Note 4: Loans Receivable and Allowance for Loan Losses

The Company’s loan portfolio is comprised of one segment – church loans. See “Note 1 – Loan Portfolio Segments and Classes” to Part I “Financial Information” of this Report. The loans fall into four classes:

wholly-owned loans for which the Company possesses the first collateral position;

wholly-owned loans that are either unsecured or for which the Company possesses a junior collateral position;

participated loans purchased for which the Company possesses the first collateral position; and

participated loans purchased for which the Company possesses a junior collateral position.

The Company makes all of its loans to various evangelical churches and related organizations, primarily to purchase, construct, or improve facilities. Loan maturities extend through 2033. The loan portfolio had a weighted average rate of 6.53% and 6.44% as of June 30, 2020 and December 31, 2019, respectively.

The table below is a summary of the Company’s mortgage loans owned (dollars in thousands):



	June 30,		December 31,
	2020		2019
Loans to evangelical churches and related organizations:
Real estate secured	$	125,969	$	130,889
Unsecured		154		160
Total loans		126,123		131,049
Deferred loan fees, net		(590)		(631)
Loan discount		(233)		(182)
Allowance for loan losses		(1,391)		(1,393)
Loans, net	$	123,909	$	128,843

Allowance for Loan Losses

Management believes it has properly calculated the allowance for loan losses as of June 30, 2020 and December 31, 2019. The following table shows the changes in the allowance for loan losses for the six months ended June 30, 2020 and the year ended December 31, 2019 (dollars in thousands):



	Six months ended		Year ended
	June 30, 2020		December 31, 2019
Balance, beginning of period	$	1,393	$	2,480
Provision for loan loss		63		(544)
Charge-offs		(65)		(923)
Recoveries		—		380
Balance, end of period	$	1,391	$	1,393

The table below presents loans by portfolio segment (church loans) and the related allowance for loan losses. In addition, the table segregates loans and the allowance for loan losses by impairment methodology (dollars in thousands).



	Loans and Allowance for Loan Losses (by segment)
	As of
	June 30, 2020		December 31, 2019
Loans:
Individually evaluated for impairment	$	6,181	$	8,843
Collectively evaluated for impairment		119,942		122,206
Balance	$	126,123	$	131,049

Allowance for loan losses:
Individually evaluated for impairment	$	110	$	175
Collectively evaluated for impairment		1,281		1,218
Balance	$	1,391	$	1,393

The Company has established a loan grading system to assist management in their analysis and supervision of the loan portfolio. The following tables summarize the credit quality indicators by loan class (dollars in thousands):



Credit Quality Indicators (by class)
As of June 30, 2020
	Wholly-Owned First		Wholly-Owned Junior		Participation First		Participation Junior		Total
Grade:
Pass	$	97,525	$	3,557	$	1,411	$	—	$	102,493
Watch		17,230		31		188		—		17,449
Special mention		—		—		—		—		—
Substandard		5,677		—		—		—		5,677
Doubtful		504		—		—		—		504
Loss		—		—		—		—		—
Total	$	120,936	$	3,588	$	1,599	$	—	$	126,123



Credit Quality Indicators (by class)
As of December 31, 2019
	Wholly-Owned First		Wholly-Owned Junior		Participation First		Participation Junior		Total
Grade:
Pass	$	96,674	$	3,557	$	1,882	$	—	$	102,113
Watch		19,870		32		191		—		20,093
Special mention		—		—		—		—		—
Substandard		7,103		—		1,230		—		8,333
Doubtful		510		—		—		—		510
Loss		—		—		—		—		—
Total	$	124,157	$	3,589	$	3,303	$	—	$	131,049

The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount (dollars in thousands):


Age Analysis of Past Due Loans (by class)
As of June 30, 2020
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days or More and Still Accruing
Church loans:
Wholly-Owned First	$	—	$	—	$	3,971	$	3,971	$	116,965	$	120,936	$	—
Wholly-Owned Junior		—		—		—		—		3,588		3,588		—
Participation First		—		—		—		—		1,599		1,599		—
Participation Junior		—		—		—		—		—		—		—
Total	$	—	$	—	$	3,971	$	3,971	$	122,152	$	126,123	$	—


Age Analysis of Past Due Loans (by class)
As of December 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment 90 Days or More and Still Accruing
Church loans:
Wholly-Owned First	$	—	$	—	$	5,907	$	5,907	$	118,250	$	124,157	$	—
Wholly-Owned Junior		—		—		—		—		3,589		3,589		—
Participation First		—		—		—		—		3,303		3,303		—
Participation Junior		—		—		—		—		—		—		—
Total	$	—	$	—	$	5,907	$	5,907	$	125,142	$	131,049	$	—

Impaired Loans

The following tables are summaries of impaired loans by loan class as of and for the three and six months ended June 30, 2020 and 2019, and the year ended December 31, 2019, respectively. The unpaid principal balance is the contractual principal outstanding on the loan. The recorded balance is the unpaid principal balance less any interest payments that management has recorded against principal. The recorded investment is the recorded balance less discounts taken. The related allowance reflects specific reserves taken on the impaired loans (dollars in thousands):



Impaired Loans (by class) As of June 30, 2020									For the three months ended June 30, 2020				For the six months ended June 30, 2020
	Unpaid Principal Balance		Recorded Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Church loans:
Wholly-Owned First	$	9,895	$	9,830	$	9,841	$	—	$	9,772	$	91	$	11,073	$	174
Wholly-Owned Junior		—		—		—		—		—		—		—		—
Participation First		—		—		—		—		—		—		—		—
Participation Junior		—		—		—		—		—		—		—		—
With an allowance recorded:
Church loans:
Wholly-Owned First		290		290		290		110		290		—		290		—
Wholly-Owned Junior		—		—		—		—		—		—		—		—
Participation First		—		—		—		—		—		—		296		11
Participation Junior		—		—		—		—		—		—		—		—
Total:
Church loans	$	10,185	$	10,120	$	10,131	$	110	$	10,062	$	91	$	11,659	$	185



