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can also increase in the event we need to increase our borrowing capacity with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at its $100 per share par value. We held $6.0 million of FHLB stock recorded at cost in other assets at both March 31, 2013, and December 31, 2012. On February 20, 2013, FHLB declared a cash dividend for the fourth quarter of 2012 at an annualized dividend rate of 0.5%. Management does not believe that the FHLB stock is other-than-temporarily-impaired, as we expect to be able to redeem this stock at cost.

As a member bank of Visa U.S.A., we hold 16,939 shares of Visa Inc. Class B common stock with a carrying value of zero, which is equal to our cost basis. These shares are restricted from resale until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s covered litigation escrow account. As a result of the restriction, these shares are not considered available-for-sale and are not carried at fair value. The fair value of the Class B common stock we own was $1.2 million and $1.1 million at March 31, 2013 and December 31, 2012, respectively, based on the Class A as-converted rate of 0.4206, which is subject to further reduction upon the final settlement of the covered litigation against Visa Inc. and its member banks. See Note 8 herein.

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Note 5: Loans and Allowance for Loan Losses

Credit Quality of Loans

Outstanding loans by class and payment aging as of March 31, 2013 and December 31, 2012 are as follows:



Loan Aging Analysis by Class as of March 31, 2013 and December 31, 2012
(dollars in thousands; 2013 unaudited)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential ¹			Installment and other consumer			Total
March 31, 2013
30-59 days past due	$	50		$	298		$	696		$	4,745		$	99		$	—		$	502		$	6,390
60-89 days past due	1,687			—			—			—			—			—			—			1,687
Greater than 90 days past due (non-accrual) ²	3,884			1,403			5,714			2,239			530			1,165			356			15,291
Total past due	5,621			1,701			6,410			6,984			629			1,165			858			23,368
Current	170,114			195,102			503,419			25,851			89,866			44,714			19,401			1,048,467
Total loans ³	$	175,735		$	196,803		$	509,829		$	32,835		$	90,495		$	45,879		$	20,259		$	1,071,835
Non-accrual loans to total loans	2.2		%	0.7		%	1.1		%	6.8		%	0.6		%	2.5		%	1.8		%	1.4		%
December 31, 2012
30-59 days past due	$	29		$	—		$	—		$	—		$	294		$	167		$	98		$	588
60-89 days past due	—			—			—			—			—			—			—			—
Greater than 90 days past due (non-accrual) ²	4,893			1,403			6,843			2,239			545			1,196			533			17,652
Total past due	4,922			1,403			6,843			2,239			839			1,363			631			18,240
Current	171,509			195,003			502,163			28,426			92,398			48,069			18,144			1,055,712
Total loans ³	$	176,431		$	196,406		$	509,006		$	30,665		$	93,237		$	49,432		$	18,775		$	1,073,952
Non-accrual loans to total loans	2.8		%	0.7		%	1.3		%	7.3		%	0.6		%	2.4		%	2.8		%	1.6		%

¹ Our residential loan portfolio includes no sub-prime loans, nor is it our normal practice to underwrite loans commonly referred to as "Alt-A mortgages", the characteristics of which are loans lacking full documentation, borrowers having low FICO scores or higher loan-to-value ratios.

² Amounts include $1.6 million of Purchased Credit Impaired ("PCI") loans that have stopped accreting interest at both March 31, 2013 and December 31, 2012, and exclude accreting PCI loans of $2.0 million and $3.0 million at March 31, 2013 and December 31, 2012, respectively, as their accretable yield interest recognition is independent from the underlying contractual loan delinquency status. There were no accruing loans past due more than ninety days at March 31, 2013 or December 31, 2012.

³ Amounts were net of deferred loan fees of $437 thousand and $769 thousand at March 31, 2013 and December 31, 2012, respectively. Amounts were also net of unaccreted purchase discounts on non-PCI loans of $2.0 million and $2.1 million at March 31, 2013 and December 31, 2012, respectively.

Our commercial loans are generally made to established small to mid-sized businesses to provide financing for their working capital needs or acquisition of fixed assets. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable or inventory, and include a personal guarantee. Some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. We target stable local businesses with strong guarantors that have proven to be more resilient in periods of economic stress. Typically, the strong guarantors provide an additional source of repayment for most of our credit extensions.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow and to be supported by real property collateral. Repayment of commercial real estate loans is largely dependent on the successful operation of the property securing the loan, or the business conducted on the property securing the loan. Substantially all of these loans underwritten by us meet a minimum debt coverage ratio of 120%, and we also generally require a conservative loan-to-value ratio of 65% or less. Furthermore, substantially all of our loans are guaranteed by the owners of the properties. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. In the event of a vacancy, strong guarantors have historically carried the loans until a replacement tenant can be found. The

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owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies on a percentage basis in this portfolio.

Construction loans are generally made to developers and builders to finance land acquisition as well as the subsequent construction. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record and obtaining independent appraisals. The construction industry can be severely impacted by several major factors, including: 1) the inherent volatility of real estate markets; 2) vulnerability to delays due to weather, change orders, labor or material shortages, and price hikes; and 3) generally thin margins and tight cash flow. Estimates of construction costs and value associated with the complete project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.

