NOTE 5 — LOANS

     The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect issues such as regulatory and organizational structure change, strategic planning revisions, concentrations of credit, loan delinquencies and non-performing loans, problem loans, and policy adjustments.

     Real estate loans are subject to loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and industrial loans consist of commercial term loans, commercial lines of credit, and SBA loans. Consumer loans consist of auto loans, credit cards, personal loans, and home equity lines of credit. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well as problem loans to prevent further deterioration.

     Concentrations of Credit: The majority of the Bank’s loan portfolio consists of commercial real estate loans and commercial and industrial loans. The Bank has been diversifying and monitoring commercial real estate loans based on property types, tightening underwriting standards, and portfolio liquidity and management, and has not exceeded certain specified limits set forth in the Bank’s loan policy. Most of the Bank’s lending activity occurs within Southern California.

Loans Receivable

     Loans receivable consisted of the following as of the dates indicated:

		June 30,				December 31,
		2011				2010
		(In Thousands)
Real Estate Loans:
Commercial Property		$	688,842			$	729,222
Construction			40,684				60,995
Residential Property			58,059				62,645
Total Real Estate Loans			787,585				852,862
Commercial and Industrial Loans: (1)
Commercial Term			1,032,274				1,118,999
SBA			105,049				105,688
Commercial Lines of Credit			50,636				59,056
International			46,560				44,167
Total Commercial and Industrial Loans			1,234,519				1,327,910
Consumer Loans			46,500				50,300
Total Gross Loans			2,068,604				2,231,072
Allowance for Loans Losses			(109,029	)			(146,059	)
Deferred Loan Fees			(11	)			(566	)
Loans Receivable, Net		$	1,959,564			$	2,084,447

     Accrued interest on loans receivable amounted to $6.0 million and $6.5 million at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, loans receivable totaling $904.5 million and $1.03 billion, respectively, was pledged to secure borrowings from the FHLB and the Fed Discount Window.

     The following table details the information on the purchases, sales and reclassification of loans receivable to loans held for sale by portfolio segment for the three months ended June 30, 2011 and 2010.

						Commercial
		Real Estate				and Industrial				Consumer				Total
						(Dollars in Thousands)
June 30, 2011
Loans Held for Sale:
Beginning Balance		$	3,513			$	44,136			$	—			$	47,649
Origination of Loans Held for Sale			—				1,771				—				1,771
Reclassification from Loans Receivable to Loans Held for sale			266				9,567				—				9,833
Sales of Loans Held for sale			(2,664	)			(11,557	)			—				(14,221	)
Principal Payoffs and Amortization			(8	)			(237	)			—				(245	)
Valuation Adjustments			(133	)			(549	)			—				(682	)
Ending Balance		$	974			$	43,131			$	—			$	44,105
June 30, 2010
Loans Held for Sale:
Beginning Balance		$	—			$	10,104			$	—			$	10,104
Origination of Loans Held for Sale			—				462				—				462
Reclassification from Loans Receivable to Loans Held for sale			22,584				60,500				—				83,084
Sales of Loans Held for sale			(7,731	)			(55,257	)			—				(62,988	)
Principal Payoffs and Amortization			—				(118	)			—				(118	)
Valuation Adjustments			—				—				—				—
Ending Balance		$	14,853			$	15,691			$	—			$	30,544

     For the three months ended June 30, 2011, loans receivable of $9.8 million were reclassified as loans held for sale, and loans held for sale of $14.2 million were sold. For the same period ended June 30, 2010, loans receivable of $83.1 million were reclassified as loans held for sale, and loans held for sale of $63.0 million were sold. The net proceeds from the sale of non-performing loans were $18.0 million and $57.4 million for the three months ended June 30, 2011 and 2010, respectively. There were no purchases of loans receivable for the three months ended June 30, 2011 and 2010.

     The following table details the information on the purchases, sales and reclassification of loans receivable to loans held for sale by portfolio segment for the six months ended June 30, 2011 and 2010.

