LOANS

3 Months Ended

Mar. 31, 2014

LOANS

LOANS

3. LOANS

The Company originates loans for business, consumer and real estate activities and for equipment purchases. Such loans are concentrated in Yolo, Placer, Sonoma, Shasta, Humboldt, Mendocino, Trinity and Del Norte Counties and neighboring communities. Substantially all loans are collateralized. Generally, real estate loans are secured by real property. Commercial and other loans are secured by bank deposits, real estate or business or personal assets. Leases are generally secured by equipment. The Company’s policy for requiring collateral reflects the Company’s analysis of the borrower, the borrower’s industry and the economic environment in which the loan would be granted. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrower.

Major classifications of loans as of the dates indicated were as follows (in thousands):

	March 31,			December 31,
	2014			2013
Commercial	$	50,040		$	47,526
Real estate - commercial		324,759			326,631
Real estate - construction		26,267			27,472
Real estate - mortgage		62,936			63,120
Installment		4,949			5,376
Other		39,352			39,311
Gross loans		508,303			509,436
Deferred loan (fees) costs, net		(247	)		(192	)
Allowance for loan losses		(9,058	)		(9,301	)
Loans, net	$	498,998		$	499,943

Salaries and employee benefits totaling $157,000 and $275,000 have been deferred as loan origination costs for the three month periods ended March 31, 2014 and 2013, respectively.

Certain real estate loans receivable are pledged as collateral for available borrowings with the FHLB. Pledged loans totaled $143,180,000 and $106,380,000 at March 31, 2014 and 2013.

The following table presents impaired loans and the related allowance for loan losses as of the dates indicated (in thousands):

	As of March 31, 2014						As of December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no allocated allowance
Commercial	$	98	$	101	$	—	$	458	$	481	$	—
Real estate - commercial		3,747		3,885		—		4,193		4,284		—
Real estate - construction		429		444		—		435		449		—
Real estate - mortgage		1,616		1,658		—		919		948		—
Installment		84		104		—		96		115		—
Other		273		291		—		374		397		—
Subtotal		6,247		6,483		—		6,475		6,674		—
With allocated allowance
Commercial		162		166		104		240		240		150
Real estate - commercial		113		113		6		113		113		28
Real estate - mortgage		414		414		2		416		416		50
Subtotal		689		693		112		769		769		228
Total Impaired Loans	$	6,936	$	7,176	$	112	$	7,244	$	7,443	$	228

The following table presents the average balance related to impaired loans for the periods indicated (in thousands):

	Three Months ended March 31,
	2014				2013
	Average Book		Interest Income		Average Book		Interest Income
	Balance		Recognized		Balance		Recognized
Commercial	$	300	$	—	$	571	$	—
Real estate - commercial		4,025		19		5,540		21
Real estate - construction		446		5		916		7
Real estate - mortgage		2,091		12		819		10
Installment		114		1		96		1
Other		293		—		158		—
Total	$	7,269	$	37	$	8,100	$	39

Nonperforming loans include all such loans that are either on nonaccrual status or are 90 days past due as to principal or interest but still accrue interest because such loans are well-secured and in the process of collection. Nonperforming loans are summarized as of the periods indicated as follows (in thousands):

					Loans Past Due Over
	Nonaccrual				89 Days Still Accruing
	March 31,		December 31,		March 31,		December 31,
	2014		2013		2014		2013
Commercial	$	260	$	698	$	—	$	—
Real estate - commercial		2,989		3,425		—		—
Real estate - construction		109		110		—		—
Real estate - mortgage		1,116		417		—		—
Installment		57		69		—		—
Other		274		374		—		—
Total	$	4,805	$	5,093	$	—	$	—

If interest on nonaccrual loans had been accrued, such income would have approximated $10,000 and $85,000 for the three month periods ended March 31, 2014 and 2013.

At March 31, 2014 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual.

