
	LOANS AND ALLOWANCE FOR LOAN LOSSES

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 allowance for loan losses ("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.

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 judgmental 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.

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 modified in 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.

Income Recognition on Impaired and Nonaccrual Loans - Loans, including impaired loans, are generally classified as nonaccrual 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 nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual 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 nonaccrual 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 nonaccrual 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.

Reserve for Credit Losses - The Company's reserve for credit losses is comprised of two components, the allowance for loan losses (the "ALLL") and the reserve for unfunded commitments (the "Unfunded Reserve").

Allowances for Loan Losses - The ALLL is a valuation allowance which 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 the 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 practices, and charge-off and recovery experience;


•	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 most of the qualitative factors. 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. For example, more weight is assigned to changes in Doubtful account balances than that assigned to changes in Substandard balances. Management has identified qualitative factors which, by nature, are subjective and for which no quantitative drivers have been established, such as lending policies, competition, and regulatory requirements.

The quantitative loss history is based on an eight quarter rolling history of net losses incurred by different loan types within the loan portfolio. For loans evaluated under the ASC 450 reserve, the qualitative factors are added to the quantitative loss factors by loan type and multiplied by the balances of each loan type to determine the ASC 450 reserve. The actual eight quarter loss history is 46 bps of average loans outstanding as of September 30, 2012. The net qualitative factors applied to the ASC 450 calculations totaled 1.36% and the quantitative factors varied from net recoveries to 35.93% for overdrafts.

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. A loan is considered impaired when it is probable that not all amounts due (principal and interest) will be collectible according to the original contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value 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.

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 drawable 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 $51.3 thousand and $23.7 thousand for September 30, 2012 and December 31, 2011, respectively, were reflected in other liabilities on the Consolidated Balance Sheets.

The composition of the loan portfolio, net of deferred fees and costs, by loan classification as of September 30, 2012 and December 31, 2011 was as follows:



	September 30, 2012			December 31, 2011
(Dollars in thousands)
Commercial	$	5,540		$	7,688
Commercial real estate:
Construction	1,726			1,871
Owner occupied	20,051			20,352
Other	26,628			24,831
Faith-based non-profit:
Construction	1,910			2,287
Owner occupied	77,137			78,161
Other	6,861			8,703
Residential real estate:
First mortgage	25,120			27,896
Multifamily	5,904			7,207
Home equity	3,420			4,457
Construction	381			—
Consumer	1,455			1,667
Other loans	2,808			2,964
Loans, net of deferred fees	178,941			188,084
Allowance for loan losses	(3,498		)	(3,850		)
Loans, net of allowance for losses	$	175,443		$	184,234

The Bank has a concentration of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience. As of September 30, 2012, the percentage of loans in this niche, which included construction, owner occupied real estate secured, and other loans, comprised approximately 48.01% of the total loan portfolio The reserve allocated for these loans is 29.47% 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, some of which have been adversely affected by the Great Recession and continued economic downturn.

A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its ALLL. The following table presents the ALLL and the reported investment in loans, net of deferred fees and costs, by portfolio segment. The first column shows the ALLL and loans classified as impaired or TDRs, and the second column presents all other loans, not classified as impaired or TDRs as of September 30, 2012:



Allowance for loan losses:	Individually evaluated for impairment		Collectively evaluated for impairment		Outstanding as of September 30, 2012
(Dollars in thousands)
Commercial	$	—	$	25	$	25
Commercial real estate	$	313	$	856	$	1,169
Faith-based non-profit	$	52	$	979	$	1,031
Residential real estate	$	342	$	832	$	1,174
Consumer	$	—	$	52	$	52
Other loans	$	—	$	47	$	47
Total	$	707	$	2,791	$	3,498
Loans:
(Dollars in thousands)
Commercial	$	590	$	4,950	$	5,540
Commercial real estate	9,134		39,271		48,405
Faith-based non-profit	13,557		72,351		85,908
Residential real estate	2,186		32,639		34,825
Consumer	—		1,455		1,455
Other loans	—		2,808		2,808
Total	$	25,467	$	153,474	$	178,941

The following table presents the ALLL and the reported investment in loans, net of deferred fees and costs, by portfolio segment and based on impairment method as of December 31, 2011:



Allowance for loan losses:	Individually evaluated for impairment		Collectively evaluated for impairment		Outstanding as of December 31, 2011
(Dollars in thousands)
Commercial	$	—	$	348	$	348
Commercial real estate	119		852		971
Faith-based non-profit	56		1,072		1,128
Residential real estate	543		756		1,299
Consumer	2		60		62
Other loans	—		42		42
Total	$	720	$	3,130	$	3,850
Loans:
(Dollars in thousands)
Commercial	$	590	$	7,098	$	7,688
Commercial real estate	6,828		40,226		47,054
Faith-based non-profit	13,816		75,335		89,151
Residential real estate	2,180		37,380		39,560
Consumer	2		1,665		1,667
Other loans	—		2,964		2,964
Total	$	23,416	$	164,668	$	188,084

Total impaired loans, including TDRs, was $25.5 million as of September 30, 2012 and $23.4 million as of December 31, 2011. One loan to a faith-based non-profit was restructured as a TDR in the quarter ended September 30, 2012. Two commercial real estate secured loans, totaling $1.4 million were restructured as TDRs during the nine months ended September 30, 2012 in addition to the TDR in the quarter ended September 30, 2012. Of the 38 TDRs at September 30, 2012, 29 loans totaling $17.7 million were in compliance with the restructured terms.

The following tables show impaired loans, excluding TDRs, with and without allocated allowances for loan losses as of September 30, 2012 and December 31, 2011, as well as average balances by loan classification for the three and nine months ended September 30, 2012 and September 30, 2011:



(Dollars in thousands)	September 30, 2012		December 31, 2011
Loans with no allocated allowance for loan losses	$	490	$	3,214
Loans with allocated allowance for loan losses	2,809		1,545
Total	$	3,299	$	4,759
Amount of the allowance for loan losses allocated	$	493	$	600

The following table shows average impaired balances by portfolio segment for the three and nine month periods shown:



(Dollars in thousands)	For the Nine Months Ended		For the Three Months Ended		For the Nine Months Ended		For the Three Months Ended
Average of impaired loans during the periods ended	September 30, 2012				September 30, 2011
Commercial	$	—	$	—	$	15	$	15
Commercial real estate:
Owner occupied	296		44		1,051		1,042
Other	874		1,653		109		117
Faith-based non-profit:
Owner occupied	2,522		2,522		5,948		6,057
Residential real estate:
First mortgage	1,202		1,222		799		1,071
Multifamily	—		—		547		629
Home equity	274		267		190		278
Consumer	2				5		5
Average impaired loans	$	5,170	$	5,708	$	8,712	$	9,214

The following table shows TDRs with and without allocated allowances for loan losses as of the periods ending September 30, 2012 and December 31, 2011 as well as average balances by loan classification for the three and nine months ended September 30, 2012 and September 30, 2011:



(Dollars in thousands)	September 30, 2012		December 31, 2011
Loans with no allocated allowance for loan losses	$	21,004	$	16,919
Loans with allocated allowance for loan losses	1,163		1,738
Total	$	22,167	$	18,657
Amount of the allowance for loan losses allocated	$	214	$	120

The following table shows average TDR balances by portfolio segment for the three and nine month periods shown:



	For the Nine Months Ended		For the Three Months Ended		For the Nine Months Ended		For the Three Months Ended
(Dollars in thousands)	September 30, 2012				September 30, 2011
Commercial	$	590	$	590	$	1,180	$	1,180
Commercial real estate:
Construction	687		374		1,029		1,021
Owner occupied	998		856		609		606
Other	5,433		6,195		3,039		3,045
Faith-based non-profit:
Owner occupied	11,792		12,342		5,798		7,080
Residential real estate:
First mortgage	618		598		345		401
Average TDR loans	$	20,118	$	20,955	$	12,000	$	13,333

The following table presents loans individually evaluated for impairment, excluding TDRs, by class of loans as of September 30, 2012:



	September 30, 2012
(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned Nine Months		Interest Earned Three Months
Without allowance recorded:
Commercial real estate:
Owner occupied	$	42	$	42	$	—	$	—	$	—
Other	50		50		—		—		—
Residential real estate:
First mortgage	398		398		—		6		—
Total impaired loans without allowance recorded	$	490	$	490	$	—	$	6	$	—
With an allowance recorded:
Commercial real estate:
Other	1,591		1,591		156		65		—
Residential real estate:
First mortgage	1,218		1,218		337		40		11
Total impaired loans with allowance recorded	$	2,809	$	2,809	$	493	$	105	$	11
Total impaired loans	$	3,299	$	3,299	$	493	$	111	$	11

The following table presents loans individually evaluated for impairment, excluding TDRs, by class of loans, as of December 31, 2011, and interest earned during the three and nine months ended September 30, 2011:



	December 31, 2011				September 30, 2011
	Unpaid Principal Balance		Allowance for Loan Losses Allocated		Interest Earned Nine Months		Interest Earned Three Months
(Dollars in thousands)
With no related allowance recorded:
Commercial real estate:
Owner occupied	322		—		17		17
Other	56		—		—		—
Faith-based non-profit:
Owner occupied	2,522		—		61		61
Residential real estate:
First mortgage	402		—		—		—
Total impaired loans without allowance recorded	$	3,302	$	—	$	78	$	78
With an allowance recorded:
Commercial real estate:
Owner occupied	$	279	$	47	$	—	$	—
Other	40		10		—		—
Residential real estate:
First mortgage	763		290		26		9
Home equity	462		251		—		—
Consumer	2		2		—		—
Total impaired loans with allowance recorded	$	1,546	$	600	$	26	$	9
Total impaired loans	$	4,848	$	600	$	104	$	87

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 September 30, 2012:



	September 30, 2012
(Dollars in thousands)	Impaired Balance		Liquid Collateral		Total Exposure		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned Nine Months		Interest Earned Three Months

Without related allowance recorded:
Commercial	$	1,567	$	—	$	1,567	$	590	$	—	$	—	$	—
Commercial real estate:
Construction	374		—		374		374		—		24		7
Owner occupied	509		—		509		509		—		28		6
Other	4,912		—		4,912		5,914		—		143		58
Faith-based non-profit:
Owner occupied	13,133		103		13,030		13,126		—		331		69
Residential real estate:
First mortgage	491		—		491		491		—		12		4
Total TDRs without allowance recorded	$	20,986	$	103	$	20,883	$	21,004	$	—	$	538	$	144
With an allowance recorded:
Commercial real estate:
Owner occupied	239		—		239		239		102		12		3
Other	414		—		414		414		55		26		6
Faith-based non-profit
Owner occupied	430		—		430		430		52		22		5
Residential real estate:
First mortgage	80		6		74		80		5		4		1
Total TDRs with allowance recorded	$	1,163	$	6	$	1,157	$	1,163	$	214	$	64	$	15
Total TDRs	$	22,149	$	109	$	22,040	$	22,167	$	214	$	602	$	159

The following table presents TDRs by class of loans as of December 31, 2011 and interest earning during the nine and three months ended September 30, 2011:



	December 31, 2011											September 30, 2011
	Impaired Balance		Liquid Collateral			Total Exposure		Recorded Investment		Allowance for Loan Losses Allocated		Interest Earned Nine Months			Interest Earned Three Months
(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,567	$	—		$	1,567	$	590	$	—	$	—		—
Commercial real estate:
Construction	628		—			628		628		—		—			—
Owner occupied	893		—			893		895		—		20			16
Other	5,112		—			5,112		3,814		—		4			—
Faith-based non-profit:
Owner occupied	10,391		(103		)	10,288		10,385		—		297			110
Residential real estate:
First mortgage	617		(9		)	608		607		—		4			1
Total TDRs with no allowance recorded	$	19,208	$	(112	)	$	19,096	$	16,919	$	—	$	325		$	127
With an allowance recorded:
Commercial real estate:
Construction	378		—			378		378		15		24			9
Owner occupied	416		—			416		416		47		—		—	—
Other	—		—			—		—		—		19			3
Faith-based non-profit:
Construction	—		—			—		—		—		—
Owner occupied	908		—			908		909		56		33			15
Other	—		—			—		—		—		—			—
Residential real estate:
First mortgage	35		—			35		35		2		—			—
Multifamily	—		—			—		—		—		—			—
Home equity	—		—			—		—		—		—			—
Construction	—		—			—		—		—		—			—
Consumer	—		—			—		—		—		—			—
Total TDRs with allowance recorded	$	1,737	$	—		$	1,737	$	1,738	$	120	$	76		$	27
Total TDRs	$	20,945	$	(112	)	$	20,833	$	18,657	$	120	$	401		$	154

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

The Bank modifies certain loans in a TDR where the borrowers are experiencing financial difficulties, and for which the Bank grants certain concessions which typically result from loss mitigation recommendations developed by the Bank's problem loan solutions team. Concessions could include reductions below market interest rates (that would be available to the particular borrower), payment extensions, forbearance from foreclosure, or other actions. Certain TDRs are 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. Management has proactively identified potential repayment issues developing, and has elected to offer concessions to borrowers prior to the borrowers actually failing to perform under the original terms of the loan. In such cases, when the borrower has continued to pay throughout the life of the loan, the loan will remain on accruing status after being modified as a TDR.

