Loans Held for Investment

9 Months Ended

Sep. 30, 2011

Loans Held for Investment

Loans Held for Investment

Note 4 — Loans Held for Investment

The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:

	September 30, 2011			December 31, 2010			September 30, 2010
	(in thousands)
Real estate loans:
Multi-family	$	211,514		$	243,584		$	251,163
Commercial non-owner occupied	164,797			130,525			130,428
One-to-four family (1)	62,638			20,318			19,668
Land	8,496			—			—
Business loans:
Commercial owner occupied (2)	164,268			113,025			105,415
Commercial and industrial	117,078			54,687			44,580
SBA	4,870			4,088			3,482
Other loans	2,215			1,417			3,520
Total gross loans (3)	735,876			567,644			558,256
Total gross loans held for investment	735,876			567,644			558,256
Less:
Deferred loan origination costs/(fees) and premiums/(discounts), net	(1,402		)	(3,227		)	(5,802		)
Allowance for loan losses	(8,522		)	(8,879		)	(9,170		)
Loans held for investment, net	$	725,952		$	555,538		$	543,284

(1) Includes second trust deeds.

(2) Majority secured by real estate.

(3) Total gross loans for September 30, 2011 is net of the mark-to-market discount on Canyon National loans of $9.3 million.

From time to time, we may purchase or sell loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.

The Company grants residential and commercial loans held for investment to customers located primarily in Southern California. Consequently, the underlying collateral for our loans and a borrower’s ability to repay may be impacted unfavorably by adverse changes in the economy and real estate market in the region.

Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of unimpaired capital plus surplus and likewise in excess of 15% for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $23.1 million for secured loans and $13.8 million for unsecured loans at September 30, 2011.  At September 30, 2011, the Bank’s largest aggregate outstanding balance of loans to one borrower was $13.3 million of secured credit.

Purchase Credit Impaired

The following table provides a summary of the Company’s investment in purchase credit impaired loans, acquired from Canyon National, as of the period indicated:

	September 30, 2011
	(in thousands)
Real estate loans:
Commercial non-owner occupied	$	1,085
One-to-four family	1,346
Land	2,414
Business loans:
Commercial owner occupied	2,450
Commercial and industrial	1,736
Total purchase credit impaired	$	9,031

On the acquisition date, the amount by which the undiscounted expected cash flows of the purchased credit impaired loans exceed the estimated fair value of the loan is the “accretable yield”. The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased credit impaired loan.

The following table summarizes the accretable yield on the purchased credit impaired for the nine months ended September 30, 2011:

	Nine Months Ended
	September 30, 2011
	(in thousands)
Balance at the beginning of period	$	—
Accretable yield at acquisition	4,692
Accretion	(418		)
Disposals and other	(1,141		)
Change in accretable yield	615
Balance at the end of period	3,748

Impaired Loans

The following table provides a summary of the Company’s investment in impaired loans as of and for the quarter ended September 30, 2011, and as of and for the year ended December 31, 2010:

					Impaired Loans
	Recorded Investment		Unpaid Principal Balance		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans		Average Recorded Investment		Interest Income Recognized
	(in thousands)
September 30, 2011
Real estate loans:
Multi-family	$	1,433	$	1,454	$	—	$	1,433	$	—	$	2,710	$	54
Commercial non-owner occupied	2,457		2,552		—		2,457		—		2,684		109
One-to-four family	1,218		1,785		—		1,218		—		2,064		24
Construction	—		—		—		—		—		206		—
Land	198		475		—		198		—		1,759		3
Business loans:
Commercial owner occupied	2,760		3,453		—		2,760		—		4,360		61
Commercial and industrial	1,983		5,339		—		1,983		—		2,886		76
SBA	725		1,484		—		725		—		934		67
Other loans	—		—		—		—		—		9		—
Totals	$	10,774	$	16,542	$	—	$	10,774	$	—	$	17,610	$	394

					Impaired Loans
	Recorded Investment		Unpaid Principal Balance		With Specific Allowance		Without Specific Allowance		Specific Allowance for Impaired Loans		Average Recorded Investment		Interest Income Recognized
	(in thousands)
December 31, 2010
Real estate loans:
Multi-family	$	1,156	$	1,156	$	—	$	1,156	$	—	$	2,114	$	94
Commercial non-owner occupied	2,068		2,068		465		1,603		47		1,949		127
One-to-four family	223		224		—		223		—		249		15
Business loans:
Commercial owner occupied	2,225		2,342		—		2,225		—		1,332		—
Commercial and industrial	54		169		—		54		—		270		14
SBA	1,092		1,751		—		1,092		—		970		14
Totals	$	6,818	$	7,710	$	465	$	6,353	$	47	$	6,882	$	264

The following table summarizes impaired loan balances at the period indicated below:

	September 30, 2010
	(in thousands)
Impaired loans without a valuation allowance	$	6,441
Imparied loans with a valuation allowance	$	174
Valuation allowance related to impaired loans	$	54
Average recorded investment in impaired loans for the nine months ended September 30, 2010	$	6,913

The Company considers a loan to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or it is determined that the likelihood of the Company receiving all scheduled payments, including interest, when due is remote. The Company has no commitments to lend additional funds to debtors whose loans have been impaired.

