Loans Receivable and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2012

Loans Receivable And Allowance For Loan Losses

Loans

3.  Loans Receivable and Allowance for Loan Losses

We originate church mortgage loans, participate in church mortgage loans, and also purchase entire church mortgage loans.  The loans fall into four classes:  whole loans for which the Company possesses the first collateral position, whole loans that are either unsecured or for which the Company possesses a junior collateral position, participated loans for which the Company possesses the first collateral position, and participated loans for which the Company possesses a junior collateral position.  All of the loans are made to various evangelical churches and related organizations, primarily to purchase, construct or improve facilities. Loan maturities extend through 2022.Loans yielded a weighted average of 6.46% as of June 30, 2012, compared to a weighted average yield of 6.40% as of June 30, 2011.

On May 15, 2012, the Company entered into a Loan Purchase Agreement with Trinity Pacific Investments and Trinity Pacific OC involving two mortgage loan interests it had acquired from ECCU, which were the subject of foreclosure proceedings.  In exchange for transferring all rights, title and interest in these two mortgage loan interests, the Company received $2.425 million in cash and was relieved of any further obligations regarding the mortgage loan interests sold. Both loans were considered impaired.  The recorded investment in these loans was $2.460 million after discounts.  The loans also carried a total of $300 thousand in specific reserves that had been recorded in prior periods.  $35 thousand of these specific reserves were charged off against our allowance for loan losses.  The Company reversed the remaining $265 thousand of specific reserves related to these two loans, reducing the Company’s provision and allowance for loan losses and improving the Company’s balance sheets and statement of operations as of and for the six months ended June 30, 2012.

Allowance for Loan Losses

An allowance for loan losses of $3.9 million as of June 30, 2012 and $4.1 million as of December 31, 2011 has been established for loans receivable. For the six month period ended June 30, 2012, we reported total charge-offs of $47 thousand on three of our mortgage loan investments. Pursuant to a Loan Purchase Agreement we entered into on May 15, 2012, we also reversed $265 thousand of provisions for loan losses related to two impaired loans that we sold.  Management believes that the allowance for loan losses as of June 30, 2012 and December 31, 2011 is appropriate. Changes in the allowance for loan losses for the three and six months ended June 30, 2012 and the year ended December 31, 2011 are as follows:

	Three Months			Six Months			Year Ended
	Ended June 30, 2012			Ended June 30, 2012			December 31, 2011
Balance, beginning of period	$	4,206		$	4,127		$	3,997
Provisions for loan loss		(240	)		(136	)		1,487
Chargeoffs		(35	)		(47	)		(1,279	)
Accretion of allowance related to
restructured loans	$	(10	)		(23	)		(78	)
Balance, end of period	$	3,921		$	3,921		$	4,127

Non-Performing Loans

Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, restructured loans, and other impaired loans where the net present value of estimated future cash flows is lower than the outstanding principal balance.  Non-accrual loans represent loans on which interest accruals have been discontinued.  Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of our loan review and work-out process.  The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows.  The following is a summary of our nonperforming loans:

	June 30		December 31		June 30
	2012		2011		2011
Impaired loans with an allowance for loan loss	$	12,632	$	18,168	$	19,925
Impaired loans without an allowance for loan loss		7,105		4,774		4,398
Total impaired loans	$	19,737	$	22,942	$	24,323
Allowance for loan losses related to impaired loans	$	2,895	$	3,064	$	2,186
Total non-accrual loans	$	19,514	$	22,942	$	24,323
Total loans past due 90 days or more and still accruing		--		--		--

We had twelve nonaccrual loans as of June 30, 2012 and fifteen at December 31, 2011.  As of June 30, 2012, we have completed foreclosure proceedings on two loan participation interests we acquired from ECCU.  In addition, we have two loans totaling $3.4 million that are in foreclosure proceedings.  There is a reserve of $275.6 thousand on these loans.  In April 2012 we completely wrote off one nonaccrual loan as uncollectible.  However, as this loan carried a discount for the entire principal balance, our recorded investment in the loan was zero, and the write-off had no impact on our net loans receivable balance.

The Company’s loan portfolio is comprised of one segment – church loans. The loans fall into four classes: whole loans for which the Company possesses the first collateral position, whole loans that are either unsecured or for which the Company possesses a junior collateral position, participated loans for which the Company possesses the first collateral position, and participated loans for which the Company possesses a junior collateral position.

Loans by portfolio segment (church loans) and the related allowance for loan losses are presented below. Loans and the allowance for loan losses are further segregated by impairment methodology (dollars in thousands).

