Loans Receivable, Net

Loans receivable, net, consisted of the following as of the dates indicated below:



	September 30, 2016		December 31, 2015
Residential Real Estate Loans	$	81,030,012	$	76,373,071
Consumer Loans	50,686,906		50,380,289
Commercial Business Loans	16,242,394		12,514,133
Commercial Real Estate Loans	211,930,466		200,083,125
Total Loans Held For Investment	359,889,778		339,350,618
Loans Held For Sale	4,143,431		2,462,559
Total Loans Receivable, Gross	364,033,209		341,813,177
Less:
Allowance For Loan Losses	8,111,111		8,275,133
Loans In Process	4,003,973		2,902,849
Deferred Loan Fees	99,555		62,466
	12,214,639		11,240,448
Total Loans Receivable, Net	$	351,818,570	$	330,572,729

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 to have the least amount of risk in terms of determining the allowance for loan losses. Loans that are graded as substandard are considered to have the most risk. 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 caution and special mention categories fall in between the pass and substandard grades and consist of loans that do not currently expose the Company to sufficient risk to warrant adverse classification but possess weaknesses.

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



	Credit Quality Measures
September 30, 2016	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	73,440,126	$	687,636	$	424,306	$	6,477,944	$	81,030,012
Consumer	47,022,390		2,506,844		7,331		1,150,341		50,686,906
Commercial Business	14,780,095		953,963		54,669		453,667		16,242,394
Commercial Real Estate	116,912,982		72,253,892		15,691,107		7,072,485		211,930,466
Total	$	252,155,593	$	76,402,335	$	16,177,413	$	15,154,437	$	359,889,778



	Credit Quality Measures
December 31, 2015	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	67,605,311	$	1,264,415	$	607,336	$	6,896,009	$	76,373,071
Consumer	46,344,056		2,510,519		81,617		1,444,097		50,380,289
Commercial Business	10,519,123		1,465,136		102,046		427,828		12,514,133
Commercial Real Estate	129,242,390		43,863,659		17,304,431		9,672,645		200,083,125
Total	$	253,710,880	$	49,103,729	$	18,095,430	$	18,440,579	$	339,350,618

8. Loans Receivable, Net, Continued

The following tables present an age analysis of past due balances by category at September 30, 2016 and December 31, 2015:



September 30, 2016	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	$	—	$	1,133,054	$	2,869,815	$	4,002,869	$	77,027,143	$	81,030,012
Consumer	855,472		46,622		283,770		1,185,864		49,501,042		50,686,906
Commercial Business	131,323		43,082		145,401		319,806		15,922,588		16,242,394
Commercial Real Estate	4,645,754		183,888		2,933,751		7,763,393		204,167,073		211,930,466
Total	$	5,632,549	$	1,406,646	$	6,232,737	$	13,271,932	$	346,617,846	$	359,889,778



December 31, 2015	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	$	—	$	1,144,381	$	3,306,675	$	4,451,056	$	71,922,015	$	76,373,071
Consumer	710,881		282,314		575,866		1,569,061		48,811,228		50,380,289
Commercial Business	101,201		—		178,076		279,277		12,234,856		12,514,133
Commercial Real Estate	3,309,287		929,819		2,973,135		7,212,241		192,870,884		200,083,125
Total	$	4,121,369	$	2,356,514	$	7,033,752	$	13,511,635	$	325,838,983	$	339,350,618

At September 30, 2016 and December 31, 2015, 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 September 30, 2016 compared to December 31, 2015:



	September 30, 2016				December 31, 2015				$			%
	Amount		Percent ⁽¹⁾		Amount		Percent ⁽¹⁾		Increase (Decrease)			Increase (Decrease)
Non-accrual Loans:
Residential Real Estate	$	2,869,815	0.81	%	$	3,306,675	0.98	%	$	(436,860	)	(13.2	)%
Consumer	283,770		0.08		575,866		0.17		(292,096		)	(50.7	)
Commercial Business	145,401		0.04		178,076		0.05		(32,675		)	(18.3	)
Commercial Real Estate	2,933,751		0.82		2,973,135		0.80		(39,384		)	(1.3	)
Total Non-accrual Loans	$	6,232,737	1.75	%	$	7,033,752	2.09	%	$	(801,015	)	(11.4	)%