The Company reviews loans for impairment when the loan is classified as substandard or worse, delinquent 90 days, or determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted a troubled debt restructurings (“TDRs”). Measurement of impairment is based on the loan’s expected future cash flows discounted at the loan’s effective interest rate, measured by reference to an observable market value, if one exists, or the fair value of the collateral if the loan is deemed collateral dependent. All loans are generally charged-off at such time the loan is classified as a loss. Valuation allowances are determined on a loan-by-loan basis or by aggregating loans with similar risk characteristics.

The following table provides additional detail on the components of impaired loans at the period end as indicated below.

	September 30, 2011		December 31, 2010		September 30, 2010
	(in thousands)
Nonaccruing loans	$	9,357	$	3,277	$	3,037
Accruing loans	1,417		3,541		3,578
Total impaired loans	$	10,774	$	6,818	$	6,615

When loans are placed on nonaccrual status all accrued interest is reversed from earnings.  Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance.  If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only.  Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least nine months of sustained repayment performance since the loan was placed on nonaccrual.

The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest.  The Company had impaired loans on nonaccrual status at September 30, 2011 of $9.4 million, December 31, 2010 of $3.3 million, and September 30, 2010 of $3.1 million.  At September 30, 2011, the Company had $9.0 million of purchased credit impaired loans acquired from Canyon National, of which $3.0 million were placed on nonaccrual status.  The Company had no loans 90 days or more past due and still accruing at September 30, 2011, December 31, 2010 or September 30, 2010.

The Company had an immaterial amount of TDRs  related to three SBA loans which were all completed prior to 2011.

Concentration of Credit Risk

The Company’s loan portfolio was collateralized by various forms of real estate and business assets located principally in Southern California.  The Company’s loan portfolio contains concentrations of credit in multi-family real estate, commercial non-owner occupied real estate and commercial owner occupied business loans.  The Company maintains policies approved by the Company’s Board of Directors (the “Board”) that address these concentrations and continues to diversify its loan portfolio through loan originations, purchases and sales to meet approved concentration levels.  While management believes that the collateral presently securing these loans is adequate, there can be no assurances that further significant deterioration in the California real estate market and economy would not expose the Company to significantly greater credit risk.

Credit Quality and Credit Risk Management

The Company’s credit quality is maintained and credit risk managed in two distinct areas.  The first is the loan origination process, wherein the Bank underwrites credit quality and chooses which risks it is willing to accept.  The second is in the ongoing oversight of the loan portfolio, where existing credit risk is measured and monitored, and where performance issues are dealt with in a timely and comprehensive fashion.

The Company maintains a comprehensive credit policy which sets forth minimum and maximum tolerances for key elements of loan risk.  The policy identifies and sets forth specific guidelines for analyzing each of the loan products the Company offers from both an individual and portfolio wide basis.  The credit policy is reviewed annually by the Board of Directors.  Seasoned underwriters ensure all key risk factors are analyzed with nearly all underwriting including a comprehensive global cash flow analysis.  The credit approval process mandates multiple-signature approval by either the management or Board credit committee for every loan which requires any subjective credit analysis.

Credit risk is managed within the loan portfolio by the Company’s Portfolio Management department based on a comprehensive credit and investment review policy.  This policy requires a program of financial data collection and analysis, comprehensive loan reviews, property and/or business inspections and monitoring of portfolio concentrations and trends.  The Portfolio Management department also monitors asset-based lines of credit, loan covenants and other conditions associated with the Company’s business loans as a means to help identify potential credit risk.  Individual loans, excluding the homogeneous loan portfolio, are reviewed at least biennially, or more frequently, if deemed necessary, and includes the assignment of a risk grade.

Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful and Loss classifications as such classifications are defined by the regulatory agencies.  The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio.  Risk grades are reviewed regularly by the Company’s Credit and Investment Review committee, and are reviewed annually by an independent third-party, as well as by regulatory agencies during scheduled examinations.

The following provides brief definitions for risk grades assigned to loans in the portfolio:

·      Pass — Pass credits are well protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Such credits exhibit few weaknesses, if any, but may include credits with exposure to certain factors that may adversely impact the credit if they materialize.  The Company has established six subcategories within the pass grade to stratify risk associated with pass loans.  The Company maintains a subset of pass credits designated as “watch” loans which, for any of a variety of reasons, requires close monitoring.

·      Special Mention — Loans graded special mention exhibit potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the institution’s credit position.  Special mention credits are not considered as part of the classified extensions of credit category and do not expose the Company to sufficient risk to warrant classification.

