2. LOANS RECEIVABLE

Loans receivable held-for-investment consists of the following:

	December 31,
	*2012*			*2011*

FIRST MORTGAGE LOANS:
Secured by single-family residences	$	67,113,044		$	79,719,713
Secured by 5 or more- residential	2,211,044			3,068,229
Secured by other properties	30,111,544			35,357,446
Construction loans	4,495,641			3,984,630
Land and land development loans	6,085,545			7,450,684
Land acquisition loans	290,249			492,120

	110,307,067			130,072,822
SECOND MORTGAGE LOANS	1,678,060			1,977,851

COMMERCIAL AND OTHER LOANS:
Commercial -secured by real estate	65,498,712			76,607,916
Commercial	1,838,454			2,735,036
Loans secured by savings accounts	166,699			149,992
Consumer installment loans	250,487			354,317

	179,739,479			211,897,934

LESS:
Allowance for loan losses	(3,151,476		)	(6,124,116		)
Deferred loan fees	(387,189		)	(420,230		)

TOTAL LOANS RECEIVABLE HELD-FOR-INVESTMENT	$	176,200,814		$	205,353,588

We originate adjustable and fixed interest rate loans. The adjustable rate loans have interest rate adjustment limitations and are generally indexed to the 1- or 3-year U.S. Treasury index. Future market factors may affect the correlation of the interest rate adjustment with the rates we pay on the short-term deposits that have been primarily utilized to fund these loans. Adjustable interest rate loans at December 31, 2012 and December 31, 2011 were $2.5 million and $6.7 million, respectively.

Allowance for Loan Losses -

Allowance for loan losses and recorded investment in loans for the years ended December 31, 2012 and 2011 is summarized as follows:

For the year ended December 31, 2012	Residential Real Estate			Construction			Land and Land Acquisition			Commercial Real Estate and Commercial			Consumer		Total
	(dollars in thousands)
Allowance for loan losses:
Beginning balance	$	2,259		$	9		$	404		$	3,449		$	3	$	6,124
Charge-offs	(1,292		)	(405		)	(464		)	(916		)	—		(3,077		)
Recoveries	17			—			14			73			—		104
Provisions	713			485			209			(1,409		)	2		—
Ending Balance	1,697			89			163			1,197			5		3,151
Ending Balance: individually evaluated for impairment	573			0			74			566			0		1,213
Ending Balance: collectively evaluated for impairment	1,124			89			89			631			5		1,938

Loans:
Ending Balance	$	101,113		$	4,496		$	6,376		$	67,337		$	417	$	179,739
Ending Balance: individually evaluated for impairment	15,700			—			4,844			13,189			5		33,738
Ending Balance: collectively evaluated for impairment	85,413			4,496			1,532			54,148			412		146,001

For the year ended December 31, 2011	Residential Real Estate			Construction			Land and Land Acquisition			Commercial Real Estate and Commercial			Consumer			Total
	(dollars in thousands)
Allowance for loan losses:
Beginning balance	$	2,891		$	326		$	2,932		$	4,067		$	4		$	10,220
Charge-offs	(1,334		)	—			(2,570		)	(434		)	(4		)	(4,342		)
Recoveries	21			10			4			10			1			46
Provisions	681			(327		)	38			(194		)	2			200
Ending Balance	2,259			9			404			3,449			3			6,124
Ending Balance: individually evaluated for impairment	1,057			0			283			1,595			0			2,935
Ending Balance: collectively evaluated for impairment	1,202			9			121			1,854			3			3,189

Loans:
Ending Balance	$	120,123		$	3,985		$	7,943		$	79,343		$	504		$	211,898
Ending Balance: individually evaluated for impairment	13,588			—			3,486			14,256			—			31,330
Ending Balance: collectively evaluated for impairment	106,535			3,985			4,457			65,087			504			180,568

The risks associated with each portfolio class are as follows:

First mortgage loans secured by single family residences, secured by 5 or more residential, secured by other properties and second mortgage loans — The primary risks related to this type of lending include; unemployment, deterioration in real estate values, our ability to access the creditworthiness of the customer, deterioration in the borrower’s financial condition (whether the result of personal issues or general economic downturn), the inability of the borrower to maintain occupancy for investment properties, and an appraisal on a property is not reflective of the true property value. Portfolio risk includes condition of the economy, changing demand for these types of loans, large concentration of these types of loans and geographic concentration of these types of loans.

