10-Q 1 form10q.htm COMMUNITY WEST BANCSHARES 10-Q 9-30-2012 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _________
 
Commission File Number:  000-23575
 
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
 
California
 
77-0446957
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

445 Pine Avenue, Goleta, California
 
93117
(Address of principal executive offices)
 
(Zip Code)
 
(805) 692-5821
(Registrant's telephone number, including area code)
 
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. x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES o NO
 
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer o
 
Accelerated filer o
     
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No
 
Number of shares of common stock of the registrant outstanding as of November 9, 2012: 5,989,510 shares
 


 
 

 
 
TABLE OF CONTENTS
 
PART I.
FINANCIAL INFORMATION
PAGE
     
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
 
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
8
     
The financial statements included in this Form 10-Q should be read in conjunction with Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
     
ITEM 2.
34
     
ITEM 3.
49
     
ITEM 4.
49
     
PART II.
OTHER INFORMATION
 
     
ITEM 1.
49
     
ITEM 1A.
49
     
ITEM 3.
52
     
ITEM 6.
52
     
54
 
 
PART I – FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
 
Community West Bancshares
 
   
September 30,
   
December 31,
 
 (in thousands, except shares)
 
2012
   
2011
 
             
Assets
           
Cash and due from banks
  $ 32,281     $ 22,547  
Federal funds sold
    25       25  
Cash and cash equivalents
    32,306       22,572  
Time and interest-bearing deposits in other financial institutions
    3,890       347  
Investment securities available-for-sale, at fair value; amortized cost of $11,930 at September 30, 2012 and $23,350 at December 31, 2011
    12,001       23,588  
Investment securities held-to-maturity, at amortized cost; fair value of $13,637 at September 30, 2012 and $16,067 at December 31, 2011
    12,822       15,335  
Federal Home Loan Bank stock, at cost
    3,618       4,214  
Federal Reserve Bank stock, at cost
    1,343       1,343  
Loans:
               
Loans held for sale, at lower of cost or fair value
    62,894       77,303  
Loans held for investment, net of allowance for loan losses of $15,055 at September 30, 2012 and $15,270 at December 31, 2011
    397,044       455,413  
Total loans
    459,938       532,716  
Foreclosed real estate and repossessed assets
    3,761       6,701  
Premises and equipment, net
    3,112       3,090  
Other assets
    24,005       23,442  
Total assets
  $ 556,796     $ 633,348  
Liabilities
               
Deposits:
               
Non-interest-bearing demand
  $ 54,466     $ 49,894  
Interest-bearing demand
    274,894       289,796  
Savings
    16,443       19,429  
Time deposits
    114,163       152,143  
Total deposits
    459,966       511,262  
Other borrowings
    34,000       61,000  
Convertible debentures
    7,852       7,852  
Other liabilities
    4,165       2,608  
Total liabilities
    505,983       582,722  
Stockholders' equity
               
Preferred stock, no par value; 10,000,000 shares authorized; 15,600 shares issued and outstanding
    15,275       15,074  
Common stock, no par value; 20,000,000 shares authorized; 5,989,510 shares issued and outstanding at September 30, 2012 and December 31, 2011
    33,449       33,422  
Retained earnings
    2,047       1,991  
Accumulated other comprehensive income, net
    42       139  
Total stockholders' equity
    50,813       50,626  
Total liabilities and stockholders' equity
  $ 556,796     $ 633,348  
 
See accompanying notes
 
 
Community West Bancshares
Consolidated Income Statements (unaudited)

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
(in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
Interest income
                       
Loans
  $ 7,324     $ 8,500     $ 23,236     $ 26,409  
Investment securities and other
    188       268       631       825  
Total interest income
    7,512       8,768       23,867       27,234  
Interest expense
                               
Deposits
    970       1,414       3,287       4,556  
Other borrowings and convertible debentures
    433       575       1,386       1,744  
Total interest expense
    1,403       1,989       4,673       6,300  
Net interest income
    6,109       6,779       19,194       20,934  
Provision for loan losses
    1,293       4,511       5,176       8,651  
Net interest income after provision for loan losses
    4,816       2,268       14,018       12,283  
Non-interest income
                               
Other loan fees
    302       345       847       986  
Gains from loan sales, net
    366       104       1,521       271  
Document processing fees
    109       99       283       312  
Loan servicing, net
    105       90       180       290  
Service charges
    98       122       327       366  
Other
    77       41       300       129  
Total non-interest income
    1,057       801       3,458       2,354  
Non-interest expenses
                               
Salaries and employee benefits
    2,899       3,079       8,526       8,895  
Occupancy and equipment expenses
    451       487       1,365       1,486  
FDIC assessment
    311       217       1,046       741  
Professional services
    372       306       993       757  
Advertising and marketing
    59       76       218       287  
Depreciation and amortization
    78       93       231       286  
Loss on sale and write-down of foreclosed real estate and repossessed assets
    189       1,361       969       2,019  
Data processing
    127       138       407       393  
Other operating expenses
    774       1,228       2,880       3,045  
Total non-interest expenses
    5,260       6,985       16,635       17,909  
Income (loss) before provision for income taxes
    613       (3,916 )     841       (3,272 )
Benefit for income taxes
    -       (1,609 )     -       (1,340 )
Net income (loss)
  $ 613     $ (2,307 )   $ 841     $ (1,932 )
Dividends and accretion on preferred stock
    253       261       785       785  
Net income (loss) applicable to common stockholders
  $ 360     $ (2,568 )   $ 56     $ (2,717 )
Earnings (loss) per common share:
                               
