Note 3 — 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 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 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,
		2013				2012
		(In thousands)
Real estate loans:
Commercial property		$	887,782			$	787,094
Residential property			88,654				101,778
Total real estate loans			976,436				888,872
Commercial and industrial loans:
Commercial term (1)			940,555				884,364
Commercial lines of credit (2)			45,195				56,121
SBA loans (3)			157,240				148,306
International loans			32,583				34,221
Total commercial and industrial loans			1,175,573				1,123,012
Consumer loans			35,380				36,676
Total gross loans			2,187,389				2,048,560
Allowance for loans losses			(59,876	)			(63,305	)
Deferred loan fees			695				796
Loans receivable, net		$	2,128,208			$	1,986,051

 

(1)	Includes owner-occupied property loans of $838.5 million and $774.2 million as of June 30, 2013 and December 31, 2012, respectively.

(2)	Includes owner-occupied property loans of $1.0 million and $1.4 million as of June 30, 2013 and December 31, 2012, respectively.

(3)	Includes owner-occupied property loans of $142.9 million and $128.4 million as of June 30, 2013 and December 31, 2012, respectively.

Accrued interest on loans receivable was $5.7 million and $5.4 million at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013 and December 31, 2012, loans receivable totaling $691.6 million and $524.0 million, respectively, were pledged to secure advances from the FHLB and the FRB’s federal discount window.

 

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the three months ended June 30, 2013 and 2012:

 

						Commercial
		Real Estate				and Industrial				Consumer				Total
						(In thousands)
June 30, 2013
Balance at beginning of period		$	—			$	6,043			$	—			$	6,043
Origination of loans held for sale			—				22,834				—				22,834
Reclassification from loans receivable to loans held for sale			780				3,857				—				4,637
Sales of loans held for sale			—				(30,956	)			—				(30,956	)
Principal payoffs and amortization			—				(5	)			—				(5	)
Balance at end of period		$	780			$	1,773			$	—			$	2,553
June 30, 2012
Balance at beginning of period		$	10,879			$	45,114			$	—			$	55,993
Origination of loans held for sale			—				34,723				—				34,723
Reclassification from loans receivable to loans held for sale			15,148				11,842				—				26,990
Reclassification from loans held for sale to loans receivable			(1,647	)			(132	)			—				(1,779	)
Sales of loans held for sale			(21,909	)			(87,552	)			—				(109,461	)
Principal payoffs and amortization			(58	)			(146	)			—				(204	)
Valuation adjustments			(1,124	)			—				—				(1,124	)
Balance at end of period		$	1,289			$	3,849			$	—			$	5,138

For the three months ended June 30, 2013, loans receivable of $4.6 million were reclassified as loans held for sale, and loans held for sale of $31.0 million were sold. For the three months ended June 30, 2012, loans receivable of $27.0 million were reclassified as loans held for sale, and loans held for sale of $109.5 million were sold.

The following table details the information on the sales and reclassifications of loans receivable to loans held for sale by portfolio segment for the six months ended June 30, 2013 and 2012:

 

						Commercial
		Real Estate				and Industrial				Consumer				Total
						(In thousands)
June 30, 2013
Balance at beginning of period		$	—			$	8,306			$	—			$	8,306
Origination of loans held for sale			—				45,978				—				45,978
Reclassification from loans receivable to loans held for sale			780				7,230				—				8,010
Sales of loans held for sale			—				(59,721	)			—				(59,721	)
Principal payoffs and amortization			—				(20	)			—				(20	)
Balance at end of period		$	780			$	1,773			$	—			$	2,553
June 30, 2012
Balance at beginning of period		$	11,068			$	11,519			$	—			$	22,587
Origination of loans held for sale			—				60,589				—				60,589
Reclassification from loans receivable to loans held for sale			32,224				32,247				—				64,471
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			(38,703	)			(99,455	)			—				(138,158	)
Principal payoffs and amortization			(169	)			(262	)			—				(431	)
Valuation adjustments			(1,124	)			(657	)			—				(1,781	)
Balance at end of period		$	1,289			$	3,849			$	—			$	5,138

For the six months ended June 30, 2013, loans receivable of $8.0 million were reclassified as loans held for sale, and loans held for sale of $59.7 million were sold. For the six months ended June 30, 2012, loans receivable of $64.5 million were reclassified as loans held for sale, and loans held for sale of $138.2 million were sold.

