6.	LOANS AND ALLOWANCE FOR LOAN LOSSES

The activity in the Company's allowance for loan losses (“ALLL”) for the three month periods ended March 31, 2015 and 2014 and related asset balances at March 31, 2015 and December 31, 2014 is summarized as follows:

	For the Three Months Ended March 31, 2015
						Faith-
						Based		Residential
				Commercial		Non-		Real					Other
(Dollars in thousands)	Commercial			Real Estate		Profit		Estate			Consumer		Loans			Unallocated		Total

ALLL:
Total ending ALLL balances as of December 31, 2014	$	353		$	579	$	1,234	$	685		$	28	$	265		$	296	$	3,440
For the three months ended March 31, 2015
Charge-offs		—			—		—		—			—		(4	)		—		(4	)
Recoveries		—			—		—		10			—		—			—		10
Provision for loan losses		(82	)		23		206		(106	)		1		(51	)		9		—
Total ending ALLL balances as of March 31, 2015	$	271		$	602	$	1,440	$	589		$	29	$	210		$	305	$	3,446

	For the Three Months Ended March 31, 2014
							Faith-
							Based			Residential
				Commercial			Non-			Real						Other
(Dollars in thousands)	Commercial			Real Estate			Profit			Estate			Consumer			Loans			Unallocated		Total

ALLL:
Total ending ALLL balances as of December 31, 2013	$	184		$	808		$	1,883		$	493		$	19		$	106		$	—	$	3,493
For the three months ended March 31, 2014
Charge-offs		—			—			—			(7	)		(1	)		(6	)		—		(14	)
Recoveries		—			—			—			4			—			3			—		7
Provision for loan losses		(6	)		(109	)		(87	)		122			1			(66	)		145		—
Total ending ALLL balances as of March 31, 2014	$	178		$	699		$	1,796		$	612		$	19		$	37		$	145	$	3,486

	March 31, 2015
					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	$	3	$	28	$	227	$	184	$	—	$	—	$	—	$	442
Collectively evaluated for impairment		268		574		1,213		405		29		210		305		3,004
Total ending ALLL balance	$	271	$	602	$	1,440	$	589	$	29	$	210	$	305	$	3,446

Loans:
Loans individually evaluated for impairment	$	3	$	8,993	$	16,454	$	4,024	$	2	$	—	$	—	$	29,476
Loans collectively evaluated for impairment		6,699		31,552		77,736		21,423		1,257		4,554		—		143,221
Total ending loans balance	$	6,702	$	40,545	$	94,190	$	25,447	$	1,259	$	4,554	$	—	$	172,697

	December 31, 2014
					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	$	—	$	11	$	6	$	259	$	—	$	—	$	—	$	276
Collectively evaluated for impairment		353		568		1,228		426		28		265		296		3,164
Total ending ALLL balance	$	353	$	579	$	1,234	$	685	$	28	$	265	$	296	$	3,440

Loans:
Loans individually evaluated for impairment	$	—	$	9,012	$	16,807	$	4,450	$	—	$	—	$	—	$	30,269
Loans collectively evaluated for impairment		7,253		31,051		78,555		22,176		1,232		4,552		—		144,819
Total ending loans balance	$	7,253	$	40,063	$	95,362	$	26,626	$	1,232	$	4,552	$	—	$	175,088

The Bank experienced $(6) thousand and $7 thousand in net loan charge-offs/(recoveries) for the three months ended March 31, 2015 and 2014, respectively. Annualized net charge-offs/(recoveries) as a percent of average loan balances outstanding totaled (0.01)% and 0.02% during the three month periods ended March 31, 2015 and 2014, respectively, and 0.06% for the year ended December 31, 2014.

