Note 5 – Loans Receivable Held for Investment

Loans at year-end were as follows:


	December 31,
	2012			2011
	(In thousands)
Real estate:
One-to-four units	$	57,733		$	76,682
Five or more units		83,350			108,161
Commercial real estate		41,124			54,259
Church		76,254			89,099
Construction		735			3,790
Commercial:
Sports		1,711			1,996
Other		2,115			4,900
Consumer:
Loan on savings		0			821
Other		104			108

Total gross loans receivable		263,126			339,816
Less:
Loans in process		74			202
Net deferred loan fees (costs)		(557	)		(473	)
Unamortized discounts		17			18
Allowance for loan losses		11,869			17,299

Loans receivable, net	$	251,723		$	322,770

The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2012 and 2011:


	For the year ended December 31, 2012
	One-to-four units			Five or more units			Commercial real estate			Church			Construction			Commercial			Consumer			Total
	(In thousands)
Beginning balance	$	4,855		$	2,972		$	3,108		$	5,742		$	249		$	247		$	126		$	17,299
Provision for loan losses		2,318			(747	)		61			415			(241	)		(561	)		(55	)		1,190
Recoveries		25			1			60			15			0			412			7			520
Loans charged off		(5,138	)		(104	)		(544	)		(1,354	)		0			0			0			(7,140	)

Ending balance	$	2,060		$	2,122		$	2,685		$	4,818		$	8		$	98		$	78		$	11,869


	For the year ended December 31, 2011
	One-to-four units			Five or more units			Commercial real estate			Church			Construction		Commercial			Consumer			Total
	(In thousands)
Beginning balance	$	4,579		$	2,469		$	3,493		$	6,909		$	74	$	1,300		$	1,634		$	20,458
Provision for loan losses		1,172			939			4,144			2,616			175		2,796			311			12,153
Recoveries		0			2			15			4			0		67			24			112
Loans charged off		(896	)		(438	)		(4,544	)		(3,787	)		0		(3,916	)		(1,843	)		(15,424	)

Ending balance	$	4,855		$	2,972		$	3,108		$	5,742		$	249	$	247		$	126		$	17,299

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2012 and 2011:


	December 31, 2012
	One-to- four units		Five or more units		Commercial real estate		Church		Construction		Commercial		Consumer		Total
	(In thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	719	$	125	$	543	$	1,276	$	0	$	0	$	69	$	2,732
Collectively evaluated for impairment		1,341		1,997		2,142		3,542		8		98		9		9,137

Total ending allowance balance	$	2,060	$	2,122	$	2,685	$	4,818	$	8	$	98	$	78	$	11,869

Loans:
Loans individually evaluated for impairment	$	4,576	$	3,766	$	10,364	$	25,328	$	273	$	0	$	69	$	44,376
Loans collectively evaluated for impairment		53,157		79,584		30,760		50,926		462		3,826		35		218,750

Total ending loans balance	$	57,733	$	83,350	$	41,124	$	76,254	$	735	$	3,826	$	104	$	263,126


	December 31, 2011
	One-to- four units		Five or more units		Commercial real estate		Church		Construction		Commercial		Consumer		Total
	(In thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,678	$	161	$	255	$	1,683	$	97	$	0	$	70	$	3,944
Collectively evaluated for impairment		3,177		2,811		2,853		4,059		152		247		56		13,355

Total ending allowance balance	$	4,855	$	2,972	$	3,108	$	5,742	$	249	$	247	$	126	$	17,299

Loans:
Loans individually evaluated for impairment	$	13,246	$	3,837	$	7,396	$	31,494	$	302	$	0	$	70	$	56,345
Loans collectively evaluated for impairment		63,436		104,324		46,863		57,605		3,488		6,896		859		283,471

Total ending loans balance	$	76,682	$	108,161	$	54,259	$	89,099	$	3,790	$	6,896	$	929	$	339,816

The following table presents information related to loans individually evaluated for impairment by class of loans as of December 31, 2012 and 2011:


	December 31, 2012						December 31, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
One-to-four units	$	1,986	$	1,484	$	0	$	6,904	$	4,636	$	0
Five or more units		2,038		1,819		0		2,946		2,871		0
Commercial real estate		10,184		6,423		0		9,105		5,449		0
Church		18,664		15,689		0		24,680		20,560		0
Construction		279		273		0		0		0		0
Commercial:
Sports		3,888		0		0		4,000		0		0
Other		0		0		0		285		0		0
With an allowance recorded:
One-to-four units		3,092		3,092		719		8,610		8,610		1,678
Five or more units		1,947		1,947		125		966		966		161
Commercial real estate		3,941		3,941		543		1,947		1,947		255
Church		9,677		9,639		1,276		10,934		10,934		1,683
Construction		0		0		0		302		302		97
Commercial:
Other		69		69		69		70		70		70

Total	$	55,765	$	44,376	$	2,732	$	70,749	$	56,345	$	3,944

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for net charge-offs.

The following table presents monthly average of individually impaired loans by class of loans and the related interest income for the years ended December 31, 2012 and 2011.


	For the year ended December 31, 2012				For the year ended December 31, 2011
	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized

	(In thousands)
One-to-four units	$	13,112	$	528	$	10,836	$	486
Five or more units		2,964		86		3,199		153
Commercial real estate		7,922		230		11,687		483
Church		30,802		967		30,148		1,445
Construction		290		12		314		23
Commercial:
Sports		0		0		2,566		0
Other		0		0		297		16
Consumer:
Loan on savings		0		0		796		0
Other		70		5		0		0

Total	$	55,160	$	1,828	$	59,843	$	2,606

Cash-basis interest income recognized represents cash received for interest payments on accruing impaired loans. Interest income that would have been recognized for the years ended December 31, 2012 and 2011 had loans performed in accordance with their original terms were $4.0 million and $5.1 million.

The following table presents the recorded investment in non-accrual loans by class of loans as of December 31, 2012 and 2011:


	December 31,
	2012		2011
	(In thousands)
Loans receivable held for sale:
One-to-four units	$	6,656	$	0
Five or more units		1,956		2,496
Commercial real estate		0		338
Church		1,556		2,778
Loans receivable held for investment:
One-to-four units		1,489		7,974
Five or more units		2,312		3,450
Commercial real estate		7,090		5,449
Church		15,689		21,891
Construction		273		302
Consumer:
Other		69		70

Total non-accrual loans	$	37,090	$	44,748

There were no loans 90 days or more delinquent that were accruing interest as of December 31, 2012 and 2011.

The following tables present the aging of the recorded investment in past due loans, including loans held for sale, as of December 31, 2012 and 2011 by class of loans:


	December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Loans Not Past Due
	(In thousands)
Loans receivable held for sale:
One-to-four units	$	0	$	871	$	6,656	$	7,527	$	389
Five or more units		0		0		1,956		1,956		3,839
Commercial real estate		0		0		0		0		1,358
Church		0		0		1,556		1,556		2,744
Loans receivable held for investment:
One-to-four units		1,077		0		1,489		2,566		55,167
Five or more units		587		554		2,312		3,453		79,897
Commercial real estate		0		0		7,090		7,090		34,034
Church		1,617		0		15,689		17,306		58,948
Construction		0		0		273		273		462
Commercial:
Sports		0		0		0		0		1,711
Other		0		0		0		0		2,115
Consumer:
Other		0		0		69		69		35

Total	$	3,281	$	1,425	$	37,090	$	41,796	$	240,699


	December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Loans Not Past Due
					(In thousands)
Loans receivable held for sale:
Five or more units	$	0	$	0	$	2,496	$	2,496	$	3,899
Commercial real estate		0		0		338		338		1,374
Church		0		0		2,778		2,778		2,772
Loans receivable held for investment:
One to four units		921		2,464		7,974		11,359		65,323
Five or more units		1,324		63		3,450		4,837		103,324
Commercial real estate		2,247		525		5,449		8,221		46,038
Church		2,647		1,440		21,891		25,978		63,121
Construction		0		264		302		566		3,224
Commercial:
Sports		0		0		0		0		1,996
Other		125		0		0		125		4,775
Consumer:
Loan on savings		0		0		0		0		821
Other		0		0		70		70		38