 

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

In the first quarter of 2010, the look-back period was reduced from twelve quarters to eight quarters, with 60 percent weighting given to the most recent four quarters and 40 percent to the oldest four quarters, to place greater emphasis on losses taken by the Bank during the economic downturn. In the second quarter of 2013, management reevaluated the look-back period and restored the twelve quarter look-back period in order to capture a period of higher losses that would have otherwise been excluded. Risk factor calculations are weighted at 50 percent for the most recent four quarters, 33 percent for the next four quarters, and 17 percent for the oldest four quarters. As homogenous loans are bulk graded, the risk grade is not factored into the historical loss analysis. The change in methodology maintained the Bank’s allowance at a level consistent with prior quarter. Under the previous methodology, the Bank would have recognized a negative provision of $5.9 million, which the Bank did not consider to be prudent, given the uncertainty in the economy.

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												As of and for the
		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
		2013				2013				2012				2013				2012
		(In thousands)
Allowance for loan losses:
Balance at beginning of period		$	61,191			$	63,305			$	81,052			$	63,305			$	89,936
Actual charge-offs			(3,490	)			(3,024	)			(14,716	)			(6,514	)			(27,037	)
Recoveries on loans previously charged off			1,867				714				1,324				2,581				2,361
Net loan charge-offs			(1,623	)			(2,310	)			(13,392	)			(3,933	)			(24,676	)
Provision charged to operating expense			308				196				4,233				504				6,633
Balance at end of period		$	59,876			$	61,191			$	71,893			$	59,876			$	71,893
Allowance for off-balance sheet items:
Balance at beginning of period		$	1,628			$	1,824			$	2,581			$	1,822			$	2,981
Provision charged to operating expense			(308	)			(196	)			(233	)			(504	)			(633	)
Balance at end of period		$	1,320			$	1,628			$	2,348			$	1,318			$	2,348

The following table details the information on the allowance for loan losses by portfolio segment for the three months ended June 30, 2013 and 2012:

 

						Commercial
		Real Estate				and Industrial				Consumer				Unallocated				Total
		(In thousands)
June 30, 2013
Allowance for loan losses:
Beginning balance		$	17,832			$	39,560			$	1,795			$	2,004			$	61,191
Charge-offs			(146	)			(3,308	)			(36	)			—				(3,490	)
Recoveries on loans previously charged off			1,042				819				6				—				1,867
Provision			(248	)			1,963				119				(1,526	)			308
Ending balance		$	18,480			$	39,034			$	1,884			$	478			$	59,876
Ending balance: individually evaluated for impairment		$	28			$	5,011			$	385			$	—			$	5,424
Ending balance: collectively evaluated for impairment		$	18,452			$	34,023			$	1,499			$	478			$	54,452
Loans receivable:
Ending balance		$	976,436			$	1,175,573			$	35,380			$	—			$	2,187,389
Ending balance: individually evaluated for impairment		$	6,972			$	37,055			$	1,647			$	—			$	45,674
Ending balance: collectively evaluated for impairment		$	969,464			$	1,138,518			$	33,733			$	—			$	2,141,715
June 30, 2012
Allowance for loan losses:
Beginning balance		$	22,230			$	54,638			$	2,244			$	1,940			$	81,052
Charge-offs			(5,243	)			(9,393	)			(80	)			—				(14,716	)
Recoveries on loans previously charged off			517				789				18				—				1,324
Provision			3,902				776				(425	)			(20	)			4,233
Ending balance		$	21,406			$	46,810			$	1,757			$	1,920			$	71,893
Ending balance: individually evaluated for impairment		$	437			$	7,224			$	—			$	—			$	7,661
Ending balance: collectively evaluated for impairment		$	20,969			$	39,586			$	1,757			$	1,920			$	64,232
Loans receivable:
Ending balance		$	839,816			$	1,070,469			$	39,339			$	—			$	1,949,624
Ending balance: individually evaluated for impairment		$	16,619			$	42,087			$	1,401			$	—			$	60,107
Ending balance: collectively evaluated for impairment		$	823,197			$	1,028,382			$	37,938			$	—			$	1,889,517