Impaired Loans (by class) As of December 31, 2019									For the year ended December 31, 2019
	Unpaid Principal Balance		Recorded Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Church loans:
Wholly-Owned First	$	12,497	$	12,404	$	12,304	$	—	$	12,343	$	1,202
Wholly-Owned Junior		—		—		—		—		—		—
Participation First		—		—		—		—		—		—
Participation Junior		—		—		—		—		—		—
With an allowance recorded:
Church loans:
Wholly-Owned First		290		290		290		110		973		—
Wholly-Owned Junior		—		—		—		—		—		—
Participation First		1,294		1,230		1,230		65		1,263		—
Participation Junior		—		—		—		—		—		—
Total:
Church loans	$	14,081	$	13,924	$	13,824	$	175	$	14,579	$	1,202



Impaired Loans (by class) As of June 30, 2019									For the three months ended June 30, 2019				For the six months ended June 30, 2019
	Unpaid Principal Balance		Recorded Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance recorded:
Church loans:
Wholly-Owned First	$	6,563	$	6,325	$	6,342	$	—	$	6,215	$	60	$	6,018	$	118
Wholly-Owned Junior		—		—		—		—		—		—		—		—
Participation First		—		—		—		—		—		—		1,158		—
Participation Junior		—		—		—		—		—		—		—		—
With an allowance recorded:
Church loans:
Wholly-Owned First		877		567		568		114		1,038		—		2,100		—
Wholly-Owned Junior		215		181		181		135		178		—		179		—
Participation First		1,302		1,274		1,274		103		1,283		—		1,283		—
Participation Junior		—		—		—		—		—		—		—		—
Total:
Church loans	$	8,957	$	8,347	$	8,365	$	352	$	8,714	$	60	$	10,738	$	118

A summary of nonaccrual loans by loan class is as follows (dollars in thousands):



Loans on Nonaccrual Status (by class)
	as of
	June 30, 2020		December 31, 2019
Church loans:
Wholly-Owned First	$	6,181	$	6,405
Wholly-Owned Junior		—		—
Participation First		—		1,230
Participation Junior		—		—
Total	$	6,181	$	7,635

A summary of loans the Company restructured during the three and six month periods ended June 30, 2020 and 2019 is as follows (dollars in thousands):



Troubled Debt Restructurings (by class)
For the six months ended June 30, 2020
	Number of Loans			Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment At Period End
Church loans:
Wholly-Owned First		1	$		1,936	$	1,955	$	1,947
Wholly-Owned Junior
Participation First
Participation Junior
Total		1		$	1,936	$	1,955	$	1,947

There were no loans restructured outside of CARES Act deferrals during the three months ended June 30, 2020.



Troubled Debt Restructurings (by class)
For the three months ended June 30, 2019
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment At Period End
Church loans:
Wholly-Owned First		1	$	1,477	$	1,488	$	1,487
Wholly-Owned Junior		—		—		—		—
Participation First		—		—		—		—
Participation Junior		—		—		—		—
Total		1	$	1,477	$	1,488	$	1,487



Troubled Debt Restructurings (by class)
For the six months ended June 30, 2019
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment At Period End
Church loans:
Wholly-Owned First		2	$	1,681	$	1,692	$	1,688
Wholly-Owned Junior		—		—		—		—
Participation First		—		—		—		—
Participation Junior		—		—		—		—
Total		2	$	1,681	$	1,692	$	1,688

For the loan restructured during six months ended June 30, 2020, the Company agreed to a forbearance agreement with the borrower whereby management added accrued interest and fees to the loan’s principal balance, and the borrower will be making interest-only payments for 12 months. For one of the loans restructured during six months ended June 30, 2019, the Company agreed to a forbearance agreement with the borrower whereby the interest rate was lowered and accrued interest and fees were added to the principal balance of the loan. For the other loan, the Company agreed to extend the maturity date of the loan and added fees to the balance of the loan. The Company has one restructured loan that is past maturity as of June 30, 2020.

The Company closely monitors delinquency in loans modified in a troubled debt restructuring as an early indicator for future default. Management regularly evaluates loans modified in a troubled debt restructuring for potential further impairment and will make adjustments to the risk ratings and specific reserves associated with troubled debt restructurings as deemed necessary.

As of June 30, 2020, the Company has no commitments to advance additional funds in connection with loans modified as troubled debt restructurings.

As discussed in Note 1 to the financial statements, the CARES Act provided the Company an option to elect to not account for certain loan modifications related to COVID-10 as troubled debt restructurings as long as the borrowers were not more than 30 days past due as of December 31, 2019. The above disclosed troubled debt restructurings were not related to COVID-19 modifications.

As of June 30, 2020, the Company has made loan modifications which qualify under the CARES Act and that the Company has elected not to account for as troubled debt restructurings. These modifications include granting temporary payment relief measures. For any payment deferral requests the Company approves, the maturity date of the mortgage note will not be extended, and any deferred payments will increase the principal amount due at maturity. The Company granted 35 borrowers deferral requests of various terms under the CARES Act. 26 of the borrowers have begun making their regular payments as of June 30, 2020. Two borrowers asked for and the Company granted their request to extend the deferral from two to four payments. The remaining nine deferral agreements require regular payments to begin at various times over the next six months. The principal balance of loans modified under the CARES Act is $50.3 million as of June 30, 2020.