·      Substandard — Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Extensions of credit classified as substandard have a well-defined weakness or weaknesses that jeopardizes the orderly payment of the debt.    Substandard credits are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.

·      Doubtful — Doubtful credits have all the weaknesses inherent in substandard credits, 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 that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined.

The Portfolio Management department also manages loan performance risks, collections, workouts, bankruptcies and foreclosures.  Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credit when they are identified.  Collection efforts are commenced immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss.  When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.

When a loan is graded as special mention or worse, the Company obtains an updated valuation of the underlying collateral.  If the credit in question is also identified as impaired, a valuation allowance, if necessary, is established against such loan or a loss is recognized by a charge to the allowance for loan losses if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable.  The Company typically continues to obtain updated valuations of underlying collateral for special mention and classified loans on an annual basis in order to have the most current indication of fair value.  Once a loan is identified as impaired, an analysis of the underlying collateral is performed at least quarterly, and corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off.

The following tables stratifies the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio as of the periods indicated:

	Credit Risk Grades (1)
	Pass		Special Mention		Substandard		Total Gross Loans
	(in thousands)
September 30, 2011
Real estate loans:
Multi-family	$	193,593	$	13,835	$	4,086	$	211,514
Commercial non-owner occupied	158,863		566		5,368		164,797
One-to-four family	57,661		1,948		3,029		62,638
Construction	—		—		—		—
Land	6,018		—		2,478		8,496
Business loans:
Commercial owner occupied	150,986		5,722		7,560		164,268
Commercial and industrial	111,337		1,478		4,263		117,078
SBA	4,710		—		160		4,870
Other loans	2,183		—		32		2,215
Totals	$	685,351	$	23,549	$	26,976	$	735,876

(1) Amounts are net of the mark-to-market discount on Canyon National loans of $10.5 million.

	Credit Risk Grades
	Pass		Special Mention		Substandard		Total Gross Loans
	(in thousands)
December 31, 2010
Real estate loans:
Multi-family	$	226,270	$	13,161	$	4,153	$	243,584
Commercial non-owner occupied	124,513		577		5,435		130,525
One-to-four family	19,823		—		495		20,318
Business loans:
Commercial owner occupied	104,475		4,074		4,476		113,025
Commercial and industrial	53,188		360		1,139		54,687
SBA	2,956		—		1,132		4,088
Other loans	1,417		—		—		1,417
Totals	$	532,642	$	18,172	$	16,830	$	567,644

	Credit Risk Grades
	Pass		Special Mention		Substandard		Total Gross Loans
	(in thousands)
September 30, 2010
Real estate loans:
Multi-family	$	232,352	$	14,958	$	3,853	$	251,163
Commercial non-owner occupied	123,442		580		6,406		130,428
One-to-four family	19,177		—		491		19,668
Construction	—		—		—		—
Land	—		—		—		—
Business loans:							—
Commercial owner occupied	96,828		3,579		5,008		105,415
Commercial and industrial	42,627		1,367		586		44,580
SBA	2,520		—		962		3,482
Other loans	3,520		—		—		3,520
Totals	$	520,466	$	20,484	$	17,306	$	558,256

	Days Past Due (1)
							Total		Non-
	30-59		60-89		90+		Past Due		Accruing
	(in thousands)
September 30, 2011
Real estate loans:
Multi-family	$	—	$	—	$	—	$	—	$	300
Commercial non-owner occupied	214		418		1,055		1,687		2,457
One-to-four family	615		320		1,018		1,953		1,018
Land	8		—		198		206		198
Business loans:							—
Commercial owner occupied	417		—		1,853		2,270		2,760
Commercial and industrial	1,898		158		1,983		4,039		1,983
SBA	—		41		562		603		641
Other loans	—		—		—		—		—
Totals	$	3,152	$	937	$	6,669	$	10,758	$	9,357

(1)   Amounts are net of the mark-to-market discount on Canyon National loans.

	Days Past Due
							Total		Non-
	30-59		60-89		90+		Past Due		Accruing
	(in thousands)
December 31, 2010
Real estate loans:
Commercial non-owner occupied	$	617	$	—	$	—	$	617	$	—
One-to-four family	402		17		20		439		26
Business loans:							—
Commercial owner occupied	184		—		2,225		2,409		2,225
Commercial and industrial	—		—		—		—		54
SBA	—		—		846		846		971
Totals	$	1,203	$	17	$	3,091	$	4,311	$	3,277

	Days Past Due
							Total		Non-
	30-59		60-89		90+		Past Due		Accruing
	(in thousands)
September 30, 2010
Real estate loans:
Multi-family	$	327	$	—	$	—	$	327	$	—
Commercial non-owner occupied	—		—		—		—		—
One-to-four family	58		—		31		89		48
Business loans:
Commercial owner occupied	—		—		2,239		2,239		2,239
Commercial and industrial	45		—		6		51		6
SBA	136		—		705		841		785
Totals	$	566	$	—	$	2,981	$	3,547	$	3,078