Loans and Allowance for Loan Losses (by segment)
As of
	June 30, 2012		December 31, 2011
Loans:
Balance	$	162,219	$	170,920
Individually evaluated
for impairment	$	19,737	$	22,942
Collectively
evaluated for impairment	$	142,482	$	147,978
Allowance for loan losses:
Balance	$	3,921	$	4,127
Individually evaluated
for impairment	$	2,895	$	3,064
Collectively
evaluated for impairment	$	1,026	$	1,063

The Company has established a standard loan grading system to assist management and review personnel in their analysis and supervision of the loan portfolio.  The loan grading system is as follows:

Pass: The borrower generates sufficient cash flow to fund its debt service obligations.  The borrower may be able to obtain similar financing from other lenders with comparable terms.  The risk of default is considered low.

Watch: These loans exhibit potential or developing weaknesses that deserve extra attention from credit management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the debt in the future.  Loans graded Watch must be reported to executive management and the Board of Managers.  Potential for loss under adverse circumstances is elevated, but not foreseeable.

Substandard: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, ministry, or environmental conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained if such weaknesses are not corrected.

Doubtful: This classification consists of loans that display the properties of substandard loans with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is very high, but because of certain important and reasonably specific factors, the amount of loss cannot be exactly determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.

Loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

The following table is a summary of the loan portfolio credit quality indicators by loan class at June 30, 2012 and 2011, which is the date on which the information was updated for each credit quality indicator (dollars in thousands):

Credit Quality Indicators (by class)
As of June 30, 2012
	Wholly-Owned First		Wholly-Owned Junior		Participation First		Participation Junior		Total
Grade:
Pass	$	87,669	$	2,357	$	36,991	$	1,006	$	128,023
Watch		5,802		3,798		8,747		-		18,347
Substandard		4,078		3,886		-		-		7,964
Doubtful		5,038		-		2,847		-		7,885
Loss		-		-		-		-		-
Total	$	102,587	$	10,041	$	48,585	$	1,006	$	162,219

Credit Quality Indicators (by class)
As of June 30, 2011
	Wholly-Owned First		Wholly-Owned Junior		Participation First		Participation Junior		Total
Grade:
Pass	$	95,705	$	11,978	$	41,634	$	-	$	149,317
Watch		4,865		3,180		4,922		1,006		13,973
Substandard		8,345		1,387		-		-		9,732
Doubtful		-		-		6,546		-		6,546
Loss		-		-		-		-		-
Total	$	108,915	$	16,545	$	53,102	$	1,006	$	179,568

The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at June 30, 2012 and 2011 (dollars in thousands):

Age Analysis of Past Due Loans (by class)
As of June 30, 2012
													Recorded
					Greater								Investment
	30-59 Days		60-89 Days		Than		Total				Total		90 Days or more
	Past Due		Past Due		90 Days		Past Due		Current		Loans		and Accruing
Church loans:
Wholly-Owned First	$	5,470	$	959	$	814	$	7,243	$	95,344	$	102,587	$	-
Wholly-Owned Junior		3,812		-		-		3,812		6,230		10,042		-
Participation First		-		-		2,611		2,611		45,973		48,584		-
Participation Junior		-		-		-		-		1,006		1,006		-
Total	$	9,282	$	959	$	3,425	$	13,666	$	148,553	$	162,219	$	-

Age Analysis of Past Due Loans (by class)
As of June 30, 2011
													Recorded
					Greater								Investment
	30-59 Days		60-89 Days		Than		Total				Total		90 Days or more
	Past Due		Past Due		90 Days		Past Due		Current		Loans		and Accruing
Church loans:
Wholly-Owned First	$	6,038	$	-	$	4,235	$	10,273	$	98,642	$	108,915	$	-
Wholly-Owned Junior		3,887		-		722		4,609		11,936		16,545		-
Participation First		-		-		6,546		6,546		46,556		53,102		-
Participation Junior		-		-		-		-		1,006		1,006		-
Total	$	9,925	$	-	$	11,503	$	21,428	$	158,140	$	179,568	$	-

The following table is a summary of impaired loans by loan class at June 30, 2012 and December 31, 2011.  The recorded investment in impaired loans reflects the balances in the financials statements, whereas the unpaid principal balance reflects the balances before discounts and partial chargeoffs (dollars in thousands):

Impaired Loans (by class)
As of June 30, 2012
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Church loans:
Wholly-Owned First	$	4,112	$	4,489	$	-	$	4,162	$	57
Wholly-Owned Junior		217		223		-		217		6
Participation First		2,611		2,744		-		2,633		-
Participation Junior		-		-		-		-		-
With an allowance recorded:
Church loans:
Wholly-Owned First		8,402		8,796		2,531		8,417		97
Wholly-Owned Junior		3,601		3,671		345		3,595		67
Participation First		235		254		19		609		-
Participation Junior		-		-		-		-		-
Total:
Church loans	$	19,178	$	20,177	$	2,895	$	19,633	$	227