Basic
  $ .06     $ (0.43 )   $ .01     $ (0.45 )
Diluted
  $ .06     $ (0.43 )   $ .01     $ (0.45 )
Basic weighted average number of common shares outstanding
    5,990       5,988       5,990       5,977  
Diluted weighted average number of common shares outstanding
    8,233       5,988       8,233       5,977  
 
See accompanying notes
 
 
Community West Bancshares
Consolidated Statements of Comprehensive Income (unaudited)

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
(in thousands)
 
2012
   
2011
   
2012
   
2011
 
Net income (loss)
  $ 613     $ (2,307 )   $ 841     $ (1,932 )
Other comprehensive loss, net of tax:
                               
Net unrealized gain (loss) on securities available-for-sale
    7       9       (97 )     (34 )
Comprehensive income (loss)
  $ 620     $ (2,298 )   $ 744     $ (1,966 )

See accompanying notes
 
 
Community West Bancshares
Consolidated Statement of Stockholders’ Equity

 
   
Preferred
   
Common Stock
   
Retained
   
Accumulated
Other
Comprehensive
   
Total
Stockholders’
 
   
Stock
    Shares    
Amount
   
Earnings
   
Income (Loss)
   
Equity
 
(in thousands)
       
 
                         
Balances at
 
 
   
 
   
 
   
 
   
 
   
 
 
January 1, 2012
  $ 15,074       5,990     $ 33,422     $ 1,991     $ 139     $ 50,626  
Stock option expense, recognized in earnings
                    27                       27  
Comprehensive income:
                                               
Net income
                            841               841  
Change in unrealized gain (loss) Securities available-for-sale, net
                                    (97 )     (97 )
Dividends and accretion on preferred stock
    201                       (785 )             (584 )
Balances at
                                               
September 30, 2012
  $ 15,275       5,990     $ 33,449     $ 2,047     $ 42     $ 50,813  
See accompanying notes

Community West Bancshares
                                   
Consolidated Statement of Stockholders’ Equity
                         
   
Preferred
   
Common Stock
   
Retained
   
Accumulated
Other
Comprehensive
   
Total
Stockholders’
 
   
Stock
    Shares     Amount    
Earnings
   
Income (Loss)
   
Equity
 
(in thousands)
       
 
                         
Balances at
 
 
   
 
   
 
   
 
   
 
   
 
 
January 1, 2011
  $ 14,807       5,916     $ 33,133     $ 13,523     $ 179     $ 61,642  
Stock option expense, recognized in earnings
                    22                       22  
Conversion of debentures
            66       231                       231  
Exercise of stock options
            8       25                       25  
Comprehensive income:
                                               
Net income
                            (1,932 )             (1,932 )
Change in unrealized gain (loss) Securities available-for-sale, net
                                    (34 )     (34 )
Dividends and accretion on preferred stock
    200                       (785 )             (585 )
Balances at
                                               
September 30, 2011
  $ 15,007       5,990     $ 33,411     $ 10,806     $ 145     $ 59,369  
See accompanying notes

 
6

 
Community West Bancshares
Consolidated Statements of Cash Flows

   
Nine Months Ended September 30,
 
 
 
2012
   
2011
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income (loss)
  $ 841     $ (1,932 )
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    5,176       8,651  
Depreciation and amortization
    231       286  
Deferred income taxes
    354       659  
Stock-based compensation
    27       22  
Net amortization of discounts and premiums for investment securities
    (21 )     (47 )
Net loss (gain) on:
               
Sale and write-downs of foreclosed real estate and repossessed assets
    1,076       2,019  
Sale of  loans held for sale
    (1,521 )     (271 )
Sale of available-for-sale securities
    (121 )     -  
Loan originated for sale and principal collections, net
    (2,379 )     3,139  
Changes in:
               
Servicing rights, net of amortization
    (121 )     86  
Other assets
    (630 )     (5,300 )
Other liabilities
    1,071       (621 )
Net cash provided by operating activities
    3,983       6,691  
Cash flows from investing activities:
               
Purchase of available-for-sale securities
    -       (6,772 )
Principal pay downs and maturities of available-for-sale securities
    7,446       2,069  
Proceeds from sale of available-for-sale securities
    4,137       -  
Purchase of Federal Reserve stock
    -       (21 )
Redemptions of Federal Home Loan Bank stock
    596       612  
Principal pay downs and maturities of held-to-maturity securities
    2,493       5,287  
Loan originations and principal collections, net
    65,185       14,064  
Proceeds from sale of foreclosed real estate and repossessed assets
    8,181       5,227  
Net (increase) decrease  in time and interest-bearing deposits in other financial
institutions
    (3,543 )     50  
Purchase of premises and equipment, net
    (253 )     (389 )
Net cash provided by investing activities
    84,242       20,127  
Cash flows from financing activities:
               
