Loans

3 Months Ended

Mar. 31, 2013

Loans

Loans

Note 4.  Loans

The following table provides a summary of outstanding loan balances:

	March 31,		December 31,
(dollar amounts in thousands)	2013		2012
Real Estate Secured
Multi-family residential	$	19,747	$	21,467
Residential 1 to 4 family	46,894		41,444
Home equity lines of credit	32,852		31,863
Commercial	391,159		372,592
Farmland	25,936		25,642
Total real estate secured	516,588		493,008
Commercial
Commercial and industrial	120,988		125,340
Agriculture	27,820		21,663
Other	55		61
Total commercial	148,863		147,064
Construction
Single family residential	8,803		8,074
Single family residential - Spec.	847		535
Multi-family	767		778
Commercial	477		10,329
Total construction	10,894		19,716
Land	23,816		24,664
Installment loans to individuals	4,527		4,895
All other loans (including overdrafts)	192		261
Total gross loans	704,880		689,608
Net deferred loan fees	(1,035)		(937)
Allowance for loan losses	17,743		18,118
Total net loans	$	686,102	$	670,553
Loans held for sale	9,138		$	22,549

Loans held for sale are primarily single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans in this category are sold within thirty to sixty days.  Under the terms of the mortgage purchase agreements, the purchaser has the right to require the Company to either repurchase the mortgage or reimburse losses incurred by the purchaser, which are determined to have been directly caused by borrower fraud or misrepresentation.  At March 31, 2013, the Company had five related loans that were originated and sold in 2007, which are in various stages of discovery by the purchaser, including three that they are seeking reimbursement from the Company for losses sustained as a result of borrower fraud and/or misrepresentation.  Although the Company intends to vigorously challenge these and any future claims, the Company has a reserve of $1.1 million for these potential repurchases at March 31, 2013.  While the Company has generally been successful in its defense of these types of claims, it has incurred losses of $0.8 million related to the settlement of six loans since the beginning of 2011.

Concentration of Credit Risk

The Company held loans that were collateralized by various forms of real estate of $551.3 million and 537.4 million at March 31, 2013 and December 31, 2012, respectively.  Such loans are generally made to borrowers located in the counties of San Luis Obispo, Santa Barbara and Ventura.  The Company attempts to reduce its concentration of credit risk by making loans which are diversified by product type.  While Management believes that the collateral presently securing this portfolio is adequate, there can be no assurances that further deterioration in the California real estate market would not expose the Company to significantly greater credit risk.

Loans serviced for others are not included in the accompanying balance sheets.  The unpaid principal balance of loans serviced for others, exclusive of Small Business Administration (“SBA”) loans, was $6.9 million at March 31, 2013 and $7.1 million at December 31, 2012.

From time to time, the Company also originates SBA loans for sale to governmental agencies and institutional investors.  At both March 31, 2013 and December 31, 2012, the unpaid principal balance of SBA loans serviced for others totaled $3.1 million.  The Company did not recognize any gains from the sale of SBA loans in the first three months of 2013 or 2012.

Impaired Loans

The following table provides a summary of the Company’s investment in impaired loans:

(dollar amounts in thousands)			Unpaid		Impaired Loans				Specific
	Recorded		Principal		With Specific		Without Specific		Allowance for
March 31, 2013	Investment (1)		Balance		Allowance		Allowance		Impaired Loans
Real Estate Secured
Residential 1 to 4 family	$	603	$	751	$	603	$	-	$	91
Home equity lines of credit	57		64		57		-		7
Commercial	707		1,413		39		668		3
Commercial
Commercial and industrial	3,857		4,262		3,039		818		2,030
Agriculture	831		1,182		17		814		7
Land	7,317		11,103		6,711		606		4,090
Installment loans to individuals	101		149		101		-		33
Totals	$	13,473	$	18,924	$	10,567	$	2,906	$	6,261

(1) The recorded investment in loans includes the book value of impaired loans as adjusted for the net deferred costs and fees related to the impaired loans.

