LOANS AND ALLOWANCE FOR LOAN LOSSES ("ALLL")

ALLL — The ALLL is management's estimate of losses inherent in the loan portfolio. The provision for loan losses is the amount charged against earnings to establish an adequate ALLL. Loan losses and recoveries are charged to or credited to the ALLL, rather than reported as a direct expense or recovery. The loan portfolio is segmented into three parts for the ALLL calculation: impaired commercial loans and smaller balance homogenous loans in the process of foreclosure (collectively referred to as "impaired loans"), TDRs, and all other loans.

For all classes of commercial loans, a quarterly evaluation of specific individual borrowers 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 through the loan classification process. The ALLL attributed to impaired loans and TDRs considers all available evidence based on significant conditions or circumstances related to the specific credits. The specific allowance amounts are determined by a method prescribed by ASC 310. The loans identified as impaired and 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. Factors considered by management in determining impairment include payment status, collateral value, alternate use of special purpose real estate which could adversely impact resale, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls are considered on a loan by loan basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. 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.

Most consumer loans are evaluated for impairment on a collective basis, because these loans are for smaller balances and are homogeneous. Any loans, including commercial loans, not specifically identified as impaired or TDRs, are collectively evaluated and segmented by loan type, applying two factors: the quantitative loss history by loan type for the previous eight quarters compared to average loans outstanding for the same period (the "quantitative factor"), and a qualitative factor that is comprised of quantitatively-driven calculations based on historical data, and subjective factors (the "qualitative factors"). The quantitative portion of the ALLL is adjusted for qualitative factors to account for model imprecision and to incorporate the range of probable outcomes inherent in the estimates used for the allowance.

The quantitative factor by loan type is applied against the unimpaired loan balances and smaller-balance homogenous impaired loans not in the process of foreclosure for which there is no specific reserve to determine the quantitative reserve. The qualitative factors, including (i) policy, underwriting, charge-off and collection, (ii) national and local economic conditions, (iii) nature and volume of the portfolio, (iv) experience, ability, and depth of lending team, (v) trends of past due, classified loans, and restructurings, (vi) quality of loan review and board oversight, (vii) existence, levels, and effect of loan concentrations and (viii) effects of external factors such as competition and regulatory oversight, are adjusted quarterly based on historical information for any quantifiable factors and qualitative judgments for subjective factors (those considered subjective are policy, underwriting, experience, ability and depth of lending team, quality of loan review and board oversight, and effects of external factors), and applied in total to each loan balance by loan type. The Company continues to enhance its modeling of the portfolio and underlying risk factors through quarterly analytical reviews with the goal of ensuring it captures all pertinent factors contributing to risk of loss inherent in the loan portfolio. The Company applies additional qualitative factors for non-homogenous classified loans including internal watch, special mention, and substandard loans not identified as impaired, when a loan has a loan to value ("LTV") exceeding 50% of the outstanding balance and is not current in its payments. Under ASC 310, the non-homogenous impaired loans, homogenous small balance real estate secured loans in process of foreclosure for which the value is less than the loan principal balance, and TDRs, are reviewed individually for impairment.

The process of assessing the adequacy of the ALLL is inherently subjective. Further, and particularly in terms 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 credit 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 allowance for loan losses.

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

As of both December 31, 2011 and December 31, 2010, the ALLL was $3.9 million which represented approximately 2.05% and 1.88% of loans outstanding, net of unearned income and deferred costs ("net loans"), on those respective dates. The 17 bp increase in the percentage of ALLL to net loans outstanding was caused by the total ALLL remaining at a total of $3.9 million at December 31, 2011 and December 31, 2010 while net loans outstanding decreased $16.2 million. Components of the reserve were impacted by a decrease in the net ALLL for the loans not evaluated individually of $0.6 million from the overall decrease of $23.3 million in loans collectively evaluated for impairment, offset by an increase in the specific reserve for impaired loans of $0.6 million, which includes an increase in the specific reserve for TDRs of $0.1 million. Nonperforming assets, defined as non-accruing loans plus OREO, at December 31, 2011 were 6.09% of total assets compared to 4.60% at December 31, 2010. Nonperforming assets as a percentage of total loans as of December 31, 2011, was 9.86% compared to 7.09% at December 31, 2010. For the years ended December 31, 2011, and December 31, 2010, the provision for loan losses was $0.9 million and $0.5 million, respectively.

