Loans Receivable, Net

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




	June 30, 2014		December 31, 2013
Residential Real Estate Loans	$	78,147,843	$	83,004,482
Consumer Loans	50,497,661		52,205,901
Commercial Business	8,964,667		7,775,098
Commercial Real Estate	219,384,091		228,399,555
Total Loans Held For Investment	356,994,262		371,385,036
Loans Held For Sale	1,384,240		1,234,158
Total Loans Receivable, Gross	358,378,502		372,619,194
Less:
Allowance For Loan Losses	9,112,157		10,241,970
Loans In Process	2,649,601		3,465,072
Deferred Loan Fees (Costs)	11,331		(4,513		)
	11,773,089		13,702,529
Total Loans Receivable, Net	$	346,605,413	$	358,916,665

Changes in the allowance for loan losses for the three and six months ended June 30, 2014 and 2013 are summarized as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Balance At Beginning Of Period	$	9,845,755		$	11,105,226		$	10,241,970		$	11,318,371
Provision For Loan Losses	100,000			900,000			200,000			2,045,381
Charge Offs	(1,016,477		)	(1,081,851		)	(1,794,052		)	(2,467,311		)
Recoveries	182,879			83,904			464,239			110,838
Total Allowance For Loan Losses	$	9,112,157		$	11,007,279		$	9,112,157		$	11,007,279

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.

9. Loans Receivable, Net, Continued



	Credit Quality Measures
June 30, 2014	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	68,998,207	$	2,496,195	$	397,203	$	6,256,238	$	78,147,843
Consumer	48,319,721		1,065,653		137,931		974,356		50,497,661
Commercial Business	8,023,461		244,286		119,067		577,853		8,964,667
Commercial Real Estate	130,972,537		35,222,429		36,515,818		16,673,307		219,384,091
Total	$	256,313,926	$	39,028,563	$	37,170,019	$	24,481,754	$	356,994,262



	Credit Quality Measures
December 31, 2013	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	74,505,587	$	890,902	$	403,138	$	7,204,855	$	83,004,482
Consumer	50,370,640		843,799		143,649		847,813		52,205,901
Commercial Business	6,807,620		368,019		524,928		74,531		7,775,098
Commercial Real Estate	135,793,150		43,252,464		25,581,235		23,772,706		228,399,555
Total	$	267,476,997	$	45,355,184	$	26,652,950	$	31,899,905	$	371,385,036

The following table presents an age analysis of past due balances by category at June 30, 2014:



	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	$	—	$	1,071,054	$	4,403,170	$	5,474,224	$	72,673,619	$	78,147,843
Consumer	497,092		129,718		699,496		1,326,306		49,171,355		50,497,661
Commercial Business	1,127,249		95,713		494,736		1,717,698		7,246,969		8,964,667
Commercial Real Estate	2,768,652		768,166		9,884,181		13,420,999		205,963,092		219,384,091
Total	$	4,392,993	$	2,064,651	$	15,481,583	$	21,939,227	$	335,055,035	$	356,994,262

The following table presents an age analysis of past due balances by category at December 31, 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	$	—	$	1,363,132	$	4,607,613	$	5,970,745	$	77,033,737	$	83,004,482
Consumer	1,494,429		234,878		399,062		2,128,369		50,077,532		52,205,901
Commercial Business	115,186		—		33,055		148,241		7,626,857		7,775,098
Commercial Real Estate	5,103,522		2,046,666		4,972,667		12,122,855		216,276,700		228,399,555
Total	$	6,713,137	$	3,644,676	$	10,012,397	$	20,370,210	$	351,014,826	$	371,385,036

9. Loans Receivable, Net, Continued

At June 30, 2014 and December 31, 2013, 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.