 

The following table details the information on the allowance for loan losses by portfolio segment for the six months ended June 30, 2013 and 2012:

 

						Commercial
		Real Estate				and Industrial				Consumer				Unallocated				Total
		(In thousands)
June 30, 2013
Allowance for loan losses:
Beginning balance		$	18,180			$	41,928			$	2,280			$	917			$	63,305
Charge-offs			(359	)			(5,955	)			(200	)			—				(6,514	)
Recoveries on loans previously charged off			1,050				1,476				55				—				2,581
Provision			(391	)			1,585				(251	)			(439	)			504
Ending balance		$	18,480			$	39,034			$	1,884			$	478			$	59,876
Ending balance: individually evaluated for impairment		$	28			$	5,011			$	385			$	—			$	5,424
Ending balance: collectively evaluated for impairment		$	18,452			$	34,023			$	1,499			$	478			$	54,452
Loans receivable:
Ending balance		$	976,436			$	1,175,573			$	35,380			$	—			$	2,187,389
Ending balance: individually evaluated for impairment		$	6,972			$	37,055			$	1,647			$	—			$	45,674
Ending balance: collectively evaluated for impairment		$	969,464			$	1,138,518			$	33,733			$	—			$	2,141,715
June 30, 2012
Allowance for loan losses:
Beginning balance		$	19,637			$	66,005			$	2,243			$	2,051			$	89,936
Charge-offs			(8,085	)			(18,508	)			(444	)			—				(27,037	)
Recoveries on loans previously charged off			517				1,802				42				—				2,361
Provision			9,337				(2,489	)			(84	)			(131	)			6,633
Ending balance		$	21,406			$	46,810			$	1,757			$	1,920				71,893
Ending balance: individually evaluated for impairment		$	437			$	7,224			$	—			$	—				7,661
Ending balance: collectively evaluated for impairment		$	20,969			$	39,586			$	1,757			$	1,920				64,232
Loans receivable:																			—
Ending balance		$	839,816			$	1,070,469			$	39,339			$	—				1,949,624
Ending balance: individually evaluated for impairment		$	16,619			$	42,087			$	1,401			$	—				60,107
Ending balance: collectively evaluated for impairment		$	823,197			$	1,028,382			$	37,938			$	—				1,889,517

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, grades (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 category 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. The following are sub categories within the Pass category, or grades (0) to (4):

 

Pass (0):		Loans or commitments 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 requirements, 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 grade 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 not corrected, 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.

 

As of June 30, 2013 and December 31, 2012, pass (grade 0-4), criticized (grade 5) and classified (grade 6-7) loans, disaggregated by loan class, were as follows:

 

		Pass (Grade 0-4)				Criticized (Grade 5)				Classified (Grade 6-7)				Total Loans
		(In thousands)
June 30, 2013
Real estate loans:
Commercial property
Retail		$	433,954			$	3,755			$	2,362			$	440,071
Land			5,465				—				7,981				13,446
Other			419,664				12,026				2,575				434,265
Residential property			86,677				—				1,977				88,654
Commercial and industrial loans:
Commercial term
Unsecured			84,786				631				16,612				102,029
Secured by real estate			779,408				16,105				43,013				838,526
Commercial lines of credit			42,914				608				1,673				45,195
SBA loans			146,716				884				9,640				157,240
International loans			31,303				—				1,280				32,583
Consumer loans			32,617				181				2,582				35,380
Total gross loans		$	2,063,504			$	34,190			$	89,695			$	2,187,389
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
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 gross loans		$	1,913,379			$	31,987			$	103,194			$	2,048,560

 

The following is an aging analysis of past due loans, disaggregated by loan class, as of June 30, 2013 and December 31, 2012:

 