Consumer loans primarily consist of home equity lines of credit, other residential (tenancy-in-common, or “TIC”) loans, and other personal loans. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend reports are reviewed by Management on a regular basis. Underwriting standards for home equity lines of credit include, but are not limited to, a maximum loan-to-value of 75% for homes with appraised values up to $1,250,000 (and even more conservatively for homes with values in excess of this amount), the number of such loans a borrower can have at one time, and documentation requirements. Our underwriting of the other residential loans, mostly secured by TIC units in San Francisco, was cautious compared to traditional residential mortgages due to the unique ownership structure and the interest-only feature of some of these loans. However, these borrowers tend to have more equity in their properties, which mitigates risk. Personal loans are nearly evenly split between mobile home loans and floating home loans along with a small number of installment loans.

We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and ultimately in the portfolio. Definitions of loans that are risk graded “Special Mention” or worse are consistent with those used by the FDIC. Our internally assigned grades are as follows:

Pass – Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial impacts. Financial ratios and trends are acceptable. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.

Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.

Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Loss potential, while inherent in the aggregate substandard amount, does not necessarily exist in the individual assets classified Substandard. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.

Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset, however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.

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We regularly review our credits for accuracy of risk grades whenever new information is received. Borrowers are required to submit financial information at regular intervals:


•	Generally, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity.


•	Investor commercial real estate borrowers with loans greater than $750 thousand are required to submit rent rolls or property income statements at least annually.


•	Construction loans are monitored monthly, and assessed on an ongoing basis.


•	Home equity and other consumer loans are assessed based on delinquency.


•	Loans graded “Watch” or more severe, regardless of loan type, are assessed no less than quarterly.

The following table represents our analysis of loans by internally assigned grades, including the PCI loans, at March 31, 2013 and December 31, 2012:



(in thousands; 2013 unaudited)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Purchased credit-impaired		Total
Credit Risk Profile by Internally Assigned Grade:
March 31, 2013
Pass	$	151,615	$	173,323	$	493,155	$	29,695	$	85,701	$	42,319	$	19,474	$	1,307	$	996,589
Special Mention	12,564		18,757		8,214		732		2,140		1,061		—		652		44,120
Substandard	11,117		2,199		7,807		2,408		2,654		2,499		785		1,657		31,126
Doubtful	—		—		—		—		—		—		—		—		—
Total loans	$	175,296	$	194,279	$	509,176	$	32,835	$	90,495	$	45,879	$	20,259	$	3,616	$	1,071,835

December 31, 2012
Pass	$	148,771	$	170,553	$	489,978	$	26,287	$	86,957	$	45,634	$	17,809	$	1,862	$	987,851
Special Mention	13,267		20,346		8,671		1,970		2,931		1,067		—		933		49,185
Substandard	13,753		2,992		8,963		2,408		3,349		2,731		966		1,754		36,916
Doubtful	—		—		—		—		—		—		—		—		—
Total loans	$	175,791	$	193,891	$	507,612	$	30,665	$	93,237	$	49,432	$	18,775	$	4,549	$	1,073,952

Troubled Debt Restructuring

Our loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on nonaccrual status at the time of restructure may be returned to accruing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months, and there is reasonable assurance of repayment and of performance.

When a loan is modified, Management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases Management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If Management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and unamortized premium or discount), impairment is recognized through a specific allowance or a charge-off of the loan.

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The table below summarizes outstanding TDR loans by loan class as of March 31, 2013 and December 31, 2012. The summary includes those TDRs that are on nonaccrual status and those that continue to accrue interest.



(in thousands; 2013 unaudited)	As of
Recorded investment in Troubled Debt Restructurings ¹	March 31, 2013		December 31, 2012

Commercial and industrial	$	9,221	$	9,470
Commercial real estate, owner-occupied	1,403		1,403
Construction	1,909		1,929
Home equity	899		908
Other residential	2,134		2,831
Installment and other consumer	1,728		1,743
Total	$	17,294	$	18,284

¹Includes $10.8 million of TDR loans that were accruing interest as of both March 31, 2013 and December 31, 2012.

The table below presents the following information for TDRs modified during the periods presented: number of contracts modified, the recorded investment in the loans prior to modification, and the recorded investment in the loans after the loans were restructured. The table below excludes fully paid-off or fully charged-off TDR loans.



(dollars in thousands; unaudited)	Number of Contracts Modified	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment at period end
Troubled Debt Restructurings during the three months ended March 31, 2013:
Commercial and industrial	4	$	717	$	715	$	714
Troubled Debt Restructurings during the three months ended March 31, 2012:
Commercial and industrial	7	$	8,406	$	8,302	$	8,272
Construction	6	11,324		11,324		11,324
Home equity	1	100		100		100
Total	14	$	19,830	$	19,726	$	19,696

Modifications during the three months ended March 31, 2013 primarily involved maturity extensions and payment extensions, while modifications in the three months ended March 31, 2012 primarily involved payment extensions and forbearances. There were no charge-offs on troubled debt restructurings during the first quarter of 2013. There were two commercial loans, two commercial real estate loans, and one construction loan modified as troubled debt restructurings within the previous twelve months with recorded investments of $830 thousand that subsequently defaulted and were charged-off in the three months ended March 31, 2012. We are reporting these defaulted TDRs based on a payment default definition of more than ninety days past due.

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Impaired Loan Balances and Their Related Allowance by Major Classes of Loans

The table below summarizes information on impaired loans and their related allowance. Total impaired loans include non-accrual loans, accruing TDR loans and accreting PCI loans that have experienced post-acquisition declines in cash flows expected to be collected.

(dollars in thousands; 2013 unaudited)

Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Total

March 31, 2013

Recorded investment in impaired loans:

With no specific allowance recorded