(dollar amounts in thousands)			Unpaid		Impaired Loans				Specific
	Recorded		Principal		With Specific		Without Specific		Allowance for
December 31, 2012	Investment (1)		Balance		Allowance		Allowance		Impaired Loans
Real Estate Secured
Residential 1 to 4 family	$	831	$	1,035	$	246	$	585	$	18
Home equity lines of credit	58		152		58		-		7
Commercial	933		1,799		42		891		-
Farmland	1,077		1,089		-		1,077		-
Commercial
Commercial and industrial	4,337		4,813		3,410		927		2,172
Agriculture	907		1,235		30		877		13
Construction
Commercial	1,380		2,508		-		1,380		-
Land	7,504		11,307		6,106		1,398		3,829
Installment loans to individuals	285		333		285		-		22
Totals	$	17,312	$	24,271	$	10,177	$	7,135	$	6,061

(1) The recorded investment in loans includes the book value of impaired loans as adjusted for the net deferred costs and fees related to the impaired loans.

The average recorded investment in impaired loans and the interest income recognized on impaired loans was:

	For the Three Months Ended March 31,
	2013				2012
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(dollar amounts in thousands)	Investment		Recognized		Investment		Recognized
Real Estate Secured
Residential 1 to 4 family	$	718	$	-	$	616	$	-
Home equity lines of credit	58		-		373		-
Commercial	818		-		2,722		-
Farmland	539		-		-		-
Commercial
Commercial and industrial	4,103		-		4,429		2
Agriculture	869		-		2,548		-
Construction
Commercial	690		-		-		-
Land	7,449		-		3,898		-
Installment loans to individuals	193		-		61		-
Totals	$	15,437	$	-	$	15,116	$	2

The Company did not record income from the receipt of cash payments related to non-accruing loans during the three month periods ended March 31, 2013 and 2012. If interest on non-accruing loans had been recognized at the original interest rates stipulated in the respective loan agreements, interest income would have increased $0.2 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively.  Interest income recognized on impaired loans in the table above, if any, represents interest the Company recognized on accruing troubled debt restructurings (“TDRs”). Because the loans currently identified as impaired have unique risk characteristics, the Company determined the related valuation allowances for such loans on a loan-by-loan basis.

At March 31, 2013 and December 31, 2012, $10.0 million and $11.6 million, respectively, in loans were classified as TDRs.  Of those balances $1.3 million and $17 thousand were accruing as of March 31, 2013 and December 31, 2012, respectively and the remaining balance of TDRs have been included in non-accruing loans.  In a majority of these loans, the Company has granted concessions regarding interest rates, payment structure and maturity.  During the three months ended March 31, 2013 and 2012, the terms of certain loans were modified as troubled debt restructurings. These term modifications included a combination of a partial charge-off of principal along with extensions of the maturity date at the loan’s original interest rate, which was lower than the current market rate for new debt with similar risk.  The maturity date extensions granted were for periods ranging from 12 months to 18 months.  Forgone interest related to concessions granted on TDRs totaled $45 thousand and $22 thousand for the three months ended March 31, 2013 and 2012, respectively.  As of March 31, 2013, the Company was not committed to lend any additional funds to borrowers whose obligations to the Company were restructured.

The following tables present loan modifications by class which resulted in TDRs:

	For the Three Months Ended March 31, 2013
		Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
(dollar amounts in thousands)	TDRs	Investment		Investment
Trouble Debt Restructurings
Commercial
Commercial and industrial	3	$	91	$	91
Totals	3	$	91	$	91

	For the Three Months Ended March 31, 2012
		Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
(dollar amounts in thousands)	TDRs	Investment		Investment
Trouble Debt Restructurings
Commercial
Commercial and industrial	1	$	65	$	65
Totals	1	$	65	$	65

The following tables present loans by class modified as TDRs, for which there was a payment default within twelve months following the modification:

	For the Three Months Ended March 31, 2013
	Number of
(dollar amounts in thousands)	TDRs	Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Commercial
Commercial and industrial	1	$	49
Totals	1	$	49

	For the Three Months Ended March 31, 2012
	Number of
(dollar amounts in thousands)	TDRs	Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Commercial
Commercial and industrial	1	$	172
Totals	1	$	172

The Bank is actively working with the borrowers to resolve their delinquencies.

