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LOANS AND ALLOWANCE FOR LOAN LOSSES
 3 Months Ended
Mar. 31, 2013
Loans And Allowance For Loan Losses  
Loans and Allowance for Loan Losses ("ALLL")
6.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The activity in the ALLL for the first three months of 2013 and 2012 and related asset balances at March 31, 2013 and December 31, 2012 is summarized as follows:

 

   March 31, 2013 
           Faith-                     
           Based   Residential                 
       Commercial   Non-   Real       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Estate   Consumer   Loans   Unallocated   Total 
ALLL:                                
                                 
Beginning of year balance  $90   $881   $1,246   $937   $30   $54   $261   $3,499 
Charge-offs   —    —    —    —    (7)   —    —    (7)
Recoveries   —    —    —    4    5    —    —    9 
Provision for loan losses   (14)   311    32    (90)   (1)   (6)   (232)   — 
Balance at March 31, 2013  $76   $1,192   $1,278   $851   $27   $48   $29   $3,501 

 

   March 31, 2012 
           Faith-                     
           Based   Residential                 
       Commercial   Non-   Real       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Estate   Consumer   Loans   Unallocated   Total 
ALLL:                                
                                 
Beginning of the balance  $348   $971   $1,128   $1,299   $62   $42   $—   $3,850 
Charge-offs   —    (56)   —    (98)   (12)   —    —    (166)
Recoveries   —    4    1    4    4    —    —    13 
Provision for loan losses   (284)   133    (21)   102    (8)   10    68    — 
Balance at March 31, 2012  $64   $1,052   $1,108   $1,307   $46   $52   $68   $3,697 

 

 

   March 31, 2013 
           Faith                     
           Based                     
       Commercial   Non-   Residential       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Real Estate   Consumer   Loans   Unallocated   Total 
ALLL:                                        
  Ending ALLL balance attributable to loans:                          
Individually evaluated for impairment  $—   $209   $27   $288   $—   $—   $—   $524 
Collectively evaluated for impairment   76    983    1,251    563    27    48    29    2,977 
Total ending ALLL balance  $76   $1,192   $1,278   $851   $27   $48   $29   $3,501 
                                         
Loans:                                        
Loans individually evaluated for impairment  $—   $7,406   $14,761   $4,316   $14   $—   $—   $26,497 
Loans collectively evaluated for impairment   2,382    46,631    71,317    28,937    1,218    2,653    —    153,138 
Total ending loans balance  $2,382   $54,037   $86,078   $33,253   $1,232   $2,653   $—   $179,635 

 

   December 31, 2012 
           Faith                     
           Based                     
       Commercial   Non-   Residential       Other         
(Dollars in thousands)  Commercial   Real Estate   Profit   Real Estate   Consumer   Loans   Unallocated   Total 
ALLL:                                
Ending ALLL balance attributable to loans:                    
Individually evaluated for impairment  $—   $87   $44   $349   $—   $—   $—   $480 
Collectively evaluated for impairment   90    794    1,202    588    30    54    261    3,019 
Total ending ALLL balance  $90   $881   $1,246   $937   $30   $54   $261   $3,499 
                                         
Loans:                                        
Loans individually evaluated for impairment  $—   $4,837   $14,907   $2,443   $16   $—   $—   $22,203 
Loans collectively evaluated for impairment   3,282    43,332    70,990    31,331    1,330    2,754    —    153,019 
Total ending loans balance  $3,282   $48,169   $85,897   $33,774   $1,346   $2,754   $—   $175,222 

 

 

The Bank experienced $2 thousand in net loan recoveries for the three months ended March 31, 2013 compared to $153 thousand in net loan charge-offs for the three months ended March 31, 2012. Annualized net charge-offs/(recoveries) as a percent of average loan balances outstanding totaled 0.00% and 0.35% during the three month periods ended March 31, 2013 and 2012, respectively, and 0.27% for the year ended December 31, 2012.

 

Loans— Loans are stated at the amount of unpaid principal, net of deferred loan origination fees and costs. Nonrefundable loan fees, net of direct costs, associated with the origination or acquisition of loans are deferred and recognized as an adjustment of the loan yield over the life of the respective loan using the effective interest method. Loans (net) are reduced by the ALLL. Interest on loans is accrued on the daily balances of unpaid principal outstanding. Interest income is accrued and credited to income only if deemed collectible. Other loan fees and charges, representing service charges for the prepayment of loans, for delinquent payments, or for miscellaneous loan services, are recorded in income when collected.