Dividends and accretion on preferred stock
    (195 )     (585 )
Exercise of stock options
    -       25  
Net (decrease) increase in demand deposits and savings accounts
    (13,316 )     35,081  
Net decrease in time certificates of deposit
    (37,980 )     (57,438 )
Proceeds from Federal Home Loan Bank advances
    -       11,000  
Repayment of Federal Home Loan Bank and FRB advances
    (27,000 )     (10,000 )
Net cash used in financing activities
    (78,491 )     (21,917 )
Net increase in cash and cash equivalents
    9,734       4,901  
Cash and cash equivalents, beginning of year
    22,572       6,226  
Cash and cash equivalents, end of period
  $ 32,306     $ 11,127  
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for interest
  $ 4,631     $ 6,324  
Cash paid for income taxes
  $ 712     $ 1,941  
Supplemental Disclosure of Noncash Investing Activity:
               
Transfers to foreclosed real estate and repossessed assets
  $ 6,317     $ 5,195  
Supplemental Disclosure of Noncash Financing Activity:
               
Preferred stock dividends declared, not paid
  $ 388     $ -  
 
See accompanying notes
 
 
COMMUNITY WEST BANCSHARES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
The interim consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the results of operations and financial condition for the interim period. The unaudited consolidated financial statements include Community West Bancshares (“CWBC”) and its wholly-owned subsidiary, Community West Bank, N.A. (“CWB” or the “Bank”).  CWBC and CWB are referred to herein collectively as the “Company”.  The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been reflected in the financial statements. The results of operations for the nine-month period ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year.
 
These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Loans Held for Investment – Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off.  Unearned income includes deferred loan origination fees reduced by loan origination costs.  Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method.  The following is a description of the loan categories held for investment.
 
Commercial Loans
In addition to traditional term commercial loans made to business customers, the Company grants revolving business lines of credit.  Under the terms of the revolving lines of credit, the Company grants a maximum loan amount, which remains available to the business during the loan term.  Generally, as part of the loan requirements, the business agrees to maintain its primary banking relationship with the Company.  The collateral for these loans typically are secured by UCC-1 financing statements, real estate and personal guarantees.  The Company does not extend material loans of this type in excess of two years.
 
Commercial Real Estate
Commercial real estate and construction loans are primarily made for the purpose of purchasing, improving or constructing single-family residences, commercial or industrial properties.  This loan category also includes SBA 504 loans and land loans.
 
A substantial portion of the Company's real estate construction loans are first and second trust deeds on the construction of owner-occupied single family dwellings.  The Company also makes real estate construction loans on commercial properties.  These consist of first and second trust deeds collateralized by the related real property.  Construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan to appraised value of 80%.  All construction loans require UCC-1 filings to secure on-site building materials, including but not limited to lumber, plumbing fixtures and dry wall.
 
Commercial and industrial real estate loans are secured by nonresidential property.  Office buildings or other commercial property primarily secure these loans.  Loan to appraised value ratios on nonresidential real estate loans are generally restricted to 75% of appraised value of the underlying real property if occupied by the owner or owner’s business; otherwise, these loans are generally restricted to 70% of appraised value of the underlying real property.
 
SBA 504 loans are made in conjunction with Certified Development Companies.  These loans are granted to purchase or construct real estate or acquire machinery and equipment.  The loan is structured with a conventional first trust deed provided by a private lender and a second trust deed which is funded through the sale of debentures.  The predominant structure is terms of 10% down payment, 50% conventional first loan and 40% debenture.  Construction loans of this type must provide additional collateral to reduce the loan-to-value to approximately 75%.
 
Conventional and investor loans are sometimes funded by our secondary-market partners and the Company receives a premium for these transactions.
 
 
SBA Loans
SBA loans consist of 7(a) and Business and Industry loans (“B&I”).  The 7(a) loan proceeds are used for working capital, machinery and equipment purchases, land and building purposes, leasehold improvements and debt refinancing.  At present, the SBA guarantees as much as 85% on loans up to $150,000 and 75% on loans more than $150,000.  In certain instances, the Company sells a portion of the loans, however, under the SBA 7(a) loan program, the Company is required to retain a minimum of 5% of the principal balance of each loan it sells into the secondary market.
 
Agricultural Loans for real estate and operating lines
 
The Company has expanded its agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock.  The primary product is supported by guarantees issued from the U.S. Department of Agriculture (“USDA”), Farm Service Agency (“FSA”), and the USDA Business and Industry loan program.  The FSA loans typically issue a 90% guarantee up to $1,214,000 for 40 years or 480 months.  The rates are typically fixed for 5 years and reset on the 61st month.  The agricultural term loans and operating lines can be either fixed or variable.  The operating lines are committed up to 7 years or 84 months and the term loans can be for 7 years or 84 months.
 
The USDA Business and Industry loans have up to 80% guarantee on loan amounts up to $5,000,000.  These loans can be utilized for rural commercial real estate and equipment.  The loans can be up to 30 years or 360 months.  The rates can be fixed or variable.
 
Single Family Real Estate Loans
The Company originates loans that consist of first and second mortgage loans secured by trust deeds on one-to-four family homes.  These loans are made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate reduction, home improvement, or debt consolidation.  Generally, these loans are underwritten to specific investor guidelines and are committed for sale to that investor.  Although the majority of these loans are sold servicing released into the secondary market, a relatively small percentage is held as part of the Company’s portfolio.
 