The following table shows non-accrual loans by category at June 30, 2014 compared to December 31, 2013:



	At June 30, 2014				At December 31, 2013				$			%
	Amount		Percent ⁽¹⁾		Amount		Percent ⁽¹⁾		Increase (Decrease)			Increase (Decrease)
Non-accrual Loans:
Residential Real Estate	$	4,403,170	1.24	%	$	4,607,613	1.25	%	$	(204,443	)	(4.4	)%
Commercial Business	494,736		0.14		33,055		0.01		461,681			1,396.7
Commercial Real Estate	9,884,181		2.79		4,972,667		1.35		4,911,514			98.8
Consumer	699,496		0.20		399,062		0.11		300,434			75.3
Total Non- accrual Loans	$	15,481,583	4.37	%	$	10,012,397	2.72	%	$	5,469,186		54.6	%

^{(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 June 30, 2014
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,668,156		$	803,868		$	369,381		$	7,004,350		$	9,845,755
Provision	(130,818		)	29,492			142,959			58,367			100,000
Charge-Offs	(165,191		)	(13,591		)	(17,132		)	(820,563		)	(1,016,477		)
Recoveries	135,134			13,977			1,370			32,398			182,879
Ending Balance	$	1,507,281		$	833,746		$	496,578		$	6,274,552		$	9,112,157



	For the Six Months Ended June 30, 2014
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,706,643		$	847,777		$	426,658		$	7,260,892		$	10,241,970
Provision	(87,312		)	156,833			67,998			62,481			200,000
Charge-Offs	(247,663		)	(208,040		)	(17,132		)	(1,321,217		)	(1,794,052		)
Recoveries	135,613			37,176			19,054			272,396			464,239
Ending Balance	$	1,507,281		$	833,746		$	496,578		$	6,274,552		$	9,112,157

9. Loans Receivable, Net, Continued



	For the Three Months Ended June 30, 2013
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,591,884		$	908,393		$	542,903		$	8,062,046		$	11,105,226
Provision	156,264			66,151			(57,981		)	735,566			900,000
Charge-Offs	(82,277		)	(96,499		)	—			(903,075		)	(1,081,851		)
Recoveries	—			10,868			3,632			69,404			83,904
Ending Balance	$	1,665,871		$	888,913		$	488,554		$	7,963,941		$	11,007,279



	For the Six Months Ended June 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	255,835			(15,662		)	(135,047		)	1,940,255			2,045,381
Charge-Offs	(111,523		)	(116,075		)	(4,436		)	(2,235,277		)	(2,467,311		)
Recoveries	—			19,379			9,118			82,341			110,838
Ending Balance	$	1,665,871		$	888,913		$	488,554		$	7,963,941		$	11,007,279

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
June 30, 2014	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	145,876	$	1,361,405	$	1,507,281
Consumer	2,600		831,146		833,746
Commercial Business	207,500		289,078		496,578
Commercial Real Estate	482,700		5,791,852		6,274,552
Total	$	838,676	$	8,273,481	$	9,112,157



	Allowance For Loan Losses
December 31, 2013	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	158,791	$	1,547,852	$	1,706,643
Consumer	103,109		744,668		847,777
Commercial Business	—		426,658		426,658
Commercial Real Estate	840,658		6,420,234		7,260,892
Total	$	1,102,558	$	9,139,412	$	10,241,970

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
June 30, 2014	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	4,734,446	$	73,413,397	$	78,147,843
Consumer	315,465		50,182,196		50,497,661
Commercial Business	494,736		8,469,931		8,964,667
Commercial Real Estate	22,543,381		196,840,710		219,384,091
Total	$	28,088,028	$	328,906,234	$	356,994,262



	Loans Receivable
December 31, 2013	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	4,838,236	$	78,166,246	$	83,004,482
Consumer	275,491		51,930,410		52,205,901
Commercial Business	19,775		7,755,323		7,775,098
Commercial Real Estate	26,221,312		202,178,243		228,399,555
Total	$	31,354,814	$	340,030,222	$	371,385,036

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 $29.8 million for three months ended June 30, 2014 compared to $35.3 million for the three months ended June 30, 2013.

9. Loans Receivable, Net, Continued

The following tables are a summary of information related to impaired loans as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013.