Impaired Loans (by class)
For the Year Ended December 31, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Church loans:
Wholly-Owned First	$	1,678	$	1,685	$	-	$	1,691	$	98
Wholly-Owned Junior		-		434		-		-		-
Participation First		2,655		2,655		-		2,699		-
Participation Junior		-		-		-		-		-
With an allowance recorded:
Church loans:
Wholly-Owned First		11,893		12,587		1,773		12,053		254
Wholly-Owned Junior		4,511		4,603		1,111		4,520		146
Participation First		978		978		180		983		-
Participation Junior		-		-		-		-		-
Total:
Church loans	$	21,715	$	22,942	$	3,064	$	21,946	$	498

A summary of nonaccrual loans by loan class at June 30, 2012 and December 31, 2011 is as follows (dollars in thousands):

Loans on Nonaccrual Status (by class)
As of June 30, 2012
Church loans:
Wholly-Owned First	$	13,004
Wholly-Owned Junior		3,663
Participation First		2,847
Participation Junior		-
Total	$	19,514

Loans on Nonaccrual Status (by class)
As of December 31, 2011
Church loans:
Wholly-Owned First	$	14,272
Wholly-Owned Junior		5,037
Participation First		3,633
Participation Junior		-
Total	$	22,942

The following are summaries of troubled debt restructurings by loan class that were modified during the period ended June 30 (dollars in thousands):

Troubled Debt Restructurings (by class)
As of June 30, 2012
			Pre-Modification Outstanding		Post-Modification Outstanding		Recorded
	Number of Loans		Recorded Investment		Recorded Investment		Investment At Period End
Church loans:
Wholly-Owned First		1	$	2,096	$	2,096	$	2,078
Wholly-Owned Junior		1		430		430		426
Participation First		-		-		-		-
Participation Junior		-		-		-		-
Total		2	$	2,526	$	2,526	$	2,504

Troubled Debt Restructurings (by class)
As of June 30, 2011
			Pre-Modification Outstanding		Post-Modification Outstanding		Recorded
	Number of Loans		Recorded Investment		Recorded Investment		Investment At Period End
Church loans:
Wholly-Owned First		2	$	4,849	$	4,849	$	4,809
Wholly-Owned Junior		1		433		433		433
Participation First		-		-		-		-
Participation Junior		-		-		-		-
Total		3	$	5,282	$	5,282	$	5,242

For 11 of the 13 restructured loans in our portfolio, unpaid accrued interest at the time of the loan restructure was added to the principal balance.  The amount of interest added was also recorded as a loan discount, thus it did not increase our net loan balance. Another restructured loan represents the modified loan balance upon foreclosure on two of three underlying properties.  In addition, for each of the 13 restructured loans, the interest rate was lowered.  Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan was restructured.

A summary of troubled debt restructurings that defaulted during the periods ended June 30, 2012 and 2011 is as follows (dollars in thousands):

Troubled Debt Restructurings Defaulted (by class)
During the three months ended June 30, 2012
	Number of		Recorded
	Loans		Investment
Troubled debt restructurings that subsequently defaulted:
Church loans:
Wholly-Owned First		1	$	2,078
Wholly-Owned Junior		1		426
Participation First		-		-
Participation Junior		-		-
Total:
Church loans		2	$	2,504

Troubled Debt Restructurings Defaulted (by class)
During the six months ended June 30, 2012
	Number of		Recorded
	Loans		Investment
Troubled debt restructurings that subsequently defaulted:
Church loans:
Wholly-Owned First		1	$	2,078
Wholly-Owned Junior		1		426
Participation First		1		236
Participation Junior		-		-
Total:
Church loans		3	$	2,740

Troubled Debt Restructurings Defaulted (by class)
During the three months ended June 30, 2011
	Number of		Recorded
	Loans		Investment
Troubled debt restructurings that subsequently defaulted:
Church loans:
Wholly-Owned First		2	$	3,963
Wholly-Owned Junior		-		-
Participation First		-		-
Participation Junior		-		-
Total:
Church loans		2	$	3,963

Troubled Debt Restructurings Defaulted (by class)
During the six months ended June 30, 2011
	Number of		Recorded
	Loans		Investment
Troubled debt restructurings that subsequently defaulted:
Church loans:
Wholly-Owned First		5	$	8,617
Wholly-Owned Junior		2		1,121
Participation First		-		-
Participation Junior		-		-
Total:
Church loans		7	$	9,738

Loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator for future default.  If loans modified in a troubled debt restructuring subsequently default, the Company evaluates such loans for potential further impairment.  As a result of this evaluation, specific reserves may be increased or adjustments may be made in the allocation of reserves.

No additional funds were committed to be advanced in connection with impaired loans as of June 30, 2012.