						Commercial
		Real Estate				and Industrial				Consumer				Total
						(Dollars in Thousands)
June 30, 2011
Loans Held for Sale:
Beginning Balance		$	3,666			$	32,954			$	—			$	36,620
Origination of Loans Held for Sale			—				16,056				—				16,056
Reclassification from Loans Receivable to Loans Held for sale			18,175				19,631				—				37,806
Sales of Loans Held for sale			(20,653	)			(22,140	)			—				(42,793	)
Principal Payoffs and Amortization			(14	)			(667	)			—				(681	)
Valuation Adjustments			(200	)			(2,703	)			—				(2,903	)
Ending Balance		$	974			$	43,131			$	—			$	44,105
June 30, 2010
Loans Held for Sale:
Beginning Balance		$	—			$	5,010			$	—			$	5,010
Origination of Loans Held for Sale			—				1,782				—				1,782
Reclassification from Loans Receivable to Loans Held for sale			35,401				66,219				—				101,620
Sales of Loans Held for sale			(20,548	)			(57,137	)			—				(77,685	)
Principal Payoffs and Amortization			—				(183	)			—				(183	)
Valuation Adjustments			—				—				—				—
Ending Balance		$	14,853			$	15,691			$	—			$	30,544

     For the six months ended June 30, 2011, loans receivable of $37.8 million were reclassified as loans held for sale, and loans held for sale of $42.8 million were sold. For the same period ended June 30, 2010, loans receivable of $101.6 million were reclassified as loans held for sale and loans held for sale of $77.7 million were sold. The net proceeds from the sale of non-performing loans were $45.9 million and $73.6 million for the six months ended June 30, 2011 and 2010, respectively. There were no purchases of loans receivable for the six months ended June 30, 2011 and 2010.

Allowance for Loan Losses and Allowance for Off-Balance Sheet Items

     Activity in the allowance for loan losses and off-balance sheet items was as follows for the periods indicated:

		As of and for the												As of and for the
		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
		2011				2011				2010				2011				2010
										(In Thousands)
Allowance for Loan Losses:
Balance at Beginning of Period		$	125,780			$	146,059			$	177,820			$	146,059			$	144,996
Actual Charge-Offs			(20,652	)			(25,181	)			(40,718	)			(45,833	)			(70,832	)
Recoveries on Loans Previously Charged Off			4,151				3,626				1,772				7,777				5,493
Net Loan Charge-Offs			(16,501	)			(21,555	)			(38,946	)			(38,056	)			(65,339	)
Provision Charged to Operating Expenses			(250	)			1,276				37,793				1,026				97,010
Balance at End of Period		$	109,029			$	125,780			$	176,667			$	109,029			$	176,667
Allowance for Off-Balance Sheet Items:
Balance at Beginning of Period		$	2,141			$	3,417			$	2,655			$	3,417			$	3,876
Provision Charged to Operating Expenses			250				(1,276	)			(293	)			(1,026	)			(1,514	)
Balance at End of Period		$	2,391			$	2,141			$	2,362			$	2,391			$	2,362

     The following table details the information on the allowance for loan losses by portfolio segment for the three months ended June 30, 2011 and 2010.

						Commercial
		Real Estate				and Industrial				Consumer				Unallocated				Total
		(Dollars in Thousands)
June 30, 2011
Allowance for Loan Losses:
Beginning Balance		$	25,884			$	93,878			$	1,732			$	4,286			$	125,780
Charge-Offs			5,591				14,741				320				—				20,652
Recoveries on Loans Previously Charged Off			2,223				1,915				13				—				4,151
Provision			1,599				1,793				162				(3,804	)			(250	)
Ending Balance		$	24,115			$	82,845			$	1,587			$	482			$	109,029
Ending Balance: Individually Evaluated for Impairment		$	3,324			$	26,149			$	223			$	—			$	29,696
Ending Balance: Collectively Evaluated for Impairment		$	20,791			$	56,696			$	1,364			$	482			$	79,333
Loans Receivable:
Ending Balance		$	787,585			$	1,234,519			$	46,500			$	—			$	2,068,604
Ending Balance: Individually Evaluated for Impairment		$	78,065			$	114,560			$	870			$	—			$	193,495
Ending Balance: Collectively Evaluated for Impairment		$	709,520			$	1,119,959			$	45,630			$	—			$	1,875,109
June 30, 2010
Allowance for Loan Losses:
Beginning Balance		$	31,597			$	143,994			$	2,229			$	—			$	177,820
Charge-Offs			12,412				27,951				355				—				40,718
Recoveries on Loans Previously Charged Off			162				1,530				80				—				1,772
Provision			12,698				22,931				244				1,920				37,793
Ending Balance		$	32,045			$	140,504			$	2,198			$	1,920			$	176,667
Ending Balance: Individually Evaluated for Impairment		$	3,963			$	24,495			$	23			$	—			$	28,481
Ending Balance: Collectively Evaluated for Impairment		$	28,082			$	116,009			$	2,175			$	1,920			$	148,186
Loans Receivable:
Ending Balance		$	913,966			$	1,503,948			$	55,790			$	—			$	2,473,704
Ending Balance: Individually Evaluated for Impairment		$	100,854			$	161,138			$	388			$	—			$	262,380
Ending Balance: Collectively Evaluated for Impairment		$	813,112			$	1,342,810			$	55,402			$	—			$	2,211,324

     The following table details the information on the allowance for loan losses by portfolio segment for the six months ended June 30, 2011 and 2010.