 

A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its ALLL. The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of March 31, 2013 and December 31, 2012 was as follows:

 

(Dollars in thousands)  March 31, 2013   December 31, 2012 
Commercial  $2,382   $3,282 
Commercial real estate:          
Construction   3,602    3,621 
Owner occupied   17,759    18,377 
Other   32,676    26,171 
Faith-based non-profit          
Construction   —    2,344 
Owner Occupied   78,849    76,418 
Other   7,229    7,135 
Residential real estate:          
First mortgage   24,274    24,702 
Multifamily   5,750    5,828 
Home equity   3,229    3,161 
Construction   —    83 
Consumer   1,232    1,346 
Other loans   2,653    2,754 
Loans, net of deferred fees   179,635    175,222 
ALLL   (3,501)   (3,499)
Loans, net of ALLL  $176,134   $171,723 

 

The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience. As of March 31, 2013, the percentage of loans in this niche, which included construction, real estate secured, and lines of credit, comprised approximately 47.92% of the total loan portfolio and the reserve for these loans was 36.50% of the total allowance. Historically the Bank has experienced low levels of loan losses in this niche; however, repayment of these loans is generally dependent on voluntary contributions which some have been adversely affected by the current economic downturn.

 

Non-Performing Loans and Leases - Generally, all classes of loans and leases are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans are adequately secured by collateral, are in the process of collection, and are reasonably expected to result in repayment), or where substantial doubt about full repayment of principal or interest is evident.

 

When a loan is placed on non-accrual status, regardless of class, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method until qualifying for return to accrual status. All payments received on non-accrual loans and leases are applied against the principal balance of the loan or lease. Loans may be returned to accrual status when all principal and interest amounts contractually due (including any arrearages) are reasonably assured of repayment within a reasonable period, the borrower has demonstrated payment performance for a minimum of six months in accordance with the original or revised contractual terms of the loan, and when doubt about repayment is resolved.

 

Generally, for all classes of loans and leases, a charge-off is recorded when it is probable that a loss has been incurred and when it is possible to determine a reasonable estimate of the loss. For all classes of commercial loans and leases, a charge-off is determined on a subjective basis after due consideration of the debtor's prospects for repayment and the fair value of collateral. For closed-end consumer loans, the entire outstanding balance of the loan is charged-off during the month that the loan becomes 120 days past due as to principal or interest. Consumer loans with non-real estate collateral are written down to the value of the collateral, less estimated costs to sell, if repossession of collateral is assured and in process. For residential mortgage and home equity loan classes, a partial charge-off is recorded at 120 days past due as to principal or interest for the amount that the loan balance exceeds the fair value of the collateral less estimated costs to sell.

 

Impaired Loans - A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due from the borrower in accordance with the original contractual terms of the loan, including scheduled interest payments. Impaired loans include all classes of commercial non-accruing loans and Troubled Debt Restructurings ("TDRs"). Impaired loans exclude smaller balance homogeneous loans (consumer and small business non-accruing loans) not in the process of foreclosure that are collectively evaluated for impairment.

 

For all classes of commercial loans, a quarterly evaluation of specific individual commercial borrowers with identified weaknesses is performed to identify impaired loans. The identification of specific borrowers for review is based on a review of non-accrual loans as well as those loans specifically identified by management as exhibiting above average levels of risk.

 

When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized by creating or adjusting an existing allocation of the ALLL, or by recording a partial charge-off of the loan to its estimated fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.

 

Income Recognition on Impaired and Non-accrual Loans - Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity, or payment of principal or interest for a period of more than 90 days, unless such loans are well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as non-accrual. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if full repayment of principal and/or interest is in doubt.

 

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period of time, and the borrower has demonstrated payment performance for a minimum of six months in accordance with the contractual terms involving payments of cash or cash equivalents. During the non-accrual period, all payments received will be applied to principal. After a loan is returned to accruing status, foregone interest will be accreted to interest income on a pro-rata basis over the remaining term of the loan if full repayment of principal and interest is reasonably assured.

 

In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the remaining loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the ALLL until prior charged off balances have been fully recovered.

