Allowance for Loan and Lease Losses

6 Months Ended

Jun. 30, 2013

Provision for Loan and Lease Losses [Abstract]

Note 12 – Allowance for Loan and Lease Losses

The allowance for loan and lease losses, a contra-asset, is established through a provision for loan and lease losses. It is maintained at a level that is considered adequate to absorb probable losses on certain specifically identified loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when cash payments are received subsequent to the charge off. We employ a systematic methodology, consistent with FASB guidelines on loss contingencies and impaired loans, for determining the appropriate level of the allowance for loan and lease losses and adjusting it at least quarterly. Pursuant to that methodology, impaired loans and leases are individually analyzed and a criticized asset action plan is completed specifying the financial status of the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation plan. A specific loss allowance is created for each impaired loan, if necessary. The following tables disclose the unpaid principal balance, recorded investment (including accrued interest), average recorded investment, and interest income recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required such. Included in the valuation allowance for impaired loans shown in the tables below are specific reserves allocated to TDR's, totaling $4.408 million at June 30, 2013 and $4.140 million at December 31, 2012.

Impaired Loans
(dollars in thousands, unaudited)	June 30, 2013
	Unpaid Principal Balance⁽¹⁾		Recorded Investment⁽²⁾		Related Allowance		Average Recorded Investment		Interest Income Recognized⁽³⁾
With an Allowance Recorded
Real Estate:
1-4 family residential construction	$	-	$	-	$	-	$	-	$	-
Other Construction/Land		5,619		5,619		1,290		5,666		46
1-4 Family - closed-end		15,901		15,901		1,338		15,959		209
Equity Lines		496		496		54		497		7
Commercial real estate- owner occupied		5,765		4,473		462		4,500		83
Commercial real estate- non-owner occupied		6,390		6,230		1,301		6,298		182
Farmland		-		-		-		-		-
Total Real Estate		34,171		32,719		4,445		32,920		527
Agriculture		-		-		-		-		-
Commercial and Industrial		1,944		1,908		744		1,984		44
Small Business Administration		2,450		2,255		1,147		2,254		29
Direct finance leases		60		60		30		60		-
Consumer loans		3,969		3,902		784		3,995		90
		42,594		40,844		7,150		41,213		690
With no Related Allowance Recorded
Real Estate:
1-4 family residential construction	$	-	$	-	$	-	$	-	$	-
Other Construction/Land		1,879		1,792		-		2,636		-
1-4 Family - closed-end		6,597		5,874		-		6,209		-
Equity Lines		760		593		-		594		-
Commercial real estate- owner occupied		5,560		5,154		-		5,183		-
Commercial real estate- non-owner occupied		7,832		7,714		-		7,719		-
Farmland		456		456		-		460		-
Total Real Estate		23,084		21,583		-		22,801		-
Agriculture		21		20		-		22		-
Commercial and Industrial		2,463		2,345		-		2,470		24
Small Business Administration		1,100		772		-		773		-
Direct finance leases		-		-		-		-		-
Consumer loans		181		52		-		60		-
		26,849		24,772		-		26,126		24
Total	$	69,443	$	65,616	$	7,150	$	67,339	$	714

⁽¹⁾Contractual principal balance due from customer.

⁽²⁾Principal balance on Company's books, less any direct charge offs.

⁽³⁾Interest income is recognized on performing balances on a regular accrual basis.

