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 changes, 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:

 

		September 30, 2012				December 31, 2011
		(In Thousands)
Real Estate Loans:
Commercial Property		$	728,419			$	663,023
Construction			7,868				33,976
Residential Property			103,774				52,921
Total Real Estate Loans			840,061				749,920
Commercial and Industrial Loans:
Commercial Term (1)			861,906				944,836
Commercial Lines of Credit (2)			54,266				55,770
SBA Loans (3)			134,264				116,192
International Loans			29,378				28,676
Total Commercial and Industrial Loans			1,079,814				1,145,474
Consumer Loans			38,415				43,346
Total Gross Loans			1,958,290				1,938,740
Allowance for Loans Losses			(66,107	)			(89,936	)
Deferred Loan Fees			630				216
Loan Receivables, Net		$	1,892,813			$	1,849,020

(1)	Includes owner-occupied property loans of $743.1 million and $776.3 million as of September 30, 2012 and December 31, 2011, respectively.

(2)	Includes owner-occupied property loans of $1.3 million and $936,000 as of September 30, 2012 and December 31, 2011, respectively.

(3)	Includes owner-occupied property loans of $115.3 million and $93.6 million as of September 30, 2012 and December 31, 2011, respectively.

Accrued interest on loans receivable amounted to $5.5 million and $5.7 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and December 31, 2011, loans receivable totaling $517.0 million and $797.1 million, respectively, were pledged to secure advances from the FHLB and the Federal Reserve Discount Window.

The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended September 30, 2012 and 2011:

 

		Real Estate				Commercial and Industrial				Consumer				Total
		(In Thousands)
September 30, 2012
Balance at Beginning of Period		$	1,289			$	3,849			$	—			$	5,138
Origination of Loans Held For Sale			—				25,722				—				25,722
Reclassification from Loan Receivables to Loans Held for Sale			8,917				16,404				—				25,321
Sales of Loans Held for Sale			(8,828	)			(36,050	)			—				(44,878	)
Principal Payoffs and Amortization			(21	)			(27	)			—				(48	)
Valuation Adjustments			—				(519	)			—				(519	)
Balance at End of Period		$	1,357			$	9,379			$	—			$	10,736
September 30, 2011
Balance at Beginning of Period		$	974			$	43,131			$	—			$	44,105
Origination of Loans Held For Sale			—				13,560				—				13,560
Reclassification from Loan Receivables to Loans Held for Sale			14,236				17,117				—				31,353
Sales of Loans Held for Sale			(5,506	)			(46,238	)			—				(51,744	)
Principal Payoffs and Amortization			(7	)			(65	)			—				(72	)
Valuation Adjustments			—				—				—				—
Balance at End of Period		$	9,697			$	27,505			$	—			$	37,202

For the three months ended September 30, 2012, loans receivable of $25.3 million were reclassified as loans held for sale, and loans held for sale of $44.9 million were sold. For the three months ended September 30, 2011, loans receivable of $31.4 million were reclassified as loans held for sale, and loans held for sale of $51.7 million were sold. There were no purchases of loans receivable for the three months ended September 30, 2012 and 2011.

 

The following table details the information on the purchases, sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the nine months ended September 30, 2012 and 2011:

 

		Real Estate				Commercial and Industrial				Consumer				Total
		(In Thousands)
September 30, 2012
Balance at Beginning of Period		$	11,068			$	11,519			$	—			$	22,587
Origination of Loans Held For Sale			—				86,311				—				86,311
Reclassification from Loan Receivables to Loans Held for Sale			41,141				48,651				—				89,792
Reclassification from Loans Held for Sale to Other Real Estate Owned			(360	)			—				—				(360	)
Reclassification from Loans Held for Sale to Loan Receivables			(1,647	)			(132	)			—				(1,779	)
Sales of Loans Held for Sale			(47,531	)			(135,505	)			—				(183,036	)
Principal Payoffs and Amortization			(190	)			(289	)			—				(479	)
Valuation Adjustments			(1,124	)			(1,176	)			—				(2,300	)
Balance at End of Period		$	1,357			$	9,379			$	—			$	10,736
September 30, 2011
Balance at Beginning of Period		$	3,666			$	32,954			$	—			$	36,620
Origination of Loans Held For Sale			—				28,656				—				28,656
Reclassification from Loan Receivables to Loans Held for Sale			33,514				38,523				—				72,037
Sales of Loans Held for Sale			(27,329	)			(68,682	)			—				(96,011	)
Principal Payoffs and Amortization			(21	)			(1,177	)			—				(1,198	)
Valuation Adjustments			(133	)			(2,769	)			—				(2,902	)
Balance at End of Period		$	9,697			$	27,505			$	—			$	37,202