 

The following tables show past due loans and loans past due 90 days or more and still accruing for the quarters ended March 31, 2013 and December 31, 2012:

 

March 31, 2013          90 Days             
   30-59 Days   60-89 Days   Or More   Total Past         
(Dollars in thousands)  Past Due   Past Due   Past Due   Due   Current   Total 
                         
Commercial  $88   $5   $—   $93  $2,289   $2,382 
Commercial real estate:                              
Construction   —    —    —    —    3,602    3,602 
Owner occupied   —    2,588    1,317    3,905   13,854    17,759 
Other   41    —    48    89   32,587    32,676 
Faith-based non-profit                              
Construction   —    —    —    —    —    — 
Owner Occupied   378    —    1,872    2,250   76,599    78,849 
Other   —    —    —    —   7,229    7,229 
Residential real estate:                              
First mortgage   1,960    739    808    3,507   20,767    24,274 
Multifamily   —    —    —    —    5,750    5,750 
Home equity   128    101    69    298   2,931    3,229 
Construction   —    —    —    —    —    — 
Consumer   6    —    —    6   1,226    1,232 
Other loans   —    —    —    —    2,653    2,653 
Total  $2,601   $3,433   $4,114   $10,148   $169,487   $179,635 

 

 

December 31, 2012          Greater than             
   30-59 Days   60-89 Days   90 Days Past   Total Past         
(Dollars in thousands)  Past Due   Past Due   Due   Due   Current   Total 
                         
Commercial  $—   $353   $—   $353  $2,929   $3,282 
Commercial real estate:                              
Construction   —    —    —    —    3,621    3,621 
Owner occupied   —    —    263    263   18,114    18,377 
Other   1,570    856    400    2,826   23,345    26,171 
Faith-based non-profit                              
Construction   —    —    —    —    2,344    2,344 
Owner Occupied   1,845    —    661    2,506   73,912    76,418 
Other   —    —    —    —   7,135    7,135 
Residential real estate:                              
First mortgage   787    548    2,812    4,147   20,555    24,702 
Multifamily   —    —    —    —    5,828    5,828 
Home equity   122    120    108    350   2,811    3,161 
Construction   —    —    —    —    83    83 
Consumer   8    9    —    17   1,329    1,346 
Other loans   —    —    —    —    2,754    2,754 
Total  $4,332   $1,886   $4,244   $10,462  $164,760   $175,222 

 

At March 31, 2013 and December 31, 2012, the total recorded investment in impaired loans amounted to $26.5 million and $24.1 million, respectively. Of these impaired loans, $8.6 million and $8.7 million were on non-accrual at March 31, 2013 and December 31, 2012, respectively.

 

The recorded investment and related information for impaired loans is summarized as follows for March 31, 2013 and December 31, 2012:

 

   March 31, 2013 
   At end of period   For Period Ended 
   Unpaid           Interest   Average 
   Principal   Recorded   ALLL   Income   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Recognized   Investment 
                     
With no related allowance recorded:                         
Commercial  $—   $—   $—   $—   $295 
Commercial real estate:                         
Construction   366    366    —    7    279 
Owner occupied   524    524    —    8    581 
Other   6,279    6,279    —    59    4,742 
Faith based non-profit:                         
Construction   —    —    —    —    — 
Owner occupied   14,336    14,336    —    142    10,193 
Other   —    —    —    —    — 
Residential real estate:                         
First mortgage   3,094    3,060    —    7    1,258 
Multifamily   —    —    —    —    — 
Home equity   103    103    —    —    92 
Construction   —    —    —    —    — 
Consumer   14    14    —    —    4 
Impaired loans with no allowance recorded  $24,716   $24,682   $—   $223   $17,444 
                          
With an allowance recorded:                         
Commercial  $—   $—   $—   $—   $— 
Commercial real estate:                         
Construction   —    —    —    —    — 
Owner occupied   237    237    209    5    59 
Other   —    —    —    —    501 
Faith based non-profit:                         
Construction   —    —    —    —    — 
Owner occupied   425    425    27    7    214 
Other   —    —    —    —    — 
Residential real estate:                         
First mortgage   1,153    1,153    288    —    660 
Multifamily   —    —    —    —    — 
Home equity   —    —    —    —    — 
Construction   —    —    —    —    — 
Consumer   —    —    —    —    — 
Impaired loans with allowance recorded  $1,815   $1,815   $524   $12   $1,434 
Impaired loans  $26,531   $26,497   $524   $235   $18,878 

