Note 4. Loans Receivable, Net

Loans receivable, net at June 30, 2014 and December 31, 2013 consisted of the following (in thousands):


	June 30, 2014			December 31, 2013
Real estate:
One-to-four family	$	765,466		$	750,585
Commercial real estate, multi family and land		577,061			528,945
Residential construction		46,092			30,821
Consumer		201,839			200,683
Commercial and industrial		75,215			60,545

Total loans		1,665,673			1,571,579
Loans in process		(16,374	)		(12,715	)
Deferred origination costs, net		3,456			3,526
Allowance for loan losses		(20,936	)		(20,930	)

Loans receivable, net	$	1,631,819		$	1,541,460

At June 30, 2014 and December 31, 2013, loans in the amount of $40,699,000 and $45,360,000, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income on these loans. There were no loans ninety days or greater past due and still accruing interest. Non-accrual loans include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.

The Company defines an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. At June 30, 2014, the impaired loan portfolio totaled $42,382,000 for which there was a specific allocation in the allowance for loan losses of $4,069,000. At December 31, 2013, the impaired loan portfolio totaled $39,903,000 for which there was a specific allocation in the allowance for loan losses of $3,647,000. The average balance of impaired loans for the three and six months ended June 30, 2014 was $42,835,000 and $42,402,000, respectively, and $37,549,000 and $38,228,000, respectively, for the same prior year periods.

An analysis of the allowance for loan losses for the three and six months ended June 30, 2014 and 2013 is as follows (in thousands):


	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Balance at beginning of period	$	20,934		$	20,494		$	20,930		$	20,510
Provision charged to operations		275			800			805			1,900
Charge-offs		(419	)		(938	)		(1,158	)		(2,299	)
Recoveries		146			464			359			709

Balance at end of period	$	20,936		$	20,820		$	20,936		$	20,820

The following table presents an analysis of the allowance for loan losses for the three and six months ended June 30, 2014 and 2013 and the balance in the allowance for loan loses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2014 and December 31, 2013 (in thousands):


	Residential Real Estate			Commercial Real Estate			Consumer			Commercial and Industrial			Unallocated		Total
For the three months ended June 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	4,290		$	11,413		$	1,369		$	1,044		$	2,818	$	20,934
Provision (benefit) charged to operations		207			(337	)		80			128			197		275
Charge-offs		(205	)		—			(204	)		(10	)		—		(419	)
Recoveries		105			1			39			1			—		146

Balance at end of period	$	4,397		$	11,077		$	1,284		$	1,163		$	3,015	$	20,936

For the three months ended June 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	5,185		$	9,286		$	2,148		$	1,094		$	2,781	$	20,494
Provision (benefit) charged to operations		19			463			(13	)		(2	)		333		800
Charge-offs		(739	)		—			(199	)		—			—		(938	)
Recoveries		435			25			3			1			—		464

Balance at end of period	$	4,900		$	9,774		$	1,939		$	1,093		$	3,114	$	20,820

For the six months ended June 30, 2014
Allowance for loan losses:
Balance at beginning of period	$	4,859		$	10,371		$	1,360		$	1,383		$	2,957	$	20,930
Provision (benefit) charged to operations		25			697			196			(171	)		58		805
Charge-offs		(795	)		—			(313	)		(50	)		—		(1,158	)
Recoveries		308			9			41			1			—		359

Balance at end of period	$	4,397		$	11,077		$	1,284		$	1,163		$	3,015	$	20,936

For the six months ended June 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	5,241		$	8,937		$	2,264		$	1,348		$	2,720	$	20,510
Provision (benefit) charged to operations		849			787			(107	)		(23	)		394		1,900
Charge-offs		(1,689	)		—			(375	)		(235	)		—		(2,299	)
Recoveries		499			50			157			3			—		709

Balance at end of period	$	4,900		$	9,774		$	1,939		$	1,093		$	3,114	$	20,820

June 30, 2014
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	131		$	3,493		$	445		$	—		$	—	$	4,069
Collectively evaluated for impairment		4,266			7,584			839			1,163			3,015		16,867

Total ending allowance balance	$	4,397		$	11,077		$	1,284		$	1,163		$	3,015	$	20,936


	Residential Real Estate		Commercial Real Estate		Consumer		Commercial and Industrial		Unallocated		Total
Loans:
Loans individually evaluated for impairment	$	18,856	$	20,885	$	2,365	$	276	$	—	$	42,382
Loans collectively evaluated for impairment		792,702		556,176		199,474		74,939		—		1,623,291

Total ending loan balance	$	811,558	$	577,061	$	201,839	$	75,215	$	—	$	1,665,673

December 31, 2013
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	2	$	3,612	$	33	$	—	$	—	$	3,647
Collectively evaluated for impairment		4,857		6,759		1,327		1,383		2,957		17,283

Total ending allowance balance	$	4,859	$	10,371	$	1,360	$	1,383	$	2,957	$	20,930

Loans:
Loans individually evaluated for impairment	$	18,192	$	17,643	$	2,961	$	1,107	$	—	$	39,903
Loans collectively evaluated for impairment		763,214		511,302		197,722		59,438		—		1,531,676

Total ending loan balance	$	781,406	$	528,945	$	200,683	$	60,545	$	—	$	1,571,579

A summary of impaired loans at June 30, 2014 and December 31, 2013 is as follows (in thousands):


	June 30,		December 31,
	2014		2013
Impaired loans with no allocated allowance for loan losses	$	27,588	$	24,457
Impaired loans with allocated allowance for loan losses		14,794		15,446

	$	42,382	$	39,903

Amount of the allowance for loan losses allocated	$	4,069	$	3,647

At June 30, 2014, impaired loans include troubled debt restructuring loans of $30,047,000 of which $23,000,000 were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2013, impaired loans include troubled debt restructuring loans of $31,119,000 of which $21,456,000 were performing in accordance with their restructured terms and were accruing interest.

The summary of loans individually evaluated for impairment by class of loans as of June 30, 2014 and December 31, 2013 and for the three months ended June 30, 2014 and 2013 follows (in thousands):


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
As of June 30, 2014
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	9,591	$	8,819	$	—
Originated by mortgage company		7,952		7,567		—
Originated by mortgage company – non-prime		1,616		1,215		—
Commercial real estate:
Commercial		8,093		8,009		—
Construction and land		—		—		—
Consumer		2,231		1,702		—
Commercial and industrial		276		276		—

	$	29,759	$	27,588	$	—

With an allowance recorded:
Residential real estate:
Originated by Bank	$	862	$	862	$	106
Originated by mortgage company		393		393		25
Originated by mortgage company – non-prime		—		—		—
Commercial real estate:
Commercial		12,591		12,572		3,417
Construction and land		304		304		76
Consumer		663		663		445
Commercial and industrial		—		—		—

	$	14,813	$	14,794	$	4,069

As of December 31, 2013
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	10,537	$	9,885	$	—
Originated by mortgage company		7,762		7,387		—
Originated by mortgage company – non-prime		1,260		858		—
Commercial real estate:
Commercial		2,303		2,292		—
Construction and land		—		—		—
Consumer		3,435		2,928		—
Commercial and industrial		1,107		1,107		—

	$	26,404	$	24,457	$	—


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Residential real estate:
Originated by Bank	$	62	$	62	$	2
Originated by mortgage company		—		—		—
Originated by mortgage company – non-prime		—		—		—
Commercial real estate:
Commercial		15,128		15,042		3,389
Construction and land		309		309		223
Consumer		33		33		33
Commercial and industrial		—		—		—

	$	15,532	$	15,446	$	3,647


	Three months ended June 30,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	9,049	$	101	$	10,983	$	86
Originated by mortgage company		7,555		65		6,774		57
Originated by mortgage company – non-prime		1,103		3		2,194		5
Commercial real estate:
Commercial		8,046		20		2,749		34
Construction and land		—		—		—		—
Consumer		2,141		20		2,792		21
Commercial and industrial		276		3		286		3

	$	28,170	$	212	$	25,778	$	206

With an allowance recorded:
Residential real estate:
Originated by Bank	$	865	$	8	$	824	$	11
Originated by mortgage company		394		7		776		9
Originated by mortgage company – non-prime		—		—		—		—
Commercial real estate:
Commercial		12,417		26		8,908		76
Construction and land		304		—		472		—
Consumer		685		11		791		9
Commercial and industrial		—		—		—		—

	$	14,665	$	52	$	11,771	$	105


	Six months ended June 30,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	9,141	$	184	$	11,276	$	176
Originated by mortgage company		7,486		127		6,761		127
Originated by mortgage company – non-prime		981		6		2,221		8
Commercial real estate:
Commercial		7,526		70		2,699		65
Construction and land		—		—		—		—
Consumer		2,161		41		2,830		40
Commercial and industrial		277		5		287		5

	$	27,572	$	433	$	26,074	$	421

With an allowance recorded:
Residential real estate:
Originated by Bank	$	869	$	18	$	826	$	21
Originated by mortgage company		395		13		779		20
Originated by mortgage company – non-prime		—		—		—		—
Commercial real estate:
Commercial		12,584		63		9,250		157
Construction and land		304		—		472		—
Consumer		678		21		827		24
Commercial and industrial		—		—		—		—

	$	14,830	$	115	$	12,154	$	222

The following table presents the recorded investment in non-accrual loans by class of loans as of June 30, 2014 and December 31, 2013 (in thousands):


	June 30, 2014		December 31, 2013
Residential real estate:
Originated by Bank	$	13,669	$	16,145
Originated by mortgage company		10,462		10,589
Originated by mortgage company – non-prime		1,182		1,479
Commercial real estate:
Commercial		11,790		11,995
Construction and land		304		309
Consumer		3,128		4,328
Commercial and industrial		164		515

	$	40,699	$	45,360

As used in these footnotes, loans “Originated by mortgage company” are mortgage loans originated under the Bank’s underwriting guidelines by the Bank’s shuttered mortgage company, and retained as part of the Bank’s mortgage portfolio. These loans have significantly higher delinquency rates than similar loans originated by the Bank. Loans “Originated by mortgage company – non-prime” are subprime or Alt-A loans which were originated for sale into the secondary market by the Bank’s shuttered mortgage company.

The following table presents the aging of the recorded investment in past due loans as of June 30, 2014 and December 31, 2013 by class of loans (in thousands):


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
June 30, 2014
Residential real estate:
Originated by Bank	$	7,851	$	1,528	$	11,628	$	21,007	$	656,085	$	677,092
Originated by mortgage company		90		—		9,796		9,886		75,959		85,845
Originated by mortgage company – non-prime		—		—		1,242		1,242		1,287		2,529
Residential construction		—		—		—		—		46,092		46,092
Commercial real estate:
Commercial		483		—		11,790		12,273		526,811		539,084
Construction and land		—		—		304		304		37,673		37,977
Consumer		442		504		3,072		4,018		197,821		201,839
Commercial and industrial		—		—		164		164		75,051		75,215

	$	8,866	$	2,032	$	37,996	$	48,894	$	1,616,779	$	1,665,673

December 31, 2013
Residential real estate:
Originated by Bank	$	6,102	$	2,526	$	13,800	$	22,428	$	632,653	$	655,081
Originated by mortgage Company		202		108		10,031		10,341		82,544		92,885
Originated by mortgage company – non-prime		—		—		1,465		1,465		1,153		2,618
Residential construction		195		—		—		195		30,626		30,821
Commercial real estate:
Commercial		985		849		9,217		11,051		491,817		502,868
Construction and land		—		—		309		309		25,769		26,078
Consumer		864		298		4,219		5,381		195,302		200,683
Commercial and industrial		—		—		515		515		60,030		60,545

	$	8,348	$	3,781	$	39,556	$	51,685	$	1,519,894	$	1,571,579

The Company categorizes all commercial and commercial real estate loans, except for small business 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 and current economic trends, among other factors. This analysis is performed on 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 Bank’s credit position at some future date.

Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. Loans not rated are included in groups of homogeneous loans. As of June 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):


	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2014
Commercial real estate:
Commercial	$	503,785	$	5,057	$	30,242	$	—	$	539,084
Construction and land		36,714		—		1,263		—		37,977
Commercial and industrial		74,336		518		361		—		75,215

	$	614,835	$	5,575	$	31,866	$	—	$	652,276

December 31, 2013
Commercial real estate:
Commercial	$	471,435	$	—	$	30,576	$	857	$	502,868
Construction and land		25,018		—		1,059		—		26,077
Commercial and industrial		59,089		1,070		386		—		60,545

	$	555,542	$	1,070	$	32,021	$	857	$	589,490

For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2014 and December 31, 2013 (in thousands):


	Residential Real Estate
	Originated by Bank		Originated by mortgage company		Originated by mortgage company – non-prime		Residential construction		Consumer
June 30, 2014
Performing	$	663,423	$	75,383	$	1,347	$	46,092	$	198,711
Non-performing		13,669		10,462		1,182		—		3,128

	$	677,092	$	85,845	$	2,529	$	46,092	$	201,839

December 31, 2013
Performing	$	638,936	$	82,296	$	1,139	$	30,821	$	196,355
Non-performing		16,145		10,589		1,479		—		4,328

	$	655,081	$	92,885	$	2,618	$	30,821	$	200,683

The Company classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the capitalization of past due amounts. Included in the non-accrual loan total at June 30, 2014 and December 31, 2013 were $7,047,000 and $9,663,000, respectively, of troubled debt restructurings. At June 30, 2014 and December 31, 2013, the Company has allocated $1,521,000 and $1,816,000, respectively, of specific reserves to loans which are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are generally returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as troubled debt restructurings which are accruing at June 30, 2014 and December 31, 2013, which totaled $23,000,000 and $21,456,000, respectively. Troubled debt restructurings with six months of performance are considered in the allowance for loan losses similar to other performing loans. Troubled debt restructurings which are non-accrual or classified are considered in the allowance for loan losses similar to other non-accrual or classified loans.

The following table presents information about troubled debt restructurings which occurred during the three and six months ended June 30, 2014 and 2013, and troubled debt restructurings modified within the previous year and which defaulted during the three and six months ended June 30, 2014 and 2013 (dollars in thousands):


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended June 30, 2014
Troubled Debt Restructurings:
Residential real estate:
Originated by mortgage company – non-prime		1	$	358	$	358
Consumer		3		93		97

	Number of Loans		Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:		None		None

	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Six months ended June 30, 2014
Troubled Debt Restructurings:
Residential real estate:
Originated by Bank		2	$	337	$	263
Originated by mortgage company		1		187		184
Originated by mortgage company – non-prime		1		358		358
Consumer		5		168		171

	Number of Loans		Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:		None		None

	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended June 30, 2013
Troubled Debt Restructurings:
Residential real estate:
Originated by Bank		3	$	628	$	628
Consumer		1		12		12

	Number of Loans		Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:		2		492

	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Six months ended June 30, 2013
Troubled Debt Restructurings:
Residential real estate:
Originated by Bank		3	$	628	$	628
Consumer		5		97		89

	Number of Loans		Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:		2		492