For the nine months ended September 30, 2012, loans receivable of $89.8 million were reclassified as loans held for sale, and loans held for sale of $183.0 million were sold. For the nine months ended September 30, 2012, $15.2 million of commercial real estate loans and $67.4 million of residential mortgage loans were purchased. For the nine months ended September 30, 2011, loans receivable of $72.0 million were reclassified as loans held for sale, and loans held for sale of $96.0 million were sold. There were no purchases of loans receivable for the nine months ended September 30, 2011.

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

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

 

		As of and for the Three Months Ended												As of and for the Nine Months Ended
		September 30, 2012				June 30, 2012				September 30, 2011				September 30, 2012				September 30, 2011
		(In Thousands)
Allowance for Loan Losses:
Beginning Balance		$	71,893			$	81,052			$	109,029			$	89,936			$	146,059
Actual Charge-Offs			(7,223	)			(14,716	)			(16,551	)			(34,260	)			(62,384	)
Recoveries on Loans Previously Charged Off			1,320				1,324				1,045				3,681				8,822
Net Loan Charge-Offs			(5,903	)			(13,392	)			(15,506	)			(30,579	)			(53,562	)
Provision Charged to Operating Expense			117				4,233				7,269				6,750				8,295
Ending Balance		$	66,107			$	71,893			$	100,792			$	66,107			$	100,792
Allowance for Off-Balance Sheet Items:
Beginning Balance		$	2,348			$	2,581			$	2,391			$	2,981			$	3,417
Provision Charged to (Reversal of Charged to) Operating Expense			(117	)			(233	)			831				(750	)			(195	)
Ending Balance		$	2,231			$	2,348			$	3,222			$	2,231			$	3,222

 

The following table details the information on the allowance for credit losses by portfolio segment for the three months ended September 30, 2012 and 2011:

 

		Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In Thousands)
September 30, 2012
Allowance for Loan Losses:
Beginning Balance		$	21,406			$	46,810			$	1,757			$	1,920			$	71,893
Charge-Offs			1,321				5,571				331				—				7,223
Recoveries on Loans Previously Charged Off			58				1,251				11				—				1,320
Provision			1,080				174				783				(1,920	)			117
Ending Balance		$	21,223			$	42,664			$	2,220			$	—			$	66,107
Ending Balance: Individually Evaluated for Impairment		$	768			$	5,148			$	398			$	—			$	6,314
Ending Balance: Collectively Evaluated for Impairment		$	20,455			$	37,516			$	1,822			$	—			$	59,793
Loans Receivables:
Ending Balance		$	840,061			$	1,079,814			$	38,415			$	—			$	1,958,290
Ending Balance: Individually Evaluated for Impairment		$	16,315			$	41,084			$	1,238			$	—			$	58,637
Ending Balance: Collectively Evaluated for Impairment		$	823,746			$	1,038,730			$	37,177			$	—			$	1,899,653
September 30, 2011
Allowance for Loan Losses:
Beginning Balance		$	24,115			$	82,845			$	1,587			$	482			$	109,029
Charge-Offs			2,142				14,023				386				—				16,551
Recoveries on Loans Previously Charged Off			—				1,014				31				—				1,045
Provision			(165	)			4,961				992				1,481				7,269
Ending Balance		$	21,808			$	74,797			$	2,224			$	1,963			$	100,792
Ending Balance: Individually Evaluated for Impairment		$	3,630			$	25,915			$	285			$	—			$	29,830
Ending Balance: Collectively Evaluated for Impairment		$	18,178			$	48,882			$	1,939			$	1,963			$	70,962
Loans Receivables:
Ending Balance		$	754,472			$	1,192,740			$	44,819			$	—			$	1,992,031
Ending Balance: Individually Evaluated for Impairment		$	47,172			$	95,959			$	1,158			$	—			$	144,289
Ending Balance: Collectively Evaluated for Impairment		$	707,300			$	1,096,781			$	43,661			$	—			$	1,847,742

The following table details the information on the allowance for credit losses by portfolio segment for the nine months ended September 30, 2012 and 2011:

 

		Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In Thousands)
September 30, 2012
Allowance for Loan Losses:
Beginning Balance		$	19,637			$	66,005			$	2,243			$	2,051			$	89,936
Charge-Offs			9,406				24,079				775				—				34,260
Recoveries on Loans Previously Charged Off			575				3,053				53				—				3,681
Provision			10,419				(2,317	)			699				(2,051	)			6,750
Ending Balance		$	21,223			$	42,664			$	2,220			$	—			$	66,107
Ending Balance: Individually Evaluated for Impairment		$	768			$	5,148			$	398			$	—			$	6,314
Ending Balance: Collectively Evaluated for Impairment		$	20,455			$	37,516			$	1,822			$	—			$	59,793
Loans Receivables:
Ending Balance		$	840,061			$	1,079,814			$	38,415			$	—			$	1,958,290
Ending Balance: Individually Evaluated for Impairment		$	16,315			$	41,084			$	1,238			$	—			$	58,637
Ending Balance: Collectively Evaluated for Impairment		$	823,746			$	1,038,730			$	37,177			$	—			$	1,899,653
September 30, 2011
Allowance for Loan Losses:
Beginning Balance		$	32,766			$	108,986			$	2,079			$	2,228			$	146,059
Charge-Offs			14,786				46,715				883				—				62,384
Recoveries on Loans Previously Charged Off			2,744				6,025				53				—				8,822
Provision			1,084				6,501				975				(265	)			8,295
Ending Balance		$	21,808			$	74,797			$	2,224			$	1,963			$	100,792
Ending Balance: Individually Evaluated for Impairment		$	3,630			$	25,915			$	285			$	—			$	29,830
Ending Balance: Collectively Evaluated for Impairment		$	18,178			$	48,882			$	1,939			$	1,963			$	70,962
Loans Receivables:
Ending Balance		$	754,472			$	1,192,740			$	44,819			$	—			$	1,992,031
Ending Balance: Individually Evaluated for Impairment		$	47,172			$	95,959			$	1,158			$	—			$	144,289
Ending Balance: Collectively Evaluated for Impairment		$	707,300			$	1,096,781			$	43,661			$	—			$	1,847,742

 

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. All loans are reviewed semi-annually. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass: pass loans, grade (0) to (4), are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or 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, or (0) to (4):

 

Pass or (0):		loans secured in full by cash or cash equivalents.
Pass or (1):		requires 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 requirement, excellent liquidity, and very strong capital.
Pass or (2):		requires 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 centered in liquid assets and strong income.
Pass or (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 or (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): Special Mention credits are potentially weak, as the borrower is exhibiting deteriorating trends which, if not corrected, could jeopardize repayment of the debt and result in a substandard classification. Credits which have significant actual, not potential, weaknesses are considered more severely classified.

Substandard or (6): A Substandard credit has a well-defined weakness that jeopardizes 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 which 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 as 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 it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified Loss will be charged off in a timely manner.

 

		Pass (Grade 0-4)				Criticized (Grade 5)				Classified (Grade 6-7)				Total Loans
		(In Thousands)
September 30, 2012
Real Estate Loans:
Commercial Property
Retail		$	362,174			$	3,073			$	5,121			$	370,368
Land			4,703				—				12,259				16,962
Other			318,598				20,988				1,503				341,089
Construction			—				—				7,868				7,868
Residential Property			99,815				—				3,959				103,774
Commercial and Industrial Loans:
Commercial Term
Unsecured			89,958				1,729				26,453				118,140
Secured By Real Estate			683,550				5,618				54,598				743,766
Commercial Lines of Credit			51,397				876				1,993				54,266
SBA Loans			121,260				1,442				11,562				134,264
International Loans			29,378				—				—				29,378
Consumer Loans			35,312				207				2,896				38,415
Total		$	1,796,145			$	33,933			$	128,212			$	1,958,290
December 31, 2011
Real Estate Loans:
Commercial Property
Retail		$	292,914			$	8,858			$	10,685			$	312,457
Land			4,351				—				3,418				7,769
Other			297,734				8,428				36,635				342,797
Construction			—				14,080				19,896				33,976
Residential Property			48,592				—				4,329				52,921
Commercial and Industrial Loans:															—
Commercial Term															—
Unsecured			100,804				8,680				41,796				151,280
Secured By Real Estate			634,822				36,290				122,444				793,556
Commercial Lines of Credit			44,985				7,676				3,109				55,770
SBA Loans			96,983				1,496				17,713				116,192
International Loans			26,566				—				2,110				28,676
Consumer Loans			40,454				676				2,216				43,346
Total		$	1,588,205			$	86,184			$	264,351			$	1,938,740