		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)
June 30, 2013
Real estate loans:
Commercial property
Retail		$	—			$	—			$	—			$	—			$	440,071			$	440,071			$	—
Land			—				—				—				—				13,446				13,446				—
Other			—				—				—				—				434,265				434,265				—
Residential property			—				219				810				1,029				87,625				88,654				—
Commercial and industrial loans:
Commercial term
Unsecured			416				455				1,885				2,756				99,273				102,029				—
Secured by real estate			—				—				122				122				838,404				838,526				—
Commercial lines of credit			—				146				188				334				44,861				45,195				—
SBA loans			2,376				2,707				3,718				8,801				148,439				157,240				—
International loans			—				—				—				—				32,583				32,583				—
Consumer loans			492				962				413				1,867				33,513				35,380				—
Total gross loans		$	3,284			$	4,489			$	7,136			$	14,909			$	2,172,480			$	2,187,389			$	—
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				—
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 gross loans		$	6,687			$	3,175			$	6,605			$	16,467			$	2,032,093			$	2,048,560			$	—

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
		(In thousands)
June 30, 2013
Real estate loans:
Commercial property
Retail		$	1,818			$	1,818			$	1,818			$	—			$	—
Land			1,612				1,902				1,612				—				—
Other			523				523				—				523				28
Residential property			3,019				3,091				3,019				—				—
Commercial and industrial loans:
Commercial term
Unsecured			12,689				13,742				3,440				9,249				3,863
Secured by real estate			16,492				17,649				15,887				605				119
Commercial lines of credit			1,052				1,259				1,052				—				—
SBA loans			5,541				8,832				3,363				2,178				998
International loans			1,281				1,280				572				709				31
Consumer loans			1,647				1,718				457				1,190				385
Total gross loans		$	45,674			$	51,814			$	31,220			$	14,454			$	5,424
December 31, 2012
Real estate loans:
Commercial property
Retail		$	2,930			$	3,024			$	2,930			$	—			$	—
Land			2,097				2,307				2,097				—				—
Other			527				527				—				527				67
Residential property			3,265				3,308				1,866				1,399				94
Commercial and industrial loans:
Commercial term
Unsecured			14,532				15,515				6,826				7,706				2,144
Secured by real estate			22,050				23,221				9,520				12,530				2,319
Commercial lines of credit			1,521				1,704				848				673				230
SBA loans			6,170				10,244				4,294				1,876				762
International loans			—				—				—				—				—
Consumer loans			1,652				1,711				449				1,203				615
Total gross loans		$	54,744			$	61,561			$	28,830			$	25,914			$	6,231

 

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

 

		Average Recorded Investment for the Three Months Ended				Interest Income Recognized for the Three Months Ended				Average Recorded Investment for the Six  Months Ended				Interest Income Recognized for the Six Months Ended
		(In thousands)
June 30, 2013
Real estate loans:
Commercial property
Retail		$	1,823			$	18			$	2,309			$	44
Land			1,637				40				1,674				80
Other			524				6				525				10
Residential property			3,027				31				3,043				59
Commercial and industrial loans:
Commercial term
Unsecured			12,933				221				13,093				406
Secured by real estate			16,539				305				17,026				618
Commercial lines of credit			1,060				9				1,286				24
SBA loans			5,595				281				6,034				554
International loans			1,330				—				1,414				—
Consumer loans			1,649				15				1,646				27
Total gross loans		$	46,117			$	926			$	48,050			$	1,822
June 30, 2012
Real estate loans:
Commercial property
Retail		$	2,546			$	19			$	1,945			$	48
Land			2,137				45				2,175				91
Other			878				11				1,138				33
Construction			7,983				89				8,090				178
Residential property			3,177				48				3,259				84
Commercial and industrial loans:
Commercial term
Unsecured			13,474				192				14,257				430
Secured by real estate			19,021				525				22,756				958
Commercial lines of credit			1,788				22				1,835				30
SBA loans			8,336				286				8,150				483
Consumer loans			1,402				2				903				10
Total gross loans		$	60,742			$	1,239			$	64,508			$	2,345

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

 