Credit Quality

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:

(dollar amounts in thousands)			Credit Risk Grades								Days Past Due
	Total Gross				Special										90+ and Still		Non-		Accruing
March 31, 2013	Loans		Pass		Mention		Substandard		Doubtful		30-59		60-89		Accruing		Accruing		TDR
Real Estate Secured
Multi-family residential	$	19,747	$	19,153	$	-	$	594	$	-	$	-	$	-	$	-	$	-	$	-
Residential 1 to 4 family	46,894		45,126		5		1,763		-		-		-		-		240		364
Home equity lines of credit	32,852		31,393		406		1,053		-		-		-		-		57		-
Commercial	391,159		352,656		12,774		25,729		-		-		-		-		703		-
Farmland	25,936		21,878		3,249		809		-		-		-		-		-		-
Commercial
Commercial and industrial	120,988		108,905		3,610		8,473		-		1,607		-		-		3,655		214
Agriculture	27,820		25,996		105		1,719		-		53		-		-		831		-
Other	55		55		-		-		-		-		-		-		-		-
Construction
Single family residential	8,803		8,803		-		-		-		-		-		-		-		-
Single family residential - Spec.	847		847		-		-		-		-		-		-		-		-
Multi-family	767		767		-		-		-		-		-		-		-		-
Commercial	477		-		-		477		-		-		-		-		-		-
Land	23,816		15,718		140		7,958		-		-		-		-		6,640		754
Installment loans to individuals	4,527		4,164		205		158		-		-		-		-		101		-
All other loans (including overdrafts)	192		192		-		-		-		-		-		-		-		-
Totals	$	704,880	$	635,653	$	20,494	$	48,733	$	-	$	1,660	$	-	$	-	$	12,227	$	1,332

(dollar amounts in thousands)			Credit Risk Grades								Days Past Due
	Total Gross				Special										90+ and Still		Non-		Accruing
December 31, 2012	Loans		Pass		Mention		Substandard		Doubtful		30-59		60-89		Accruing		Accruing		TDR
Real Estate Secured
Multi-family residential	$	21,467	$	20,869	$	-	$	598	$	-	$	-	$	-	$	-	$	-	$	-
Residential 1 to 4 family	41,444		40,234		6		1,204		-		199		-		-		835		-
Home equity lines of credit	31,863		30,808		-		1,055		-		-		47		-		58		-
Commercial	372,592		332,968		14,235		25,389		-		-		-		-		928		-
Farmland	25,642		20,492		3,260		1,890		-		-		-		-		1,077		-
Commercial
Commercial and industrial	125,340		114,126		2,245		8,969		-		446		104		15		4,657		17
Agriculture	21,663		19,771		106		1,786		-		-		-		-		907		-
Other	61		61		-		-		-		-		-		-		-		-
Construction
Single family residential	8,074		8,074		-		-		-		-		-		-		-		-
Single family residential - Spec.	535		535		-		-		-		-		-		-		-		-
Multi-family	778		778		-		-		-		-		-		-		-		-
Commercial	10,329		8,469		-		1,860		-		-		-		-		1,380		-
Land	24,664		12,461		4,124		8,079		-		50		-		-		7,182		-
Installment loans to individuals	4,895		4,365		230		300		-		-		-		-		285		-
All other loans (including overdrafts)	261		261		-		-		-		-		-		-		-		-
Totals	$	689,608	$	614,272	$	24,206	$	51,130	$	-	$	695	$	151	$	15	$	17,309	$	17