Construction loans — Since this portfolio is substantially owner occupied residential construction loans, the loan specific risks and portfolio risks are the same as described above as first mortgage loans secured by single family residences. However these loans carry the additional risk associated with the builder and the potential for builder cost overruns and/or the builder being unable to complete the construction.

Land development loans and land acquisition loans — The primary loan-specific risk in land and land development are: unemployment, deterioration of the business and/or collateral values, deterioration of the financial condition of the borrowers and/or guarantors creates a risk of default, and that an appraisal on the collateral is not reflective of the true property value. These loans usually include funding for the acquisition and development of unimproved properties to be used for residential or non-residential construction. We may provide permanent financing on the same projects for which we have provided the development and construction financing. Portfolio risk includes condition of the economy, changing demand for these types of loans, large concentration of these types of loans, and geographic concentrations of these types of loans.

Commercial and Commercial secured by real estate — The primary loan-specific risks in these types of loans are: unemployment, general deterioration in the economy, deterioration of the business and/or business cash flows, financial condition of the guarantors, deterioration of collateral values, and that an appraisal on any real estate collateral is not reflective of the true property value. Portfolio risk includes condition of the economy, changing demand for these types of loans, large concentration of these types of loans, and geographic concentration of these types of loans.

Loans secured by savings accounts and consumer installment loans- The primary risks of these loans are: unemployment, and deterioration of the borrower’s financial condition, whether the result of person issues or a general economic downturn. The portfolio risks for these types of loans is the same as for first mortgage loans secured by single family residences as described above.

Credit quality indicators as of December 31, 2012 are as follows:

Pass: Loans classified as pass generally meet or exceed normal credit standards. Factors include repayment source, collateral, borrower cash flows, and performance history.

Special Mention: Loans classified Special Mention loans have potential weaknesses that deserve management’s attention. These loans are not adversely classified and do not expose an institution to sufficient risk to currently warrant adverse classification.

Substandard: Loans classified as substandard are loans that have a well-defined weakness. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. These loans are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged as security for the asset.

Doubtful: Loans classified as doubtful consists of loans where we expect a loss, but not a total loss. These loans have all the weaknesses inherent in a substandard asset, in addition, these weaknesses make collection highly questionable or improbable based on the existing circumstances.

Loss: Loans classified as loss are considered uncollectible. A loan classified as a loss does not mean that an asset has no recovery value, but that it is not practical to defer writing off or reserving all or a portion of the asset, even though partial recovery may be collected in the future. Loans that are classified as “Loss” are fully reserved for on our financial statements.

The credit risk profile by internally assigned grade under the Allowance for Loan Losses for the years ended December 31, 2012 and 2011 are as follows:

For the year ended December 31, 2012	Residential Real Estate		Construction		Land and Land Acquisition		Commercial Real Estate and Commercial		Consumer		Total
	(dollars in thousands)
Pass	$	90,846	$	4,496	$	1,916	$	53,279	$	412	$	150,949
Special Mention	1,111		—		25		477		—		1,613
Substandard	9,082		—		4,390		13,581		5		27,058
Doubtful/Loss	74		—		45		—		—		119
Total	$	101,113	$	4,496	$	6,376	$	67,337	$	417	$	179,739

For the year ended December 31, 2011	Residential Real Estate		Construction		Land and Land Acquisition		Commercial Real Estate and Commercial		Consumer		Total
	(dollars in thousands)
Pass	$	101,738	$	3,985	$	3,726	$	50,130	$	504	$	160,083
Special Mention	4,501		—		58		12,251		—		16,810
Substandard	13,724		—		3,889		16,875		—		34,488
Doubtful/Loss	160		—		270		87		—		517
Total	$	120,123	$	3,985	$	7,943	$	79,343	$	504	$	211,898

Information on impaired loans for the years ended December 31, 2012 and 2011 is as follows:

For the year ended December 31, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Residential Real Estate	$	5,166	$	5,166	$	—	$	6,839	$	298
Construction	—		—		—		—		—
Land and Land Acquisition	2,157		2,157		—		3,626		63
Commercial Real Estate and Commercial	2,159		2,159		—		2,401		27
Consumer	5		5		—		7		1
With an allowance recorded:
Residential Real Estate	$	9,968	$	10,534	$	573	$	10,102	$	472
Construction	—		—		—		—		—
Land and Land Acquisition	2,613		2,687		74		2,670		66
Commercial Real Estate and Commercial	10,457		11,030		566		10,501		533
Consumer	—		—		—		—		—
Total
Residential Real Estate	$	15,134	$	15,700	$	573	$	16,941	$	770
Construction	—		—		—		—		—
Land and Land Acquisition	4,770		4,844		74		6,296		129
Commercial Real Estate and Commercial	12,616		13,189		566		12,902		560
Consumer	5		5		—		7		1