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2013				2012				2013				2012
		(In thousands)
Interest income that would have been recognized had impaired loans performed in accordance with their original terms		$	1,057			$	1,505			$	2,125			$	2,933
Less: Interest income recognized on impaired loans			(926	)			(1,239	)			(1,822	)			(2,345	)
Interest foregone on impaired loans		$	131			$	266			$	303			$	588

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, as of the dates indicated:

 

		June 30,				December 31,
		2013				2012
		(In thousands)
Real estate loans:
Commercial property
Retail		$	—			$	1,079
Land			1,612				2,097
Residential property			1,620				1,270
Commercial and industrial loans:
Commercial term
Unsecured			6,209				8,311
Secured by real estate			5,389				8,679
Commercial lines of credit			1,052				1,521
SBA loans			10,596				12,563
Consumer loans			1,497				1,759
Total non-accrual loans		$	27,975			$	37,279

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

 

		June 30,				December 31,
		2013				2012
		(In thousands)
Non-accrual loans		$	27,975			$	37,279
Loans 90 days or more past due and still accruing			—				—
Total non-performing loans			27,975				37,279
Other real estate owned			900				774
Total non-performing assets		$	28,875			$	38,053

Loans on non-accrual status, excluding loans held for sale, totaled $28.0 million as of June 30, 2013, compared to $37.3 million as of December 31, 2012, representing a 25.0 percent decrease. Delinquent loans (defined as 30 days or more past due), excluding loans held for sale, were $14.9 million as of June 30, 2013, compared to $16.5 million as of December 31, 2012, representing a 9.5 percent decrease.

As of June 30, 2013, other real estate owned consisted of two properties in Virginia and California with a combined carrying value of $900,000, and a valuation adjustment of $126,000 was recorded. As of December 31, 2012, there were two properties located in Illinois and Virginia with a combined carrying value of $774,000 and no valuation adjustment.

Troubled Debt Restructuring

In April 2011, the FASB issued ASU 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 three months ended June 30, 2013, we restructured monthly payments on 9 loans, with a net carrying value of $787,000 as of June 30, 2013, 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 concession type and by loan type, as of June 30, 2013 and December 31, 2012:

 

		Non-Accrual TDRs																				Accrual TDRs
		Deferral of Principal				Deferral of Principal and Interest				Reduction of Principal and Interest				Extension of Maturity				Total				Deferral of Principal				Deferral of Principal and Interest				Reduction of Principal and Interest				Extension of Maturity				Total
																		(In thousands)
June 30, 2013
Real estate loans:
Commercial property
Retail		$	—			$	—			$	—			$	—			$	—			$	342			$	—			$	—			$	174			$	516
Other			—				—				—				—				—				523				—				—				—				523
Residential property			811				—				—				—				811				—				—				—				—				—
Commercial and industrial loans:
Commercial term
Unsecured			—				570				2,830				926				4,326				906				—				1,848				2,671				5,425
Secured by real estate			2,221				1,035				279				—				3,535				2,116				—				579				4,510				7,205
Commercial lines of credit			656				—				188				208				1,052				—				—				—				—				—
SBA loans			1,641				1,191				811				—				3,643				450				—				75				—				525
International loans			—				—				—				—				—				—				—				1,280				—				1,280
Consumer loans			—				—				—				—				—				—				—				149				—				149
Total		$	5,329			$	2,796			$	4,108			$	1,134			$	13,367			$	4,337			$	—			$	3,931			$	7,355			$	15,623
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

The following table details troubled debt restructuring, disaggregated by loan class, for the three months ended June 30, 2013 and 2012:

 

		June 30, 2013												June 30, 2012
		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)
Commercial and industrial loans:
Commercial term
Unsecured (1)			6			$	518			$	498				10			$	1,640			$	1,588
Secured by real estate (2)			—				—				—				1				378				358
Commercial lines of credit (3)			1				—				—				1				196				192
SBA loans (4)			1				148				140				4				681				653
Consumer loans (5)			1				149				149				—				—				—
Total			9			$	815			$	787				16			$	2,895			$	2,791

 

(1)

Includes modifications of $42,000 through a reduction of principal or accrued interest and $456,000 through extensions of maturity for the three months ended June 30, 2013, and modifications of $1.2 million through payment deferrals and $394,000 through extensions of maturity for the three months ended June 30, 2012.