Of the non-accruing loans totaling $15.3 million at December 31, 2011, 35.87% are secured by faith-based non-profit real estate, 60.25% are secured by real estate excluding faith-based non-profit, which factors management believes lessens the risk of loss. TDRs in compliance with the modified terms totaled $9.6 million or 56.5% of total TDRs at December 31, 2011. GAAP does not provide specific guidance on when a loan may be returned to accrual status. Federal banking regulators have provided guidance that interest on impaired loans, including TDRs, should only be recorded when there has been a sustained period of repayment performance, the loan is well secured, and collection under any revised terms is assessed as probable. The Company evaluates impaired loan and TDR performance under the banking guidelines and returns loans to accruing after a sustained period of repayment performance.

Loans are generally placed on non-accrual status when the scheduled payments reach 90 days past due. Loans are charged-off, with Board approval, when the Chief Credit Officer and his staff determine that all reasonable means of collection of the outstanding balances, except foreclosure, have been exhausted. The Company continues its collection efforts subsequent to charge-off, which historically has resulted in some recoveries each year.

The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of December 31, 2011 and December 31, 2010 was as follows:



	December 31, 2011			December 31, 2010			December 31, 2009
(Dollars in thousands)
Commercial	$	7,688		$	9,148		$	8,006
Commercial real estate:
Construction	1,871			1,187			1,162
Owner occupied	20,352			22,395			33,147
Other	24,831			25,179			27,029
Faith-based non-profit
Construction	2,287			11,094			13,773
Owner occupied	78,161			79,490			65,566
Other	8,703			2,127			2,652
Residential real estate:
First mortgage	27,896			32,673			35,639
Multifamily	7,207			7,892			8,982
Home equity	4,457			5,123			5,539
Construction	—			2,243			2,052
Consumer	1,635			2,218			2,303
Other loans	2,996			3,559			4,261
Loans, net of deferred fees	188,084			204,328			210,111
ALLL	(3,850		)	(3,851		)	(3,564		)

Loans, net of ALLL	$	184,234		$	200,477		$	206,547

The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience. As of December 31, 2011, the percentage of loans in this niche, which included construction, owner occupied real estate secured, and other loans, comprised approximately 47.40% of the total loan portfolio The reserve allocated for these loans is 29.30% of the total ALLL. Historically the Bank has experienced low levels of loan losses in this niche; however, repayment of these loans is generally dependent on voluntary contributions, some of which have been adversely affected by the current economic downturn.

In 2010, management enhanced its loan-related disclosure classifications in its financial reports to present portfolio segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. The following table presents the reported investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of December 31, 2011:



	December 31, 2011
(Dollars in thousands)	Commercial		Commercial Real Estate		Faith- Based Non-Profit		Residential Real Estate		Consumer		Other Loans		Total
ALLL:
Ending ALLL balance attributable to loans:
Individually evaluated for impairment	$	—	$	119	$	56	$	543	$	2	$	—	$	720
Collectively evaluated for impairment	348		852		1,072		756		60		42		3,130
Total ending ALLL balance	348		971		1,128		1,299		62		42		3,850
Loans:
Loans individually evaluated for impairment	$	590	$	6,828	$	13,816	$	2,180	$	2	$	—	$	23,416
Loans collectively evaluated for impairment	7,098		40,226		75,335		37,380		1,665		2,964		164,668
Total ending loans balance	$	7,688	$	47,054	$	89,151	$	39,560	$	1,667	$	2,964	$	188,084

The following table presents the reported investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of December 31, 2010:



	December 31, 2010
(Dollars in thousands)	Commercial		Commercial Real Estate		Faith- Based Non-Profit		Residential Real Estate		Consumer		Other Loans		Total
ALLL:
Ending ALLL balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	118	$	—	$	—	$	118
Collectively evaluated for impairment	651		651		1,289		927		105		110		3,733
Total ending ALLL balance	$	651	$	651	$	1,289	$	1,045	$	105	$	110	$	3,851
Loans:
Loans individually evaluated for impairment	$	1,180	$	6,644	$	7,270	$	1,272	$	—	$	—	$	16,366
Loans collectively evaluated for impairment	7,968		42,117		85,441		46,659		2,218		3,559		187,962
Total ending loans balance	$	9,148	$	48,761	$	92,711	$	47,931	$	2,218	$	3,559	$	204,328