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, 2015 and December 31, 2014 was as follows:

(Dollars in thousands)	March 31, 2015			December 31, 2014

Commercial	$	6,702		$	7,253
Commercial real estate:
Construction		7,487			2,557
Owner occupied		17,633			18,013
Other		15,425			19,493
Faith-based non-profit:
Construction		1,932			6,156
Owner Occupied		88,998			84,499
Other		3,260			4,707
Residential real estate:
First mortgage		18,359			18,995
Multifamily		2,955			3,001
Home equity		4,011			4,124
Construction		122			506
Consumer		1,259			1,232
Other loans		4,554			4,552
Loans, net of deferred fees		172,697			175,088
ALLL		(3,446	)		(3,440	)
Loans, net of ALLL	$	169,251		$	171,648

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, 2015, the percentage of loans in this segment, which included construction, real estate secured, and lines of credit, comprised approximately 54.54% of the total loan portfolio and the reserve for these loans was 41.79% 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 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 present loans not past due and the aging of past due loans as of March 31, 2015 and December 31, 2014:

					90 Days
March 31, 2015	30-59 Days		60-89 Days		Or More		Total Past
(Dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Total

Commercial	$	150	$	—	$	—	$	150	$	6,552	$	6,702
Commercial real estate:
Construction		—		—		—		—		7,487		7,487
Owner occupied		87		69		360		516		17,117		17,633
Other		—		—		3,602		3,602		11,823		15,425
Faith-based non-profit:												—
Construction		—		—		—		—		1,932		1,932
Owner occupied		694		464		1,329		2,487		86,511		88,998
Other		—		—		15		15		3,245		3,260
Residential real estate:												—
First mortgage		740		115		2,456		3,311		15,048		18,359
Multifamily		84		—		—		84		2,871		2,955
Home equity		—		135		25		160		3,851		4,011
Construction		—		—		—		—		122		122
Consumer		40		—		2		42		1,217		1,259
Other loans		—		—		8		8		4,546		4,554
Total	$	1,795	$	783	$	7,797	$	10,375	$	162,322	$	172,697

					90 Days
December 31, 2014	30-59 Days		60-89 Days		Or More		Total Past
(Dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Total

Commercial	$	3	$	—	$	—	$	3	$	7,250	$	7,253
Commercial real estate:
Construction		—		—		—		—		2,557		2,557
Owner occupied		69		321		42		432		17,581		18,013
Other		25		1,188		3,602		4,815		14,678		19,493
Faith-based non-profit:
Construction		—		—		—		—		6,156		6,156
Owner occupied		1,923		435		674		3,032		81,467		84,499
Other		—		—		15		15		4,692		4,707
Residential real estate:
First mortgage		745		103		3,322		4,170		14,825		18,995
Multifamily		—		—		—		—		3,001		3,001
Home equity		47		—		23		70		4,054		4,124
Construction		—		—		—		—		506		506
Consumer		11		—		—		11		1,221		1,232
Other loans		—		8		—		8		4,544		4,552
Total	$	2,823	$	2,055	$	7,678	$	12,556	$	162,532	$	175,088

At March 31, 2015 and December 31, 2014, the total recorded investment in impaired loans amounted to $29.5 million and $30.7 million, respectively.

The recorded investment and related information for impaired loans is summarized as follows for March 31, 2015, December 31, 2014 and March 31, 2014:

	March 31, 2015
							For the Three Months Ended
	Unpaid								Average
	Principal		Recorded		ALLL		Interest		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Earned		Investment

With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		77		78		—		1		78
Owner occupied		42		42		—		—		42
Other		4,087		3,852		—		4		3,862
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		5,717		5,730		—		59		7,747
Other		—		—		—		—		—
Residential real estate:
First mortgage		2,488		2,354		—		59		2,618
Multifamily		—		—		—		—		—
Home equity		125		115		—		1		67
Construction		—		—		—		—		—
Consumer		11		2		—		—		1
Impaired loans with no allowance recorded	$	12,547	$	12,173	$	—	$	124	$	14,415

With an allowance recorded:
Commercial	$	3	$	3	$	3	$	—	$	1
Commercial real estate:
Construction		274		275		1		5		277
Owner occupied		4,748		4,759		27		57		4,779
Other		—		—		—		—		—
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		10,737		10,761		227		150		9,061
Other		—		—		—		—		—
Residential real estate:
First mortgage		1,515		1,515		171		—		1,471
Multifamily		—		—		—		—		—
Home equity		43		43		13		—		94
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	17,320	$	17,356	$	442	$	212	$	15,683
Impaired loans	$	29,867	$	29,529	$	442	$	336	$	30,098

	December 31, 2014
	Unpaid								Average
	Principal		Recorded		ALLL		Interest		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Earned		Investment