 

   March 31, 2012 
   At end of period   For Period Ended 
   Unpaid           Interest   Average 
   Principal   Recorded   ALLL   Income   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Recognized   Investment 
                     
With no related allowance recorded:                         
Commercial  $1,567   $590   $—   $—   $590 
Commercial real estate:                         
Construction   618    618    —    —    623 
Owner occupied   728    728    —    11    973 
Other   5,114    5,114    —    31    4,492 
Faith based non-profit:                         
Construction   —    —    —    —    — 
Owner occupied   10,293    10,287    —    103    11,597 
Other   —    —    —    —    — 
Residential real estate:                         
First mortgage   610    600    —    1    761 
Multifamily   —    —    —    —    — 
Home equity   —    —    —    —    — 
Construction   —    —    —    —    — 
Consumer   —    —    —    —    — 
Impaired loans with no allowance recorded  $18,930   $17,937   $—   $146   $19,036 
                          
With an allowance recorded:                         
Commercial  $—   $—   $—   $—   $— 
Commercial real estate:                         
Construction   377    377    14    10    378 
Owner occupied   241    242    102    5    469 
Other   416    416    76    8    228 
Faith based non-profit:                         
Construction   —    —    —    —    — 
Owner occupied   904    904    50    17    907 
Other   —    —    —    —    — 
Residential real estate:                         
First mortgage   33    33    4    —    415 
Multifamily   —    —    —    —    — 
Home equity   —    —    —    —    231 
Construction   —    —    —    —    — 
Consumer   —    —    —    —    1 
Impaired loans with allowance recorded  $1,971   $1,972   $246   $40   $2,629 
Impaired loans  $20,901   $19,909   $246   $186   $21,665 

 

   December 31, 2012 
   At end of period   For Period Ended 
   Unpaid           Interest   Average 
   Principal   Recorded   ALLL   Income   Recorded 
(Dollars in thousands)  Balance   Investment   Allocated   Recognized   Investment 
                     
With no related allowance recorded:                         
Commercial  $—   $—   $—   $—   $295 
Commercial real estate:                         
Construction   371    371    —    31    300 
Owner occupied   530    530    —    38    635 
Other   4,312    3,698    —    129    4,473 
Faith based non-profit:                         
Construction   —    —    —    —    — 
Owner occupied   14,479    14,479    —    567    12,261 
Other   —    —    —    —    1,611 
Residential real estate:                         
First mortgage   814    814    —    19    2,671 
Multifamily   —    —    —    —    — 
Home equity   86    86    —    3    111 
Construction   —    —    —    —    — 
Consumer   16    16    —    —    4 
Impaired loans with no allowance recorded  $20,608   $19,994   $—   $787   $22,361 
                          
With an allowance recorded:                         
Commercial  $—   $—   $—   $—   $— 
Commercial real estate:                         
Construction   —    —    —    —    — 
Owner occupied   238    238    87    15    60 
Other   —    —    —    —    500 
Faith based non-profit:                         
Construction   —    —    —    —    214 
Owner occupied   428    428    44    30    — 
Other   —    —    —    —    — 
Residential real estate:                         
First mortgage   1,543    1,543    349    45    757 
Multifamily   —    —    —    —    — 
Home equity   —    —    —    —    — 
Construction   —    —    —    —    — 
Consumer   —    —    —    —    — 
Impaired loans with allowance recorded  $2,209   $2,209   $480   $90   $1,531 
Impaired loans  $22,817   $22,203   $480   $877   $23,892 

 

Impaired loans not included in the above December 31, 2012 table are recorded investments of $1.9 million in homogeneous first mortgage residential real estate loans, which are collectively measured for impairment. Total impaired loans were $24.1 million as of December 31, 2012.

 

The recorded investment in TDRs, which are included in total impaired loans, was $21.1 million $20.0 million and $20.2 million at March 31, 2013, March 31, 2012 and December 31, 2012, respectively.

 

Reserve for Credit Losses - The Company's reserve for credit losses is comprised of two components, the ALLLand the reserve for unfunded commitments (the “Unfunded Reserve”).

 

Allowances for Loan Losses - The ALLL is a valuation allowance that is established through a provision for loan losses charged to expense. When management believes that the collectability of the principal is unlikely, loans are charged against the ALLL. Subsequent recoveries, if any, are credited to the ALLL.