For the year ended December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
With no related allowance recorded:
Residential Real Estate	$	1,569	$	2,467	$	—	$	2,484	$	82
Construction	—		—		—		—		—
Land and Land Acquisition	1,273		2,300		—		2,309		58
Commercial Real Estate and Commercial	101		101		—		162		19
Consumer	—		—		—		—		—
With an allowance recorded:
Residential Real Estate	$	10,962	$	12,019	$	1,057	$	11,057	$	542
Construction	—		—		—		—		—
Land and Land Acquisition	1,930		2,213		283		1,938		77
Commercial Real Estate and Commercial	12,560		14,155		1,595		14,781		501
Consumer	—		—		—		—		—
Total
Residential Real Estate	$	12,531	$	14,486	$	1,057	$	13,541	$	624
Construction	—		—		—		—		—
Land and Land Acquisition	3,203		4,513		283		4,247		135
Commercial Real Estate and Commercial	12,661		14,256		1,595		14,943		520
Consumer	—		—		—		—		—

At December 31, 2012 and 2011, nonaccrual loans are $19.7 million and $12.8 million, respectively.

An age analysis of past due loans as of December 31, 2012 and 2011 are as follows:

For the year ended December 31, 2012	2 payments Past Due	3 payments Past Due	Non-Accrual Loans	Total Past Due	Current	Total
	(dollars in thousands)
Residential Real Estate	1,842	1,329	5,088	8,259	92,855	101,114
Construction	—	—	—	—	4,496	4,496
Land and Land Acquisition	—	25	6,349	6,374	1	6,375
Commercial Real Estate and Commercial	3,043	988	8,290	12,321	55,016	67,337
Consumer	—	—	5	5	412	417
Total	4,885	2,342	19,732	26,959	152,780	179,739

For the year ended December 31, 2011	2 payments Past Due	3 payments Past Due	Non-Accrual Loans	Total Past Due	Current	Total
	(dollars in thousands)
Residential Real Estate	3,578	2,043	4,436	10,057	110,066	120,123
Construction	—	—	—	—	3,985	3,985
Land and Land Acquisition	2,197	58	1,823	4,078	3,865	7,943
Commercial Real Estate and Commercial	1,617	—	6,580	8,197	71,146	79,343
Consumer	—	—	—	—	504	504
Total	7,392	2,101	12,839	22,332	189,566	211,898

Loans on which the recognition of interest has been discontinued amounted to approximately $19.7 million and $12.8 million at December 31, 2012 and 2011, respectively. If interest income had been recognized on those loans at their stated rates during the years ending December 31, 2012 and 2011, interest income would have been increased by approximately $2.0 million and $1.1 million, respectively. The total allowance for loan losses on these impaired loans was approximately $512,000 and $2.9 million at December 31, 2012 and 2011, respectively.

The impaired loans included in the table above were comprised of collateral dependent 1-4 residential real estate, lot loans, commercial real estate loans and consumer loans. The average recorded investment in impaired loans was $36.1 million and $32.7 million at December 31, 2012 and 2011, respectively, which included an average recorded balance in non-performing loans of $13.7 million and $19.3 million at December 31, 2012 and 2011, respectively.

A troubled debt restructure (“TDR”) is when we grant a concession to borrowers that the Bank would not otherwise have considered due to a borrower’s financial difficulties. All TDRs are considered “impaired”. The substantial majority of our residential real estate TDRs involved reducing the interest rate for a specified period. We also have restructured loans involving the restructure of loan terms such as a reduction in the payment requiring interest only payments and/or extending the maturity date of these loans.

We had approximately $22.7 million in TDRs, with approximately $2.5 million added during the twelve month period ending December 31, 2012, the majority of which were on accrual status.

December 31, 2012 (in thousands)	TDRs on Non- Accural Status		TDRs on Accrual Status		Total TDRs

Residential Real Estate	$	775	$	9,907	$	10,682
Land and Lot Loans	943		762		1,705
Commercial Real Estate	6,977		3,337		10,314

Total TDRs	$	8,695	$	14,006	$	22,701

December 31, 2011 (in thousands)	TDRs on Non- Accural Status		TDRs on Accrual Status		Total TDRs

Residential Real Estate	$	267	$	7,349	$	7,616
Land and Lot Loans	931		1,689		2,620
Commercial Real Estate	687		9,453		10,140

Total TDRs	$	1,885	$	18,491	$	20,376

We consider an impaired loan to be performing to its modified terms if the loan is not past due 30 day or more as of the report date.

