Note 4: Loans and Allowance for Loan Losses

The majority of our loan activity is with customers located in California, primarily in the counties of Marin, Napa, San Francisco and Sonoma. More than half of our loans are for commercial real estate, 79% of which are secured by real estate located in Marin, Napa, Sonoma and San Francisco counties, California. Approximately 85% and 86% of total loans were secured by real estate at December 31, 2011 and 2010, respectively.

Outstanding loans by class and payment aging at December 31, 2011 and 2010 are as follows:

Credit Quality of Loans

Loan Aging Analysis by Class As of December 31, 2011 and 2010
(dollars in thousands)	Commercial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential 1			Installment and other consumer			Total
December 31, 2011
30-59 days past due	$	371		$	576		$	6,060		$	-		$	195		$	-		$	7		$	7,209
60-89 days past due		139			-			-			-			-			-			34			173
Greater than 90 days past due (non-accrual) 2		2,955			2,033			741			3,014			766			1,942			519			11,970
Total past due		3,465			2,609			6,801			3,014			961			1,942			560			19,352
Current		172,325			172,096			439,624			48,943			97,082			59,560			22,172			1,011,802
Total loans 3	$	175,790		$	174,705		$	446,425		$	51,957		$	98,043		$	61,502		$	22,732		$	1,031,154

Non-accrual loans to total loans		1.7	%		1.2	%		0.2	%		5.8	%		0.8	%		3.2	%		2.3	%		1.2	%

December 31, 2010
30-59 days past due	$	20		$	-		$	-		$	-		$	25		$	-		$	307		$	352
60-89 days past due		-			-			-			-			-			-			-			-
Greater than 90 days past due (non-accrual) 2		2,486			632			-			9,297			-			148			362			12,925
Total past due		2,506			632			-			9,297			25			148			669			13,277
Current		151,330			141,958			383,553			68,322			86,907			69,843			26,210			928,123
Total loans 3	$	153,836		$	142,590		$	383,553		$	77,619		$	86,932		$	69,991		$	26,879		$	941,400

Non-accrual loans to total loans		1.6	%		0.4	%		-			12.0	%		-			0.2	%		1.3	%		1.4	%

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 December 31, 2011 amounts include $2.5 million PCI loans that have stopped accreting interest and exclude accreting PCI loans of $3.4 million, as their accretable yield interest recognition is independent from the underlying contractual loan delinquency status. There were no loans past due more than 90 days still accruing interest at December 30, 2011 or at December 31, 2010.

3 Amounts were net of deferred loan fees of $1.6 million and $2.8 million at December 31, 2011 and December 31, 2010, 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 or other business assets such as accounts receivable or inventory and incorporate a personal guarantee; however, 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 our credit extensions.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans primarily as cash flow loans and secondarily as loans secured by real estate. 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. Underwriting for these loans must meet a minimum debt coverage ratio of 1.20:1.00, and we also require a conservative loan-to-value of 65% or less. Furthermore, substantially all of our loans are guaranteed by the owners of the properties. Commercial real estate loans may be more 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 owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we experience nominal delinquencies 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 appraisal reviews. The construction industry can be severely impacted by several major factors, including: 1) the inherent volatility of real estate markets; 2) vulnerability to weather delays, 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 success of the ultimate project.

Consumer loans primarily consist of home equity lines of credit and loans, 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 and outlook reports are reviewed by Management on a regular basis. Underwriting standards for home equity loans include, but are not limited to, a maximum loan-to-value percentage of 75% of loans that are $1,250,000 or less (and even more conservatively for homes with values in excess of this amount), collection remedies, 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, has been cautious compared to traditional residential mortgages due to the unique ownership structure and the interest-only feature 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 direct auto loans and installment loans. Personal unsecured loans are offered to consumers with additional underwriting procedures in place, including net worth, and borrowers' verified liquid assets analysis. In general, personal loans usually have a higher degree of risk than other types of loans.

