NOTE F - ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2011

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

NOTE F – ALLOWANCE FOR LOAN LOSSES

A summary of the allowance for loan losses at September 30, 2011 and 2010 is as follows (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Allowance for loan losses at beginning of period	$	14,746		$	16,151		$	14,993		$	18,539
Loans charged-off		(1,571	)		(5,705	)		(4,374	)		(11,740	)
Recoveries on loans previously charged-off		96			203			402			480
Provisions for loan losses		400			4,600			2,650			8,200
Balance of allowance for loan losses at end of period	$	13,671		$	15,249		$	13,671		$	15,479
Components of allowance for credit losses
Allowance for loan losses	$	13,671		$	15,249		$	13,671		$	15,249
Reserve for unfunded commitments		241			230			241			230
Total allowance for credit losses	$	13,912		$	15,479		$	13,912		$	15,479

The following table shows the allocation of the allowance for loan losses by portfolio segment for the three and nine month periods ended September 30, 2011 (in thousands):

	For the three months ended September 30, 2011
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance June 30, 2011	$	1,931		$	8,778		$	1,339		$	1,015		$	251		$	745		$	687	$	14,746
Charge-offs		(54	)		(1,115	)		(159	)		(73	)		(42	)		(128	)				(1,571	)
Recoveries		59			—			—			2			35			—					96
Provisions for loan losses		(229	)		394			130			(13	)		(34	)		123			29		400
Balance September 30, 2011	$	1,707		$	8,057		$	1,310		$	931		$	210		$	740		$	716	$	13,671

	For the nine months ended September 30, 2011
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517		$	8,439		$	1,936		$	956		$	339		$	666		$	1,140		$	14,993
Charge-offs		(928	)		(1,973	)		(356	)		(354	)		(334	)		(429	)					(4,374	)
Recoveries		197			—			10			2			193			—						402
Provisions for loan losses		921			1,591			(280	)		327			12			503			(424	)		2,650
Balance September 30, 2011	$	1,707		$	8,057		$	1,310		$	931		$	210		$	740		$	716		$	13,671
Reserve to impaired loans	$	713		$	352		$	241		$	119		$	—		$	—		$	—		$	1,425
Reserve to non-impaired loans	$	994		$	7,705		$	1,069		$	812		$	210		$	740		$	716		$	12,246
Loans
Balance September 30, 2011	$	47,826		$	281,443		$	34,885		$	48,462		$	10,958		$	48,542					$	472,116
Impaired Loans	$	2,182		$	5,068		$	3,387		$	1,282		$	110		$	113					$	12,142
Non-impaired loans	$	45,644		$	276,375		$	31,498		$	47,180		$	10,848		$	48,429					$	459,974

The following table shows the allocation of the allowance for loan losses by portfolio segment as of December 31, 2010 (in thousands):

	As of December 31, 2010
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517	$	8,439	$	1,936	$	956	$	339	$	666	$	1,140	$	14,993
Reserve to impaired loans	$	327	$	563	$	—	$	153	$	—	$	—	$	—	$	1,043
Reserve to non-impaired loans	$	1,190	$	7,876	$	1,936	$	803	$	339	$	666	$	1,140	$	13,950
Loans
Balance December 31, 2010	$	54,639	$	291,514	$	55,181	$	49,726	$	14,690	$	48,292			$	514,042
Impaired Loans	$	1,470	$	6,692	$	9,016	$	2,820	$	67	$	—			$	20,065
Non-impaired loans	$	53,169	$	284,822	$	46,165	$	46,906	$	14,623	$	48,292			$	493,977

The following table shows the loan portfolio allocated by management’s internal risk ratings (in thousands):

	As of September 30, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	36,079	$	7,365	$	3,771	$	611	$	47,826
Real estate - commercial		249,282		5,930		26,231		—		281,443
Real estate - construction		20,563		2,770		11,552		—		34,885
Real estate - mortgage		45,754		430		2,278		—		48,462
Installment		10,847		—		111		—		10,958
Other		48,091		—		451		—		48,542
Total	$	410,616	$	16,495	$	44,394	$	611	$	472,116

	As of December 31, 2010
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	43,773	$	3,531	$	7,203	$	132	$	54,639
Real estate - commercial		259,929		2,214		29,371		—		291,514
Real estate - construction		23,542		10,171		21,468		—		55,181
Real estate - mortgage		43,655		482		5,589		—		49,726
Installment		14,499		—		191		—		14,690
Other		47,790		—		502		—		48,292
Total	$	433,188	$	16,398	$	64,324	$	132	$	514,042

The following table shows an ageing analysis of the loan portfolio by the amount of time past due (in thousands):

	As of September 30, 2011
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	44,907	$	737	$	189	$	1,993	$	47,826
Real estate - commercial		276,375		—		—		5,068		281,443
Real estate - construction		31,447		51		—		3,387		34,885
Real estate - mortgage		46,647		533		—		1,282		48,462
Installment		10,743		105		—		110		10,958
Other		48,354		75		—		113		48,542
Total	$	458,473	$	1,501	$	189	$	11,953	$	472,116

	As of December 31, 2010
	Accruing Interest
					Greater than
			30-89 Days		90 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	53,010	$	159	$	—	$	1,470	$	54,639
Real estate - commercial		284,788		34		—		6,692		291,514
Real estate - construction		46,165		—		—		9,016		55,181
Real estate - mortgage		46,068		838		—		2,820		49,726
Installment		14,450		173		—		67		14,690
Other		48,258		34		—		—		48,292
Total	$	492,739	$	1,238	$	—	$	20,065	$	514,042

The Company did not recognize any interest income on impaired loans for the three and nine month periods ended September 30, 2011 or the year ending December 31, 2010. The following table shows information related to impaired loans at and for the period ended (in thousands):

	As of September 30, 2011
							Average		Average
			Unpaid				Recorded		Recorded
	Recorded		Principal		Related		Investment		Investment
	Investment		Balance		Allowance		Three Months Ended		Nine Months Ended
With no allocated allowance
Commercial	$	189	$	189	$	—	$	189	$	189
Real estate - commercial		3,102		3,156		—		3,136		3,172
Real estate - construction		971		971		—		979		978
Real estate - mortgage		514		559		—		515		515
Installment		111		116		—		111		112
Other		113		113		—		113		113
Subtotal		5,000		5,104		—		5,043		5,079
With allocated allowance
Commercial		1,993		1,993		713		2,167		2,199
Real estate - commercial		1,965		2,815		352		2,387		2,388
Real estate - construction		2,416		2,416		241		2,444		2,444
Real estate - mortgage		768		826		119		776		787
Subtotal		7,142		8,050		1,425		7,774		7,818
Total Impaired Loans	$	12,142	$	13,154	$	1,425	$	12,817	$	12,897

	As of December 31, 2010
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With no allocated allowance
Commercial	$	1,121	$	1,466	$	—	$	1,531
Real estate - commercial		2,602		2,794		—		2,793
Real estate - construction		9,016		13,599		—		13,572
Real estate - mortgage		1,557		1,611		—		1,679
Installment		67		67		—		68
Subtotal		14,363		19,537		—		19,643
With allocated allowance
Commercial		349		363		327		370
Real estate - commercial		4,090		4,178		563		4,252
Real estate - mortgage		1,263		1,265		153		1,563
Subtotal		5,702		5,806		1,043		6,185
Total Impaired Loans	$	20,065	$	25,343	$	1,043	$	25,828

The following table shows information related to Troubled Debt Restructurings for the period ended September 30, 2011 (in thousands):

			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	Contracts		Investment		Investment
Real estate - commercial		4	$	2,909	$	2,909
Real estate - construction		2	$	445	$	445
Real estate - mortgage		4	$	1,087	$	1,087

The Company has allocated $49,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011. There are no commitments to lend additional amounts at September 30, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

During the period ending September 30, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

There were no modifications involving a reduction of the stated interest rate. There were two modifications involving an extension of the maturity date; one for 36 months and one for 48 months.

The troubled debt restructurings described above increased the allowance for loan losses by $2,000. One troubled debt restructuring identified at December 31, 2010 was charged off in the amount of $144,000 on March 29, 2011. Another troubled debt restructuring identified at December 31, 2010 was partially charged-off by $46,000 on August 11, 2011.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risks inherent in the loan portfolio. In determining levels of risk, management considers a variety of factors, including, but not limited to, asset classifications, economic trends, industry experience and trends, geographic concentrations, estimated collateral values, historical loan loss experience, and the Company’s underwriting policies. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable losses in loans receivable. While management uses the best information available to make these estimates, future adjustments to allowances may be necessary due to economic, operating, regulatory, and other conditions that may be beyond the Company’s control. The Company also engages a third party credit review consultant to analyze the Company’s loan loss adequacy each calendar quarter. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

The allowance for loan losses is comprised of several components including the specific, formula and unallocated allowance relating to loans in the loan portfolio. Our methodology for determining the allowance for loan losses consists of several key elements, which include:

· Specific Allowances. A specific allowance is established when management has identified unique or particular risks that were related to a specific loan that demonstrated risk characteristics consistent with impairment. Specific allowances are established when management can estimate the amount of an impairment of a loan.

· Formula Allowance. The formula allowance is calculated by applying loss factors through the assignment of loss factors to homogenous pools of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and such other data as management believes to be pertinent. Management, also, considers a variety of subjective factors, including regional economic and business conditions that impact important segments of our portfolio, loan growth rates, the depth and skill of lending staff, the interest rate environment, and the results of bank regulatory examinations and findings of our internal credit examiners to establish the formula allowance.

· Unallocated Allowance. The unallocated loan loss allowance represents an amount for imprecision or uncertainty that is inherent in estimates used to determine the allowance.

The Company also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing agreements, for example, the Bank’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet.

Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s primary regulators, the Federal Reserve Bank of San Francisco (“FRB”) and the California Department of Financial Institutions, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.