Total	$	7,264	$	4,756	$	44,748	$	56,768	$	296,705

Troubled Debt Restructurings

The Company has allocated $2.5 million and $2.6 million of specific reserves for loans the terms of which have been modified in troubled debt restructurings and were performing as of December 31, 2012 and December 31, 2011. At December 31, 2012, loans classified as a TDR totaled $41.1 million, of which $22.8 million were included in non-accrual loans and $18.3 million were on accrual status. At December 31, 2011, loans classified as a TDR totaled $37.1 million, of which $19.4 million were included in non-accrual loans and $17.7 million were on accrual status. TDRs on accrual status are comprised of loans that were accruing at the time of restructuring or loans that have complied with the terms of their restructured agreements for a satisfactory period of time, and for which the Bank anticipates full repayment of both principal and interest. TDRs that are on non-accrual can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments as modified. As of December 31, 2012 and December 31, 2011, the Company has no commitment to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the year ended December 31, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 10 months to 7 years. Modifications involving an extension of the maturity date were for periods ranging from 10 months to 5 years.

The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2012 and 2011:


	Year Ended December 31, 2012						Year Ended 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
	(Dollars in thousands)
One-to-four units		2	$	115	$	115		9	$	7,711	$	7,745
Five or more units		6		2,205		2,351		1		494		459
Commercial real estate		6		4,515		4,716		0		0		0
Church		13		7,036		7,123		12		9,211		8,681
Other		1		0		0		1		70		70

Total		28	$	13,871	$	14,305		23	$	17,486	$	16,955

The troubled debt restructurings described above increased the allowance for loan losses by $778 thousand and $2.5 million for the years ended December 31, 2012 and 2011 and resulted in charge offs of $279 thousand and $928 thousand during the years ended December 31, 2012 and 2011.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the years ended December 31, 2012 and 2011:


	Year Ended December 31, 2012				Year Ended December 31, 2011
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial real estate		0	$	0		1	$	418
Church		4		3,211		0		0

Total		4	$	3,211		1	$	418

The terms of certain other loans were modified during 2012 and 2011 that did not meet the definition of a troubled debt restructuring. As of December 31, 2012 and 2011, these loans have a total recorded investment of $791 thousand and $7.2 million, respectively. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. For one-to-four family residential, consumer and other smaller balance homogenous loans, a credit grade is established at inception, and generally only adjusted based on performance. Information about payment status is disclosed elsewhere. The Company analyzes all other loans individually by classifying the loans as to credit risk. This analysis is performed at least on a quarterly basis. The Company uses the following definitions for risk ratings:

•

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

•

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

•

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

•

Loss. Loans classified as loss are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans as of December 31, 2012 and December 31, 2011 was as follows:


	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Loss
					(In thousands)
One-to-four units	$	55,613	$	631	$	1,489	$	0	$	0
Five or more units		73,673		5,250		4,427		0		0
Commercial real estate		25,605		2,541		12,921		57		0
Church		33,532		19,502		23,220		0		0
Construction		462		0		273		0		0
Commercial:
Sports		0		1,711		0		0		0
Other		1,877		141		97		0		0
Consumer:
Other		35		0		69		0		0

Total	$	190,797	$	29,776	$	42,496	$	57	$	0


	December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Loss
					(In thousands)
One-to-four units	$	63,483	$	3,044	$	9,846	$	309	$	0
Five or more units		95,621		7,450		4,939		151		0
Commercial real estate		36,098		6,721		11,364		76		0
Church		37,532		13,100		37,873		594		0
Construction		500		2,988		302		0		0
Commercial:
Sports		0		1,996		0		0		0
Other		2,363		2,369		168		0		0
Consumer:
Loan on savings		821		0		0		0		0
Other		108		0		0		0		0

Total	$	236,526	$	37,668	$	64,492	$	1,130	$	0