Loans

12 Months Ended

Dec. 31, 2011

Loans {1}

Loans

(3)       Loans

Loans

As of December 31, 2011 and 2010, gross loans outstanding totaled $233.0 million and $179.3 million, respectively, within the following loan categories:

                                                                                                                                                          December 31,

	2011					2010
	Amount			Percent		Amount					Percent
(dollars in thousands)	Outstanding			of Total		Outstanding					of Total
Commercial (1)	$	70,945		30.4	%		$		67,411			37.6	%
Commercial real estate	70,269			30.2	%		54,456					30.4	%
Residential	54,944			23.6	%		21,707					12.1	%
Land and construction	16,670			7.2	%		15,462					8.6	%
Consumer and other (2)	20,140			8.6	%		20,235					11.3	%
Loans, gross	232,968			100.0	%		179,271					100.0	%
Net deferred costs	37					22
Less — allowance for loan losses	(5,284		)			(5,283				)
Loans, net	$	227,721				$		174,010

(1)         Unsecured commercial loan balances were $11.5 million and $11.0 million at December 31, 2011 and 2010, respectively.

(2)         Unsecured consumer and other loan balances were $2.8 million and $1.9 million at December 31, 2011 and 2010, respectively.

As of December 31, 2011 and 2010, substantially all of the Company’s loan customers were located in Southern California.

Allowance for Loan Losses and Recorded Investment in Loans

The following is a summary of activities for the allowance for loan losses and recorded investment in loans as of December 31, 2011:

(in thousands)		Commercial			Commercial Real Estate				Residential			Land and Construction				Consumer and Other			Total
For the Year Ended December 31, 2011:
Allowance for loan losses:
Beginning balance	$		2,812			$	888			$	213		$	995		$	375			$	5,283
Provision for loan losses			(724	)			894				370			(209	)		(56	)			275
Charge-offs			(223	)			(530	)			—			(270	)		—				(1,023	)
Recoveries			719				—				—			—			30				749
Ending balance	$		2,584			$	1,252			$	583		$	516		$	349			$	5,284
As of December 31, 2011:
Ending balance: individually evaluated for impairment	$		700			$	—			$	—		$	—		$	—			$	700
Ending balance: collectively evaluated for impairment			1,884				1,252				583			516			349				4,584
Total	$		2,584			$	1,252			$	583		$	516		$	349			$	5,284
Loans:
Ending balance: individually evaluated for impairment	$		2,175			$	3,756			$	—		$	1,330		$	345			$	7,606
Ending balance: collectively evaluated for impairment			68,770				66,513				54,944			15,340			19,795				225,362
Total	$		70,945			$	70,269			$	54,944		$	16,670		$	20,140			$	232,968

The following is a summary of activities for the allowance for loan losses for the year ended December 31, 2010:

(in thousands)
Beginning balance	$	5,478
Provision for loan losses	2,775
Charge-offs:
Commercial	(2,321		)
Commercial real estate	(900		)
Consumer and other	(190		)
Total charge-offs	(3,411		)
Recoveries:
Commercial	386
Commercial real estate	20
Consumer and other	35
Total recoveries	441
Ending balance	$	5,283

The following is a summary of the allowance for loan losses and recorded investment in loans as of December 31, 2010:

(in thousands)	Commercial		Commercial Real Estate					Residential					Land and Construction					Consumer and Other					Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	1,121			$		20			$		—			$		—			$		40			$		1,181
Ending balance: collectively evaluated for impairment		1,691					868					213					995					335					4,102
Total	$	2,812			$		888			$		213			$		995			$		375			$		5,283
Loans:
Ending balance: individually evaluated for impairment	$	1,693		$		5,080			$		—			$		—			$		345			$		7,118
Ending balance: collectively evaluated for impairment		65,718					49,376					21,707					15,462					19,890					172,153
Total	$	67,411			$		54,456			$		21,707			$		15,462			$		20,235			$		179,271

There were no loans acquired with deteriorated credit quality as of December 31, 2011 and 2010.

