California Bank of Commerce NOTES TO FINANCIAL STATEMENTS 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Allowance for Loan Losses (Continued)  (Continued) Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures Transfer of Financial Assets 21 Transfers of financial assets are accounted for as sales, when control over the assets has been  surrendered. Control over transferred assets is deemed surrendered when (1) the assets have been  isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from  taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does  not maintain effective control over the transferred assets through an agreement to repurchase them  before their maturity. The Bank also maintains a separate allowance for off-balance-sheet commitments. Management  estimates anticipated losses using historical data and utilization assumptions. The allowance for  off-balance-sheet commitments is included in accrued interest payable and other liabilities on the  balance sheet, and totaled $120,000 and $35,000 at December 31, 2011 and 2010, respectively. Although management believes the allowance to be adequate, ultimate losses may vary from its  estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including  consideration of the relative risks in the portfolio, current economic conditions and other factors. If  the Board of Directors and management determine that changes are warranted based on those  reviews, the allowance is adjusted. In addition, the Bank’s primary regulators, the FDIC and California  Department of Financial Institutions, as an integral part of their examination process, review the  adequacy of the allowance. These regulatory agencies may require additions to the allowance based  on their judgment about information available at the time of their examinations. Real Estate - HELOC  – The degree of risk in residential real estate lending depends primarily  on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to  repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than  other real estate portfolio segments. Economic trends determined by unemployment rates  and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be  deteriorating. Installment & Other  – An installment loan portfolio is usually comprised of a number of small  loans scheduled to be amortized over a specific period. Most installment loans are made directly  for consumer purchases, but business loans granted for the purchase of heavy equipment or  industrial vehicles may also be included. Economic trends determined by unemployment  rates and other key economic indicators are closely correlated to the credit quality of these  loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations  may be deteriorating. Loans in the “Other” category are typically inconsequential and typically  include overdrafts on deposit accounts.