						Commercial
		Real Estate				and Industrial				Consumer				Unallocated				Total
		(Dollars in Thousands)
June 30, 2011
Allowance for Loan Losses:
Beginning Balance		$	32,766			$	108,986			$	2,079			$	2,228			$	146,059
Charge-Offs			12,644				32,693				496				—				45,833
Recoveries on Loans Previously Charged Off			2,744				5,011				22				—				7,777
Provision			1,249				1,541				(18	)			(1,746	)			1,026
Ending Balance		$	24,115			$	82,845			$	1,587			$	482			$	109,029
Ending Balance: Individually Evaluated for Impairment		$	3,324			$	26,149			$	223			$	—			$	29,696
Ending Balance: Collectively Evaluated for Impairment		$	20,791			$	56,696			$	1,364			$	482			$	79,333
Loans Receivable:
Ending Balance		$	787,585			$	1,234,519			$	46,500			$	—			$	2,068,604
Ending Balance: Individually Evaluated for Impairment		$	78,065			$	114,560			$	870			$	—			$	193,495
Ending Balance: Collectively Evaluated for Impairment		$	709,520			$	1,119,959			$	45,630			$	—			$	1,875,109
June 30, 2010
Allowance for Loan Losses:
Beginning Balance		$	30,081			$	112,225			$	2,690			$	—			$	144,996
Charge-Offs			17,817				52,037				978				—				70,832
Recoveries on Loans Previously Charged Off			1,865				3,507				121				—				5,493
Provision			17,916				76,809				365				1,920				97,010
Ending Balance		$	32,045			$	140,504			$	2,198			$	1,920			$	176,667
Ending Balance: Individually Evaluated for Impairment		$	3,963			$	24,495			$	23			$	—			$	28,481
Ending Balance: Collectively Evaluated for Impairment		$	28,082			$	116,009			$	2,175			$	1,920			$	148,186
Loans Receivable:
Ending Balance		$	913,966			$	1,503,948			$	55,790			$	—			$	2,473,704
Ending Balance: Individually Evaluated for Impairment		$	100,854			$	161,138			$	388			$	—			$	262,380
Ending Balance: Collectively Evaluated for Impairment		$	813,112			$	1,342,810			$	55,402			$	—			$	2,211,324

     Credit Quality Indicators

     As part of the on-going monitoring of the credit quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from 0 to 8) for each and every loan in our loan portfolio.

     Pass-grade (0 to 4) loans are reviewed for reclassification on an annual basis, while criticized (5) and classified (6 and 7) loans are reviewed semi-annually. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

     Pass: These loans, risk rated 0 to 4, are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential for defined weaknesses as defined under “Special Mention” (5), “Substandard” (6) or “Doubtful” (7). This is the strongest level of the Bank’s loan grading system. It incorporates all performing loans with no credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans. Following are sub categories within the Pass grade:

          Pass 0: Secured in full by cash or cash equivalents.

          Pass 1: A very strong, well-structured credit relationship with an established borrower.

The relationship should be supported by audited financial statements indicating cash flow, well in excess of debt service requirements, excellent liquidity, and very strong capital.

Pass 2: These loans require a well-structured credit that may not be as seasoned or as high quality as grade 1. Capital, liquidity, debt service capacity, and collateral coverage must all be well above average. This category includes individuals with substantial net worth supported by liquid assets and strong income.

Pass 3: Loans or commitments to borrowers exhibiting a fully acceptable credit risk. These borrowers should have sound balance sheet proportions and significant cash flow coverage, although they may be somewhat more leveraged and exhibit greater fluctuations in earning and financing but generally would be considered very attractive to the Bank as a borrower. The borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans which are designated this grade must have characteristics that place them well above the minimum underwriting requirements. Asset-based borrowers assigned this grade must exhibit extremely favorable leverage and cash flow characteristics and consistently demonstrate a high level of unused borrowing capacity

Pass 4: Loans or commitments to borrowers exhibiting either somewhat weaker balance sheet proportions or positive, but inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result of this, the Bank may have secured its exposure in an effort to mitigate the risk. If so, the collateral taken should provide an unquestionable ability to repay the indebtedness in full through liquidation, if necessary. Cash flows should be adequate to cover debt service and fixed obligations, although there may be a question about the borrower’s ability to provide alternative sources of funds in emergencies. Better quality real estate and asset-based borrowers who fully comply with all underwriting standards and are performing according to projections would be assigned this grade.