Manufactured Housing Loans
The Company originates loans secured by manufactured homes located in approved mobile home parks in our primary lending area of Santa Barbara and Ventura Counties as well as along the California coast.  The loans are serviced internally and are originated under one of two programs: fixed rate loans written for terms of 10 to 20 years; and adjustable rate loans written for a term of 30 years with the initial interest rates fixed for the first 5 or 10 years and then adjusting annually subject to caps and floors.
 
HELOC
The Company provides lines of credit collateralized by residential real estate, home equity lines of credit (“HELOC”), for consumer related purposes.  Typically, HELOCs are collateralized by a second deed of trust.  The combined loan-to-value, first trust deed and second trust deed, are not to exceed 75% on all new HELOCs.
 
Other Installment Loans
Installment loans consist of automobile and general-purpose loans made to individuals.  These loans are primarily fixed rate.
 
Provision and Allowance for Loan Losses – The Company maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan losses (“ALL”).  The ALL is based on estimates and is intended to be adequate to provide for probable losses inherent in the loan portfolio.  This process involves deriving probable loss estimates that are based on migration analysis/historical loss rates and qualitative factors that are based on management’s judgment. The migration analysis and historical loss rate calculations are based upon the annualized loss rates utilizing a twelve-quarter loss history. Migration analysis is utilized for the Commercial Real Estate, Commercial, SBA, HELOC, Single Family Residential, and Consumer portfolios. The historical loss rate method is utilized for the homogeneous loan categories, primarily the Manufactured Housing portfolio. The migration analysis takes into account the risk rating of loans that are charged off in each loan category. Loans that are considered Doubtful are typically charged off.  The following is a description of the characteristics of loans graded Pass, Special Mention, Substandard, Doubtful and Loss.  Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual basis.
 
 
Pass
Loans rated in this category are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company.  Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.  In the case of individuals, borrowers deserving of this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment.
 
Special Mention
A Special Mention loan has potential weaknesses that deserve management's close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
 
Substandard
A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
 
Doubtful
A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
 
Loss
Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be affected in the future.  Losses are taken in the period in which they surface as uncollectible. The following is the Company’s policy regarding charging off loans by loan categories.
 
Commercial, Commercial Real Estate and SBA Loans
Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible.  A loan is considered uncollectible when the debtor is delinquent in principal or interest repayment 90 days or more and, in the opinion of the Company, improvement in the debtor's ability to repay the debt in a timely manner is doubtful.  Also, collateral value is insufficient to cover the outstanding indebtedness.  Loans secured by real estate on which principal or interest is due and unpaid for 90 days are evaluated for possible charge-down and placed on non-accrual.  Generally, loan balances are charged-down to the fair value of the property, if, based on a current appraisal, an apparent deficiency exists.  In the event there is no perceived equity, the loan is charged-off in full like any other unsecured loan, which is not secured and over 90 days.
 
Single Family Real Estate, HELOC’s and Manufactured Housing Loans
Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which principal or interest is due and unpaid for 90 days, are evaluated for possible charge-down.  Loan balances are charged-down to the fair value of the property if, based on a current appraisal, an apparent deficiency exists.  In the event there is no perceived equity, the loan is generally charged-off in full like any other consumer loan, which is not secured and unpaid over 90-120 days.
 
Consumer Loans
All consumer loans (excluding real estate mortgages, home equity loans and savings secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or 5 payments delinquent.  Consumer losses are identified well before the 120 day limit whenever possible.  Net recoverable value can only be determined if the collateral is in the Company's possession, and its liquidation value can be verified and realized in the near term.
 
The second component of the ALL covers qualitative factors related to non-impaired loans. The qualitative allowance on each of the loan pools is based on the following factors:
 
 
 
·
Concentrations of credit
 
·
International risk
 
·
Trends in volume, maturity, and composition
 
·
Off-balance sheet
 
·
Volume and trend in delinquency
 
·
Economic conditions
 
·
Outside exams
 
·
Geographic distance
 
·
Policy and procedures
 
·
Staff experience and ability
 
The ALL calculation for the different loan portfolios is as follows:
 
 
·
Commercial Real Estate, Commercial, SBA, HELOC, Single Family Residential, and Consumer – Migration analysis combined with risk rating is used to determine the required allowance for all non-impaired loans.  In addition, the migration results are adjusted based upon the qualitative factors previously discussed that affect this specific portfolio category.   Reserves on impaired loans are determined based upon the individual characteristics of the loan.
 
·
Manufactured Housing – The allowance is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency.  In addition, the migration results are adjusted based upon the qualitative factors previously discussed that affect this specific portfolio.
 
The Company evaluates and individually assesses for impairment loans generally greater than $500,000, classified as substandard or doubtful in addition to loans either on nonaccrual, considered a troubled debt restructuring (“TDR”) or when other conditions exist which lead management to review for possible impairment.   The $500,000 threshold for the evaluation of individual loans for impairment represents a change instituted in the second quarter of 2012.  Previously, the threshold for the evaluation of loans for impairment was $100,000.  Measurement of impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans.  The amount of impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods.
 
 
·
The expected future cash flows are estimated and then discounted at the effective interest rate.
 