When loans are modified, 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 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 following tables set forth new TDRs made during the periods present as well as the concessions granted, and status of performance:



	For the Three Months Ended
	September 30, 2012
	Number of Loans		Recorded Investment		Unpaid Principal Balance		Allowance		Concession	Performing or not
(Dollars in thousands)
Faith-based non-profit
Owner occupied	1		$	2,522	$	2,522	—		Below market interest rate and extended repayment terms	Not yet due as of 9-30-12
Total TDR Loans	$	1	$	2,522	$	2,522	$	—


	For the Nine Months Ended
	September 30, 2012
	Number of Loans		Recorded Investment		Unpaid Principal Balance		Allowance		Concession	Performing or not
(Dollars in thousands)
Commercial real estate:
Owner occupied	1		$	80	$	80	—		Extended repayment terms	Performing
Other	1		1,353		1,353		—		Extended repayment terms	Performing
Faith-based non-profit
Owner occupied	1		2,522		2,522		—		Below market interest rate and extended repayment terms	Not yet due as of 9-30-12
Total TDR Loans	$	3	$	3,955	$	3,955	$	—

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 September 30, 2012:



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

Commercial	$	590	1	$	—	—
Commercial real estate:
Owner occupied	42		1	170		3
Other	50		1	—		—
Faith-based non-profit:
Owner occupied	5,600		4	145		1
Residential real estate:
First mortgage	3,400		42	89		2
Home equity	20		3	—		—
Consumer	18		3	—		—
Total	$	9,720	55	$	404	6

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:



	Nonaccrual		Number	Loans Past Due Over 90 Days Still Accruing		Number
(Dollars in thousands)
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:
Owner occupied	5,497		3	—		—
Residential real estate:
First mortgage	3,749		39	47		1
Multifamily	—		—	114		1
Home equity	582		8	—		—
Consumer	5		2	—		—
Total	$	15,326	62	$	214	4

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 nonaccrual unless they are well secured and in process of collection.

Unrecognized income on non-accrual loans as of September 30, 2012 and December 31, 2011 was $1.2 million and $1.9 million, respectively. In the quarter ended June 30, 2012 three TDRs to a single borrower were returned to accruing status. The interest foregone during the non-accrual period totaled approximately $0.9 million which will be accreted to income through the scheduled maturities of March 1, 2015. In the quarter ended September 30, 2012, three TDR loans to one borrower were paid in full, including principal previously written down and unpaid interest.

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.

The following table presents loans not past due, and the aging of the recorded investment in past due loans as of September 30, 2012 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	$	6	$	—	$	590	$	596	$	4,944	$	5,540
Commercial real estate:
Construction	—		—		—		—		1,726		1,726
Owner occupied	—		—		213		213		19,838		20,051
Other	—		353		50		403		26,225		26,628
Faith-based non-profit:
Construction	—		—		—		—		1,910		1,910
Owner occupied	833		51		2,930		3,814		73,323		77,137
Other	—		—		—		—		6,861		6,861
Residential real estate:
First mortgage	468		319		2,554		3,341		21,779		25,120
Multifamily	—		—		—		—		5,904		5,904
Home equity	157		—		7		164		3,256		3,420
Construction	—		—		—		—		381		381
Consumer	14		2		—		16		1,439		1,455
Other loans	—		—		—		—		2,808		2,808
Total	$	1,478	$	725	$	6,344	$	8,547	$	170,394	$	178,941

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:



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

Non-accruals decreased $5.6 million in the period ending September 30, 2012 from the period ending December 31, 2011, while the total loans past due

decreased by 36.05%, or $4.8 million, over the same period. The table below shows that the Bank has $3.4 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 as of September 30, 2012.



(Dollars in thousands)	September 30, 2012
	Amount		Number
Loans past due over 90 days still on accrual	$	404	6
Nonaccrual loans past due
Less than 30 days	$	3,436	12
30-59 days	308		3
60-89 days	35		1
90+ days	5,941		39
Nonaccrual loans	$	9,720	55

Changes in the allowance for loan losses for the three and nine months ended September 30, 2012 are as follows:



	For the Three Months Ended
	September 30, 2012
(Dollars in thousands)	June 30, 2012		Charge-offs			Recoveries		Provision/ (Recovery)			September 30, 2012
Commercial	$	61	$	—		$	—	$	(36	)	$	25
Commercial real estate	1,187		—			—		(18		)	1,169
Faith-based non-profit	1,091		—			—		(60		)	1,031
Residential real estate	1,243		(303		)	4		230			1,174
Consumer	46		—			4		2			52
Other	51		(8		)	—		4			47
Total	$	3,679	$	(311	)	$	8	$	122		$	3,498