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

8. Loans Receivable, Net, Continued

The following tables show the activity in the allowance for loan losses by category for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30, 2016
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,462,636		$	1,115,976		$	865,867		$	4,950,735		$	8,395,214
Provision for Loan Losses	31,415			(155,298		)	713,276			(589,393		)	—
Charge-Offs	(137,935		)	(35,312		)	(150,000		)	—			(323,247		)
Recoveries	1,228			23,569			11,731			2,616			39,144
Ending Balance	$	1,357,344		$	948,935		$	1,440,874		$	4,363,958		$	8,111,111



	Nine Months Ended September 30, 2016
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,323,183		$	1,063,153		$	773,948		$	5,114,849		$	8,275,133
Provision for Loan Losses	160,823			(1,501		)	805,195			(964,517		)	—
Charge-Offs	(137,935		)	(189,193		)	(150,000		)	(202,618		)	(679,746		)
Recoveries	11,273			76,476			11,731			416,244			515,724
Ending Balance	$	1,357,344		$	948,935		$	1,440,874		$	4,363,958		$	8,111,111



	Three Months Ended September 30, 2015
	Residential Real Estate			Consumer			Commercial Business		Commercial Real Estate			Total
Beginning Balance	$	1,310,078		$	1,007,984		$	747,067	$	4,730,453		$	7,795,582
Provision for Loan Losses	142,917			199,719			4,565		(547,201		)	(200,000		)
Charge-Offs	(59,996		)	(77,720		)	—		(303,682		)	(441,398		)
Recoveries	782			26,783			564		752,710			780,839
Ending Balance	$	1,393,781		$	1,156,766		$	752,196	$	4,632,280		$	7,935,023



	Nine Months Ended September 30, 2015
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,392,065		$	886,716		$	159,353		$	5,919,362		$	8,357,496
Provision for Loan Losses	106,079			656,424			595,906			(1,458,409		)	(100,000		)
Charge-Offs	(105,912		)	(471,345		)	(10,947		)	(750,154		)	(1,338,358		)
Recoveries	1,549			84,971			7,884			921,481			1,015,885
Ending Balance	$	1,393,781		$	1,156,766		$	752,196		$	4,632,280		$	7,935,023

8. Loans Receivable, Net, Continued

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



	Allowance For Loan Losses
September 30, 2016	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,357,344	$	1,357,344
Consumer	1,752		947,183		948,935
Commercial Business	—		1,440,874		1,440,874
Commercial Real Estate	145,953		4,218,005		4,363,958
Total	$	147,705	$	7,963,406	$	8,111,111



	Allowance For Loan Losses
December 31, 2015	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,323,183	$	1,323,183
Consumer	32,300		1,030,853		1,063,153
Commercial Business	—		773,948		773,948
Commercial Real Estate	49,300		5,065,549		5,114,849
Total	$	81,600	$	8,193,533	$	8,275,133

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



	Loans Receivable
September 30, 2016	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	2,621,211	$	78,408,801	$	81,030,012
Consumer	188,571		50,498,335		50,686,906
Commercial Business	145,401		16,096,993		16,242,394
Commercial Real Estate	6,796,582		205,133,884		211,930,466
Total	$	9,751,765	$	350,138,013	$	359,889,778



	Loans Receivable
December 31, 2015	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	2,922,105	$	73,450,966	$	76,373,071
Consumer	372,382		50,007,907		50,380,289
Commercial Business	162,201		12,351,932		12,514,133
Commercial Real Estate	9,190,640		190,892,485		200,083,125
Total	$	12,647,328	$	326,703,290	$	339,350,618

8. Loans Receivable, Net, Continued

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 the 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 $10.6 million for the three months ended September 30, 2016 compared to $14.1 million for the three months ended September 30, 2015.

The following tables present information related to impaired loans by loan category at September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015.



