Loans Held for Investment

12 Months Ended

Dec. 31, 2011

Loans Held for Investment

Loans Held for Investment

4. Loans Held for Investment

Loans held for investment consisted of the following at December 31:

	2011			2010
	(in thousands)
Real estate loans:
Multi-family	$	193,830		$	243,584
Commercial non-owner occupied	164,341			130,525
One-to-four family	60,027			20,318
Land	6,438			—
Business loans:
Commercial owner occupied	152,299			113,025
Commercial and industrial	86,684			42,077
Warehouse facilities	67,518			12,610
SBA	4,727			4,088
Other loans	3,390			1,417
Total gross loans	739,254			567,644
Plus (less):
Deferred loan origination costs-net	(665		)	(3,227		)
Allowance for estimated loan losses	(8,522		)	(8,879		)
Loans held for investment, net	$	730,067		$	555,538

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 $24.5 million for secured loans and $14.7 million for unsecured loans at December 31, 2011.  At December 31, 2011, the Bank’s largest aggregate outstanding balance of loans-to-one borrower was $22.0 million of secured credit.

Loans serviced for others are not included in the accompanying balance sheets.  The unpaid principal balance of loans and participations serviced for others were $26.5 million at December 31, 2011 and $33.2 million at December 31, 2010, for which we have no capitalized servicing rights.

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 Board approved policies 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.

Impaired Loans

The following tables provide a summary of the Company’s investment in impaired loans as of and for the periods indicated:

					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, 2011
Real estate loans:
Multi-family	$	1,423	$	1,450	$	—	$	1,423	$	—	$	2,309	$	88
Commercial non-owner occupied	1,495		1,592		—		1,495		—		2,283		198
One-to-four family	521		705		—		521		—		311		47
Land	—		—		—		—		—		11		1
Business loans:
Commercial owner occupied	1,641		1,771		—		1,641		—		1,635		64
Commercial and industrial	1,138		1,321		—		1,138		—		373		62
SBA	773		2,427		—		773		—		887		68
Other loans	—		—		—		—		—		2		—
Totals	$	6,991	$	9,266	$	—	$	6,991	$	—	$	7,811	$	528

					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 investor	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		—		1,331		—
Commercial and industrial	54		169		—		54		—		270		14
SBA	1,092		1,751		—		1,092		—		969		14
Totals	$	6,818	$	7,710	$	465	$	6,353	$	47	$	6,882	$	264

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 restructure.  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 summarizes impaired loan balances for prior periods as presented below:

	December 31,
	2009
	(in thousands)
Nonaccruing loans	$	8,191
Loans 90 days or more past due	5,466
Total impaired loans	$	13,657
Impaired loans without a valuation allowance	$	13,041
Impaired loans with a valuation allowance	616
Valuation allowance related to impaired loans	179
Average recorded investment in impaired loans	$	11,228

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 six 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 loans on nonaccrual status at December 31, 2011 of $6.1 million, 2010 of $3.3 million, and 2009 of $10.0 million.   If such loans had been performing in accordance with their original terms, the Company would have recorded additional loan interest income of $413,000 in 2011, $600,000 in 2010, and $781,000 in 2009.  The Company did not record income from the receipt of cash payments related to nonaccruing loans during the years ended December 31, 2011, 2010 and 2009.  The Company had no loans 90 day or more past due and still accruing at December 31, 2011 or 2010.  The Company has less than $351,000 in troubled debt restructures at December 31, 2011.

Credit Quality and Credit Risk

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 no less than 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 in order to ensure that the protections built into the loan approvals serve as the early warning and risk mitigation mechanisms.  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 scrutinized by annual independent loan reviews performed by a 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, require the Company’s closer attention.  Watch credits are more heavily scrutinized than other pass credits so that any potential weaknesses that may develop in such credits are more quickly identified, thereby serving to mitigate potential losses.

·      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 so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  (The term “liquidation” as used here refers to the orderly repayment of the debt and not to a forced sale of the loan or its underlying collateral.)  They 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.

·      Loss - Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted.  Amounts classified as loss are promptly charged off.

The Portfolio Management department also manages loan performance risks, handling collections, workouts, bankruptcies and foreclosures.  These risks are controlled by moving quickly and assertively when problems are identified.  Collection efforts are immediate upon non-payment, and the portfolio managers seek to determine right away 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 prosecute the foreclosure process, including any associated judicial legal actions.  When appropriate, the Company’s General Counsel or outside legal advisors are consulted to ensure that legal risks are appropriately addressed in handling loan performance issues.

When a loan is graded as watch 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 watch, special mention and classified loans on an annual or biennial 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 stratify 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
			Special				Total Gross
	Pass		Mention		Substandard		Loans
December 31, 2011	(in thousands)
Real estate loans:
Multi-family	$	176,477	$	13,286	$	4,067	$	193,830
Commercial non-owner occupied	160,051		676		3,614		164,341
One-to-four family	57,685		—		2,342		60,027
Land	6,386		—		52		6,438
Business loans:
Commercial owner occupied	138,975		5,689		7,635		152,299
Commercial and industrial	83,441		1,046		2,197		86,684
Warehouse facilities	67,518		—		—		67,518
SBA	4,548		—		179		4,727
Other loans	3,352		—		38		3,390
Totals	$	698,433	$	20,697	$	20,124	$	739,254

	Credit Risk Grades
			Special				Total Gross
	Pass		Mention		Substandard		Loans
December 31, 2010	(in thousands)
Real estate loans:
Multi-family	$	226,270	$	13,161	$	4,153	$	243,584
Commercial investor	124,513		577		5,435		130,525
One-to-four family	19,823		—		495		20,318
Construction	—		—		—		—
Land	—		—		—		—
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

			Days Past Due
											Non-
	Current		30-59		60-89		90+		Total		Accruing
December 31, 2011	(in thousands)
Real estate loans:
Multi-family	$	193,830	$	—	$	—	$	—	$	193,830	$	293
Commercial non-owner occupied	162,663		434		—		1,244		164,341		1,495
One-to-four family	59,503		201		—		323		60,027		323
Land	5,769		—		617		52		6,438		52
Business loans:
Commercial owner occupied	151,380		—		—		919		152,299		2,053
Commercial and industrial	85,615		12		—		1,057		86,684		1,177
Warehouse facilities	67,518								67,518		—
SBA	3,900		49		113		665		4,727		700
Other loans	3,386		3		1		—		3,390		—
Totals	$	733,564	$	699	$	731	$	4,260	$	739,254	$	6,093

			Days Past Due
											Non-
	Current		30-59		60-89		90+		Total		Accruing
December 31, 2010
Real estate loans:
Multi-family	$	243,584	$	—	$	—	$	—	$	243,584	$	—
Commercial investor	129,908		617		—		—		130,525		—
One-to-four family	19,879		402		17		20		20,318		26
Business loans:
Commercial owner occupied	110,616		184		—		2,225		113,025		2,225
Commercial and industrial	54,687		—		—		—		54,687		54
SBA	3,242		—		—		846		4,088		971
Other loans	1,417		—		—		—		1,417		—
Totals	$	563,333	$	1,203	$	17	$	3,091	$	567,644	$	3,277