In addition to the allowance for loan losses, the Company also estimates probable losses related to unfunded lending commitments.  Unfunded lending commitments are subject to individual reviews and are analyzed and segregated by risk according to the Company’s internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments.  Provision for credit losses related to unfunded lending commitments is reported in other operating expenses in the Consolidated Statements of Operations.  The allowance held for unfunded lending commitments is reported in accrued interest and other liabilities within the accompanying Consolidated Balance Sheets, and not as part of the allowance for loan losses in the above tables.  As of December 31, 2011 and 2010, the allowance for unfunded lending commitments was $203,000 and is primarily related to commercial and home equity lines of credit and letters of credit which amounted to $59.7 million and $62.9 million at December 31, 2011 and 2010, respectively.

Non-Performing Assets

The following table presents an aging analysis of the recorded investment of past due loans as of December 31, 2011 and 2010. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan.  Loans are considered to be non-performing when a loan is greater than 90 days delinquent.  Loans that are 90 days or more past due may still accrue interest if they are well-secured and in the process of collection.  Total additions to non-performing loans during the years ended December 31, 2011 and 2010 were $2.5 million and $3.7 million, respectively.  Non-performing loans represented 3.3% and 4.0% of total loans at December 31, 2011 and 2010, respectively.  There were no accruing loans past due 90 days or more at December 31, 2011 and 2010.

(in thousands)	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total
As of December 31, 2011:
Commercial	$	364	$	4	$	683	$	1,051	$	69,894	$	70,945
Commercial real estate		—		—		540		540		69,729		70,269
Residential		—		—		—		—		54,944		54,944
Land and construction		—		—		—		—		16,670		16,670
Consumer and other		50		—		345		395		19,745		20,140
Totals	$	414	$	4	$	1,568	$	1,986	$	230,982	$	232,968
As of December 31, 2010:
Commercial	$	437	$	—	$	—	$	437	$	66,974	$	67,411
Commercial real estate		—		—		1,695		1,695		52,761		54,456
Residential		—		—		—		—		21,707		21,707
Land and construction		—		—		—		—		15,462		15,462
Consumer and other		50		—		345		395		19,840		20,235
Totals	$	487	$	—	$	2,040	$	2,527	$	176,744	$	179,271

The following table sets forth non-accrual loans and other real estate owned at December 31, 2011 and 2010:

	December 31,
(dollars in thousands)	2011			2010
Non-accrual loans:
Commercial	$	2,175		$	1,693
Commercial real estate	3,756			5,080
Land and construction	1,330			—
Consumer and other	345			345
Total non-accrual loans	7,606			7,118
OREO	—			845
Total non-performing assets	$	7,606		$	7,963
Non-performing assets to gross loans and OREO	3.26		%	4.42		%
Non-performing assets to total assets	1.88		%	2.58		%

Credit Quality Indicators

The following table represents the credit exposure by internally assigned grades at December 31, 2011 and 2010.  This grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements in accordance with the loan terms.  The Company’s internal credit risk grading system is based on management’s experiences with similarly graded loans.  Credit risk grades are reassessed each quarter based on any recent developments potentially impacting the creditworthiness of the borrower, as well as other external statistics and factors, which may affect the risk characteristics of the respective loan.

The Company’s internally assigned grades are as follows:

Pass – Strong credit with no existing or known potential weaknesses deserving of management's close attention.

Special Mention – Potential weaknesses that deserve management’s close attention.  Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.

Substandard – Inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.

Doubtful – All the weakness inherent in one classified as Substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.

Loss – Considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or whole of a perceived asset even though partial recovery may be collected in the future.