	September 30, 2016						December 31, 2015
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With No Related Allowance Recorded:
Residential Real Estate	$	2,621,212	$	2,792,712	$	—	$	2,922,105	$	3,033,735	$	—
Consumer	127,360		135,660		—		120,889		129,188		—
Commercial Business	145,401		995,401		—		162,201		362,201		—
Commercial Real Estate	6,157,972		8,118,513		—		8,620,301		10,969,642		—
With An Allowance Recorded:
Residential Real Estate	—		—		—		—		—		—
Consumer	61,210		61,210		1,752		251,493		256,923		32,300
Commercial Business	—		—		—		—		—		—
Commercial Real Estate	638,610		651,624		145,953		570,339		577,139		49,300
Total
Residential Real Estate	2,621,212		2,792,712		—		2,922,105		3,033,735		—
Consumer	188,570		196,870		1,752		372,382		386,111		32,300
Commercial Business	145,401		995,401		—		162,201		362,201		—
Commercial Real Estate	6,796,582		8,770,137		145,953		9,190,640		11,546,781		49,300
Total	$	9,751,765	$	12,755,120	$	147,705	$	12,647,328	$	15,328,828	$	81,600

8. Loans Receivable, Net, Continued



	Three Months Ended September 30,
	2016				2015
Impaired Loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	3,319,559	$	—	$	3,084,808	$	—
Consumer	128,751		—		97,894		—
Commercial Business	296,401		—		170,601		—
Commercial Real Estate	6,180,761		67,380		10,168,004		71,766
With An Allowance Recorded:
Residential Real Estate	—		—		—		—
Consumer	61,581		772		100,743		1,201
Commercial Business	—		—		—		—
Commercial Real Estate	641,743		28,534		452,393		2,303
Total
Residential Real Estate	3,319,559		—		3,084,808		—
Consumer	190,332		772		198,637		1,201
Commercial Business	296,401		—		170,601		—
Commercial Real Estate	6,822,504		95,914		10,620,397		74,069
Total	$	10,628,796	$	96,686	$	14,074,443	$	75,270



	Nine Months Ended September 30,
	2016				2015
Impaired Loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	3,469,066	$	8,282	$	3,132,323	$	8,477
Consumer	294,714		—		100,937		247
Commercial Business	301,881		—		198,430		—
Commercial Real Estate	8,589,845		192,017		10,510,256		246,219
With An Allowance Recorded:
Residential Real Estate	—		—		—		—
Consumer	62,322		3,470		101,435		3,615
Commercial Business	—		—		—		—
Commercial Real Estate	652,867		28,534		456,982		15,919
Total
Residential Real Estate	3,469,066		8,282		3,132,323		8,477
Consumer	357,036		3,470		202,372		3,862
Commercial Business	301,881		—		198,430		—
Commercial Real Estate	9,242,712		220,551		10,967,238		262,138
Total	$	13,370,695	$	232,303	$	14,500,363	$	274,477

8. 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 September 30, 2016 and December 31, 2015 were $5.2 million and $6.7 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 loan 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 Bank did not modify any loans that were considered to be TDRs during the nine months ended September 30, 2016. The following table is a summary of loans restructured as TDRs during the nine months ended September 30, 2015.



	Nine Months Ended September 30, 2015
Troubled Debt Restructurings	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Consumer	1	$	36,460	$	36,460
Commercial Real Estate	5	872,703		872,703
Total	6	$	909,163	$	909,163

During the nine months ended September 30, 2015, the Bank modified six loans that were considered to be TDRs, three of which were modified during the three months ended September 30, 2015. The Bank lowered the interest rate on two of the loans to allow the borrowers to begin making monthly principal and interest payments and changed the monthly payment to interest only for an agreed upon period for the other four loans.

At September 30, 2016, six loans totaling $765,000 that had previously been restructured as TDRs were in default, none of which had been restructured within the last 12 months. Three of the loans, with a balance of $637,000, defaulted during the nine month period ended September 30, 2016. In comparison, at September 30, 2015, three loans totaling $684,000 that had previously been restructured as TDRs were in default, and two of the loans, with a balance of $555,000 defaulted during the nine month period. The Bank considers any loan 30 days or more past due to be in default.

Our policy with respect to accrual of interest on loans restructured as 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 probable. 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 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 modified loan terms before that loan can be placed back on accrual status. In addition to this payment history, the borrower must demonstrate an ability to continue making payments on the loan prior to restoration of accrual status.