(2)	Includes a modification of $358,000 through a reduction of principal or accrued interest for the three months ended June 30, 2012.

(3)	Includes a modification of zero through a reduction of principal or accrued interest for the three months ended June 30, 2013 and a modification of $192,000 through a reduction of principal or accrued interest for the three months ended June 30, 2012.

(4)	Includes a modification of $140,000 through a reduction of principal or accrued interest for the three months ended June 30, 2013, and modifications of $362,000 through payment deferrals and $291,000 through reductions of principal or accrued interest for the three months ended June 30, 2012.

(5)	Includes a modification of $149,000 through a reduction of principal or accrued interest for the three months ended June 30, 2013.

 

The following table details troubled debt restructuring, disaggregated by loan class, for the six months ended June 30, 2013 and 2012:

 

		June 30, 2013												June 30, 2012
		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)
Commercial and industrial loans:
Commercial term
Unsecured (1)			7				764				692				27				4,696				4,426
Secured by real estate (2)			—				—				—				3				2,211				2,144
Commercial lines of credit (3)			1				—				—				1				202				192
SBA loans (4)			2				161				147				9				975				934
International loans (5)			2				1,584				1,280				—				—				—
Consumer loans (6)			1				149				149				—				—				—
Total			13			$	2,658			$	2,268				40			$	8,084			$	7,696

 

(1)

Includes modifications of $42,000 through a reduction of principal or accrued interest and $650,000 through extensions of maturity for the six months ended June 30, 2013, and modifications of $893,000 through payment deferrals, $1.9 million through reductions of principal or accrued interest and $1.6 million through extensions of maturity for the six months ended June 30, 2012.

(2)	Includes modifications of $1.6 million through reductions of principal or accrued interest and $497,000 through an extension of maturity for the six months ended June 30, 2012.

(3)	Includes a modification of zero through a reduction of principal or accrued interest for the three months ended June 30, 2013 and a modification of $192,000 through a reduction of principal or accrued interest for the six months ended June 30, 2012.

(4)

Includes modifications of $7,000 through a payment deferral and $140,000 through a reduction of principal or accrued interest for the six months ended June 30, 2013, and modifications of $503,000 through payments deferral and $442,000 through reductions of principal or accrued interest for the six months ended June 30, 2012.

(5)	Includes a modification of $1.3 million through reductions of principal or accrued interest for the six months ended June 30, 2013.

(6)	Includes a modification of $149,000 through a reduction of principal or accrued interest for the six months ended June 30, 2013.

As of June 30, 2013 and December 31, 2012, total TDRs, excluding loans held for sale, were $29.0 million and $35.7 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 June 30, 2013 and December 31, 2012, TDRs, excluding loans held for sale, were subjected to specific impairment analysis, and $3.3 million and $3.6 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, for the three and six months ended June 30, 2013 and 2012, respectively:

 

		Three Months Ended																Six Months Ended
		June 30, 2013								June 30, 2012								June 30, 2013								June 30, 2012
		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
														(In thousands, except number of loans)
Commercial and industrial loans:
Commercial term
Unsecured			4			$	311				6			$	636				4			$	311				7			$	677
Secured by real estate			—				—				—				—				1				1,274				—				—
Commercial lines of credit			—				—				1				273				—				—				1				273
SBA loans			2				170				12				1,042				2				170				12				1,042
Total			6			$	481				19			$	1,951				7			$	1,755				20			$	1,992

 

Servicing Assets

The changes in servicing assets for the six months ended June 30, 2013 and 2012 were as follows:

 

		Six Months Ended June 30,
		2013				2012
		(In thousands)
Balance at beginning of period		$	5,542			$	3,720
Additions			1,580				1,702
Amortization			(739	)			(419	)
Balance at end of period		$	6,383			$	5,003

At June 30, 2013 and 2012, we serviced loans sold to unaffiliated parties in the amounts of $330.4 million and $268.8 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.