 

The ALLL is management's estimate of probable losses that are inherent in the loan portfolio. The ALLL is based on regular quarterly assessments. The methodologies for measuring the appropriate level of the ALLL include the combination of a quantitative historical loss history by loan type and a qualitative analysis for loans not classified as impaired or TDRs ("ASC 450 reserve"), and a specific allowance method for impaired and TDR loans ("ASC 310 reserve"). The qualitative analysis for the ASC 450 reserve is patterned after the guidelines provided under Securities Exchange Commission (“SEC”) Staff Accounting Bulletin 102 and the Federal Financial Institutions Examination Council (“FFIEC”) Interagency Policy Statement on the Allowance for Loan and Lease Losses and include the following:

 

·Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
·Changes in national economic and business conditions and developments and the effect of unemployment on African Americans, who are the majority of our customers;
·Changes in the nature and volume of the loan portfolio;
·Changes in the experience, ability, and depth of lending management and staff;
·Changes in trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans, troubled debt restructurings and classified loans;
·Changes in the quality of the loan review system and the degree of oversight by the Bank’s Board of Directors;
·The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
·The effect of external factors such as competition and legal and regulatory requirements.

 

Management has developed, from historical loan and economic information, quantitative drivers for certain qualitative factors. Management has identified which factors, by nature, are subjective, such as lending policies, competition and regulatory requirements. The quantitative drivers of qualitative factors, to which different weights are assigned based on management’s judgment, are reviewed and updated quarterly based on updated quarterly and eight-quarter rolling data. The quantitative loss history is based on an eight-quarter rolling history of losses incurred by different loan types within the loan portfolio.

 

A specific ALLL is established for loans identified as impaired or TDRs, based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by ASC 310, Receivables. Loans identified as impaired and non-accruing TDRs are accounted for in accordance with one of three valuations: (i) the present value of future cash flows discounted at the loan's effective interest rate; (ii) the loan's observable market price, or (iii) the fair value of the collateral, if the loan is collateral dependent, less estimated liquidation costs.

 

For commercial business, faith-based non-profit, real estate and certain consumer loans, the measurement of loan impairment is based on the present value of the expected future cash flows, discounted at the loan's effective interest rate, or on the fair value of the loan's collateral if the loan is collateral dependent. Most consumer loans are smaller balance and homogeneous, and are evaluated for impairment on a collective basis, applying the quantitative loss history and the qualitative factors. Impairment losses are included in the ALLL through a charge to the provision for loan losses.

 

The Company uses several credit quality indicators to manage credit risk on an ongoing basis. The Company's credit risk rating system was developed to aid in the risk management process by grouping credits with similar risk profiles into pass (which includes internal watch), special mention, or criticized categories, which includes substandard, doubtful, and loss. Credit risk ratings are applied individually to all classes of loans. Internal credit reviews and external contracted credit review examinations are used to determine and validate loan risk grades. The credit review system takes into consideration factors such as: borrower's background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, market value and volatility of the market value of collateral; lien position; and the financial strength of guarantors.

 

The process of assessing the adequacy of the ALLL is necessarily subjective. Further, and particularly in periods of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management's current estimates of incurred losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management's current estimate of what constitutes a reasonable ALLL.

 

The Company and the Bank are subject to periodic examination by their federal and state regulators, and may be required by such regulators to recognize additions to the allowance for loan losses based on the regulators' assessment of credit information available to them at the time of their examinations.

 

Reserve for Unfunded Commitments - The Unfunded Reserve is a component of other liabilities and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include loans with usable balances available, new commitments to lend that are not yet funded, and standby and commercial letters of credit. The process used to determine the Unfunded Reserve is consistent with the process for determining the quantitative portion of the ASC 450 reserve, as adjusted for estimated funding probabilities and historical eight quarter rolling quantitative loan loss factors. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense. The balances of $29.8 thousand and $54.4 thousand for March 31, 2013 and December 31, 2012, respectively, are reflected in other liabilities on the Consolidated Balance Sheets.

