Loans Receivable, Net

Loans receivable, net, consisted of the following as of the dates shown:



	September 30, 2013			December 31, 2012
Residential Real Estate Loans	$	83,706,115		$	90,677,625
Consumer Loans	53,038,081			56,595,093
Commercial Business	7,079,274			8,063,901
Commercial Real Estate	232,912,073			250,924,094
Total Loans Held For Investment	376,735,543			406,260,713
Loans Held For Sale	1,385,925			4,770,760
Total Loans Receivable, Gross	378,121,468			411,031,473
Less:
Allowance For Loan Losses	10,649,331			11,318,371
Loans In Process	2,559,695			2,002,595
Deferred Loan Fees (Costs)	(10,653		)	4,687
	13,198,373			13,325,653
Total Loans Receivable, Net	$	364,923,095		$	397,705,820

Changes in the allowance for loan losses for the three and nine months ended September 30, 2013 and 2012 are summarized as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Balance At Beginning Of Period	$	11,007,279		$	12,684,327		$	11,318,371		$	14,261,374
Provision For Loan Losses	600,000			300,000			2,645,381			2,975,000
Charge Offs	(1,002,990		)	(1,411,300		)	(3,470,300		)	(5,850,835		)
Recoveries	45,042			73,132			155,879			260,620
Total Allowance For Loan Losses	$	10,649,331		$	11,646,159		$	10,649,331		$	11,646,159

The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, caution, special mention, and substandard. These indicators are used to rate the credit quality of loans for the purposes of determining the Company’s allowance for loan losses. Pass loans are loans that are performing and are deemed adequately protected by the net worth of the borrower or the underlying collateral value. These loans are considered the least risky in terms of determining the allowance for loan losses. Substandard loans are considered the most risky category. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 90 days or more past due are automatically classified in this category. The other two categories fall in between these two grades.

The following tables list the loan grades used by the Company as credit quality indicators and the balance in each category at the dates presented, excluding loans held for sale.



	Credit Quality Measures
September 30, 2013	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	76,141,552	$	482,578	$	405,792	$	6,676,193	$	83,706,115
Consumer	51,218,363		740,157		165,670		913,891		53,038,081
Commercial Business	6,127,742		239,892		544,313		167,327		7,079,274
Commercial Real Estate	136,918,099		45,623,322		19,270,017		31,100,635		232,912,073
Total	$	270,405,756	$	47,085,949	$	20,385,792	$	38,858,046	$	376,735,543

9. Loans Receivable, Net, Continued



	Credit Quality Measures
December 31, 2012	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	82,565,630	$	222,046	$	293,079	$	7,596,870	$	90,677,625
Consumer	54,899,665		152,368		184,731		1,358,329		56,595,093
Commercial Business	7,256,607		151,521		514,253		141,520		8,063,901
Commercial Real Estate	162,570,021		32,049,447		17,417,778		38,886,848		250,924,094
Total	$	307,291,923	$	32,575,382	$	18,409,841	$	47,983,567	$	406,260,713

The following table presents an age analysis of past due balances by category at September 30, 2013:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
Residential Real Estate	$	—	$	841,302	$	3,933,183	$	4,774,485	$	78,931,630	$	83,706,115
Consumer	726,439		129,080		500,801		1,356,320		51,681,761		53,038,081
Commercial Business	177,434		32,643		700		210,777		6,868,497		7,079,274
Commercial Real Estate	7,527,051		4,531,168		7,703,099		19,761,318		213,150,755		232,912,073
Total	$	8,430,924	$	5,534,193	$	12,137,783	$	26,102,900	$	350,632,643	$	376,735,543

The following table presents an age analysis of past due balances by category at December 31, 2012:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
Residential Real Estate	$	—	$	1,794,644	$	3,757,801	$	5,552,445	$	85,125,180	$	90,677,625
Consumer	1,862,611		211,756		646,136		2,720,503		53,874,590		56,595,093
Commercial Business	445,113		36,079		86,991		568,183		7,495,718		8,063,901
Commercial Real Estate	2,432,423		4,852,227		13,913,190		21,197,840		229,726,254		250,924,094
Total	$	4,740,147	$	6,894,706	$	18,404,118	$	30,038,971	$	376,221,742	$	406,260,713

At September 30, 2013 and December 31, 2012, the Company did not have any loans that were 90 days or more past due and still accruing interest. Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral. In the event an acceptable arrangement cannot be reached, we may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

9. Loans Receivable, Net, Continued

The following table shows non-accrual loans by category at June 30, 2013 compared to December 31, 2012:



	At September 30, 2013				At December 31, 2012				$			%
	Amount		Percent ⁽¹⁾		Amount		Percent ⁽¹⁾		Increase (Decrease)			Increase (Decrease)
Non-accrual Loans:
Residential Real Estate	$	3,933,183	1.1	%	$	3,757,801	0.9	%	$	175,382		4.7	%
Commercial Business	700		—		86,991		—		(86,291		)	(99.2	)
Commercial Real Estate	7,703,099		2.1		13,913,190		3.4		(6,210,091		)	(44.6	)
Consumer	500,801		0.1		646,136		0.2		(145,335		)	(22.5	)
Total Non- accrual Loans	$	12,137,783	3.2	%	$	18,404,118	4.5	%	$	(6,266,335	)	(34.0	)%

^{(1) PERCENT OF TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.}

The following tables show the activity in the allowance for loan losses by category for the periods indicated:



	For the Three Months Ended September 30, 2013
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,665,871		$	888,913		$	488,554		$	7,963,941		$	11,007,279
Provision	175,482			(26,974		)	(66,101		)	517,593			600,000
Charge-Offs	(212,876		)	(27,916		)	—			(762,198		)	(1,002,990		)
Recoveries	—			18,953			10,219			15,870			45,042
Ending Balance	$	1,628,477		$	852,976		$	432,672		$	7,735,206		$	10,649,331



	For the Three Months Ended September 30, 2012
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	2,030,522		$	1,251,799		$	473,224		$	8,928,782		$	12,684,327
Provision	50,497			(80,555		)	(9,339		)	339,397			300,000
Charge-Offs	(192,026		)	(113,799		)	(28,736		)	(1,076,739		)	(1,411,300		)
Recoveries	330			2,901			4,087			65,814			73,132
Ending Balance	$	1,889,323		$	1,060,346		$	439,236		$	8,257,254		$	11,646,159



	For the Nine Months Ended September 30, 2013
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,521,559		$	1,001,271		$	618,919		$	8,176,622		$	11,318,371
Provision	431,317			(42,636		)	(201,148		)	2,457,848			2,645,381
Charge-Offs	(324,399		)	(143,991		)	(4,436		)	(2,997,474		)	(3,470,300		)
Recoveries	—			38,332			19,337			98,210			155,879
Ending Balance	$	1,628,477		$	852,976		$	432,672		$	7,735,206		$	10,649,331

9. Loans Receivable, Net, Continued



	For the Nine Months Ended September 30, 2012
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	2,416,356		$	996,780		$	720,405		$	10,127,833		$	14,261,374
Provision	147,559			1,327,579			(68,840		)	1,568,702			2,975,000
Charge-Offs	(684,681		)	(1,296,004		)	(217,466		)	(3,652,684		)	(5,850,835		)
Recoveries	10,089			31,991			5,137			213,403			260,620
Ending Balance	$	1,889,323		$	1,060,346		$	439,236		$	8,257,254		$	11,646,159

The following tables present information related to impaired loans evaluated individually for impairment and collectively evaluated for impairment in the allowance for loan losses:



	Allowance For Loan Losses
September 30, 2013	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	107,000	$	1,521,477	$	1,628,477
Consumer	—		852,976		852,976
Commercial Business	—		432,672		432,672
Commercial Real Estate	332,000		7,403,206		7,735,206
Total	$	439,000	$	10,210,331	$	10,649,331



	Allowance For Loan Losses
December 31, 2012	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,521,559	$	1,521,559
Consumer	—		1,001,271		1,001,271
Commercial Business	—		618,919		618,919
Commercial Real Estate	440,000		7,736,622		8,176,622
Total	$	440,000	$	10,878,371	$	11,318,371

9. Loans Receivable, Net, Continued

The following tables present information related to impaired loans evaluated individually for impairment and collectively evaluated for impairment in loans receivable for the periods indicated:



	Loans Receivable
September 30, 2013	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	4,120,500	$	79,585,615	$	83,706,115
Consumer	389,735		52,648,346		53,038,081
Commercial Business	20,611		7,058,663		7,079,274
Commercial Real Estate	29,170,177		203,741,896		232,912,073
Total	$	33,701,023	$	343,034,520	$	376,735,543



	Loans Receivable
December 31, 2012	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	4,500,902	$	86,176,723	$	90,677,625
Consumer	322,588		56,272,505		56,595,093
Commercial Business	7,853		8,056,048		8,063,901
Commercial Real Estate	35,115,195		215,808,899		250,924,094
Total	$	39,946,538	$	366,314,175	$	406,260,713

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sale, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $36.1 million for nine months ended September 30, 2013 compared to $39.4 million for the nine months ended September 30, 2012.

9. Loans Receivable, Net, Continued

The following tables are a summary of information related to impaired loans as of and for the three months ended September 30, 2013 and 2012.



			At				For The Three Months Ended September 30,
	September 30, 2013						2013				2012
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Invesment		Interest Income Recognized		Average Recorded Invesment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	3,714,628	$	4,117,557	$	—	$	3,834,984	$	9,662	$	2,714,824	$	13,904
Consumer Loans	389,735		453,735		—		397,003		1,783		863,939		620
Commercial Business	20,611		20,611		—		21,438		226		16,220		207
Commercial Real Estate	28,175,429		33,729,063		—		28,838,663		271,472		33,178,350		276,147
With An Allowance Recorded:
Residential Real Estate	405,872		405,872		107,000		405,872		—		1,196,138		—
Consumer Loans	—		—		—		—		—		13,233		178
Commercial Business	—		—		—		—		—		49,537		—
Commercial Real Estate	994,748		1,442,740		332,000		1,151,053		8,326		4,161,122		2,643
Total
Residential Real Estate	4,120,500		4,523,429		107,000		4,240,856		9,662		3,910,962		13,904
Consumer Loans	389,735		453,735		—		397,003		1,783		877,172		798
Commercial Business	20,611		20,611		—		21,438		226		65,757		207
Commercial Real Estate	29,170,177		35,171,803		332,000		29,989,716		279,798		37,339,472		278,790
Total	$	33,701,023	$	40,169,578	$	439,000	$	34,649,013	$	291,469	$	42,193,363	$	293,699

9. Loans Receivable, Net, Continued



	For The nine months Ended September 30,
	2013				2012
Impaired Loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	3,911,750	$	20,289	$	2,388,929	$	92,425
Consumer Loans	394,775		7,494		1,467,255		11,201
Commercial Business	23,745		335		110,021		368
Commercial Real Estate	30,090,250		1,031,806		30,054,920		1,204,035
With An Allowance Recorded:
Residential Real Estate	405,872		—		957,060		6,137
Consumer Loans	—		—		17,066		178
Commercial Business	—		—		110,326		956
Commercial Real Estate	1,278,434		23,274		4,292,826		188,164
Total
Residential Real Estate	4,317,622		20,289		3,345,989		98,562
Consumer Loans	394,775		7,494		1,484,321		11,379
Commercial Business	23,745		335		220,347		1,324
Commercial Real Estate	31,368,684		1,055,080		34,347,746		1,392,199
Total	$	36,104,826	$	1,083,198	$	39,398,403	$	1,503,464

9. Loans Receivable, Net, Continued



	December 31, 2012
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	4,500,902	$	4,611,873	$	—	$	4,531,543	$	130,896
Consumer Loans	322,588		386,588		—		342,916		28,419
Commercial Business	7,853		7,853		—		12,236		—
Commercial Real Estate	31,808,577		35,373,833		—		32,963,079		1,036,344
With An Allowance Recorded:
Residential Real Estate	—		—		—		—		—
Consumer Loans	—		—		—		—		—
Commercial Business	—		—		—		—		—
Commercial Real Estate	3,306,618		4,766,031		440,000		3,705,660		—
Total
Residential Real Estate	4,500,902		4,611,873		—		4,531,543		130,896
Consumer Loans	322,588		386,588		—		342,916		28,419
Commercial Business	7,853		7,853		—		12,236		—
Commercial Real Estate	35,115,195		40,139,864		440,000		36,668,739		1,036,344
Total	$	39,946,538	$	45,146,178	$	440,000	$	41,555,434	$	1,195,659

In the course of resolving delinquent loans, the Bank may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider (Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 310-40). The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Bank grants such concessions to reassess the borrower’s financial status and develop a plan for repayment. TDRs included in impaired loans at September 30, 2013 and December 31, 2012 were $12.2 million and $15.9 million, respectively.

Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the note is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).

9. Loans Receivable, Net, Continued

There were no loan modifications during the three months ended September 30, 2013 or 2012 that were TDRs. The following table is a summary of loans restructured as TDRs during the periods indicated:



	For the nine months Ended September 30, 2013					For the nine months Ended September 30, 2012
Troubled Debt Restructurings	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Residential Real Estate	—	$	—	$	—	—	$	—	$	—
Consumer Loans	—	—		—		1	15,358		15,358
Commercial Business	—	—		—		—	—		—
Commercial Real Estate	4	1,651,023		1,651,023		9	7,871,114		7,871,114
Total	4	$	1,651,023	$	1,651,023	10	$	7,886,472	$	7,886,472

During the nine months ended September 30, 2013, the Bank modified four loans that were considered to be a TDR. The Bank lowered the interest rate on these loans to enable the customer to begin making monthly principal and interest payments. During the three and nine months ended September 30, 2013, one loan for $142,000 that had been previously restructured within the last twelve months defaulted. The Bank considers any loan 30 days or more past due to be in default. During the nine months ended September 30, 2012, seven loans with a recorded investment of $4.1 million that had been restructured during the previous 12 months subsequently defaulted during the period. Of these seven loans, three with a recorded investment of $333,000 defaulted during the three months ended September 30, 2012.

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.

We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status.