We use a risk rating system as a tool used to evaluate asset quality, and to identify and monitor credit risk in individual loans, and ultimately in the portfolio. Definitions of risk grades of “Special Mention” or worse are consistent with those used by the regulators. 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-dependant.

We regularly review our credits for accuracy of risk grades whenever new financial 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 regularly 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 as of December 31, 2011 and 2010:

Credit Quality Indicators As of December 31, 2011 and 2010
(in thousands)	Commercial		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:
December 31, 2011
Pass	$	148,806	$	146,449	$	433,307	$	32,272	$	93,188	$	54,711	$	21,648	$	1,541	$	931,922
Special Mention		7,874		18,434		4,877		-		838		2,010		-		529		34,562
Substandard		17,897		6,609		6,617		19,492		3,677		4,420		895		3,563		63,170
Doubtful		98		-		-		193		339		361		189		320		1,500
Total loans	$	174,675	$	171,492	$	444,801	$	51,957	$	98,042	$	61,502	$	22,732	$	5,953	$	1,031,154

December 31, 2010
Pass	$	120,428	$	135,443	$	369,976	$	57,779	$	84,830	$	64,570	$	26,280	$	-	$	859,306
Special mention		17,009		454		330		10,253		447		-		-		-		28,493
Substandard		16,169		6,693		13,247		9,587		1,655		5,421		427		-		53,199
Doubtful		230		-		-		-		-		-		172		-		402
Total loans	$	153,836	$	142,590	$	383,553	$	77,619	$	86,932	$	69,991	$	26,879	$	-	$	941,400

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 may 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.

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.

As a result of adopting the amendments in ASU No. 2011-02 discussed in Note 1, Management reassessed all loan modifications that occurred on or after January 1, 2011 for potential identification as TDRs. Management has identified TDRs for which the related allowance for loan losses had previously been measured under the general allowance for loan losses methodology. Upon identifying those receivables as TDRs, they are newly considered as impaired under the guidance in ASC Section 310-10-35. The amendments in ASU No. 2011-02 require prospective application of the impairment guidance in ASC Section 310-10-35 for those receivables newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in receivables for which the allowance for loan losses had been previously measured under a general allowance for loan losses methodology and now considered impaired was $3.1 million, and the related specific allowance, based on a current evaluation of loss, was $11 thousand.

The table below, by loan class, presents the following information for all TDRs during 2011: 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. Modifications generally involved reductions in the interest rate, payment extensions or forbearances, or a combination of any of the above. As of December 31, 2010, there were $1.2 million of TDR loans (mostly installment and other consumer loans) which were performing. There were three TDRs in 2010 and 2011 with loan balances of $1.0 million that subsequently defaulted within twelve months of restructuring and were charged-off during 2011. The table below excludes fully charged-off TDR loans:

(dollars in thousands)	Number of Contracts Modified		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment at December 31, 20111
Troubled Debt Restructurings
Commercial		27	$	5,854	$	5,940	$	4,969
Commercial real estate, owner-occupied		2		1,366		1,403		1,403
Construction		2		817		817		800
Home equity		3		478		469		467
Other residential		3		1,467		1,467		1,464
Installment and other consumer		13		1,607		1,605		1,552
Total		50	$	11,589	$	11,701	$	10,655

1 Includes $6.3 million of TDR loans that were accruing interest as of December 31, 2011.

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

The table below summarizes information on impaired loans and their related allowance:

(in thousands)	Commercial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total
December 31, 2011

Recorded investment in impaired loans:
With no specific allowance recorded	$	2,866	$	2,195	$	648	$	2,395	$	591	$	1,464	$	1,022	$	11,181
With a specific allowance recorded		2,969		1,018		623		909		454		1,942		1,049		8,964
Total recorded investment in impaired loans	$	5,835	$	3,213	$	1,271	$	3,304	$	1,045	$	3,406	$	2,071	$	20,145
Unpaid principal balance of impaired loans:
With no specific allowance recorded	$	4,730	$	5,140	$	648	$	5,007	$	1,077	$	1,464	$	1,064	$	19,130
With a specific allowance recorded		4,598		1,862		825		1,095		544		1,942		1,049		11,915
Total unpaid principal balance of the impaired loans	$	9,328	$	7,002	$	1,473	$	6,102	$	1,621	$	3,406	$	2,113	$	31,045