·
The value of the underlying collateral net of selling costs.  Selling costs are estimated based on industry standards, the Company’s actual experience or actual costs incurred as appropriate.  When evaluating real estate collateral, the Company typically uses appraisals or valuations, no more than twelve months old at time of evaluation.  When evaluating non-real estate collateral securing the loan, the Company will use audited financial statements or appraisals no more than twelve months old at time of evaluation.  Additionally for both real estate and non-real estate collateral, the Company may use other sources to determine value as deemed appropriate.
 
·
The loan’s observable market price.
 
Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.
 
The Company determines the appropriate ALL on a monthly basis and updates the qualitative factors quarterly.  Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the appropriate ALL determination and adjusted as deemed necessary.  The review of the adequacy of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental conditions that may affect the borrowers' ability to pay and/or the value of the underlying collateral.  Additional factors considered include: geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience.  These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.
 
The Company’s ALL is maintained at a level believed adequate by management to absorb known and inherent probable losses on existing loans.  A provision for loan losses is charged to expense.  The allowance is charged for losses when management believes that full recovery on the loan is unlikely.
 
 
The Company has outsourced and centralized appraisal management processes that track and monitor appraisals, appraisal reviews and other valuations. The centralization focus is to ensure the use of qualified and independent appraisers capable of providing reliable real estate values in the context of ever changing market conditions. The review process is monitored to ensure application of the appropriate appraisal methodology, agreement with the interpretation of market data and the resultant real estate value. The process also provides the means of tracking the performance quality of the appraisers on the Company’s approved appraiser list.  Any loan evaluation that results in the Company determining that elevated credit risk and/or default risk exists and also exhibits a lack of a timely valuation of the collateral or apparent collateral value deterioration is reappraised and reevaluated to determine the current extent of any change in collateral value and credit risk.  A similar review process is conducted quarterly on all classified and criticized real estate credits to determine the timeliness and adequacy of the real estate collateral value.
 
Foreclosed Real Estate and Repossessed Assets – Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell.  Any excess of loan balance over the fair value less estimated costs to sell of the other assets is charged-off against the allowance for loan losses.  Any excess of the fair value less estimated costs to sell over the loan balance is recorded as a loan loss recovery to the extent of the loan loss previously charged-off against the allowance for loan losses; and, if greater, recorded as a gain on foreclosed real estate. Subsequent to the legal ownership date, management periodically performs a new valuation and the asset is carried at the lower of carrying amount or fair value less estimated costs to sell.  Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.
 
Income Taxes – The Company uses the asset and liability method, which recognizes a liability or asset representing the tax effects of future deductible or taxable amounts that have been recognized in the consolidated financial statements.  Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting.  These items represent “temporary differences.”  Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized.
 
As of December 31, 2011, the deferred tax asset, net of valuation allowance, totaled $306,000.  Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income.  The Company is required  to establish a valuation allowance for deferred tax asset and record a charge to income if Management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax asset may not be realized.
 
For the three-year period ended December 31, 2011, the Company was in a cumulative pretax loss position.  For purposes of establishing a deferred tax valuation allowance, this cumulative pretax loss position was considered significant, objective evidence that the Company may not be able to realize some portion of the deferred tax asset in the future.  As a result, the Company established a valuation allowance for the deferred tax asset of $6.7 million as of December 31, 2011.  The net deferred tax asset of $306,000 represented the estimated amount of tax that Management has determined may be recoverable through carryback of tax losses to prior years.
 
Net income represents positive evidence for the reduction of the deferred tax valuation allowance. Based on net income of $841,000 for the first nine months ended September 30, 2012, the deferred tax valuation allowance was reduced by $354,000 to $6.3 million at September 30, 2012.  The net deferred tax asset increased from $306,000 at December 31, 2011 to $660,000 at September 30, 2012.
 
The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740).  ASC 740 prescribes a more-likely-than-not threshold for the financial statement recognition of uncertain tax positions.  ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.
 
Earnings Per Share - Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income (loss) applicable to common shareholders.  Diluted earnings per share include the effect of all dilutive potential common shares for the period.  Potentially dilutive common shares include stock options, warrants and shares that could result from the conversion of debenture bonds.
 
 
Recent Accounting PronouncementsIn May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows:  (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets.  ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks.  This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs.  In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the balance sheet but whose fair value must be disclosed.  The provisions of ASU No. 2011-04 are effective for the Company’s interim reporting period beginning on or after December 15, 2011.  The adoption of ASU No. 2011-04 did not have a material impact on the Company’s balance sheets and statements of income.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.”  The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income (“OCI”) either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of OCI along with a total for OCI, and a total amount for comprehensive income.  The statement(s) are required to be presented with equal prominence as the other primary financial statements.  ASU No. 2011-05 eliminates the option to present the components of OCI as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income.  The provisions of ASU No. 2011-05 are effective for the Company’s interim reporting period beginning on or after December 15, 2011, with retrospective application required.  The adoption of ASU No. 2011-05 resulted in presentation changes to the Company’s statements of income and the addition of a statement of comprehensive income.  The adoption of ASU No. 2011-05 had no impact on the Company’s balance sheets.

In December 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”.   The amendments are being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and OCI for all periods presented.  Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.  The adoption of ASU 2011-12 will have no impact on the Company’s balance sheets.
 