(in thousands)	Commercial		Commercial Real Estate		Residential		Land and Construction		Consumer and Other
As of December 31, 2011:
Grade:
Pass	$	64,838	$	65,837	$	54,944	$	12,933	$	19,745
Special Mention		1,245		—		—		2,407		—
Substandard		4,862		4,432		—		1,330		395
Total	$	70,945	$	70,269	$	54,944	$	16,670	$	20,140
As of December 31, 2010:
Grade:
Pass	$	57,315	$	49,376	$	21,707	$	7,861	$	18,724
Special Mention		3,053		—		—		2,137		938
Substandard		5,922		5,080		—		5,464		573
Doubtful		1,121		—		—		—		—
Total	$	67,411	$	54,456	$	21,707	$	15,462	$	20,235

There were no loans assigned to the Doubtful or Loss grade as of December 31, 2011.  There were no loans assigned to the Loss grade as of December 31, 2010.

Impaired Loans

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.  Management determined the specific allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral.  In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded.  Also presented in the table below are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on non-accrual status, contractual interest is credited to interest income when received, under the cash basis method. The average balances are calculated based on the month-end balances of the loans of the period reported.

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
As of and for the year ended December 31, 2011:
With no related allowance recorded:
Commercial	$	1,029	$	1,291	$	—	$	699
Commercial real estate		3,756		7,950		—		3,892
Residential		—		—		—		—
Land and construction		1,330		1,600		—		111
Consumer and other		345		345		—		173
With an allowance recorded:
Commercial	$	1,146	$	2,225	$	700	$	1,288
Commercial real estate		—		—		—		478
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		—		—		—		172
Totals:
Commercial	$	2,175	$	3,516	$	700	$	1,987
Commercial real estate	$	3,756	$	7,950	$	—	$	4,370
Residential	$	—	$	—	$	—	$	—
Land and construction	$	1,330	$	1,600	$	—	$	111
Consumer and other	$	345	$	345	$	—	$	345
As of and for the year ended December 31, 2010:
With no related allowance recorded:
Commercial	$	247	$	262	$	—	$	1,380
Commercial real estate		4,425		8,276		—		5,300
Residential		—		—		—		707
Land and construction		—		—		—		—
Consumer and other		—		—		—		—
With an allowance recorded:
Commercial	$	1,446	$	2,462	$	1,121	$	733
Commercial real estate		655		705		20		202
Residential		—		—		—		—
Land and construction		—		—		—		—
Consumer and other		345		345		40		106
Totals:
Commercial	$	1,693	$	2,724	$	1,121	$	2,113
Commercial real estate	$	5,080	$	8,981	$	20	$	5,502
Residential	$	—	$	—	$	—	$	707
Land and construction	$	—	$	—	$	—	$	—
Consumer and other	$	345	$	345	$	40	$	106

During the years ended December 31, 2011 and 2010, no interest income was recognized on these loans subsequent to their classification as impaired.  Furthermore, the Company stopped accruing interest on these loans on the date they were classified as non-accrual and reversed any uncollected interest that had been previously accrued as income.  The Company may begin recognizing interest income on these loans as cash interest payments are received, if collection of principal is reasonably assured.

Troubled Debt Restructurings

Troubled debt restructurings for the year ended December 31, 2011 are set forth in the following table.

		For the Year Ended December 31, 2011
(dollars in thousands)		Number of Loans			Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
	Commercial		1	$	1,146	$	1,146
	Commercial real estate		—		—		—
	Residential		—		—		—
	Land and construction		—		—		—
	Consumer and other		—		—		—
	Total		1	$	1,146	$	1,146

The loan identified as a troubled debt restructuring by the Company was previously on non-accrual status and reported as an impaired loan prior to restructuring.  The modification primarily related to extending the amortization period of the loan.  This loan was on non-accrual status as of December 31, 2011.  Because the loan was impaired both before and after restructuring, the modifications did not impact the Company's determination of the allowance for loan losses.  As of December 31, 2011, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months.  There were no troubled debt restructurings during 2010.