With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		77		78		—		6		186
Owner occupied		42		42		—		16		2,818
Other		3,855		3,872		—		100		3,017
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		9,744		9,764		—		558		9,937
Other		—		—		—		—		40
Residential real estate:
First mortgage		2,894		2,881		—		172		2,717
Multifamily		—		—		—		—		—
Home equity		20		20		—		2		70
Construction		—		—		—		—		—
Consumer		—		—		—		—		8
Impaired loans with no allowance recorded	$	16,632	$	16,657	$	—	$	854	$	18,793

With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		278		279		1		23		176
Owner occupied		4,760		4,800		10		200		1,164
Other		—		—		—		—		1,714
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		7,063		7,361		6		327		6,801
Other		—		—		—		—		—
Residential real estate:
First mortgage		1,426		1,427		242		76		644
Multifamily		—		—		—		—		—
Home equity		145		145		17		6		112
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	13,672	$	14,012	$	276	$	632	$	10,611
Impaired loans	$	30,304	$	30,669	$	276	$	1,486	$	29,404

	March 31, 2014
							For the Three Months Ended
	Unpaid								Average
	Principal		Recorded		ALLL		Interest		Recorded
(Dollars in thousands)	Balance		Investment		Allocated		Earned		Investment

With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		359		361		—		7		362
Owner occupied		3,159		3,159		—		32		3,171
Other		867		869		—		6		3,186
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		8,502		8,518		—		128		11,361
Other		—		—		—		—		—
Residential real estate:
First mortgage		2,750		2,744		—		19		2,931
Multifamily		—		—		—		—		—
Home equity		82		83		—		1		80
Construction		—		—		—		—		—
Consumer		8		8		—		—		10
Impaired loans with no allowance recorded	$	15,727	$	15,742	$	—	$	193	$	21,101

With an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—
Owner occupied		—		—		—		—		—
Other		4,660		4,676		5		49		2,338
Faith based non-profit:
Construction		—		—		—		—		—
Owner occupied		8,075		8,089		746		102		5,794
Other		—		—		—		—		—
Residential real estate:
First mortgage		545		523		196		3		573
Multifamily		—		—		—		—		—
Home equity		78		78		19		1		105
Construction		—		—		—		—		—
Consumer		—		—		—		—		—
Impaired loans with allowance recorded	$	13,358	$	13,366	$	966	$	155	$	8,810
Impaired loans	$	29,085	$	29,108	$	966	$	348	$	29,911

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

Allowance for Loan Losses (“ALLL”) - 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 Accounting Standards Codification 450 reserve ("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 an updated 4-year rolling data for periods beginning December 31, 2014 and previously an eight-quarter rolling data. The quantitative loss history is based on a 4-year rolling history of losses incurred by different loan types within the loan portfolio for periods beginning December 31, 2014 and previously an eight-quarter rolling history of losses. The change in methodology resulted in a $375 thousand increase in the ALLL at December 31, 2014.

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 $38 thousand and $34 thousand for March 31, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, respectively:

					90 Days
					or More
					Past Due
March 31, 2015					Still
(Dollars in thousands)	Non-accrual		Number		Accruing		Number

Commercial	$	3		1	$	—		—
Commercial real estate:
Construction		—		—		—		—
Owner occupied		42		1		318		1
Other		3,628		4		—		—
Faith-based non-profit:
Construction		—		—		—		—
Owner occupied		22		—		1,307		1
Other		—		1		15		7
Residential real estate:
First mortgage		3,405		35		81		4
Multifamily		—		—		—		—
Home equity		158		5		7		1
Construction		—		—		—		—
Consumer		2		1		—		—
Other loans		—		—		8		1
Total	$	7,260		48	$	1,736		15

					90 Days
					or More
					Past Due
December 31, 2014					Still
(Dollars in thousands)	Non-accrual		Number		Accruing		Number

Commercial	$	—		—	$	—		—
Commercial real estate:
Construction		—		—		—		—
Owner occupied		42		1		—		—
Other		2,860		3		771		1
Faith-based non-profit:
Construction		—		—		—		—
Owner occupied		133		2		541		2
Other		—		—		15		1
Residential real estate:
First mortgage		2,720		33		1,696		8
Multifamily		—		—		—		—
Home equity		165		7		—		—
Construction		—		—		—		—
Consumer		—		—		—		1
Other loans		—		—		—		—
Total	$	5,920		46	$	3,023		13

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.