Total impaired loans including TDR loans was $23.4 million as of December 31, 2011 and $16.4 million as of December 31, 2010. The year ended December 31, 2011 showed a $7.0 million increase of impaired and TDR loans compared to year-end 2010. The increases were primarily due to the new TDRs negotiated for nine faith based non-profits which totaled $9.1 million, and one new impaired faith-based non-profit loan for $2.5 million. One faith-based non-profit loan, which totaled $1.0 million at December 31, 2010, has been returned to accrual status and removed from the impaired and TDR listing due to satisfactory performance for over a year. One commercial TDR was written off by 50% during the fourth quarter of 2011 and downgraded to "doubtful". During 2011, the Company foreclosed on four faith-based non-profit properties.

The following tables show impaired loans, excluding TDR loans, with and without valuation allowances as of December 31, 2011, December 31, 2010 and December 31, 2009:



(Dollars in thousands)	December 31, 2011				December 31, 2010		December 31, 2009
Loans with no allocated ALLL	$	3,214	$	7	$	6,426	$	105
Loans with allocated ALLL	1,545				564		1,607
Total	$	4,759			$	6,990	$	1,712
Amount of the ALLL allocated	$	600			$	109	$	35



	For the years ended
(Dollars in thousands)	December 31, 2011		December 31, 2010		December 31, 2009
Average of impaired loans during the periods ended	$	6,338	$	5,337	$	2,621

The following table shows TDR loans with and without valuation allowances as of the years ending December 31, 2011, December 31, 2010 and December 31, 2009:



(Dollars in thousands)	December 31, 2011		December 31, 2010		December 31, 2009
Loans with no allocated ALLL	$	16,919	$	9,327	$	6,205
Loans with allocated ALLL	1,738		49		773
Total	$	18,657	$	9,376	$	6,978
Amount of the ALLL allocated	$	120	$	9	$	201



	For the years ended
(Dollars in thousands)	December 31, 2011		December 31, 2010		December 31, 2009
Average of TDR loans during the periods ended	$	14,016	$	8,177	$	6,770

The following table presents loans individually evaluated for impairment, excluding TDR loans, by class of loans as of December 31, 2011:



	December 31, 2011
(Dollars in thousands)	Unpaid Principal Balance		Total Exposure		Recorded Investment		ALLL Allocated		Interest Earned For the Year

With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction			—		—
Owner occupied	322		322		322		—		17
Other	56		56		56		—		—
Faith-based non-profit:
Construction	—		—		—		—		—
Owner occupied	2,522		2,522		2,522		—		61
Other	—		—		—		—		—
Residential real estate:
First mortgage	402		402		314		—		5
Multifamily	—		—		—		—		—
Home equity	—		—		—		—		—
Construction	—		—		—		—		—
Consumer	—		—		—		—		—
Total impaired loans with no allowance recorded	$	3,302	$	3,302	$	3,214	$	—	$	83
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—		—
Owner occupied	279		279		279		47		—
Other	40		40		40		10		—
Faith-based non-profit			—
Construction	—		—		—		—		—
Owner Occupied	—		—		—		—		—
Other	—		—		—		—		—
Residential real estate:
First mortgage	763		763		762		290		36
Multifamily	—		—		—		—		—
Home equity	462		462		462		251		—
Construction	—		—		—		—		—
Consumer	2		2		2		2		—
Total impaired loans with allowance recorded	$	1,546	$	1,546	$	1,545	$	600	$	36
Total impaired loans	$	4,848	$	4,848	$	4,759	$	600	$	119

The following table presents loans individually evaluated for impairment, excluding TDR loans, by loan class, as of December 31, 2010.



	December 31, 2010
(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment		ALLL Allocated		Interest Earned

With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—
Commercial real estate:
Construction
Owner occupied	1,358		1,355		—		31
Other	65		65		—		4
Faith-based non-profit:
Construction
Owner occupied	4,474		4,466		—		247
Other	—		—		—		—
Residential real estate:
First mortgage	207		207		—		10
Multifamily	322		322		—		14
Home equity	11		11		—		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total impaired loans without allowance recorded	$	6,437	$	6,426	$	—	$	306
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—
Owner occupied	—		—		—		—
Other	—		—		—		—
Faith-based non-profit:
Construction	—		—		—		—
Owner occupied	—		—		—		—
Other	—		—		—		—
Residential real estate:
First mortgage	324		323		8		13
Multifamily	143		143		61		3
Home equity	98		98		40		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total impaired loans with allowance recorded	$	565	$	564	$	109	$	16
Total impaired loans	$	7,002	$	6,990	$	109	$	322

The recorded investment in loan balance is net of deferred fees and costs, and partial charge-offs where applicable.

