California Bank of Commerce NOTES TO FINANCIAL STATEMENTS 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued) Loans (Continued) Allowance for Loan Losses Generally, loans are restored to accrual status when the obligation is brought current and has  performed in accordance with the contractual terms for a reasonable period of time and the ultimate  collectability of the total contractual principal and interest is no longer in doubt. The policy for placing  loans on nonaccrual status, recording payments received on nonaccrual loans, resuming the accrual  of interest and determining past due or delinquency status, does not differ by portfolio segment or  class of financing receivable. An impaired loan is measured based on the present value of expected future cash flows discounted  at the loan’s effective rate or, as a practical matter, at the loan’s observable market price or the fair  value of collateral less estimated costs to sell if the loan is collateral dependent. A loan is collateral  dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. All loans are evaluated and considered impaired when, based on current information and events,  it is probable that the Bank will be unable to collect all amounts due (including both principal and  interest) in accordance with the contractual terms of the loan agreement. The policy for accounting  for impaired loans, recognizing interest on impaired loans and recording payments on impaired loans  is generally the same as that described above for nonaccrual loans, and does not differ by portfolio  segment or class of financing receivable. Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase  premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be  amortized to interest income over the contractual term of the loan. The unamortized balance of  deferred fees and costs is reported as a component of net loans. The Bank services loans that have been participated with other financial institutions totaling  approximately $6,879,000 and $3,856,000, respectively, as of December 31, 2011 and 2010. The  participated balances of these loans were sold without recourse and are not included on the Bank’s  balance sheet. The allowance for loan losses is an estimate of credit losses inherent in the Bank’s loan portfolio that  have been incurred as of the balance-sheet date. The allowance is established through a provision  for loan losses which is charged to expense. Additions to the allowance are expected to maintain the  adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to  be uncollectible are charged against the allowance. Cash received on previously charged off amounts  is recorded as a recovery to the allowance. The policy for charging off loans and recording recoveries  does not differ by portfolio segment or class of financing receivable. The overall allowance consists  of two primary components, specific reserves related to individually identified impaired loans and  general reserves for inherent losses related to loans that are collectively evaluated for impairment. 18