	For the Nine Months Ended
	September 30, 2012
	December 31, 2011		Charge-offs			Recoveries		Provision/ (Recovery)			September 30, 2012
Commercial	$	348						$	(323	)	$	25
Commercial real estate	971		(56		)	1		253			1,169
Faith-based non-profit	1,128							(97		)	1,031
Residential real estate	1,299		(539		)	93		321			1,174
Consumer	62		(1		)	1		(10		)	52
Other	42		(26		)	9		22			47
Total	$	3,850	$	(622	)	$	104	$	166		$	3,498

Changes in the allowance for loan losses as of and for the three and nine months ended September 30, 2011 are as follows:



	For the Three Months Ended
(Dollars in thousands)	June 30, 2011		Charge-offs			Recoveries		Provision/ (Recovery)			September 30, 2011
Commercial	$	582	$	(14	)	$	—	$	(10	)	$	558
Commercial real estate	840		(19		)	3		27			851
Faith-based non-profit	1,220		—			—		13			1,233
Residential real estate	1,457		(181		)	—		242			1,518
Consumer	43		(8		)	—		26			61
Other	103		(6		)	2		(34		)	65
Total	$	4,245	$	(228	)	$	5	$	264		$	4,286

	For the Nine Months Ended
	December 31, 2010		Charge-offs			Recoveries		Provision/ (Recovery)			September 30, 2011
Commercial	$	651	$	(14	)	$	95	$	(174	)	$	558
Commercial real estate	651		(19		)	129		90			851
Faith-based non-profit	1,289		—			—		(56		)	1,233
Residential real estate	1,045		(181		)	2		652			1,518
Consumer	105		(8		)	6		(42		)	61
Other	110		(23		)	11		(33		)	65
Total	$	3,851	$	(245	)	$	243	$	437		$	4,286

The Bank experienced $311 thousand in net loan charge offs for the three months ended September 30, 2012 compared to $228 thousand in net loan charge offs for the three months ended September 30, 2011. On a rolling eight quarter basis, net loan charge-offs as a percent of average loan balances outstanding decreased from 62 bps as of September 30, 2011 to 57 bps as of December 31, 2011, and 46 bps as of September 30, 2012.

The Bank 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 Bank 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 Bank 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.

•

Substandard. Loans classified as substandard are inadequately protected by the current sound 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 or repayment according to the original terms of the debt. 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. These loans exhibit a distinct possibility that the Bank will sustain some loss if the deficiencies related to the loans 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 (includes internal watch). Loans are classified as pass in all classes within the portfolio that are not identified as special mention, substandard, doubtful, or loss, 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.

As of September 30, 2012, 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	$	4,941	$	—	$	9	$	590	$	5,540
Commercial real estate:
Construction	1,352		—		374		—		1,726
Owner occupied	14,492		3,730		1,829		—		20,051
Other	16,176		982		9,470		—		26,628
Faith-based and non-profit:
Construction	1,910		—		—		—		1,910
Owner occupied	56,091		5,829		15,217		—		77,137
Other	6,780		77		4		—		6,861
Residential real estate:
First mortgage	19,735		1,468		3,917		—		25,120
Multifamily	5,777		63		64		—		5,904
Home equity	3,125		—		295		—		3,420
Construction	381		—		—		—		381
Consumer	1,427		4		24		—		1,455
Other loans	2,808		—		—		—		2,808
Total	$	134,995	$	12,153	$	31,203	$	590	$	178,941

As of September 30, 2012, the allowance for loan losses by class of loans, is as follows:



(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total

Commercial	$	24	$	—	$	1	$	—	$	25
Commercial real estate:
Construction	20		—		—		—		20
Owner occupied	294		89		127		—		510
Other	370		23		246		—		639
Faith-based and non-profit:
Construction	26		—		—		—		26
Owner occupied	751		113		48		—		912
Other	92		1		—		—		93
Residential real estate:
First mortgage	571		35		400		—		1,006
Multifamily	114		1		1		—		116
Home equity	38		—		9		—		47
Construction	5		—		—		—		5
Consumer	51		—		1		—		52
Other loans	47								47
Total	$	2,403	$	262	$	833	$	—	$	3,498

As of December 31, 2011, the risk category of loans by class of loans was as follows:



	Pass		Special Mention		Substandard		Doubtful		Total
(Dollars in thousands)
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:



	Pass		Special Mention		Substandard		Doubtful		Total
(Dollars in thousands)
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