5. Allowance for Loan Losses

The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit and investment review process along with data from peer institutions and economic information gathered from published sources.

The loan portfolio is segmented into groups of loans with similar risk characteristics. Each segment possesses varying degrees of risk based on, among other things, the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated using the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

The following provides a summary of the ALLL calculation for the major segments within the Company’s loan portfolio.

Commercial Business Loans, Owner-Occupied Commercial Real Estate Loans, and SBA Loans

The Company’s base ALLL factor for commercial business loans, owner-occupied commercial real estate loans and SBA loans is determined by management using the Bank’s actual trailing thirty-six month, trailing twenty-four month, trailing twelve month and annualized trailing six month charge-off data. Adjustments to those base factors are made for relevant internal and external factors. For owner occupied commercial real estate loans, commercial business loans and SBA loans, those factors include:

· Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,

· Changes in the nature and volume of the loan portfolio, including new types of lending,

· Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and

· The existence and effect of concentrations of credit, and changes in the level of such concentrations.

The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing twelve month total charge-off data for all FDIC insured commercial banks and savings institutions based in California. This factor is applied to balances graded pass-1 through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.

Non-Owner Occupied Commercial Real Estate, Multi-Family, Land and Construction Loans

The Company’s base ALLL factor for multi-family and non-owner occupied commercial real estate loans is determined by management using the Bank’s actual trailing thirty-six month, trailing twenty-four month, trailing twelve month and annualized trailing six month charge-off data. Adjustments to those base factors are made for relevant internal and external factors. For multi-family and non-owner occupied commercial real estate loans, those factors include:

· Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,

· Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and

· The existence and effect of concentrations of credit, and changes in the level of such concentrations.

Single Family and Consumer Loans and Warehouse Repurchase Facilities

The Company’s base ALLL factor for single family and consumer loans and warehouse repurchase facilities is determined by management using the Bank’s actual trailing thirty-six month, trailing twenty-four month, trailing twelve month and annualized trailing six month charge-off data. Adjustments to those base factors are made for relevant internal and external factors. For single family and consumer loans and warehouse repurchase facilities, those factors include:

· Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment.

The following tables summarize the allocation of the allowance as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the periods indicated:

	Commercial and industrial			Commercial owner occupied			SBA			Warehouse			Commercial non-owner occupied			Multi-family			One-to-four family			Construction			Land			Other loans			Total
	(dollars in thousands)

Balance, December 31, 2012	$	1,310		$	1,512		$	79		$	1,544		$	1,459		$	1,145		$	862		$	—		$	31		$	52		$	7,994
Charge-offs	(509		)	(232		)	(143		)	—			(756		)	(101		)	(272		)	—			—			(18		)	(2,031		)
Recoveries	138			—			50			—			—			—			47			—			—			142			377
Provisions for (reduction in) loan losses	1,029			538			165			(1,152		)	955			(227		)	462			136			96			(142		)	1,860
Balance, December 31, 2013	$	1,968		$	1,818		$	151		$	392		$	1,658		$	817		$	1,099		$	136		$	127		$	34		$	8,200

Amount of allowance attributed to:
Specifically evaluated impaired loans	$	—		$	—		$	—		$	—		$	1		$	—		$	104		$	—		$	—		$	—		$	105
General portfolio allocation	1,968			1,818			151			392			1,657			817			995			136			127			34			8,095

Loans individually evaluated for impairment	—			747			14			—			983			—			683			—			—			—			2,427
Specific reserves to total loans individually evaluated for impairment	0.00		%	0.00		%	0.00		%	0.00		%	0.10		%	0.00		%	15.23		%	0.00		%	0.00		%	0.00		%	4.33		%
Loans collectively evaluated for impairment	$	187,035		$	220,342		$	10,645		$	87,517		$	332,561		$	233,689		$	144,552		$	13,040		$	7,605		$	3,839		$	1,240,825
General reserves to total loans collectively evaluated for impairment	1.05		%	0.83		%	1.42		%	0.45		%	0.50		%	0.35		%	0.69		%	1.04		%	1.67		%	0.89		%	0.65		%

Total gross loans	$	187,035		$	221,089		$	10,659		$	87,517		$	333,544		$	233,689		$	145,235		$	13,040		$	7,605		$	3,839		$	1,243,252
Total allowance to gross loans	1.05		%	0.82		%	1.42		%	0.45		%	0.50		%	0.35		%	0.76		%	1.04		%	1.67		%	0.89		%	0.66		%


	Commercial and industrial			Commercial owner occupied			SBA			Warehouse			Commercial non-owner occupied			Multi-family			One-to-four family			Construction			Land			Other loans			Total
	(dollars in thousands)

Balance, December 31, 2011	$	1,361		$	1,119		$	80		$	1,347		$	1,287		$	2,281		$	931		$	—		$	39		$	77		$	8,522
Charge-offs	(512		)	(265		)	(132		)	—			(88		)	—			(371		)	—			(145		)	(2		)	(1,515		)
Recoveries	2			—			163			—			21			—			8			—			—			42			236
Provisions for (reduction in) loan losses	459			658			(32		)	197			239			(1,136		)	294			—			137			(65		)	751
Balance, December 31, 2012	$	1,310		$	1,512		$	79		$	1,544		$	1,459		$	1,145		$	862		$	—		$	31		$	52		$	7,994

Amount of allowance attributed to:
Specifically evaluated impaired loans	$	270		$	—		$	—		$	—		$	—		$	—		$	395		$	—		$	—		$	—		$	665
General portfolio allocation	$	1,040		$	1,512		$	79		$	1,544		$	1,459		$	1,145		$	467		$	—		$	31		$	52		$	7,329

Loans individually evaluated for impairment	$	593		$	—		$	259		$	—		$	670		$	266		$	948		$	—		$	—		$	—		$	2,736
Specific reserves to total loans individually evaluated for impairment	45.53		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	41.67		%	0.00		%	0.00		%	0.00		%	24.31		%
Loans collectively evaluated for impairment	$	114,761		$	150,934		$	6,623		$	195,761		$	252,739		$	156,158		$	96,515		$	—		$	8,774		$	1,193		$	983,458
General reserves to total loans collectively evaluated for impairment	0.91		%	1.00		%	1.19		%	0.79		%	0.58		%	0.73		%	0.48		%	0.00		%	0.35		%	4.36		%	0.75		%

Total gross loans	$	115,354		$	150,934		$	6,882		$	195,761		$	253,409		$	156,424		$	97,463		$	—		$	8,774		$	1,193		$	986,194
Total allowance to gross loans	1.14		%	1.00		%	1.15		%	0.79		%	0.58		%	0.73		%	0.88		%	0.00		%	0.35		%	4.36		%	0.81		%