The following table presents TDRs by class of loans as of December 31, 2011:



	December 31, 2011
(Dollars in thousands)	Impaired Balance		Liquid Collateral		Total Exposure		Recorded Investment		ALLL Allocated		Interest Earned

With no related allowance recorded:
Commercial	$	1,567	$	—	$	1,567	$	590	$	—	$	—
Commercial real estate:
Construction	628				628		628		—		—
Owner occupied	893		—		893		895		—		40
Other	5,112		—		5,112		3,814		—		32
Faith-based non-profit:
Construction	—		—		—		—		—		—
Owner occupied	10,391		103		10,288		10,385		—		474
Other	—		—		—		—		—		—
Residential real estate:
First mortgage	617		9		608		607		—		7
Multifamily	—		—		—		—		—		—
Home equity	—		—		—		—		—		—
Construction	—		—		—		—		—		—
Consumer	—		—		—		—		—		—
Total TDRs with no allowance recorded	$	19,208	$	112	$	19,096	$	16,919	$	—	$	553
With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction	378		—		378		378		15		26
Owner occupied	416		—		416		416		47		—
Other	—		—		—		—		—		34
Faith-based non-profit
Construction	—		—		—		—		—		—
Owner occupied	908		—		909		909		56		50
Other	—		—		—		—		—		—
Residential real estate:
First mortgage	35		—		35		35		2		—
Multifamily	—		—		—		—		—		—
Home equity	—		—		—		—		—		—
Construction	—		—		—		—		—		—
Consumer	—		—		—		—		—		—
Total TDRs with allowance recorded	$	1,737	$	—	$	1,738	$	1,738	$	120	$	110
Total TDR loans	$	20,945	$	112	$	20,834	$	18,657	$	120	$	663

The following table presents TDRs by class of loans as of December 31, 2010:



	December 31, 2010
	Impaired Balance		Liquid Collateral			Total Exposure		Recorded Investment		ALLL Allocated		Interest Earned
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,180	$	—		$	1,180	$	1,180	$	—	$	—
Commercial real estate:
Construction	1,038		—			1,038		1,038		—		32
Owner occupied	744		—			744		744		—
Other	3,948		—			3,948		3,948		—		32
Faith-based and non-profit:
Construction	—		—			—		—		—		—
Owner occupied	2,301		(103		)	2,198		2,299		—		201
Other	—		—			—		—		—		—
Residential real estate:
First mortgage	118		(6		)	112		118		—		4
Multifamily	—		—			—		—		—		—
Home equity	—		—			—		—		—		—
Construction	—		—			—		—		—		—
Consumer	—		—			—		—		—		—
Total TDRs with no allowance recorded	$	9,329	$	(109	)	$	9,220	$	9,327	$	—	$	269
With an allowance recorded:
Commercial	$	—	$	—		$	—	$	—	$	—	$	—
Commercial real estate:
Construction	—		—			—		—		—		—
Owner occupied	—		—			—		—		—		—
Other	—		—			—		—		—		—
Faith-based and non-profit:
Construction	—		—			—		—		—		—
Owner occupied	—		—			—		—		—		—
Other	—		—			—		—		—		—
Residential real estate:
First mortgage	49		—			49		49		9		2
Multifamily	—		—			—		—		—		—
Home equity	—		—			—		—		—		—
Construction	—		—			—		—		—		—
Consumer	—		—			—		—		—		—
Total TDRs with allowance recorded	$	49	$	—		$	49	$	49	$	9	$	2
Total TDR loans	$	9,378	$	(109	)	$	9,269	$	9,376	$	9	$	271

The recorded investment in loan balance is net of deferred fees and costs, and partial charge-offs, where applicable.

The Bank modifies certain loans and provides a concession such as a reduced rate, extended terms, or reduction of principal and/or interest, in a TDR where the borrowers are experiencing financial difficulties. These concessions typically result from loss mitigation recommendations developed by the Bank's problem loan team. Concessions could include reductions in below market interest rates, payment extensions, forbearance or other actions. TDRs are generally classified as nonperforming at the time of restructuring and may only be returned to performing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

When loans are modified as TDRs, the Bank evaluates each loan for any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the repayment source is expected to be the liquidation of underlying collateral, in which cases the Bank uses the fair value of the collateral, less selling costs, instead of discounted cash flows. If the Bank determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance allocation or a charge-off to the allowance.