	December 31, 2012
	Unpaid Principal Balance⁽¹⁾		Recorded Investment⁽²⁾		Related Allowance		Average Recorded Investment		Interest Income Recognized⁽³⁾
With an Allowance Recorded
Real Estate:
1-4 family residential construction	$	153	$	153	$	23	$	91	$	-
Other Construction/Land		10,313		10,313		1,244		10,755		86
1-4 Family - closed-end		19,218		18,910		955		19,024		401
Equity Lines		1,142		1,142		163		1,144		9
Commercial real estate- owner occupied		5,846		5,585		563		5,666		126
Commercial real estate- non-owner occupied		18,539		17,579		1,230		18,079		481
Farmland		254		254		2		259		-
Total Real Estate		55,465		53,936		4,180		55,018		1,103
Agriculture		28		28		28		28		-
Commercial and Industrial		2,955		2,920		934		3,100		51
Small Business Administration		2,704		2,507		1,038		2,507		53
Direct finance leases		135		135		67		135		-
Consumer loans		4,349		4,344		878		4,493		183
		65,636		63,870		7,125		65,281		1,390
With no Related Allowance Recorded
Real Estate:
1-4 family residential construction	$	-	$	-	$	-	$	-	$	-
Other Construction/Land		2,335		2,335		-		2,346		-
1-4 Family - closed-end		4,312		4,312		-		4,491		-
Equity Lines		116		116		-		155		1
Commercial real estate- owner occupied		4,298		3,365		-		3,540		-
Commercial real estate- non-owner occupied		390		390		-		421		3
Farmland		1,679		1,679		-		1,686		-
Total Real Estate		13,130		12,197		-		12,639		4
Agriculture		1,008		635		-		1,017		-
Commercial and Industrial		735		736		-		740		-
Small Business Administration		1,008		720		-		720		-
Direct finance leases		-		-		-		-		-
Consumer loans		4		4		-		7		-
		15,885		14,292		-		15,123		4
Total	$	81,521	$	78,162	$	7,125	$	80,404	$	1,394

⁽¹⁾Contractual principal balance due from customer.

⁽²⁾Principal balance on Company's books, less any direct charge offs.

⁽³⁾Interest income is recognized on performing balances on a regular accrual basis.

Similar but condensed information is provided in the following table, as of the dates noted:

Impaired Loans
(dollars in thousands, unaudited)
	June 30, 2013		December 31, 2012

Impaired loans without a valuation allowance	$	24,772	$	14,292
Impaired loans with a valuation allowance	$	40,844	$	63,870
Total impaired loans ⁽¹⁾	$	65,616	$	78,162
Valuation allowance related to impaired loans	$	7,150	$	7,125
Total non-accrual loans	$	42,309	$	53,094
Total loans past-due ninety days or more and still accruing	$	2	$	-

⁽¹⁾ Principal balance on Company's books less any direct charge-off

The specific loss allowance for an impaired loan generally represents the difference between the face value of the loan and either the fair value of underlying collateral less estimated disposition costs, or the loan’s net present value as determined by a discounted cash flow analysis. The discounted cash flow approach is typically used to measure impairment on loans for which it is anticipated that repayment will be provided from cash flows other than those generated solely by the disposition or operation of underlying collateral. However, historical loss rates may be used to determine a specific loss allowance if they indicate a higher potential reserve need than the discounted cash flow analysis. Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral value, net of the expected costs of disposition where applicable, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required. At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within 30 to 60 days if a recent appraisal is not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company's licensed staff appraisers may update older appraisals based on current market conditions and property value trends. Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required, and adjusts the specific loss allowance, as necessary, once a new appraisal is received. Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired. Current appraisals were available for 92% of the Company's impaired real estate loan balances at June 30, 2013. Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off against the Company's allowance for loan and lease losses, with the loan then carried at the fair value of the collateral, as appraised, less estimated costs of disposition if applicable. Once a charge-off or write-down is recorded, it will not be restored to the loan balance on the Company's accounting books.

Our methodology also provides that a "general" allowance be established for probable incurred losses inherent in loans and leases that are not impaired. Unimpaired loan balances are segregated by credit quality, and are then evaluated in pools with common characteristics. At the present time, pools are based on the same segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other measurable information, the classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on management's judgment and experience. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the condition of the agricultural industry and other key industries in the Central San Joaquin Valley. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was $5.0 million at June 30, 2013.

During the three months ended June 30, 2013, there were no material changes to the methodology used to determine our allowance for loan and lease losses. As we add new products and expand our geographic coverage, and as the economic environment changes, we expect to continue to enhance our methodology to keep pace with the size and complexity of the loan and lease portfolio and respond to pressures created by external forces. We engage outside firms on a regular basis to assess our methodology and perform independent credit reviews of our loan and lease portfolio. In addition, the Company's external auditors, the FDIC, and the California DFI review the allowance for loan and lease losses as an integral part of their audit and examination processes. Management believes that the current methodology is appropriate given our size and level of complexity. The tables that follow detail the activity in the allowance for loan and lease losses for the periods noted: