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:

 

		As of December 31,
		2012				2011
		(In Thousands)
Real Estate Loans:
Commercial Property		$	787,094			$	663,023
Construction			—				33,976
Residential Property			101,778				52,921
Total Real Estate Loans			888,872				749,920
Commercial and Industrial Loans:
Commercial Term (1)			884,364				944,836
Commercial Lines of Credit (2)			56,121				55,770
SBA Loans (3)			148,306				116,192
International Loans			34,221				28,676
Total Commercial and Industrial Loans			1,123,012				1,145,474
Consumer Loans			36,676				43,346
Total Gross Loans			2,048,560				1,938,740
Allowance for Loans Losses			(63,305	)			(89,936	)
Deferred Loan Fees			796				216
Loan Receivables, Net		$	1,986,051			$	1,849,020

 

(1)	Includes owner-occupied property loans of $774.2 million and $776.3 million as of December 31, 2012 and 2011, respectively.

 

(2)	Includes owner-occupied property loans of $1.4 million and $936,000 as of December 31, 2012 and 2011, respectively.

 

(3)	Includes owner-occupied property loans of $128.4 million and $93.6 million as of December 31, 2012 and 2011, respectively.

Accrued interest on loans receivable was $5.4 million and $5.7 million at December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011, loans receivable totaling $524.0 million and $797.1 million, respectively, were pledged to secure FHLB advances and the FRB’s federal 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 years ended December 31, 2012 and 2011:

 

		Real Estate				Commercial and Industrial				Consumer				Total
		(In Thousands)
December 31, 2012:
Balance at Beginning of Period		$	11,068			$	11,519			$	-			$	22,587
Origination of Loans Held for Sale			—				116,829				-				116,829
Reclassification from Loans Receivable to Loans Held for Sale			46,960				48,651				-				95,611
Reclassification from Loans Held for Sale to Other Real Estate Owned			(360	)			—				-				(360	)
Reclassification from Loans Held for Sale to Loans Receivable			(1,647	)			(132	)			-				(1,779	)
Sales of Loans Held for Sale			(54,669	)			(165,563	)			-				(220,232	)
Principal Payoffs and Amortization			(228	)			(376	)			-				(604	)
Valuation Adjustments			(1,124	)			(2,622	)			-				(3,746	)
Balance at End of Period		$	—			$	8,306			$	-			$	8,306
December 31, 2011:
Balance at Beginning of Period		$	3,666			$	32,954			$	-			$	36,620
Origination of Loans Held for Sale			—				60,238				-				60,238
Reclassification from Loans Receivable to Loans Held for Sale			56,428				53,862				-				110,290
Sales of Loans Held for Sale			(48,841	)			(131,653	)			-				(180,494	)
Principal Payoffs and Amortization			(52	)			(1,112	)			-				(1,164	)
Valuation Adjustments			(133	)			(2,770	)			-				(2,903	)
Balance at End of Period		$	11,068			$	11,519			$	-			$	22,587

For the year ended December 31, 2012, loans receivable of $95.6 million were reclassified as loans held for sale, and loans held for sale of $220.0 million were sold. For the year ended December 31, 2011, loans receivable of $110.3 million were reclassified as loans held for sale, and loans held for sale of $180.5 million were sold.

For the year ended December 31, 2012, $15.2 million of commercial real estate loans and $67.4 million of residential mortgage loans were purchased. There was no purchase of loans receivable for the year ended December 31, 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 Year Ended December 31,
		2012								2011								2010
		Allowance for Loan Losses				Allowance for Off- Balance Sheet Items				Allowance for Loan Losses				Allowance for Off- Balance Sheet Items				Allowance for Loan Losses				Allowance for Off- Balance Sheet Items
		(In Thousands)
Balance at Beginning of Period		$	89,936			$	2,981			$	146,059			$	3,417			$	144,996			$	3,876
Provision Charged to Operating Expense			7,157				(1,157	)			12,536				(436	)			122,955				(459	)
Actual Charge-Offs			(38,227	)			—				(78,652	)			—				(131,823	)			—
Recoveries on Loans Previously Charged Off			4,439				—				9,993				—				9,931				—
Balance at End of Period		$	63,305			$	1,824			$	89,936			$	2,981			$	146,059			$	3,417

The allowance for off-balance sheet items and provisions is maintained at a level believed to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. As of December 31, 2012 and 2011, the allowance for off-balance sheet items amounted to $1.8 million and $3.0 million, respectively. Net adjustments to the allowance for off-balance sheet items are included in the provision for credit losses.

 

The following table details the information on the allowance for loan losses by portfolio segment for the years ended December 31, 2012 and 2011:

 

		Real Estate				Commercial and Industrial				Consumer				Unallocated				Total
		(In Thousands)
December 31, 2012:
Allowance for Loan Losses:
Beginning Balance		$	19,637			$	66,005			$	2,243			$	2,051			$	89,936
Charge-Offs			11,382				25,897				948				—				38,227
Recoveries on Loans Previously Charged Off			583				3,758				98				—				4,439
Provision			9,342				(1,938	)			887				(1,134	)			7,157
Ending Balance		$	18,180			$	41,928			$	2,280			$	917			$	63,305
Ending Balance: Individually Evaluated for Impairment		$	161			$	5,456			$	615			$	—			$	6,232
Ending Balance: Collectively Evaluated for Impairment		$	18,019			$	36,472			$	1,665			$	917			$	57,073
Loans Receivable:
Ending Balance		$	888,872			$	1,123,012			$	36,676			$	—			$	2,048,560
Ending Balance: Individually Evaluated for Impairment		$	8,819			$	44,273			$	1,652			$	—			$	54,744
Ending Balance: Collectively Evaluated for Impairment		$	880,053			$	1,078,739			$	35,024			$	—			$	1,993,816
December 31, 2011:
Allowance for Loan Losses:
Beginning Balance		$	32,766			$	108,986			$	2,079			$	2,228			$	146,059
Charge-Offs			18,539				59,498				615				—				78,652
Recoveries on Loans Previously Charged Off			2,794				7,093				106				—				9,993
Provision			2,616				9,424				673				(177	)			12,536
Ending Balance		$	19,637			$	66,005			$	2,243			$	2,051			$	89,936
Ending Balance: Individually Evaluated for Impairment		$	3,618			$	19,738			$	26			$	—			$	23,382
Ending Balance: Collectively Evaluated for Impairment		$	16,019			$	46,267			$	2,217			$	2,051			$	66,554
Loans Receivable:
Ending Balance		$	749,920			$	1,145,474			$	43,346			$	—			$	1,938,740
Ending Balance: Individually Evaluated for Impairment		$	38,699			$	82,244			$	746			$	—			$	121,689
Ending Balance: Collectively Evaluated for Impairment		$	711,221			$	1,063,230			$	42,600			$	—			$	1,817,051

 

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 by a third-party loan reviewer on a semi-annual basis. 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 grade 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 (0): Loans secured in full by cash or cash equivalents.

Pass (1): Loans or commitments requiring 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 (2): Loans or commitments requiring 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 sheets 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 with 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 sheets or positive, but inconsistent, cash flow coverage. These borrowers may exhibit somewhat greater credit risk, and as a result, the Bank may have secured its exposure 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: A Special Mention credit, grade (5), has potential weaknesses that deserve management’s close attention. If left uncollected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.

Substandard: A Substandard credit, grade (6), 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: A Doubtful credit, grade (7), 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: A loan classified as Loss, grade (8), is 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)
December 31, 2012:
Real Estate Loans:
Commercial Property
Retail		$	386,650			$	3,971			$	2,324			$	392,945
Land			5,491				—				8,516				14,007
Other			366,518				12,132				1,492				380,142
Construction			—				—				—				—
Residential Property			99,250				—				2,528				101,778
Commercial and Industrial Loans:
Commercial Term
Unsecured			87,370				663				22,139				110,172
Secured By Real Estate			710,723				13,038				50,431				774,192
Commercial Lines of Credit			53,391				863				1,867				56,121
SBA Loans			136,058				1,119				11,129				148,306
International Loans			34,221				—				—				34,221
Consumer Loans			33,707				201				2,768				36,676
Total		$	1,913,379			$	31,987			$	103,194			$	2,048,560
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 loan class, as of December 31, 2012 and 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)
December 31, 2012:
Real Estate Loans:
Commercial Property
Retail		$	—			$	111			$	—			$	111			$	392,834			$	392,945			$	—
Land			—				—				335				335				13,672				14,007				—
Other			—				—				—				—				380,142				380,142				—
Construction			—				—				—				—				—				—				—
Residential Property			—				588				311				899				100,879				101,778				—
Commercial and Industrial Loans:
Commercial Term
Unsecured			918				1,103				1,279				3,300				106,872				110,172				—
Secured By Real Estate			1,949				—				926				2,875				771,317				774,192				—
Commercial Lines of Credit			—				188				416				604				55,517				56,121				—
SBA Loans			3,759				1,039				2,800				7,598				140,708				148,306				—
International Loans			—				—				—				—				34,221				34,221				—
Consumer Loans			61				146				538				745				35,931				36,676				—
Total		$	6,687			$	3,175			$	6,605			$	16,467			$	2,032,093			$	2,048,560			$	—
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. 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, using 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 Investment				Unpaid Principal Balance				With No Related Allowance Recorded				With an Allowance Recorded				Related Allowance				Average Recorded Investment				Interest Income Recognized
		(In Thousands)
December 31, 2012:
Real Estate Loans:
Commercial Property
Retail		$	2,930			$	3,024			$	2,930			$	—			$	—			$	2,357			$	136
Land			2,097				2,307				2,097				—				—				2,140				179
Other			527				527				—				527				67				835				43
Construction			—				—				—				—				—				6,012				207
Residential Property			3,265				3,308				1,866				1,399				94				3,268				164
Commercial and Industrial Loans:
Commercial Term
Unsecured			14,532				15,515				6,826				7,706				2,144				14,160				821
Secured By Real Estate			22,050				23,221				9,520				12,530				2,319				21,894				1,723
Commercial Lines of Credit			1,521				1,704				848				673				230				1,688				64
SBA Loans			6,170				10,244				4,294				1,876				762				7,173				1,131
Consumer Loans			1,652				1,711				449				1,203				615				1,205				73
Total Gross Loans		$	54,744			$	61,561			$	28,830			$	25,914			$	6,231			$	60,732			$	4,541
December 31, 2011:
Real Estate Loans:
Commercial Property
Retail		$	1,260			$	1,260			$	1,100			$	160			$	126			$	105			$	—
Land			3,178				3,210				—				3,178				360				16,910				78
Other			14,773				14,823				1,131				13,642				3,004				14,850				907
Construction			14,120				14,120				14,120				—				—				14,353				1,077
Residential Property			5,368				5,408				3,208				2,160				128				5,399				279
Commercial and Industrial Loans:
Commercial Term
Unsecured			16,035				16,559				244				15,791				10,793				15,685				1,043
Secured By Real Estate			53,159				54,156				14,990				38,169				7,062				51,977				3,652
Commercial Lines of Credit			1,431				1,554				715				716				716				1,590				82
SBA Loans			11,619				12,971				9,445				2,174				1,167				12,658				1,186
Consumer Loans			746				788				511				235				26				832				44
Total Gross Loans		$	121,689			$	124,849			$	45,464			$	76,225			$	23,382			$	134,359			$	8,348

 

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

 

		Year Ended December 31,
		2012				2011				2010
		(In Thousands)
Interest Income That Would Have Been Recognized Had Impaired Loans
Performed in Accordance With Their Original Terms		$	5,887			$	9,192			$	20,848
Less: Interest Income Recognized on Impaired Loans			(4,541	)			(8,348	)			(11,473	)
Interest Foregone on Impaired Loans		$	1,346			$	844			$	9,375

 

 

(1)	Includes interest income recognized on an accrual basis prior to classification as impaired.

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 loan class for the periods indicated:

 

		As of December 31,
		2012				2011
		(In Thousands)
Real Estate Loans:
Commercial Property
Retail		$	1,079			$	1,260
Land			2,097				2,362
Other			—				1,199
Construction			—				8,310
Residential Property			1,270				2,097
Commercial and Industrial Loans:
Commercial Term
Unsecured			8,311				7,706
Secured By Real Estate			8,679				11,725
Commercial Lines of Credit			1,521				1,431
SBA Loans			12,563				15,479
Consumer Loans			1,759				809
Total Non-Accrual Loans		$	37,279			$	52,378

 

The following table details non-performing assets for the periods indicated:

 

		As of December 31,
		2012				2011
		(In Thousands)
Non-Accrual Loans		$	37,279			$	52,378
Loans 90 Days or More Past Due and Still Accruing			—				—
Total Non-Performing Loans			37,279				52,378
Other Real Estate Owned			774				180
Total Non-Performing Assets		$	38,053			$	52,558

Loans on non-accrual status, excluding loans held for sale, totaled $37.3 million as of December 31, 2012, compared to $52.4 million as of December 31, 2011, representing a 28.8 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $16.5 million as of December 31, 2012, compared to $35.2 million as of December 31, 2011, representing a 53.1 percent decrease.