 

The following table presents the recorded investment in non-accrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2013 and December 31, 2012, respectively:

 

           Loans Past     
           Due Over     
           90 Days     
March 31, 2013          Still     
(Dollars in thousands)  Non-accrual   Number   Accruing   Number 
                 
Commercial  $—    —   $—    — 
Commercial real estate:                    
Construction   —    —    —    — 
Owner occupied   34    1    1,283    4 
Other   47    1    —    — 
Faith-based non-profit                    
Construction   —    —    —    — 
Owner Occupied   5,150    3    1,872    3 
Other   —    —    —    — 
Residential real estate:                    
First mortgage   3,378    43    428    6 
Multifamily   —    —    —    — 
Home equity   34    4    53    2 
Construction   —    —    —    — 
Consumer   14    3    —    — 
Other loans   —    —    —    — 
Total  $8,657    55   $3,636    15 

 

           Loans Past     
           Due Over     
           90 Days     
December 31, 2012          Still     
(Dollars in thousands)  Non-accrual   Number   Accruing   Number 
                 
Commercial  $—    —   $—    — 
Commercial real estate:                    
Construction   —    —    —    — 
Owner occupied   39    1    224    4 
Other   49    1    351    1 
Faith-based non-profit                    
Construction   —    —    —    — 
Owner Occupied   5,241    4    661    3 
Other   —    —    —    — 
Residential real estate:                    
First mortgage   3,384    44    357    6 
Multifamily   —    —    —    — 
Home equity   3    1    101    1 
Construction   —    —    —    — 
Consumer   16    2    —    — 
Other loans   —    —    —    — 
Total  $8,732    53   $1,694    15 

 

Non-accrual loans and loans past due over 90 days still accruing interest include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans for which principal or interest is in default for 90 days or more are classified as a non-accrual unless they are well secured and in process of collection.

 

Those loans over 90 days still accruing interest were in the process of modification. In these cases, the borrowers are still making payments. Borrowers have continued to make payments on these loans while administrative and legal due processes are proceeding which will enable the Bank to extend or modify maturity dates.

 

Unrecognized income on non-accrual loans at March 31, 2013 and December 31, 2012 was $1.2 million.

 

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. The Company analyzes loans for reserves according to the loan's classification as to credit risk. This analysis includes non-homogenous loans, such as commercial, commercial real estate and faith-based non–profit entities, and mortgage loans in process of foreclosure for which the loan to value does not support repayment in full. This analysis is performed on at least 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. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.

 

·Substandard. Loans classified as substandard are inadequately protected by the current sound financial repayment capacity and debt service coverage of the obligor or of the collateral pledge, if any. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of our repayment according to the original terms of the debt. In addition to commercial and faith-based non-profit loans with identified weaknesses, substandard loans include loans within the mortgage and consumer portfolio segments that are past due 90 days or more as to principal or interest if the loan to value does not support full repayment. Substandard loans are evaluated for impairment on an individual loan basis unless the substandard loan is a smaller homogeneous loan that is not a TDR and is not in the process of foreclosure. These loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies related to the loss are not corrected in a timely manner.

 

·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. Based on current facts and circumstances, loans classified as loss are not expected to be repaid, or that collateral will be difficult to liquidate. Loans classified as loss are charged off to the ALLL with board approval.

 

·Pass. Loans not identified as special mention, substandard, doubtful or loss are classified as pass.

 

The following is a breakdown of loans by risk categories at March 31, 2013 and December 31, 2012:

 

March 31, 2013                    
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubful   Total 
                     
Commercial  $2,374   $—   $8   $—   $2,382 
Commercial real estate:                         
Construction   3,050    —    552    —    3,602 
Owner occupied   12,694    3,239    1,826    —    17,759 
Other   28,140    947    3,589    —    32,676 
Faith-based non-profit                         
Construction   —    —    —    —    — 
Owner Occupied   61,342    5,427    12,080    —    78,849 
Other   7,153    76    —    —    7,229 
Residential real estate:                         
First mortgage   18,333    2,022    3,919    —    24,274 
Multifamily   5,648    39    63    —    5,750 
Home equity   2,899    —    330    —    3,229 
Construction   —    —    —    —    — 
Consumer   1,213    —    19    —    1,232 
Other loans   2,653    —    —    —    2,653 
Total  $145,499   $11,750   $22,386   $—   $179,635 

 

 

December 31, 2012                    
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubful   Total 
                     