Specific allowance	$	1,285	$	169	$	163	$	194	$	262	$	408	$	465	$	2,946

Average recorded investment in impaired loans during the year		4,695		1,873		595		3,505		813		1,612		1,844		14,937

Interest income recognized on impaired loans during the year		102		---		38		---		14		72		26		252

December 31, 2010

Recorded investment in impaired loans:
With no specific allowance recorded	$	959	$	633	$	---	$	8,742	$	---	$	---	$	73	$	10,407
With a specific allowance recorded		1,526		---	$	---		555		259		148		1,214		3,702
Total recorded investment in impaired loans	$	2,485	$	633	$	---	$	9,297	$	259	$	148	$	1,287	$	14,109
Unpaid principal balance of impaired loans:
With no specific allowance recorded	$	959	$	689	$	---	$	11,485	$	---	$	---	$	115	$	13,248
With a specific allowance recorded		2,570		---		---		555		259		148		1,214		4,746
Total unpaid principal balance of the impaired loans	$	3,529	$	689	$	---	$	12,040	$	259	$	148	$	1,329	$	17,994

Specific allowance	$	667	$	---	$	---	$	3	$	25	$	93	$	290	$	1,078

Average recorded investment in impaired loans during the year		1,326		3,086		---		6,326		191		39		1,212		12,180

Interest income recognized on impaired loans during the year		85		22		---		336		8		5		66		522

The average recorded investment in impaired loans was $8.3 million in 2009. We recognized interest income of $407 thousand on these impaired loans for cash payments received during the year ended 2009. Substantially all interest income on impaired loans was recognized on the cash basis.

The gross interest income that would have been recorded had non-accrual loans been current totaled $821 thousand, $756 thousand and $728 thousand in the years ended December 31, 2011, 2010 and 2009, respectively. PCI loans are excluded from the foregone interest data above as their accretable yield interest recognition is independent from the underlying contractual loan delinquency status. See page 71, “Purchased Credit-Impaired Loans” for further discussion.

Management monitors delinquent loans continuously and identifies problem loans, generally loans graded substandard or worse, to be evaluated individually for impairment testing. Generally, we charge off our estimated losses related to specifically-identified impaired loans when it is deemed uncollectible. The cumulative charged-off portion of impaired loans outstanding at December 31, 2011 totaled approximately $5.8 million. At December 31, 2011, there were no significant commitments to extend credit on impaired loans, including loans to borrowers whose terms have been modified in troubled debt restructurings.

The following table discloses loans by major portfolio categories and the specific allowance for loan losses disaggregated by impairment evaluation method as of December 31, 2011 and 2010, as well as activity in the allowance for loan losses for the years ended December 31, 2011 and 2010:

Allowance for Loan Losses and Recorded Investment in Loans as of and for the year ended December 31, 2011
(dollars in thousands)	Commercial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	3,114		$	1,037		$	4,134		$	1,694		$	643		$	738		$	835		$	197	$	12,392
Provision (reversal)		4,469			377			(424	)		275			1,342			202			787			22		7,050
Charge-offs		(3,306	)		(113	)		---			(473	)		(554	)		---			(456	)		---		(4,902	)
Recoveries		57			4			---			9			13			---			16			---		99
Ending balance	$	4,334		$	1,305		$	3,710		$	1,505		$	1,444		$	940		$	1,182		$	219	$	14,639

Ending ALLL related to loans collectively evaluated for impairment	$	3,049		$	1,136		$	3,547		$	1,311		$	1,182		$	532		$	717		$	219	$	11,693
Ending ALLL related to loans individually evaluated for impairment	$	957		$	-		$	91		$	194		$	262		$	408		$	465		$	---	$	2,377
Ending ALLL related to purchased credit-impaired loans	$	328		$	169		$	72		$	---		$	---		$	---		$	---		$	---	$	569