As of December 31, 2012, other real estate owned consisted of two properties located in Illinois and Virginia with a combined carrying value of $774,000 with no valuation adjustment. For the year ended December 31, 2012, six properties were transferred from loans receivable to other real estate owned at fair value less aggregate selling costs of $3.1 million, and a valuation adjustment of $433,000 was recorded. 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 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 year ended December 31, 2012, we restructured monthly payments on 59 loans, with a net carrying value of $15.0 million as of December 31, 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 restructurings, disaggregated by type of concession and by loan type as of December 31, 2012 and 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)
December 31, 2012:
Real Estate Loans:
Commercial Property
Retail		$	—			$	—			$	—			$	1,080			$	1,080			$	357			$	—			$	—			$	175			$	532
Other			—				—				—				—				—				527				—				—				—				527
Residential Property			827				—				—				—				827				—				572				—				—				572
Commercial and Industrial Loans:
Commercial Term
Unsecured			—				658				4,558				1,413				6,629				976				—				1,090				3,260				5,326
Secured By Real Estate			2,317				1,343				318				—				3,978				4,444				—				448				4,547				9,439
Commercial Lines of Credit			673				—				188				244				1,105				—				—				—				—				—
SBA Loans			2,831				1,287				1,032				—				5,150				484				—				100				—				584
Total		$	6,648			$	3,288			$	6,096			$	2,737			$	18,769			$	6,788			$	572			$	1,638			$	7,982			$	16,980
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 restructuring, disaggregated by loan class, for the years ended December 31, 2012 and 2011:

 

		For the Year Ended
		December 31, 2012												December 31, 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)			2			$	562			$	533				2			$	1,260			$	1,260
Other (2)			1				547				527				2				2,387				2,381
Residential Property (3)			—				—				—				3				2,740				2,739
Commercial and Industrial Loans:
Commercial Term
Unsecured (4)			37				6,024				5,277				50				15,410				14,797
Secured By Real Estate (5)			7				7,963				7,570				12				15,363				14,268
Commercial Lines of Credit (6)			1				202				188				—				—				—
SBA Loans (7)			11				1,022				951				29				7,954				6,670
Total			59			$	16,320			$	15,046				98			$	45,114			$	42,115

 

(1)	Includes modifications of $357,000 through payment deferrals and $175,000 through extensions of maturity for the year ended December 31, 2012, and $1.3 million through extensions of maturity for the year ended December 31, 2011.

 

(2)	Includes modifications of $527,000 through payment deferrals for the year ended December 31, 2012 and $2.4 million through payment deferrals for the year ended December 31, 2011.

 

(3)	Includes modifications of $2.7 million through payment deferrals for the year ended December 31, 2011.

 

(4)

Includes modifications of $909,000 through payment deferrals, $723,000 through reductions of principal or accrued interest, and $3.6 million through extensions of maturity for the year ended December 31, 2012, and $1.6 million through payment deferrals, $11.5 million through reductions of principal or accrued interest, and $1.5 million through extensions of maturity for the year ended December 31, 2011.

 

(5)

Includes modifications of $5.4 million through payment deferrals, $318,000 through reductions of principal or accrued interest, and $1.9 million through extensions of maturity for the year ended December 31, 2012, and $2.4 million through payment deferrals, $9.1 million through reduction of principal or accrued interest and $2.7 million through extensions of maturity for the year ended December 31, 2011.

 

(6)	Includes a modification of $188,000 through reductions of principal or accrued interest for the year ended December 31, 2012.

 

(7)

Includes modifications of $504,000 through payment deferrals and $447,000 through reductions of principal or accrued interest for the year ended December 31, 2012, and $5.7 million through payment deferrals and $957,000 through reductions of principal or accrued interest for the year ended December 31, 2011.

As of December 31, 2012 and 2011, total TDRs, excluding loans held for sale, was $35.7 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 TDRs 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 December 31, 2012 and 2011, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $3.6 million and $14.2 million, respectively, of reserves relating to these loans were included in the allowance for loan losses.

The following table details troubled debt restructurings that defaulted subsequent to the modifications occurring within the previous twelve months, disaggregated by loan class, during the years ended December 31, 2012 and 2011:

 

		For the Year Ended
		December 31, 2012								December 31, 2011
		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
		(In Thousands)
Commercial and Industrial Loans:
Commercial Term
Unsecured			8			$	554				6			$	2,368
Commercial Lines of Credit			1				188				—				—
SBA Loans			3				165				8				1,450
Totals			12			$	907				14			$	3,818

Servicing Assets

The changes in servicing assets were as follows for the years ended December 31, 2012 and 2011:

 

		As of December 31,
		2012				2011
		(In Thousands)
Balance at Beginning of Year		$	3,720			$	2,890
Addition			2,889				1,560
Amortization			(1,067	)			(730	)
Balance at End of Year		$	5,542			$	3,720

At December 31, 2012 and 2011, we serviced loans sold to unaffiliated parties in the amounts of $297.2 million and $218.5 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.