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

	As of March 31, 2014
	Accruing Interest
					Greater than
			30-89 Days		89 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	48,589	$	1,191	$	—	$	260	$	50,040
Real estate - commercial		321,721		49		—		2,989		324,759
Real estate - construction		26,158		—		—		109		26,267
Real estate - mortgage		61,307		513		—		1,116		62,936
Installment		4,888		4		—		57		4,949
Other		38,976		102		—		274		39,352
Total	$	501,639	$	1,859	$	—	$	4,805	$	508,303

	As of December 31, 2013
	Accruing Interest
					Greater than
			30-89 Days		89 Days
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial	$	46,587	$	241	$	—	$	698	$	47,526
Real estate - commercial		322,773		433		—		3,425		326,631
Real estate - construction		27,362		—		—		110		27,472
Real estate - mortgage		62,178		525		—		417		63,120
Installment		5,273		34		—		69		5,376
Other		38,594		343		—		374		39,311
Total	$	502,767	$	1,576	$	—	$	5,093	$	509,436

A troubled debt restructuring (“TDRs”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. 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.

At March 31, 2014, accruing TDRs were $2,131,000 and nonaccrual TDRs were $841,000 compared to accruing TDRs of $2,151,000 and nonaccrual TDRs of $905,000 at December 31, 2013. At March 31, 2014, there were $8,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. At December 31, 2013, there were $78,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. There were no commitments to lend additional amounts at March 31, 2014 and December 31, 2013 to customers with outstanding loans classified as troubled debt restructurings. There were no TDRs that subsequently defaulted during the period ended March 31, 2014 and 2013 for which there was a modification in the preceding twelve months.

The following table presents loans that were modified and recorded as TDRs during of the periods indicated below (dollars in thousands):

	For the period ended March 31, 2014						For the period ended December 31, 2013
	Accruing TDRs						Accruing TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Real estate - commercial		—	$	—	$	—		1	$	435	$	435
Real estate - mortgage		—	$	—	$	—		1	$	209	$	209

	Nonaccrual TDRs						Nonaccrual TDRs
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		1	$	162	$	162		1	$	36	$	36
Real estate - construction		—	$	—	$	—		1	$	110	$	110
Real estate - mortgage		1	$	97	$	98		1	$	113	$	113
Other		1	$	46	$	47		3	$	210	$	210

The following table presents a summary of TDRs by type of concession and by type of loan as of the periods indicated below (dollars in thousands):

	March 31, 2014
Accruing TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Real estate - commercial		5	$	—	$	193	$	678	$	871
Real estate-construction		1	$	—	$	320	$	—	$	320
Real estate - mortgage		3	$	—	$	292	$	622	$	914
Installment		1	$	—	$	—	$	26	$	26

Nonaccrual TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Commercial		2	$	—	$	162	$	31	$	193
Real estate-construction		1	$	—	$	110	$	—	$	110
Real estate - mortgage		2	$	97	$	—	$	110	$	207
Installment		2	$	—	$	—	$	57	$	57
Other		5	$	149	$	58	$	67	$	274

	December 31, 2013
Accruing TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Real estate - commercial		5	$	—	$	195	$	686	$	881
Real estate-construction		1	$	—	$	325	$	—	$	325
Real estate - mortgage		3	$	—	$	293	$	625	$	918
Installment		1	$	—	$	—	$	27	$	27

Nonaccrual TDRs							Rate
							Reduction
	Number						and
	of		Rate		Maturity		Maturity
	Contracts		Reduction		Extension		Extension		Total
Commercial		2	$	—	$	—	$	391	$	391
Real estate-construction		1	$	—	$	110	$	—	$	110
Real estate - mortgage		1	$	—	$	—	$	113	$	113
Installment		2	$	—	$	—	$	59	$	59
Other		4	$	104	$	60	$	68	$	232

Allowance for Loan Losses

The following table presents the activity in the allowance for loan losses by portfolio segment (in thousands):

	For the three months ended March 31, 2014
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2013	$	876		$	5,196		$	610		$	842		$	131		$	832		$	814		$	9,301
Charge-offs		—			(13	)		—			(252	)		(33	)		—						(298	)
Recoveries		50			—			—			—			4			1						55
Provisions for loan losses		(132	)		(39	)		(29	)		269			18			(35	)		(52	)		—
Balance March 31, 2014	$	794		$	5,144		$	581		$	859		$	120		$	798		$	762		$	9,058

