Note 5. Loans Receivable, Net

Loans receivable, net at June 30, 2013 and December 31, 2012 consisted of the following (in thousands):


	June 30, 2013			December 31, 2012

Real estate:
One-to-four family	$	776,858		$	802,959
Commercial real estate, multi family and land		477,600			475,155
Residential construction		12,879			9,013
Consumer		192,325			198,143
Commercial		66,924			57,967

Total loans		1,526,586			1,543,237
Loans in process		(4,057	)		(3,639	)
Deferred origination costs, net		3,971			4,112
Allowance for loan losses		(20,820	)		(20,510	)

Loans receivable, net	$	1,505,680		$	1,523,200

At June 30, 2013 and December 31, 2012, loans in the amount of $45,900,000 and $43,374,000, 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, 2013, the impaired loan portfolio totaled $37,099,000 for which there was a specific allocation in the allowance for loan losses of $3,436,000. At December 31, 2012, the impaired loan portfolio totaled $37,546,000 for which there was a specific allocation in the allowance for loan losses of $2,554,000. The average balance of impaired loans for the three and six months ended June 30, 2013 was $37,549,000 and $38,228,000, respectively and $29,369,000 and $28,843,000, respectively, for the same prior year periods.

An analysis of the allowance for loan losses for the three months ended June 30, 2013 and 2012 is as follows (in thousands):


	Three months ended						Six months ended
	June 30,						June 30,
	2013			2012			2013			2012

Balance at beginning of period	$	20,494		$	18,241		$	20,510		$	18,230
Provision charged to operations		800			1,700			1,900			3,400
Charge-offs		(938	)		(2,542	)		(2,299	)		(4,342	)
Recoveries		464			258			709			369

Balance at end of period	$	20,820		$	17,657		$	20,820		$	17,657

The following table presents an analysis of the allowance for loan losses for the three and six months ended June 30, 2013 and 2012 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, 2013 and December 31, 2012 (in thousands):


	Residential Real Estate			Commercial Real Estate			Consumer			Commercial			Unallocated			Total
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 three months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	4,164		$	8,609		$	1,861		$	1,225		$	2,382		$	18,241
Provision (benefit) charged to operations		1,961			(76	)		798			(118	)		(865	)		1,700
Charge-offs		(1,529	)		—			(1,013	)		—			—			(2,542	)
Recoveries		172			81			2			3			—			258

Balance at end of period	$	4,768		$	8,614		$	1,648		$	1,110		$	1,517		$	17,657


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


For the six months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	5,370		$	8,474		$	1,461		$	900		$	2,025		$	18,230
Provision (benefit) charged to operations		2,101			32			1,570			205			(508	)		3,400
Charge-offs		(2,904	)		(47	)		(1,391	)		—			—			(4,342	)
Recoveries		201			155			8			5			—			369

Balance at end of period	$	4,768		$	8,614		$	1,648		$	1,110		$	1,517		$	17,657


	Residential Real Estate		Commercial Real Estate		Consumer		Commercial		Unallocated		Total

June 30, 2013
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	194	$	2,757	$	485	$	—	$	—	$	3,436
Collectively evaluated for impairment		4,706		7,705		1,454		406		3,113		17,384

Total ending allowance balance	$	4,900	$	10,462	$	1,939	$	406	$	3,113	$	20,820


Loans:
Loans individually evaluated for impairment	$	21,000	$	12,375	$	3,440	$	284	$	—	$	37,099
Loans collectively evaluated for impairment		768,737		465,225		188,885		66,640		—		1,489,487

Total ending loan balance	$	789,737	$	477,600	$	192,325	$	66,924	$	—	$	1,526,586


December 31, 2012
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	179	$	1,834	$	541	$	—	$	—	$	2,554
Collectively evaluated for impairment		5,062		7,103		1,723		1,348		2,720		17,956

Total ending allowance balance	$	5,241	$	8,937	$	2,264	$	1,348	$	2,720	$	20,510


Loans:
Loans individually evaluated for impairment	$	22,427	$	12,116	$	2,712	$	291	$	—	$	37,546
Loans collectively evaluated for impairment		789,545		463,039		195,431		57,676		—		1,505,691

Total ending loan balance	$	811,972	$	475,155	$	198,143	$	57,967	$	—	$	1,543,237

A summary of impaired loans at June 30, 2013 and December 31, 2012 is as follows (in thousands):