The Bank completed 13 TDR modifications within the year ended December 31, 2011. All of the TDRs were secured by real estate. Management has disclosed the recorded investment and number of all modifications for TDRs within the last year that were in default in the current reporting period.

Of the 20 loans restructured during the year ended December 31, 2011, one loan of $0.3 million was in default. This loan resulted in a loss of $25.3 thousand of interest income for the year ending December 31, 2011. Based upon financial analysis and the fair value of collateral, the Bank has allocated $0.1 million of specific reserves to customers whose loans were TDRs.

The following tables display the TDR loans that were restructured during the year ended December 31, 2011:



(Dollars in thousands)	Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Below market interest rate
Commercial	—	$	—	$	—
Commercial real estate:
Construction	—	—		—
Owner occupied	—	—		—
Other	—	—		—
Faith-based non-profit
Construction	—	—		—
Owner occupied	3	3,410		3,365
Other	—	—		—
Residential real estate:
First mortgage	1	263		259
Multifamily	—	—		—
Home equity	—	—		—
Construction	—	—		—
Consumer	—	—		—
Other loans	—	—		—

Extended payment terms
Commercial	—	—		—
Commercial real estate:
Construction	—	—		—
Owner occupied	3	860		864
Other	1	56		55
Faith-based non-profit
Construction	—	—		—
Owner occupied	10	6,637		6,517
Other	—	—		—
Residential real estate:
First mortgage	2	429		424
Multifamily	—	—		—
Home equity	—	—		—
Construction	—	—		—
Consumer	—	—		—
Other loans	—	—		—

Total	20	$	11,655	$	11,484

The following table presents the successes and failures of the types of modifications within the year ended December 31, 2011:




	Paid in full			Paying as restructured			Converted to non-accrual			Foreclosure/Default
	Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment		Number of loans	Recorded Investment
(Dollars in thousands)
Below market interest rate	—	$	—	3	$	3,366	1	$	259	—	$	—
Extended payment terms	—	—		16	7,859		—	—		—	—

Total	—	$	—	19	$	11,225	1	$	259	—	$	—

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2011:



(Dollars in thousands)	Nonaccrual		Number		Loans Past Due Over 90 Days Still Accruing		Number

Commercial	$	590	1		$	—	—
Commercial real estate:
Construction	628		1		—		—
Owner occupied	772		4		52		1
Other	3,503		4		1		1
Faith-based non-profit:
Construction
Owner occupied	5,497		3		—		—
Other	—				—		—
Residential real estate:
First mortgage	3,749		39		47		1
Multifamily	—		—		114		1
Home equity	582		8		—		—
Construction	—		—		—		—
Consumer	5		2		—		—
Total	$	15,326	$	62	$	214	$	4

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2010:



(Dollars in thousands)	Nonaccrual		Number		Loans Past Due Over 90 Days Still Accruing		Number

Commercial	$	1,180	1		$	—	—
Commercial real estate:
Construction	650		1		—		—
Owner occupied	1,808		7		70		1
Other	2,683		3		417		2
Faith-based and non-profit:
Construction	—		—		—		—
Owner occupied	3,356		3		3,256		2
Other	—		—		—		—
Residential real estate:
First mortgage	2,312		31		—		—
Multifamily	465		3		—		—
Home equity	118		4		—		—
Construction	—		—		—		—
Consumer	—		—		—		—
Total	$	12,572	$	53	$	3,743	$	5

Non-accrual loans and loans past due over 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans from which principal or interest is in default for 90 days or more are classified as a nonaccrual unless they are well secured and in process of collection. Loans over 90 days still accruing were matured loans that were well secured and in process of collection. 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 as of December 31, 2011 and December 31, 2010 was $1.9 million and $1.0 million, respectively, and increase of $0.9 million or 88.9%.

Those loans over 90 days still accruing interest were in the process of modification. In these cases, the borrowers are still making payments.