 
2.
INVESTMENT SECURITIES
 
The amortized cost and estimated fair value of investment securities are as follows:
 
September 30, 2012
 
(in thousands)
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
Available-for-sale securities
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. Government agency: MBS
  $ 164     $ 10     $ -     $ 174  
U.S. Government agency: CMO
    11,766       62       (1 )     11,827  
Total
  $ 11,930     $ 72     $ (1 )   $ 12,001  
                                 
Held-to-maturity securities
                               
U.S. Government agency: MBS
  $ 12,822     $ 815     $ -     $ 13,637  
Total
  $ 12,822     $ 815     $ -     $ 13,637  
 
December 31, 2011
 
(in thousands)
 
           
Gross
   
Gross
         
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
Available-for-sale securities
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. Government agency: Notes
  $ 2,496     $ -     $ (10 )   $ 2,486  
U.S. Government agency: MBS
    4,486       186       -       4,672  
U.S. Government agency: CMO
    16,368       66       (4 )     16,430  
Total
  $ 23,350     $ 252     $ (14 )   $ 23,588  
                                 
Held-to-maturity securities
                               
U.S. Government agency: MBS
  $ 15,335     $ 732     $ -     $ 16,067  
Total
  $ 15,335     $ 732     $ -     $ 16,067  

At September 30, 2012 and December 31, 2011, $24.8 million and $38.9 million of securities, respectively, at carrying value, were pledged to the Federal Home Loan Bank (“FHLB”), San Francisco, as collateral for current and future advances.
 
In the first quarter of 2012, the Company sold seven available-for-sale securities for a gain of $121,000.  The cost basis of the securities sold was determined by specific identification.  As a result, $99,000 in unrealized gain was classified out of accumulated other comprehensive income.
 
The maturity periods and weighted average yields of investment securities at September 30, 2012 are as follows:
 
   
Total Amount
   
Less than One Year
   
One to Five Years
   
Five to
Ten Years
 
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
 
   
(dollars in thousands)
 
Available-for-sale securities
                                               
U. S. Government:
                                               
Agency: MBS
  $ 174       2.66 %   $ -       0.00 %   $ 68       2.55 %   $ 106       2.73 %
Agency: CMO
    11,827       0.85 %     2,678       1.16 %     9,149       0.76 %     -       0.00 %
Total
  $ 12,001       0.88 %   $ 2,678       1.16 %   $ 9,217       0.77 %   $ 106       2.73 %
                                                                 
Held-to-maturity securities
                                                               
U.S. Government:
                                                               
Agency: MBS
  $ 12,822       3.40 %   $ -       0.00 %   $ 4,165       4.05 %   $ 8,657       3.08 %
Total
  $ 12,822       3.40 %   $ -       0.00 %   $ 4,165       4.05 %   $ 8,657       3.08 %
 
 
Expected maturities will differ from contractual maturities because borrowers or issuers have the right to call or prepay investment securities. Changes in interest rates may also impact borrowers or issuers of investment securities and cause them to prepay investment securities earlier than the contractual term.
 
The following tables show all securities that were in an unrealized loss position and temporarily impaired as of:

September 30, 2012
 
Less than 12 months
   
More than 12 months
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(in thousands)
 
Available-for-sale securities
                                   
U.S. Government agency: CMO
  $ -     $ -     $ 1,196     $ 1     $ 1,196     $ 1  
Total
  $ -     $ -     $ 1,196     $ 1     $ 1,196     $ 1  

December 31, 2011
 
Less than 12 months
   
More than 12 months
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(in thousands)
 
Available-for-sale securities
                                   
U.S. Government agency: Notes
  $ 2,486     $ 10     $ -     $ -     $ 2,486     $ 10  
U.S. Government agency: CMO
    4,275       4       -       -       4,275       4  
Total
  $ 6,761     $ 14     $ -     $ -     $ 6,761     $ 14  
 
As of September 30, 2012 and December 31, 2011, there were three and five securities, respectively, in an unrealized loss position.
 
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost (ii) the financial condition and near-term prospects of the issuer and (iii) the Company’s intent to sell an impaired security and if it is not more likely than not it will be required to sell the security before the recovery of its amortized basis.
 
The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality, as all are direct or indirect agencies of the U. S. Government.   Accordingly, as of September 30, 2012 and December 31, 2011, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Company’s consolidated income statements.
 
3.
LOAN SALES AND SERVICING
 
SBA Loan Sales - The Company periodically sells the guaranteed portion of selected SBA loans into the secondary market, on a servicing-retained basis.  The Company retains the unguaranteed portion of these loans and services the loans as required under the SBA programs to retain specified yield amounts.
 
On certain SBA loan sales that occurred prior to 2003, the Company retained interest only strips (“I/O strips”), which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees.  The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.
 
Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  In connection with the sale of $10.1 million in SBA loans during the first quarter of 2012, the Company recorded a servicing asset of $276,000 and has elected to measure this asset at fair value in accordance with ASC 825-10 – Fair Value Option to better reflect the impact of subsequent changes in interest rates.  The SBA program stipulates that the Company retains a minimum of 5% of the loan balance, which is unguaranteed.  The percentage of each unguaranteed loan in excess of 5% may be periodically sold to a third party, typically for a cash premium.  The Company records servicing liabilities for the unguaranteed loans sold calculated based on the present value of the estimated future servicing costs associated with each loan. As of September 30, 2012 and December 31, 2011, the servicing liability was $46,000 and $55,000, respectively.
 