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, 2015 and December 31, 2014:

March 31, 2015
(Dollars in thousands)	Pass		Special Mention		Substandard			Doubtful	Total

Commercial	$	763	$	3,144	$	2,795	$	—	$	6,702
Commercial real estate:
Construction		7,136		—		351		—		7,487
Owner occupied		17,226		296		111		—		17,633
Other		10,245		444		4,736		—		15,425
Faith-based non-profit:
Construction		1,932		—		—		—		1,932
Owner occupied		73,808		8,027		7,163		—		88,998
Other		3,260		—		—		—		3,260
Residential real estate:
First mortgage		14,247		81		4,031		—		18,359
Multifamily		2,864		31		60		—		2,955
Home equity		3,800		—		211		—		4,011
Construction		122		—		—		—		122
Consumer		1,240		13		6		—		1,259
Other loans		4,554		—		—		—		4,554
Total	$	141,197	$	12,036	$	19,464	$	—	$	172,697

December 31, 2014
(Dollars in thousands)	Pass		Special Mention		Substandard			Doubtful	Total

Commercial	$	1,279	$	3,159	$	2,815	$	—	$	7,253
Commercial real estate:
Construction		2,202		—		355		—		2,557
Owner occupied		17,596		306		111		—		18,013
Other		14,263		457		4,773		—		19,493
Faith-based non-profit:
Construction		6,156		—		—		—		6,156
Owner occupied		68,963		6,160		9,376		—		84,499
Other		4,707		—		—		—		4,707
Residential real estate:
First mortgage		14,328		88		4,579		—		18,995
Multifamily		2,910		31		60		—		3,001
Home equity		3,910		—		214		—		4,124
Construction		506		—		—		—		506
Consumer		1,213		14		5		—		1,232
Other loans		4,552		—		—		—		4,552
Total	$	142,585	$	10,215	$	22,288	$	—	$	175,088

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 as 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. In response to the extended economic downtown, 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 to satisfy their loan repayment obligations to the Company.

The following tables present TDRs as of March 31, 2015 and December 31, 2014.

	Troubled Debt Restructurings
	March 31, 2015
					Non-accrual				Total
	Accrual Status				Status				Modifications
(Dollars in thousands)	Number		Amount		Number		Amount		Number		Amount

Commercial real estate:
Construction		2	$	351		—	$	—		2	$	351
Owner occupied		4		4,748		—		—		4		4,748
Other		2		223		2		2,830		4		3,053
Faith-based non-profit:
Owner occupied		20		16,432		1		22		21		16,454
Other		—		—		—		—		—		—
Residential real estate:
First mortgage		3		147		2		155		5		302
Total		31	$	21,901		5	$	3,007		36	$	24,908

	Troubled Debt Restructurings
	December 31, 2014
					Non-accrual				Total
	Accrual Status				Status				Modifications
(Dollars in thousands)	Number		Amount		Number		Amount		Number		Amount

Commercial real estate:
Construction		2	$	355		—	$	—		2	$	355
Owner occupied		4		4,760		—		—		4		4,760
Other		2		224		2		2,830		4		3,054
Faith-based non-profit:
Owner occupied		20		16,391		1		22		21		16,413
Other		—		—		—		—		—		—
Residential real estate:
First mortgage		1		23		2		164		3		187
Total		29	$	21,753		5	$	3,016		34	$	24,769

Two loans totaling $129 thousand were restructured during the three and 12 months ended March 31, 2015. All loans restructured during that period were paying as restructured as of March 31, 2015. No loans were restructured during the three months ended March 31, 2014. Loans totaling $3.1 million were restructured during the 12 months ended March 31, 2014. One loan totaling $2.6 million was placed on non-accrual during the 12 months ended March 31, 2014 due to delinquency. All loans restructured during that period were paying as restructured as of March 31, 2014.

The following table shows loans newly restructured during the three months ended March 31, 2015. There were no restructures during the three months ended March 31, 2014.

March 31, 2015			Pre-modification Outstanding		Post-Modification Outstanding
(Dollars in thousands)	Number of loans		Recorded Investment		Recorded Investment

Below market interest rates
Residential real estate:
First mortgage		2	$	129	$	125
Total		2	$	129	$	125

There were no 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, 2015 and 2014. The Company defines default as the loan becoming 90 days or more past due, foreclosed upon or charged-off.

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 are 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.