 

The following is an aging analysis of past due loans, disaggregated by class of loan, as of September 30, 2012 and December 31, 2011:

 

		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				Total Past Due				Current				Total Loans				Accruing 90 Days or More Past Due
		(In Thousands)
September 30, 2012
Real Estate Loans:
Commercial Property
Retail		$	—			$	—			$	—			$	—			$	370,368			$	370,368			$	—
Land			—				—				—				—				16,962				16,962				—
Other			—				—				—				—				341,089				341,089				—
Construction			—				—				7,868				7,868				—				7,868				—
Residential Property			512				241				319				1,072				102,702				103,774				—
Commercial and Industrial Loans:
Commercial Term
Unsecured			1,125				731				613				2,469				115,671				118,140				—
Secured By Real Estate			—				—				1,921				1,921				741,845				743,766				—
Commercial Lines of Credit			—				—				416				416				53,850				54,266				—
SBA Loans			2,267				592				3,212				6,071				128,193				134,264				—
International Loans			—				—				—				—				29,378				29,378				—
Consumer Loans			271				15				136				422				37,993				38,415				—
Total		$	4,175			$	1,579			$	14,485			$	20,239			$	1,938,051			$	1,958,290			$	—
December 31, 2011
Real Estate Loans:
Commercial Property
Retail		$	485			$	—			$	—			$	485			$	311,972			$	312,457			$	—
Land			—				—				—				—				7,769				7,769				—
Other			—				—				—				—				342,797				342,797				—
Construction			—				—				8,310				8,310				25,666				33,976				—
Residential Property			277				1,613				2,221				4,111				48,810				52,921				—
Commercial and Industrial Loans:
Commercial Term
Unsecured			438				611				1,833				2,882				148,398				151,280				—
Secured By Real Estate			3,162				6,496				1,202				10,860				782,696				793,556				—
Commercial Lines of Credit			—				—				416				416				55,354				55,770				—
SBA Loans			260				472				7,108				7,840				108,352				116,192				—
International Loans			—				—				—				—				28,676				28,676				—
Consumer Loans			126				7				154				287				43,059				43,346				—
Total		$	4,748			$	9,199			$	21,244			$	35,191			$	1,903,549			$	1,938,740			$	—

Impaired Loans

Loans are considered 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 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. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. 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 value of the collateral 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 class of loans, as of the dates indicated:

 

		Recorded Investment				Unpaid Principal Balance				With No Related Allowance Recorded				With Allowance Recorded				Related Allowance
		(In Thousands)
September 30, 2012
Real Estate Loans:
Commercial Property
Retail		$	2,606			$	2,680			$	2,606			$	—			$	—
Land			2,037				2,204				2,037				—				—
Other			532				532				—				532				37
Construction			7,868				8,075				7,868				—				—
Residential Property			3,272				3,323				576				2,696				731
Commercial and Industrial Loans:
Commercial Term
Unsecured			13,595				14,535				451				13,144				3,825
Secured By Real Estate			19,841				20,967				16,733				3,108				655
Commercial Lines of Credit			1,547				1,713				863				684				3
SBA Loans			6,101				10,113				4,515				1,586				665
Consumer Loans			1,238				1,283				266				972				398
Total		$	58,637			$	65,425			$	35,915			$	22,722			$	6,314
December 31, 2011
Real Estate Loans:
Commercial Property
Retail		$	1,260			$	1,260			$	1,100			$	160			$	126
Land			3,178				3,210				—				3,178				360
Other			14,773				14,823				1,131				13,642				3,004
Construction			14,120				14,120				14,120				—				—
Residential Property			5,368				5,408				3,208				2,160				128
Commercial and Industrial Loans:
Commercial Term
Unsecured			16,035				16,559				244				15,791				10,793
Secured By Real Estate			53,159				54,156				14,990				38,169				7,062
Commercial Lines of Credit			1,431				1,554				715				716				716
SBA Loans			11,619				12,971				9,445				2,174				1,167
Consumer Loans			746				788				511				235				26
Total		$	121,689			$	124,849			$	45,464			$	76,225			$	23,382