 
The Company may also periodically sell certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.  As of September 30, 2012 and December 31, 2011, the Company had approximately $57.2 million and $74.1 million, respectively, in SBA loans included in loans held for sale.  As of September 30, 2012 and December 31, 2011, the principal balance of SBA loans serviced was $34.5 million and $27.6 million, respectively.

The Company has expanded its agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock.  The primary product is supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program.  In the third quarter of 2012, the Company sold $2.5 million in USDA loans and elected to measure the related servicing asset at fair value of $72,000 in accordance with ASC 825-10.
 
As of September 30, 2012 and December 31, 2011, the Company had no USDA loans included in loans held for sale. The $950,000 balance of the USDA loans at September 30, 2012 represent the unguaranteed portion included in loans held for investment.  As of September 30, 2012 and December 31, 2011, the principal balance of USDA loans serviced was $2.5 million and $0, respectively.

The following is a summary of activity for the Company’s I/O strips:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands)
   
(in thousands)
 
Beginning balance
  $ 456     $ 471     $ 419     $ 492  
Adjustment to fair value
    (5 )     (14 )     32       (35 )
Ending balance
  $ 451     $ 457     $ 451     $ 457  
 
The key data and assumptions used in estimating the fair value of the Company’s I/O strips as of September 30, 2012 were as follows:
 
   
September 30, 2012
 
Weighted-Average Constant Prepayment Rate
    5.66 %
Weighted-Average Life (in years)
    6  
Weighted-Average Discount Rate
    12.94 %
 
A sensitivity analysis of the Company’s fair value of I/O strips to change in certain key assumptions as of September 30, 2012 is presented in the following table:
   
September 30, 2012
 
   
(in thousands)
 
Discount Rate
     
Increase in fair value from 100 basis points (“bps”) decrease
  $ 13  
Decrease in fair value from 100 bps increase
    (13 )
Constant Prepayment Rate
       
Increase in fair value from 10% decrease
  $ 7  
Decrease in fair value from 10% increase
    (7 )


The following is a summary of activity for servicing rights accounted for under the amortization method:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands)
   
(in thousands)
 
Beginning balance
  $ 441     $ 724     $ 625     $ 782  
Amortization
    (29 )     (28 )     (213 )     (86 )
Ending balance
  $ 412     $ 696     $ 412     $ 696  
 
The following is a summary of activity for servicing rights accounted for under the fair value method:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands)
   
(in thousands)
 
Beginning balance
  $ 253     $ -     $ -     $ -  
Additions through loan sales
    72       -       349       -  
Adjustment to fair value
    8       -       (16 )     -  
Ending balance
  $ 333     $ -     $ 333     $ -  
 
The key data and assumptions used in estimating the fair value of the Company’s servicing rights as of September 30, 2012 were as follows:
 
   
September 30, 2012
 
Weighted-Average Constant Prepayment Rate
    5.19 %
Weighted-Average Life (in years)
    9  
Weighted-Average Discount Rate
    13.93 %


A sensitivity analysis of the Company’s fair value of servicing rights to change in certain key assumptions as of September 30, 2012 is presented in the following table:
   
September 30, 2012
 
   
(in thousands)
 
Discount Rate
     
Increase in fair value from 100 basis points (“bps”) decrease
  $ 13  
Decrease in fair value from 100 bps increase
    (13 )
Constant Prepayment Rate
       
Increase in fair value from 10% decrease
  $ 7  
Decrease in fair value from 10% increase
    (7 )
 
This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s servicing rights usually is not linear. Also, the effect of changing one key assumption without changing other assumptions is not realistic.
 
Mortgage Loan Sales – The Company enters into mortgage loan rate lock commitments (normally for 30 days) with potential borrowers.  In conjunction therewith, the Company enters into a forward sale commitment to sell the locked loan to a third party investor.  This forward sale agreement requires delivery of the loan on a “best efforts” basis but does not obligate the Company to deliver if the mortgage loan does not fund.
 
 
The mortgage rate lock agreement and the forward sale agreement qualify as derivatives.  The value of these derivatives is generally equal to the fee, if any, charged to the borrower at inception but may fluctuate in the event of changes in interest rates.  Although the Company does not attempt to qualify these transactions for special hedge accounting, management believes that changes in the fair value of the two commitments generally offset and create an economic hedge.  At September 30, 2012 and December 31, 2011, the Company had $10.5 million and $8.0 million, respectively, in outstanding mortgage loan interest rate lock and forward sale commitments.  The values of related derivative instruments were not material to the Company’s financial position or results of operations.
 