			At				For the Three Months Ended June 30,
	June 30, 2014						2014				2013
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	$	4,138,338	$	4,138,338	$	—	$	4,298,141	$	14,139	$	3,202,717	$	3,890
Consumer Loans	247,748		247,748		—		249,210		—		300,998		2,875
Commercial Business	16,089		16,089		—		16,089		—		23,302		—
Commercial Real Estate	19,869,021		19,869,021		—		21,434,443		155,690		26,980,203		180,095
With An Allowance Recorded:
Residential Real Estate	596,108		741,984		145,876		603,056		—		596,933		1,938
Consumer Loans	67,717		70,317		2,600		67,932		839		—		—
Commercial Business	478,647		686,147		207,500		483,561		—		—		—
Commercial Real Estate	2,674,360		3,157,060		482,700		2,636,348		8,384		4,191,700		26,979
Total
Residential Real Estate	4,734,446		4,880,322		145,876		4,901,197		14,139		3,799,650		5,828
Consumer Loans	315,465		318,065		2,600		317,142		839		300,998		2,875
Commercial Business	494,736		702,236		207,500		499,650		—		23,302		—
Commercial Real Estate	22,543,381		23,026,081		482,700		24,070,791		164,074		31,171,903		207,074
Total	$	28,088,028	$	28,926,704	$	838,676	$	29,788,780	$	179,052	$	35,295,853	$	215,777

9. Loans Receivable, Net, Continued



	For the Six Months Ended June 30,
	2014				2013
Impaired Loans	Average Recorded Invesment		Interest Income Recognized		Average Recorded Invesment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	4,351,870	$	26,355	$	3,236,129	$	6,087
Consumer Loans	250,016		—		300,783		3,467
Commercial Business	16,089		—		24,819		—
Commercial Real Estate	21,817,619		268,199		27,549,900		506,537
With An Allowance Recorded:
Residential Real Estate	620,314		—		596,933		9,548
Consumer Loans	68,212		2,086		—		—
Commercial Business	488,387		—		—		—
Commercial Real Estate	2,694,448		28,374		4,216,012		63,051
Total
Residential Real Estate	4,972,184		26,355		3,833,062		15,635
Consumer Loans	318,228		2,086		300,783		3,467
Commercial Business	504,476		—		24,819		—
Commercial Real Estate	24,512,067		296,573		31,765,912		569,588
Total	$	30,306,955	$	325,014	$	35,924,576	$	588,690



	December 31, 2013
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance
With No Related Allowance Recorded:
Residential Real Estate	$	3,936,316	$	4,588,645	$	—
Consumer Loans	106,197		106,198		—
Commercial Business	19,775		19,775		—
Commercial Real Estate	21,810,347		26,775,853		—
With An Allowance Recorded:
Residential Real Estate	901,920		901,920		158,791
Consumer Loans	169,294		169,294		103,109
Commercial Business	—		—		—
Commercial Real Estate	4,410,965		4,954,058		840,658
Total
Residential Real Estate	4,838,236		5,490,565		158,791
Consumer Loans	275,491		275,492		103,109
Commercial Business	19,775		19,775		—
Commercial Real Estate	26,221,312		31,729,911		840,658
Total	$	31,354,814	$	37,515,743	$	1,102,558

9. Loans Receivable, Net, Continued

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 June 30, 2014 and December 31, 2013 were $11.2 million and $12.4 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).

The following table is a summary of loans restructured as TDRs during the periods indicated:



	For the Three Months Ended June 30, 2014					For the Three Months Ended June 30, 2013
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	—	—		—		—	—		—
Commercial Business	—	—		—		—	—		—
Commercial Real Estate	1	79,072		79,072		1	329,999		329,999
Total	1	$	79,072	$	79,072	1	$	329,999	$	329,999



	For the Six Months Ended June 30, 2014					For the Six Months Ended June 30, 2013
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	—	—		—		—	—		—
Commercial Business	—	—		—		—	—		—
Commercial Real Estate	1	79,072		79,072		4	1,651,023		1,651,023
Total	1	$	79,072	$	79,072	4	$	1,651,023	$	1,651,023

During the three and six months ended June 30, 2014, the Bank modified one loan that was considered to be a TDR by lowering the interest rate. During the three months ended June 30, 2013, the Bank modified one loan that was considered to be a TDR by lowering the interest rate. This modification enabled the customer to begin making monthly principal and interest payments.

During the six months ended June 30, 2014, five loans totaling $3.0 million that had previously been restructured were in default, four of the loans totaling $2.8 million went into default during the six month period. No loans that had been previously restructured within the last twelve months defaulted during the six months ended June 30, 2014. The Bank considers any loan 30 days or more past due to be in default.

9. Loans Receivable, Net, Continued

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.