 

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

 

		Average Recorded Investment for the Three Months Ended				Interest Income Recognized for the Three Months Ended				Average Recorded Investment for the Nine Months Ended				Interest Income Recognized for the Nine Months Ended
			(In Thousands)
September 30, 2012
Real Estate Loans:
Commercial Property
Retail		$	2,597			$	47			$	2,162			$	95
Land			2,054				45				2,134				136
Other			534				5				937				38
Construction			7,868				29				8,016				207
Residential Property			3,279				34				3,265				118
Commercial and Industrial Loans:															—
Commercial Term															—
Unsecured			13,723				214				14,079				644
Secured By Real Estate			19,990				342				21,834				1,300
Commercial Lines of Credit			1,555				16				1,742				46
SBA Loans			6,168				330				7,489				813
Consumer Loans			1,257				49				1,021				59
Total		$	59,025			$	1,111			$	62,679			$	3,456
September 30, 2011
Real Estate Loans:
Commercial Property
Retail		$	8,754			$	27			$	9,733			$	78
Land			16,376				12				22,192				12
Other			21,768				282				21,879				372
Construction			11,057				272				11,201				317
Residential Property			2,364				8				2,386				8
Commercial and Industrial Loans:
Commercial Term
Unsecured			18,972				82				19,554				148
Secured By Real Estate			66,108				813				64,667				1,809
Commercial Lines of Credit			2,398				2				2,631				5
SBA Loans			19,333				23				20,256				63
Consumer Loans			1,181				1				1,286				3
Total		$	168,311			$	1,522			$	175,785			$	2,815

The following is a summary of interest foregone on impaired loans for the periods indicated:

 

There were no commitments to lend additional funds to borrowers whose loans are included above.

 

Non-Accrual Loans

Loans are placed on non-accrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when principal and interest payments become current and full repayment is expected.

The following table details non-accrual loans, disaggregated by class of loan, for the periods indicated:

 

		September 30,				December 31,
		2012				2011
		(In Thousands)
Real Estate Loans:
Commercial Property
Retail		$	1,102			$	1,260
Land			2,037				2,362
Other			—				1,199
Construction			7,868				8,310
Residential Property			1,411				2,097
Commercial and Industrial Loans:
Commercial Term
Unsecured			8,106				7,706
Secured By Real Estate			8,418				11,725
Commercial Lines of Credit			1,359				1,431
SBA Loans			13,048				15,479
Consumer Loans			1,343				809
Total Non-Accrual Loans		$	44,692			$	52,378

The following table details non-performing assets as of the dates indicated:

 

		September 30, 2012				December 31, 2011
		(In Thousands)
Non-Accrual Loans		$	44,692			$	52,378
Loans 90 Days or More Past Due and Still Accruing			—				—
Total Non-Performing Loans			44,692				52,378
Other Real Estate Owned			364				180
Total Non-Performing Assets		$	45,056			$	52,558

Loans on non-accrual status, excluding loans held for sale, totaled $44.7 million as of September 30, 2012, compared to $52.4 million as of December 31, 2011, representing a 14.7 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $20.2 million as of September 30, 2012, compared to $35.2 million as of December 31, 2011, representing a 42.6 percent decrease.

As of September 30, 2012, other real estate owned consisted of two properties with a combined carrying value of $364,000 with a valuation adjustment of $257,000. For the nine months ended September 30, 2012, five properties were transferred from loans receivable to other real estate owned at fair value less selling cost of $2.6 million and recorded a valuation adjustment of $301,000. As of December 31, 2011, there was one real estate owned property, located in Colorado, with a net carrying value of $180,000.

Troubled Debt Restructuring

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies the guidance for evaluating whether a restructuring constitutes a TDR. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For the purposes of measuring impairment of loans that are newly considered impaired, the guidance should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.

As a result of the amendments in ASU No. 2011-02, we reassessed all restructurings that occurred on or after the beginning of the annual period and identified certain receivables as TDRs. Upon identifying those receivables as TDRs, we considered them impaired and applied the impairment measurement guidance prospectively for those receivables newly identified as impaired.

 

During the nine months ended September 30, 2012, we restructured monthly payments on 50 loans, with a net carrying value of $12.9 million as of September 30, 2012, through temporary payment structure modifications or re-amortization. For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms are probable.