Commercial  $3,274   $—   $8   $—   $3,282 
Commercial real estate:                         
Construction   3,065    —    556    —    3,621 
Owner occupied   13,379    3,151    1,847    —    18,377 
Other   21,582    966    3,623    —    26,171 
Faith-based non-profit                         
Construction   2,344    —    —    —    2,344 
Owner Occupied   58,732    5,313    12,373    —    76,418 
Other   7,059    76    —    —    7,135 
Residential real estate:                         
First mortgage   19,465    1,731    3,506    —    24,702 
Multifamily   5,702    63    63    —    5,828 
Home equity   2,853    —    308    —    3,161 
Construction   83    —    —    —    83 
Consumer   1,323    2    21    —    1,346 
Other loans   2,754    —    —    —    2,754 
Total  $141,615   $11,302   $22,305   $—   $175,222 

 

Loans Modified as a TDR - Loans are considered to have been modified as a TDR when the Company makes certain concessions to a borrower experiencing financial difficulty. Concessions to the borrower at modification may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modifiedas a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. Since the economic crisis began in 2008, management has elected to offer concessions to borrowers with identified financial weaknesses, even if the borrowers have continued making scheduled payments, working with the borrowers to enable them to continue meeting their obligations to repay the debt to the Company.

 

The following tables present TDRs as of March 31, 2013 and December 31, 2012.

 

   Troubled Debt Restructurings 
   March 31, 2013 
           Non-accrual   Total 
   Accrual Status   Stauts   Modifications 
(Dollars in thousands)  Number   Amount   Number   Amount   Number   Amount 
                         
Commercial real estate:                              
Construction   2   $366    —   $—    2   $366 
Owner occupied   4    727    —    —    4    727 
Other   5    4,660    —    —    5    4,660 
Faith-based non-profit:                              
Owner occpied   17    9,612    3    5,150    20    14,762 
Residential real estate:                              
First mortgage   2    284    4    299    6    583 
    30   $15,649    7   $5,449    37   $21,098 

 

 

   Troubled Debt Restructurings 
   December 31, 2012 
           Non-accrual   Total 
   Accrual Status   Stauts   Modifications 
(Dollars in thousands)  Number   Amount   Number   Amount   Number   Amount 
                         
Commercial real estate:                              
Construction   2   $371    —   $—    2   $371 
Owner occupied   4    730    —    —    4    730 
Other   5    3,648    —    —    5    3,648 
Faith-based non-profit:                              
Owner occpied   17    9,666    4    5,241    21    14,907 
Residential real estate:                              
First mortgage   2    285    4    309    6    594 
    30   $14,700    8   $5,550    38   $20,250 

 

No loans were restructured during the three months ended March 31, 2013. Loans totaling $3.2 million were restructured during the 12 months ended March 31, 2013. All loans restructured during that period were paying as restructured as of March 31, 2013. During the three months ended March 31, 2012, two loans were restructured totaling $1.4 million. One loan with a balance of $169 thousand, that was restructured during the previous 12 months, defaulted. The Company defines default as the loan becoming more than 90 days past due, foreclosured upon or charged-off. Of the loans restructure during the 15 months ended March 31, 2012, $8.0 million were paying as restructured as of March 31, 2012.

 

The following table shows loans newly restructured during the three months ended March 31, 2012. There were no restructures during the three months ended March 31, 2013.

 

   For the Three Months Ended 
   March 31, 2012 
       Pre-modification Outstanding   Post-Modification Oustanding 
(Dollars in thousands)  Number of loans   Recorded Investment   Recorded Investment 
             
Extended payment terms               
Commercial real estate:               
Owner occupied   1    82    82 
Other   1    1,354    1,359 
    2   $1,436   $1,441 

 

The following table presents loans modified as TDRs and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three months ended March 31, 2013 and 2012.

 

   March 31, 2013   March 31, 2012 
   Foreclosure/Default   Foreclosure/Default 
   Number of   Recorded   Number of   Recorded 
(Dollars in thousands)  Loans   Investment   Loans   Investment 
                 
Below market interest rate   —   $—    1   $169 
Extended payment terms   —         —      
Total   —   $—    1   $169 

 

TDR defaults can result in a higher ALLL and a corresponding higher provision for loan losses because they generally negatively impact the timing of and expected collections from these impaired loans. Impaired loans, which include TDRs, are evaluated for specific additions to the ALLL by subtracting the recorded investment in these impaired loans from their fair values. Fair values is generally determined by the present value of future cash flows, collateral value, or liquidation value. Defaults generally reduce the present value of the future cash flows and can negatively influence the collateral values if the declining real estate values are affecting the sale of collateral.