The following presents, by class, information related to loans modified in a TDR during the twelve months ending December 31, 2012 and 2011.

	Loans Modified as a TDR for the Twelve Months Ended
	December 31, 2012			December 31, 2011
Troubled Debt Restructurings:	Number of	Recorded Investment		Number of	Recorded Investment
(dollars in thousands)	Contracts	(as of period end)		Contracts	(as of period end)

Residential Real Estate	14	$	2,202	12	$	5,140
Land and Lot Loans	1	$	64	4	$	906
Commerical Real Estate	1	99		9	1,867

Total TDRs	16	$	2,365	25	$	7,913

The following reflects a summary of TDR loan modifications outstanding and respective performance under the modified terms as of December 31, 2012.

	TDRs		TDRs Not
	Performing to		Performing to		Total
December 31, 2012 (in thousands)	Modified Terms		Modified Terms		TDRs

Residential Real Estate
Rate reduction	$	9,021	$	924	$	9,945
Extension or other modification	581		156		737
Total residential TDRs	$	9,602	$	1,080	$	10,682

Land and Lot Loans:
Rate reduction	$	762	$	912	$	1,674
Extension or other modification	—		31		31
Total Land and Lot Loans	$	762	$	943	$	1,705

Commercial:
Rate reduction	$	875	$	7,536	$	8,411
Extension or other modification	—		1,903		1,903
Total commercial TDRs	$	875	$	9,439	$	10,314
Total TDRs	$	11,239	$	11,462	$	22,701

	TDRs		TDRs Not		Total TDRs
	Performing to		Performing to
December 31, 2011 (in thousands)	Modified Terms		Modified Terms

Residential Real Estate
Rate reduction	$	6,509	$	527	$	7,036
Extension or other modification	579		—		579
Total residential TDRs	$	7,088	$	527	$	7,615

Land and Lot Loans:
Rate reduction	$	1,079	$	989	$	2,068
Extension or other modification	553		—		553
Total Land and Lot Loans	$	1,632	$	989	$	2,621

Commercial:
Rate reduction	$	8,050	$	2,090	$	10,140
Extension or other modification	—				—
Total commercial TDRs	$	8,050	$	2,090	$	10,140
Total TDRs	$	16,770	$	3,606	$	20,376

The following presents loans modified in a TDR that defaulted during the twelve month periods ending December 30, 2012 and 2011, and within twelve months of their modification date. A TDR is considered to be in default once it becomes 30 days or more past due following a modification.

	Twelve Months ended
TDRs that Defaulted During the Period,	December 31, 2012			December 31, 2011
Within Twelve Months of Modification Date	Number of	Recorded Investment		Number of	Recorded Investment
(dollars in thousands)	Contracts	(as of period end)		Contracts	(as of period end)

Residential Real Estate	8	$	1,082	11	$	2,128
Lot Loans	3	322		13	1,660
Commercial Real Estate	2	869		5	7,682

Total TDRs	13	$	2,273	29	$	11,470

Non-residential real estate loans had an outstanding balance of $30.1 million and $35.4 million at December 31, 2012 and 2011, respectively. These loans are considered by management to have somewhat greater risk of collectability due to the dependence on income production. Additionally, all of our non-residential real estate loans were collateralized by real estate (primarily warehouse and office space) in the Washington, D.C. metropolitan area.

We originate and participate in land and land development loans, real estate construction loans and commercial real estate loans, the proceeds of which are used by the borrower for acquisition, development, and construction purposes. Often the loan arrangements require us to provide, from the loan proceeds, amounts sufficient for payment of loan fees and anticipated costs during acquisition, development, or construction, including interest. This type of lending is considered by management to have higher risks. At December 31, 2012 and 2011, the undisbursed portion of such loans totaled $10.2 million and $11.0 million, respectively.

We have made loans to certain of the Bank’s executive officers and directors. These loans were made on substantially the same terms, including interest rate and collateral requirements, as those prevailing at the time for comparable transactions with unrelated customers. The risk of loss on these loans is considered to be no greater than for loans made to unrelated customers.

The following schedule summarizes changes in amounts of loans outstanding to executive officers and directors:

	Years ended
	December 31,
	2012			2011

Balance at beginning of year	$	5,054,698		$	4,928,053
Additions	145,798			1,622,208
Repayments	(1,299,341		)	(1,495,563		)

Balance at end of year	$	3,901,155		$	5,054,698