 
4. 
LOANS HELD FOR INVESTMENT

The composition of the Company’s loans held for investment loan portfolio follows:

   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Manufactured housing
  $ 180,104     $ 189,331  
Commercial real estate
    137,231       168,812  
Commercial
    34,291       42,058  
SBA
    31,549       37,888  
HELOC
    19,018       20,719  
Single family real estate
    9,947       11,779  
Consumer
    250       312  
      412,390       470,899  
Less:
               
Allowance for loan losses
    15,055       15,270  
Deferred costs, net
    (162 )     (109 )
Discount on SBA loans
    453       325  
Loans held for investment, net
  $ 397,044     $ 455,413  
 
At September 30, 2012, the aging of the Company’s loans held for investment is as follows:
 
   
30-59 Days
Past Due
   
60-89
Days
Past Due
   
Greater
Than 90
Days Past
Due
   
Total
Past
Due
   
Current
   
Total
Financing
Receivables
   
Recorded
Investment > 90
Days and
Accruing
 
   
(in thousands)
 
                                           
Manufactured housing
  $ 414     $ 441     $ 414     $ 1,269     $ 178,835     $ 180,104     $ -  
Commercial real estate:
                                                       
Commercial real estate
    -       -       3,590       3,590       84,854       88,444       -  
504 1st TD
    -       551       548       1,099       34,626       35,725       -  
Land
    -       -       -       -       4,590       4,590       -  
Construction
    -       -       -       -       8,472       8,472       -  
Commercial
    20       49       476       545       33,746       34,291       343  
SBA
    309       3,883       2,893       7,085       24,464       31,549       -  
HELOC
    -       -       -       -       19,018       19,018       -  
Single family real estate
    30       87       29       146       9,801       9,947       -  
Consumer
    -       -       -       -       250       250       -  
Total
  $ 773     $ 5,011     $ 7,950     $ 13,734     $ 398,656     $ 412,390     $ 343  
Of the $7.1 million SBA loans past due, $6.0 million is guaranteed.
 
 
At December 31, 2011, the aging of the Company’s loans held for investment is as follows:
 
   
30-59
Days Past
Due
   
60-89
Days Past
Due
   
Greater
Than 90
Days Past
Due
   
Total
Past
Due
   
Current
   
Total
Financing
Receivables
   
Recorded
Investment > 90
Days and
Accruing
 
(in thousands)
 
Manufactured housing
  $ 2,279     $ 519     $ 902     $ 3,700     $ 185,631     $ 189,331     $ -  
Commercial real estate:
                                                       
Commercial real estate
    247       -       3,718       3,965       104,260       108,225       -  
504 1st TD
    300       -       2,068       2,368       34,958       37,326       -  
Land
    -       -       -       -       5,230       5,230       -  
Construction
    -       -       1,519       1,519       16,512       18,031       -  
Commercial
    115       18       1,881       2,014       40,044       42,058       510  
SBA
    629       53       9,332       10,014       27,874       37,888       -  
HELOC
    258       -       75       333       20,386       20,719       74  
Single family real estate
    41       7       944       992       10,787       11,779       -  
Consumer
    -       -       -       -       312       312       -  
Total
  $ 3,869     $ 597     $ 20,439     $ 24,905     $ 445,994     $ 470,899     $ 584  
Of the $10.0 million SBA loans past due, $9.6 million is guaranteed.
 
An analysis of the allowance for loan losses for loans held for investment is as follows:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands)
   
(in thousands)
 
Balance, beginning of period
  $ 15,446     $ 15,237     $ 15,270     $ 13,302  
                                 
Loans charged off
    (1,946 )     (5,538 )     (6,403 )     (7,965 )
Recoveries on loans previously charged off
    262       39       1,012       261  
Net charge-offs
    (1,684 )     (5,499 )     (5,391 )     (7,704 )
                                 
Provision for loan losses
    1,293       4,511       5,176       8,651  
Balance, end of period
  $ 15,055     $ 14,249     $ 15,055     $ 14,249  
 
As of September 30, 2012 and December 31, 2011, the Company also had established reserves for credit losses on undisbursed loans of $127,000 and $356,000 respectively, which are included in other liabilities in the consolidated balance sheets.

 
The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended September 30, 2012:
   
Allowance
6/30/12
   
Provision
   
Charge-offs
   
Recoveries
   
Net Charge-offs
   
Allowance
9/30/12
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 5,187     $ 2,022     $ (1,212 )   $ 3     $ (1,209 )   $ 6,000  
Commercial real estate
    3,175       151       (396 )     31       (365 )     2,961  
Commercial
    3,064       (521 )     -       81       81       2,624  
SBA
    3,148       (238 )     (241 )     140       (101 )     2,809  
HELOC
    671       (111 )     (74 )     -       (74 )     486  
Single family real estate
    199       (5 )     (23 )     2       (21 )     173  
Consumer
    2       (5 )     -       5       5       2  
Total
  $ 15,446     $ 1,293     $ (1,946 )   $ 262     $ (1,684 )   $ 15,055  

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the nine months ended September 30, 2012:
   
Allowance
12/31/11
   
Provision
   
Charge-offs
   
Recoveries
   
Net Charge-offs
   
Allowance
9/30/12
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 4,629     $ 4,434     $ (3,115 )   $ 52     $ (3,063 )   $ 6,000  
Commercial real estate
    3,528       1,088       (1,687 )     32       (1,655 )     2,961  
Commercial
    2,734       428       (656 )     118       (538 )     2,624  
SBA
    3,877       (1,218 )     (600 )     750       150       2,809  
HELOC
    349       163       (76 )     50       (26 )     486  
Single family real estate
    150       279       (261 )     5       (256 )     173  
Consumer
    3       2