The following table presents loans not past due and the aging of the recorded investment in past due loans as of December 31, 2011 by class of loans:



(Dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total

Commercial	$	2	$	—	$	590	$	592	$	7,096	$	7,688
Commercial real estate:
Construction	378		—		628		1,006		865		1,871
Owner occupied	343		—		824		1,167		19,185		20,352
Other	—		—		3,503		3,503		21,328		24,831
Faith-based non-profit:
Construction	—		—		—		—		2,287		2,287
Owner occupied	—		—		2,522		2,522		75,639		78,161
Other	—		—		—		—		8,703		8,703
Residential real estate:
First mortgage	643		309		2,805		3,757		24,139		27,896
Multifamily	—		—		114		114		7,093		7,207
Home equity	—		127		567		694		3,763		4,457
Construction	—				—		—		—		—
Consumer	10		—		—		10		1,657		1,667
Other loans	—		—		—		—		2,964		2,964
Total	$	1,376	$	436	$	11,553	$	13,365	$	174,719	$	188,084

The following table presents loans not past due and the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:



(Dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total

Commercial	$	3	$	17	$	1,180	$	1,200	$	7,948	$	9,148
Commercial real estate:
Construction	—		—		650		650		537		1,187
Owner occupied	54		70		1,640		1,764		20,631		22,395
Other	92		—		4,014		4,106		21,073		25,179
Faith-based and non-profit:
Construction	—		—		—		—		9,840		9,840
Owner occupied	703		721		6,557		7,981		72,763		80,744
Other	—		—		—		—		2,127		2,127
Residential real estate:
First mortgage	1,172		226		2,226		3,624		29,049		32,673
Multifamily	—		—		465		465		7,427		7,892
Home equity	625		—		109		734		4,389		5,123
Construction	—		—		—		—		2,243		2,243
Consumer	18		2		—		20		2,198		2,218
Other loans	—		—		—		—		3,559		3,559
Total	$	2,667	$	1,036	$	16,841	$	20,544	$	183,784	$	204,328

Non-accruals increased $2.8 million in the period ending December 31, 2011 from the period ending December 31, 2010, while the total loans past due from the tables above decreased by $7.2 million over the same period. The total loans past due declined in the tables above while total non-accruals increased because the total loans past due in the tables above do not include loans less than 30 days past due. The table below shows that the Company has $3.8 million in non-accrual loans that are less than 30 days past due.

The following table displays all non-accrual loans and loans 90 or more days past due and still on accrual for the periods ended December 31, 2011.



	December 31, 2011
(Dollars in thousands)	Amount		Number
Loans past due over 90 days still on accrual	$	214	$	4
Nonaccrual loans past due
Less than 30 days	$	3,839	$	4
30-59 days	6		2
60-89 days	142		—
90+ days	11,339		57
Nonaccrual loans	$	15,326	$	63

Changes in the allowance for loan losses as of and for the year ended December 31, 2011 are as follows:



(Dollars in thousands)	Commercial			Commercial Real Estate			Faith- Based Non-Profit			Residential Real Estate			Consumer			Other Loans			Total

ALLL:
Total ending ALLL balance as of December 31, 2010	$	651		$	651		$	1,289		$	1,045		$	105		$	110		$	3,851
For the year ended December 31, 2011
Charge-offs	(604		)	(19		)	—			(461		)	(66		)	(3		)	(1,153		)
Recoveries	95			126			—			3			25			—			249
Provision (decrease) increase	206			213			(161		)	712			(2		)	(65		)	903
Total ending ALLL balance as of December 31, 2011	$	348		$	971		$	1,128		$	1,299		$	62		$	42		$	3,850

Changes in the allowance for loan losses as of and for the years ended December 31, 2010 are as follows:



(Dollars in thousands)	Commercial			Commercial Real Estate			Faith- Based Non-Profit		Residential Real Estate			Consumer			Other Loans		Total
ALLL:
Total ending ALLL balance as of December 31, 2009	$	401		$	849		$	1,170	$	973		$	105		$	66	$	3,564
For the year ended December 31, 2010
Charge-offs	(17		)	(98		)	—		(132		)	(60		)	—		(307		)
Recoveries	31			—			—		28			15			—		74
Provision (decrease) increase	236			(100		)	119		176			45			44		520
Total ending ALLL balance as of December 31, 2010	$	651		$	651		$	1,289	$	1,045		$	105		$	110	$	3,851

The Company experienced $0.9 million in net loan charge-offs for the year ended December 31, 2011 compared to $0.2 million in net loan charge offs for the year ended December 31, 2010. On a rolling eight quarter basis, net loan charge-offs as a percent of average loan balances outstanding decreased from 0.70% as of December 31, 2010 to 0.57% as of December 31, 2011.