     Special Mention or 5: A Special Mention credit has potential weaknesses that deserve management’s close attention, as the borrower is exhibiting deteriorating trends that, if not corrected, could jeopardize repayment of the debt and result in a “Substandard” (6) grade. Credits which have significant actual, not potential, weaknesses are assigned lower grades than this grade.

     Substandard or 6: A Substandard credit has a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. A credit graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.

     Doubtful or 7: A Doubtful credit is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events that may work to strengthen the credit, and therefore the amount or timing of a possible loss cannot be determined at the current time.

     Loss or 8: Loans classified Loss are considered uncollectible and of such little value that their continuance as active Bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that the loan should be charged off now, even though partial or full recovery may be possible in the future. Loans classified Loss will be charged off in a timely manner.

		Pass				Criticized				Classified
		(Grade 0-4)				(Grade 5)				(Grade 6-7)				Total Loans
		(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail		$	274,428			$	11,015			$	33,903			$	319,346
Land			3,610				—				26,256				29,866
Other			278,636				20,966				40,028				339,630
Construction			8,529				14,080				18,075				40,684
Residential Property			54,936				—				3,123				58,059
Commercial and Industrial Loans:
Commercial Term
Unsecured			113,299				17,597				55,206				186,102
Secured by Real Estate			617,367				72,790				156,015				846,172
Commercial Lines of Credit			38,580				8,758				3,298				50,636
SBA			71,024				580				33,445				105,049
International			40,698				312				5,550				46,560
Consumer Loans			43,990				574				1,936				46,500
Total		$	1,545,097			$	146,672			$	376,835			$	2,068,604
December 31, 2010:
Real Estate Loans:
Commercial Property
Retail		$	302,696			$	18,507			$	38,568			$	359,771
Land			3,845				—				37,353				41,198
Other			265,957				20,804				41,493				328,254
Construction			12,958				25,897				22,139				60,994
Residential Property			59,329				—				3,315				62,644
Commercial and Industrial Loans:
Commercial Term
Unsecured			134,709				24,620				63,739				223,068
Secured by Real Estate			617,200				107,645				171,086				895,931
Commercial Lines of Credit			40,195				8,019				10,841				59,055
SBA			68,994				731				35,965				105,690
International			38,447				4,693				1,027				44,167
Consumer Loans			48,027				347				1,926				50,300
Total		$	1,592,357			$	211,263			$	427,452			$	2,231,072

     The following is an aging analysis of past due loans, disaggregated by loan class, as of June 30, 2011 and December 31, 2010:

		30-59 Days Past								90 Days or More																Accruing 90 Days or
		Due				60-89 Days Past Due				Past Due				Total Past Due				Current				Total Loans				More Past Due
		(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail		$	—			$	—			$	—			$	—			$	319,346			$	319,346			$	—
Land			—				—				21,970				21,970				7,896				29,866				—
Other			4,081				—				—				4,081				335,549				339,630				—
Construction			—				—				12,298				12,298				28,386				40,684				—
Residential Property			1,883				895				695				3,473				54,586				58,059				—
Commercial and Industrial Loans:
Commercial Term
Unsecured			1,874				759				1,237				3,870				182,232				186,102				—
Secured by Real Estate			4,816				2,142				2,104				9,062				837,110				846,172				—
Commercial Lines of Credit			—				—				1,422				1,422				49,214				50,636				—
SBA			3,136				3,740				9,943				16,819				88,230				105,049				—
International			2,943				399				—				3,342				43,218				46,560				—
Consumer Loans			1,024				321				40				1,385				45,115				46,500				—
Total		$	19,757			$	8,256			$	49,709			$	77,722			$	1,990,882			$	2,068,604			$	—
December 31, 2010:
Real Estate Loans:
Commercial Property
Retail		$	—			$	—			$	7,857			$	7,857			$	351,913			$	359,770			$	—
Land			—				—				25,725				25,725				15,471				41,196				—
Other			—				—				7,212				7,212				321,043				328,255				—
Construction			10,409				—				8,477				18,886				42,108				60,994				—
Residential Property			522				—				1,240				1,762				60,883				62,645				—
Commercial and Industrial Loans:
Commercial Term
Unsecured			2,208				2,781				6,842				11,831				211,237				223,068				—
Secured by Real Estate			5,111				3,720				10,530				19,361				876,570				895,931				—
Commercial Lines of Credit			454				—				1,745				2,199				56,857				59,056				—
SBA			2,287				8,205				13,957				24,449				81,241				105,690				—
International			—				—				—				—				44,167				44,167				—
Consumer Loans			596				202				865				1,663				48,637				50,300				—
Total		$	21,587			$	14,908			$	84,450			$	120,945			$	2,110,127			$	2,231,072			$	—