Loans outstanding:
Collectively evaluated for impairment	$	169,564		$	171,492		$	444,060		$	48,653		$	96,998		$	58,095		$	20,661			---	$	1,009,523
Individually evaluated for impairment 1		5,110			---			741			3,304			1,045			3,407			2,071			---		15,678
Purchased credit-impaired		1,116			3,213			1,624			---			---			---			---			---		5,953
Total	$	175,790		$	174,705		$	446,425		$	51,957		$	98,043		$	61,502		$	22,732		$	---	$	1,031,154

Ratio of allowance for loan losses to total loans at year end		2.47	%		0.75	%		0.83	%		2.90	%		1.47	%		1.53	%		5.20	%		---		1.42	%

Allowance for loan losses to non-accrual loans at year end		147	%		64	%		501	%		50	%		189	%		48	%		228	%		---		122	%

1 Total excludes $4.5 million PCI loans that have experienced credit deterioration post-acquisition, which are included in the "Purchased credit-impaired" amount in the next line below.

Allowance for Loan Losses and Recorded Investment in Loans as of and for the year ended December 31, 2010
(dollars in thousands)	Commercial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated			Total

Allowance for loan losses:
Beginning balance	$	2,544		$	1,006		$	3,000		$	1,832		$	586		$	734		$	662		$	254		$	10,618
Provision (reversal)		1,118			78			1,134			2,395			207			4			471			(57	)		5,350
Charge-offs		(643	)		(47	)		---			(2,628	)		(150	)		---			(318	)		---			(3,786	)
Recoveries		95			---			---			95			---			---			20			---			210
Ending balance	$	3,114		$	1,037		$	4,134		$	1,694		$	643		$	738		$	835		$	197		$	12,392

Ending ALLL balance related to loans collectively evaluated for impairment	$	2,447		$	1,037		$	4,134		$	1,691		$	618		$	645		$	545		$	197		$	11,314
Ending ALLL balance related to loans individually evaluated for impairment	$	667		$	---		$	---		$	3		$	25		$	93		$	290		$	---		$	1,078

Loans outstanding:
Collectively evaluated for impairment	$	151,351		$	141,957		$	383,553		$	68,322		$	86,673		$	69,843		$	25,592			---		$	927,291
Individually evaluated for impairment		2,485			633			---			9,297			259			148			1,287			---			14,109
Total	$	153,836		$	142,590		$	383,553		$	77,619		$	86,932		$	69,991		$	26,879		$	---		$	941,400

Ratio of allowance for loan losses to total loans at end of year		2.02	%		0.73	%		1.08	%		2.18	%		0.74	%		1.05	%		3.11	%		---			1.32	%

Allowance for loan losses to non-accrual loans at year end		125	%		164	%	NA				18	%	NA				499	%		231	%		---			96	%

Activity in the allowance for loan losses for the year ended December 31, 2009 follows:

(dollars in thousands)	2009
Allowance for loan losses:
Beginning balance	$	9,950
Provision		5,510
Charge-offs		(5,362	)
Recoveries		520
Ending balance	$	10,618

Total loans outstanding at end of year, before deducting allowance for loan losses	$	917,748

Ratio of allowance for loan losses to total loans at year end		1.16	%

Allowance for loan losses to non-accrual loans at year end		91.81	%

Non-accrual loans to total loans at year end		1.26	%

Purchased Credit-Impaired Loans

The following table presents the fair value of loans pursuant to accounting standards for purchased credit-impaired loans and other purchased loans as of the acquisition date:

	February 18, 2011
	Purchased			Other
	credit-impaired			purchased
(dollars in thousands)	loans			loans			Total
Contractually required payments including interest	$	24,316		$	69,702		$	94,018
Less: nonaccretable difference		(13,044	)		---			(13,044	)
Cash flows expected to be collected (undiscounted)		11,272			69,702			80,974
Accretable yield		(1,902	)		(17,307	)		(19,209	)
Fair value of purchased loans	$	9,370		$	52,395		$	61,765

1 $5.8 million of the $17.3 million represents the difference between the contractual principal amounts due and the fair value. This discount is to be accreted to interest income over the remaining lives of the loans. The remaining $11.5 million is the contractual interest to be earned over the life of the loans.

For the PCI loans, the accretable yield initially represents the excess of the cash flows expected to be collected at acquisition over the fair value of the loans at the acquisition date, and is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. The accretable yield is affected by:

(1) Changes in interest rate indices for variable rate loans – Expected future cash flows are based on the variable rates in effect at the time of the regular evaluations of cash flows expected to be collected;

(2) Changes in prepayment assumptions – Prepayments affect the estimated life of the loans which may change the amount of interest income, and possibly principal, expected to be collected;

(3) Changes in the expected principal and interest payments over the estimated life – Updates to expected cash flows are driven by the credit outlook and actions taken with borrowers. Changes in expected future cash flows from loan modifications are included in the regular evaluations of cash flows expected to be collected.

When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a nonperforming loan; otherwise, if the timing and amounts of expected cash flows for purchased credit-impaired loans are reasonably estimable, then interest is accreted and the loans are reported as performing loans. The initial estimated cash flows expected to be collected are updated each quarter based on current assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. Probable decreases in expected cash flows after acquisition result in the recognition of impairment, which would be recorded as a specific allowance for loan losses or a charge-off to the allowance. Probable and significant increases in expected cash flows would first reverse any related allowance for loan losses and any remaining increases would be recognized prospectively as interest income over the estimated remaining lives of the loans. The impact of changes in variable interest rates is recognized prospectively as adjustments to interest income.

The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans.

The following table reflects the outstanding balance and related carrying value of PCI loans as of the acquisition date (February 18, 2011) and December 31, 2011:

	February 18, 2011				December 31,2011
(in thousands)	Unpaid				Unpaid
	principal		Carrying		principal		Carrying
PCI Loans	balance		value		balance		value
Commercial	$	10,860	$	3,706	$	3,168	$	1,116
Commercial real estate		10,139		5,664		9,466		4,837
Total purchased credit-impaired loans	$	20,999	$	9,370	$	12,634	$	5,953

The activities in the accretable yield, or income expected to be earned, for PCI loans were as follows:

Accretable Yield	Year ended
(in thousands)	December 31, 2011
Balance at beginning of period	$	---
Additions		1,902
Removals 1		(1,019	)
Accretion		(1,418	)
Reclassifications from/(to) nonaccretable difference 2		5,940
Balance at end of period	$	5,405

1 Represents the accretable difference that is relieved when a loan exits the PCI population due to payoff, full charge-off, or transfer to repossessed assets, etc.

2 Primarily relates to improvements in expected credit performance and changes in expected timing of cash flows.

Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balance of $547.6 million at December 31, 2011. Our FHLB line of credit totaled $261.2 million and $219.2 million at December 31, 2011 and 2010, respectively. In addition, we pledge a certain residential loan portfolio with an unpaid balance of $46.2 million at December 31, 2011 to secure our borrowing capacity with the FRB, which totaled $41.2 million and $40.2 million at December 31, 2011 and 2010, respectively. Also see Note 8 below.

Related Party Loans

The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal stockholders and their associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features.

An analysis of net loans to related parties for each of the three years ended December 31, 2011, 2010 and 2009 is as follows:

(in thousands)	2011			2010			2009
Balance at beginning of year	$	6,997		$	7,401		$	7,421
Additions		1,690			95			331
Advances		43
Repayments		(1,864	)		(499	)		(274	)
Reclassified as unrelated-party loan		---			---			(77	)
Balance at end of year	$	6,866		$	6,997		$	7,401

The undisbursed commitment to related parties was $910 thousand as of December 31, 2011.