The following table details troubled debt restructuring, disaggregated by type of concession and by type of loans as of September 30, 2012 and December 31, 2011:

 

		Non-Accrual TDRs																				Accrual TDRs
		Deferral of Principal				Deferral of Principal and Interest				Reduction of Principal or Interest				Extension of Maturity				Total				Deferral of Principal				Deferral of Principal and Interest				Reduction of Principal or Interest				Extension of Maturity				Total
		(In Thousands)
September 30, 2012
Real Estate Loans:
Commercial Property
Retail		$	—			$	—			$	—			$	1,102			$	1,102			$	—			$	—			$	—			$	177			$	177
Other			—				—				—				—				—				532				—				—				—				532
Residential Property			835				—				121				—				956				1,289				572				—				—				1,861
Commercial and Industrial Loans:
Commercial Term
Unsecured			—				615				5,802				869				7,286				1,010				—				1,127				2,388				4,525
Secured By Real Estate			2,374				1,385				338				1,413				5,510				2,111				—				324				6,495				8,930
Commercial Lines of Credit			684				—				—				258				942				—				—				188				—				188
SBA Loans			2,905				1,365				934				—				5,204				490				33				229				—				752
Total			$6,798			$	3,365			$	7,195			$	3,642			$	21,000			$	5,432			$	605			$	1,868			$	9,060			$	16,965
December 31, 2011
Real Estate Loans:
Commercial Property
Retail		$	—			$	—			$	—			$	1,260			$	1,260			$	—			$	—			$	—			$	—			$	—
Other			900				—				—				—				900				1,480				—				—				—				1,480
Residential Property			—				—				138				—				138				2,167				572				—				—				2,739
Commercial and Industrial Loans:
Commercial Term
Unsecured			765				669				4,650				484				6,568				185				—				7,069				1,584				8,838
Secured By Real Estate			1,202				1,523				2,403				3,243				8,371				2,005				—				8,628				2,699				13,332
Commercial Lines of Credit			715				—				—				198				913				—								—				—				—
SBA Loans			2,758				1,524				794				—				5,076				1,354				468				—				—				1,986
Total		$	6,340			$	3,716			$	7,985			$	5,185			$	23,226			$	7,191			$	1,040			$	15,697			$	4,283			$	28,375

 

The following table details troubled debt restructurings, disaggregated by class of loans, for the three months ended September 30, 2012 and 2011:

 

		For the Three Months Ended
		September 30, 2012												September 30, 2011
		Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(In Thousands, Except Number of Loans)
Real Estate Loans:
Commercial Property
Retail (1)			1			$	131			$	177				—			$	—			$	—
Other (2)			1				538				532				3				3,782				3,782
Residential Property (3)			—				—				—				1				458				449
Commercial and Industrial Loans:
Commercial Term
Unsecured (4)			5				777				759				29				8,279				8,131
Secured By Real Estate (5)			3				4,525				4,475				7				6,706				6,115
Commercial Lines of Credit (6)			—				—				—				1				123				120
SBA Loans (7)			3				78				89				17				2,684				2,615
Total			13			$	6,049			$	6,032				58			$	22,032			$	21,212

(1)	Includes a modification of $177,000 through extension of maturity

(2)	Includes a modification of $532,000 through payment deferral for the three months ended September 30, 2012 and a modification of $3.8 million through payment deferral for the three months ended September 30, 2011

(3)	Includes a modification of $449,000 through payment deferral

(4)

Includes modifications of $750,000 through extension of maturity and $9,000 through payment deferral for the three months ended September 30, 2012 and modifications of $6.3 million through reduction of principal or accrued interest, $1.2 million through payment deferral and $700,000 through extension of maturity for the three months ended September 30, 2011

(5)

Includes modifications of $3.1 million through payment deferral and $1.4 million through extension of maturity for the three months ended September 30, 2012, and modifications of $1.2 million through reduction of principal or accrued interest and $4.9 million through payment deferral for the three months ended September 30, 2011

(6)	Includes a modification of $120,000 through extension of maturity

(7)	Includes modifications of $48,000 through payment deferral and $41,000 through reduction of principal or accrued interest for the three months ended September 30, 2012, and modifications of $2.3 million through payment deferral and $273,000 through reduction of principal or accrued interest

 

The following table details troubled debt restructurings, disaggregated by class of loans, for the nine months ended September 30, 2012 and 2011:

 

		For the Nine Months Ended
		September 30, 2012												September 30, 2011
		Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(In Thousands, Except Number of Loans)
Real Estate Loans:
Commercial Property
Retail (1)			1			$	184			$	177				2			$	2,982			$	2,895
Other (2)			1				547				532				5				5,606				5,588
Residential Property (3)			—				—				—				2				1,325				1,315
Commercial and Industrial Loans:
Commercial Term
Unsecured (4)			31				5,362				4,940				45				14,126				13,556
Secured By Real Estate (5)			5				5,584				5,307				17				21,342				20,033
Commercial Lines of Credit (6)			1				202				188				1				123				120
SBA Loans (7)			11				1,060				1,000				24				7,693				7,149
Total			50			$	12,939			$	12,144				96			$	53,197			$	50,656

(1)	Includes a modification of $177,000 through extension of maturity for the nine months ended September 30, 2012 and a modification of $2.9 million through payment deferral for the nine months ended September 30, 2011

(2)	Includes a modification of $532,000 through payment deferral for the nine months ended September 30, 2012, and includes a modification of $5.6 million through payment deferral for the nine months ended September 30, 2011

(3)	Includes a modification of $1.3 million through payment deferral

(4)

Includes modifications of $2.2 million through extension of maturity, $1.9 million through reduction of principal or accrued interest, $884,000 through payment deferral for the nine months ended September 30, 2012, and modifications of $11.3 million through reduction of principal or accrued interest, $1.2 million through payment deferral, and $1.1 million through extension of maturity for the nine months ended September 30, 2011

(5)

Includes modifications of $3.1 million through payment deferral, $1.9 million through extension of maturity and $338,000 through reduction of principal or accrued interest for the nine months ended September 30, 2012, and modifications of $9.3 million through reduction of principal or accrued interest, $7.4 million through payment deferrals, and $3.3 million in extension of maturity for the nine months ended September 30, 2011

(6)	Includes a modification of $188,000 through reduction of principal or accrued interest for the nine months ended September 30, 2012, and a modification of $120,000 through extension of maturity for the nine months ended September 30, 2011

(7)

Includes modifications of $551,000 through payment deferral and $449,000 through reduction of principal or accrued interest for the nine months ended September 30, 2012, and modifications of $6.2 million through payment deferral and $919,000 through reduction of principal or accrued interest for the nine months ended September 30, 2011

As of September 30, 2012 and December 31, 2011, total TDR loans receivable, excluding loans held for sale, was $38.0 million and $51.6 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for six months or less. All TDR loans are impaired and are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent.

At September 30, 2012, TDR loans, excluding loans held for sale, were subjected to specific impairment analysis and a $4.8 million reserve relating to these loans was included in the allowance for loan losses. At December 31, 2011, TDR loans, excluding loans held for sale, were subjected to specific impairment analysis and the related allowance for loan losses was $14.2 million.

 

 

The following table details troubled debt restructurings that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by class of loans, during the three months and nine months ended September 30, 2012 and 2011:

 

		For the Three Months Ended																For the Nine Months Ended
		September 30, 2012								September 30, 2011								September 30, 2012								September 30, 2011
		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
		(In Thousands)
Real Estate Loans:
Commercial Property
Retail			—			$	—				—			$	—				—			$	—				1			$	1,425
Other			—				—				—				—				—				—				2				1,805
Residential Property			—				—				1				449				—				—				1				449
Commercial and Industrial Loans:
Commercial Term
Unsecured			3				171				8				3,344				6				431				18				6,055
Secured By Real Estate			—				—				3				3,137				—				—				9				10,684
Commercial Lines of Credit			—				—				—				—				1				258				—				—
SBA Loans			6				272				11				1,575				6				272				17				6,013
Totals			9			$	443				23			$	8,505				13			$	961				48			$	26,431

Servicing Assets

The changes in servicing assets were as follows for the nine months ended September 30, 2012 and 2011:

 

		September 30, 2012				September 30, 2011
		(In Thousands)
Balance at Beginning of Period		$	3,720			$	2,890
Additions			2,148				481
Amortization			720				(487	)
Balance at End of Period		$	5,148			$	2,884

At September 30, 2012 and 2011, we serviced loans sold to unaffiliated parties in the amounts of $277.7 million and $187.9 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance. All of the loans being serviced were SBA loans.