Impaired Loans

     Loans are identified and classified as impaired when, non-accrual and principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructuring (TDR) loans to offer terms not typically granted by the Bank or when current information or events make it unlikely to collect in full according to the contractual terms of the loan agreements; or they are classified as Substandard loans in an amount over 5% of the Bank’s Tier 1 Capital; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

     We evaluate loan impairment in accordance with applicable GAAP.

     Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, loans that are considered impaired are specifically excluded from the quarterly migration analysis when determining the amount of the allowance for loan losses required for the period.

     The allowance for collateral-dependent loans is determined by calculating the difference between the outstanding loan balance and the collateral value as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

     The following table provides information on impaired loans, disaggregated by loan class, as of the dates indicated:

		Recorded				Unpaid Principal				With No Related				With an Allowance				Related
		Investment				Balance				Allowance Recorded				Recorded				Allowance
										(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail		$	15,810			$	16,329			$	8,845			$	6,963			$	565
Land			26,008				26,008				25,184				825				105
Other			21,624				21,748				3,698				17,926				2,623
Construction			12,298				12,396				12,298				—				—
Residential Property			2,325				2,386				1,982				343				31
Commercial and Industrial Loans:
Commercial Term
Unsecured			14,999				15,463				661				14,338				11,040
Secured by Real Estate			83,382				85,570				41,163				42,219				9,092
Commercial Lines of Credit			3,028				3,097				1,218				1,810				1,394
SBA			17,780				19,437				7,340				10,441				1,380
International			3,243				3,243				—				3,243				3,243
Consumer Loans			870				898				379				491				223
Total		$	201,367			$	206,575			$	102,768			$	98,599			$	29,696
December 31, 2010:
Real Estate Loans:
Commercial Property
Retail		$	17,606			$	18,050			$	6,336			$	11,270			$	1,543
Land			35,207				35,295				5,482				29,725				1,485
Other			11,357				11,476				10,210				1,147				33
Construction			17,691				17,831				13,992				3,699				280
Residential Property			1,926				1,990				1,926				—				—
Commercial and Industrial Loans:
Commercial Term
Unsecured			17,847				18,799				6,465				11,382				10,313
Secured by Real Estate			80,213				81,395				35,154				45,059				11,831
Commercial Lines of Credit			4,067				4,116				1,422				2,645				1,321
SBA			17,715				18,544				7,112				10,603				2,122
International			127				141				—				127				127
Consumer Loans			934				951				393				541				393
Total		$	204,690			$	208,588			$	88,492			$	116,198			$	29,448

     The following table provides information on impaired loans, disaggregated by loan class, as of the dates indicated:

		Average				Interest				Average				Interest
		Recorded				Income				Recorded				Income
		Investment				Recognized				Investment				Recognized
		for the Three				for the Three				for the Six				for the Six
		Months				Months				Months				Months
		Ended				Ended(1)				Ended				Ended(1)
		(In Thousands)
June 30, 2011:
Real Estate Loans:
Commercial Property
Retail		$	17,260			$	26			$	17,633			$	51
Land			27,561				—				29,023				—
Other			21,849				60				21,864				121
Construction			12,535				—				12,578				—
Residential Property			2,371				—				2,386				—
Commercial and Industrial Loans:
Commercial Term
Unsecured			15,365				53				15,571				105
Secured by Real Estate			84,898				456				85,504				821
Commercial Lines of Credit			3,076				2				3,090				4
SBA			18,900				31				19,107				57
International			3,243				—				2,255				—
Consumer Loans			889				1				893				1
Total		$	207,947			$	629			$	209,904			$	1,160
June 30, 2010:
Real Estate Loans:
Commercial Property
Retail		$	17,977			$	—			$	25,664			$	—
Land			43,425				59				45,164				114
Other			16,492				55				18,524				216
Construction			9,823				—				9,823				—
Residential Property			2,725				—				2,784				—
Commercial and Industrial Loans:
Commercial Term
Unsecured			20,289				—				18,278				9
Secured by Real Estate			111,388				67				104,745				293
Commercial Lines of Credit			6,132				56				5,499				82
SBA			25,573				—				26,083				—
International			284				—				588				—
Consumer Loans			396				—				531				—
Total		$	254,504			$	237			$	257,683			$	714