	For the three months ended March 31, 2013
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2012	$	843		$	6,295		$	690		$	982		$	98		$	721		$	829		$	10,458
Charge-offs		(83	)		(437	)		(369	)		(156	)		(11	)		—						(1,056	)
Recoveries		242			—			2			—			5			—						249
Provisions for loan losses		168			(138	)		272			112			(5	)		(45	)		(364	)		—
Balance March 31, 2013	$	1,170		$	5,720		$	595		$	938		$	87		$	676		$	465		$	9,651

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (in thousands):

			Real Estate		Real Estate		Real Estate
March 31, 2014	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	104	$	6	$	—	$	2	$	—	$	—	$	—	$	112
Collectively evaluated for impairment		690		5,138		581		857		120		798		762		8,946
Total ending allowance balance	$	794	$	5,144	$	581	$	859	$	120	$	798	$	762	$	9,058
Loans:
Loans individually evaluated for impairment	$	260	$	3,860	$	429	$	2,030	$	84	$	273			$	6,936
Loans collectively evaluated for impairment		49,780		320,899		25,838		60,906		4,865		39,079				501,367
Total ending loans balance	$	50,040	$	324,759	$	26,267	$	62,936	$	4,949	$	39,352			$	508,303
			Real Estate		Real Estate		Real Estate
December 31, 2013	Commercial		Commercial		Construction		Mortgage		Installment		Other		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	150	$	28	$	—	$	50	$	—	$	—	$	—	$	228
Collectively evaluated for impairment		726		5,168		610		792		131		832		814		9,073
Total ending allowance balance	$	876	$	5,196	$	610	$	842	$	131	$	832	$	814	$	9,301
Loans:
Loans individually evaluated for impairment	$	698	$	4,306	$	435	$	1,335	$	96	$	374			$	7,244
Loans collectively evaluated for impairment		46,828		322,325		27,037		61,785		5,280		38,937				502,192
Total ending loans balance	$	47,526	$	326,631	$	27,472	$	63,120	$	5,376	$	39,311			$	509,436

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

	As of March 31, 2014
	Pass		Special Mention		Substandard		Total
Commercial	$	45,352	$	3,989	$	699	$	50,040
Real estate - commercial		313,209		3,089		8,461		324,759
Real estate - construction		25,908		250		109		26,267
Real estate - mortgage		60,850		—		2,086		62,936
Installment		4,872		—		77		4,949
Other		38,757		—		595		39,352
Total	$	488,948	$	7,328	$	12,027	$	508,303
	As of December 31, 2013
	Pass		Special Mention		Substandard		Total
Commercial	$	45,446	$	1,107	$	973	$	47,526
Real estate - commercial		309,828		6,213		10,590		326,631
Real estate - construction		27,101		261		110		27,472
Real estate - mortgage		61,200		—		1,920		63,120
Installment		5,278		—		98		5,376
Other		38,611		—		700		39,311
Total	$	487,464	$	7,581	$	14,391	$	509,436

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the probable incurred losses 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. During the second quarter of 2013, there was a change in the Bank’s method of calculating the historical loss factors applied to loans identified as “homogenous segments” of the loan portfolio as follows: Losses from the past twelve quarters are applied to loan pools based on a “Migration Analysis” method. The method calculates Net Charge Offs (charge offs less corresponding recoveries) and measures them against average balances in loan pools based on the risk grade in effect on charged-off loans four quarters prior to the actual charge off date. The logic behind this four quarter “look back” is to account for management’s estimate of the typical time lapse between the recognition of the problem loan and the recognition of some or all of the loan as uncollectable. In addition, the loss ratios are calculated using “factored” logic which systematically reduces the Net Charge Off value so that charge offs occurring in older periods do not have as much weight as more recent charge offs. Management of the Company believes that, given the recent trends in historical losses and the correlation of those losses with a loans identified risk grade, that incorporation of a migration analysis in the current and future analyses was a prudent refinement of the allowance methodology. In addition, management believes that the decreases in the overall level of the allowance for loan losses over the past several quarters is directionally consistent with the improving credit quality trends of the loan portfolio. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable incurred 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 periodically. 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 and was $146,000, as of March 31, 2014 and December 31, 2013.