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. These loans exhibit 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 debtor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of or 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 balance homogenous 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 loans is 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.

•

Pass. Loans are classified as pass in all classes within the commercial, faith-based non-profit, mortgage, consumer, and other portfolio segments that are not identified as special mention, substandard, or doubtful, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. These loans exhibit a low likelihood of loss related to those loans that are considered pass.

Management’s definitions of risk characteristics were reviewed and updated during 2010.

As of December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:



(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total

Commercial	$	6,882	$	204	$	12	$	590	$	7,688
Commercial real estate:
Construction	857		—		1,014		—		1,871
Owner occupied	15,766		1,996		2,590		—		20,352
Other	14,938		1,004		8,889		—		24,831
Faith-based and non-profit:
Construction	2,287				—		—		2,287
Owner occupied	51,354		10,766		16,041		—		78,161
Other	8,125		572		6		—		8,703
Residential real estate:
First mortgage	21,938		1,363		4,595		—		27,896
Multifamily	6,661		42		504		—		7,207
Home equity	3,529		—		928		—		4,457
Construction	—		—		—		—		—
Consumer	1,644		14		7		2		1,667
Other loans	2,964		—		—		—		2,964
Total	$	136,945	$	15,961	$	34,586	$	592	$	188,084

As of December 31, 2011, the allowance for loan losses by class of loans, is as follows:



(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total

Commercial	$	347	$	—	$	1	$	—	$	348
Commercial real estate:
Construction	12		—		16		—		28
Owner occupied	328		41		71		—		440
Other	322		23		158		—		503
Faith-based and non-profit:
Construction	32		—		—		—		32
Owner occupied	740		156		88		—		984
Other	104		8		—		—		112
Residential real estate:
First mortgage	444		31		347		—		822
Multifamily	128		1		11		—		140
Home equity	72		—		265		—		337
Construction	—		—		—		—		—
Consumer	56		—		—		6		62
Other loans	42		—		—		—		42
Total	$	2,627	$	260	$	957	$	6	$	3,850

As of December 31, 2010, the risk category of loans by class of loans was as follows:



	Pass		Special Mention		Substandard		Doubtful		Total
(Dollars in thousands)
Commercial	$	7,495	$	234	$	1,419	$	—	$	9,148
Commercial real estate:
Construction	115		34		1,038		—		1,187
Owner occupied	17,312		1,759		3,324		—		22,395
Other	16,637		1,529		7,013		—		25,179
Faith-based and non-profit:
Construction	9,560		—		280		—		9,840
Owner occupied	61,147		2,940		16,657		—		80,744
Other	2,057		22		48		—		2,127
Residential real estate:
First mortgage	27,340		1,362		3,971		—		32,673
Multifamily	7,293		67		532		—		7,892
Home equity	4,544		73		506		—		5,123
Construction	2,243		—		—		—		2,243
Consumer	2,158		—		60		—		2,218
Other loans	437		—		3,122		—		3,559
Total	$	158,338	$	8,020	$	37,970	$	—	$	204,328

As of December 31, 2010, and based on the most recent analysis performed, the allowance for loan losses by class of loans, is as follows:



	Pass		Special Mention		Substandard		Doubtful		Total
(Dollars in thousands)
Commercial	$	629	$	19	$	3	$	—	$	651
Commercial real estate:
Construction	2				—		—		2
Owner occupied	312		23		33		—		368
Other	217		20		44		—		281
Faith-based and non-profit:
Construction	125		—		4		—		129
Owner occupied	933		40		157		—		1,130
Other	27		1		2		—		30
Residential real estate:
First mortgage	515		19		68		—		602
Multifamily	179		3		63		—		245
Home equity	120		2		46		—		168
Construction	30		—		—		—		30
Consumer	103		—		2		—		105
Other loans	66		—		44		—		110
Total	$	3,258	$	127	$	466	$	—	$	3,851

The OREO portfolio increased a net of $1.3 million during the year ended December 31, 2011. The net increase resulted from $2.1 million in outstanding loan balances transferred to OREO through foreclosure or deed in lieu of foreclosure ("at foreclosure"), $0.8 million in sales from OREO, $0.9 million in gains recognized at foreclosure , and $0.9 million in impairment losses on the properties in OREO during the year.