During 2010, REO increased by $964 thousand to $3.0 million from the end of 2009. At December 31, 2010 the Bank’s REO consisted of three one-to-four family residential properties, three multi-family residential properties and five commercial real estate properties, three of which are church buildings.
We are continuing to monitor our loan portfolio closely and work with borrowers to maximize the value of our assets. As part of this process, during 2010 we enhanced our loan monitoring and servicing procedures, implemented direct reporting to a committee of our Board of Directors, and hired experienced managers for both our loan servicing and Internal Asset Review functions. In addition, we are pursuing sales of our REO and selected classified assets. During 2010 we successfully sold $13.1 million of loans, including $1.9 million of classified non-performing loans, and $3.0 million of REO. During 2009, we sold $2.9 million of loans.
At December 31, 2010 our allowance for loan losses was $20.5 million, or 5.08% of our gross loans, compared to $20.5 million, or 4.52% of our gross loans, at year-end 2009. The ratio of the allowance for loan losses to NPLs was 54.53% at December 31, 2010, compared to 66.20% at year-end 2009. The decrease in the coverage ratio of the allowance for loan losses to non-performing loans was primarily due to the impact of loan charge-offs, which reduced the allowance for loan losses proportionately more than the corresponding reduction in NPLs. Net loan charge-offs during 2010 were $4.5 million, or 0.97% of average loans, compared to $2.7 million, or 0.64% of average loans, during 2009.
In determining the level of allowances for loan losses, we account for unimpaired loans in accordance with FASB Accounting Standards Codification Topic, “Loss Contingencies” (Topic 450-20). In contrast, we account for impaired loans in accordance with FASB Accounting Standards Codification Topic, “Impairment of a Loan” (Topic 310-10-35). Loans identified as impaired are accounted for in accordance with one of the three acceptable valuation methods: 1) the present value of future cash flows discounted at the loan’s effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral (as determined by third party appraisals or opinions of value obtained from real estate brokers), if the loan is collateral dependent. We believe that our loan reserves are adequate based on our analyses, the comprehensive review of our portfolio by an independent third party, and the reviews performed by the OTS and the FDIC during 2010.
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