	June 30,		December 31,
	2013		2012

Impaired loans with no allocated allowance for loan losses	$	25,312	$	25,513
Impaired loans with allocated allowance for loan losses		11,787		12,033

	$	37,099	$	37,546


Amount of the allowance for loan losses allocated	$	3,436	$	2,554

At June 30, 2013, impaired loans include troubled debt restructuring loans of $34,758,000 of which $15,292,000 were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2012, impaired loans include troubled debt restructuring loans of $35,893,000 of which $17,733,000 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, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 follows (in thousands):


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
As of June 30, 2013
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	11,586	$	11,052	$	—
Originated by mortgage company		6,526		6,160		—
Originated by mortgage company – non-prime		2,774		2,190		—
Commercial real estate:
Commercial		3,001		2,977		—
Construction and land		—		—		—
Consumer		2,996		2,649		—
Commercial		284		284		—

	$	27,167	$	25,312	$	—

With an allowance recorded:
Residential real estate:
Originated by Bank	$	824	$	824	$	127
Originated by mortgage company		791		774		67
Originated by mortgage company – non-prime		—		—		—
Commercial real estate:
Commercial		9,100		8,926		2,555
Construction and land		472		472		202
Consumer		791		791		485
Commercial		—		—		—

	$	11,978	$	11,787	$	3,436

As of December 31, 2012
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	11,200	$	10,956	$	—
Originated by mortgage company		7,210		7,061		—
Originated by mortgage company – non-prime		2,335		2,251		—
Commercial real estate:
Commercial		2,722		2,691		—
Construction and land		482		482		—
Consumer		1,956		1,781		—
Commercial		291		291		—

	$	26,196	$	25,513	$	—


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated

With an allowance recorded:
Residential real estate:
Originated by Bank	$	1,761	$	1,755	$	142
Originated by mortgage company		404		404		37
Originated by mortgage company – non-prime		—		—		—
Commercial real estate:
Commercial		9,022		8,943		1,834
Construction and land		—		—		—
Consumer		934		931		541
Commercial		—		—		—

	$	12,121	$	12,033	$	2,554


	Three months ended June 30,
	2013				2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	10,983	$	86	$	8,653	$	96
Originated by mortgage company		6,774		57		5,079		55
Originated by mortgage company – non-prime		2,194		5		2,256		1
Commercial real estate:
Commercial		2,749		34		1,730		24
Construction and land		—		—		—		—
Consumer		2,792		21		714		9
Commercial		286		3		295		3

	$	25,778	$	206	$	18,727	$	188

With an allowance recorded:
Residential real estate:
Originated by Bank	$	824	$	11	$	1,055	$	6
Originated by mortgage company		776		9		—		—
Originated by mortgage company – non-prime		—		—		401		—
Commercial real estate:
Commercial		8,908		76		9,055		99
Construction and land		472		—		—		—
Consumer		791		9		131		1
Commercial		—		—		—		—

	$	11,771	$	105	$	10,642	$	106


	Six months ended June 30,
	2013				2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	11,276	$	176	$	8,606	$	198
Originated by mortgage company		6,761		127		5,083		109
Originated by mortgage company – non-prime		2,221		8		2,175		2
Commercial real estate:
Commercial		2,699		65		1,614		45
Construction and land		—		—		—		—
Consumer		2,830		40		722		19
Commercial		287		5		296		4

	$	26,074	$	421	$	18,496	$	377

With an allowance recorded:
Residential real estate:
Originated by Bank	$	826	$	21	$	920	$	46
Originated by mortgage company		779		20		—		—
Originated by mortgage company – non-prime		—		—		400		—
Commercial real estate:
Commercial		9,250		157		8,896		184
Construction and land		472		—		—		—
Consumer		827		24		131		2
Commercial		—		—		—		—

	$	12,154	$	222	$	10,347	$	232

The following table presents the recorded investment in non-accrual loans by class of loans as of June 30, 2013 and December 31, 2012 (in thousands):


	June 30, 2013		December 31, 2012
Residential real estate:
Originated by Bank	$	14,858	$	13,156
Originated by mortgage company		10,813		10,477
Originated by mortgage company – non-prime		2,774		2,888
Commercial real estate:
Commercial		11,392		11,085
Construction and land		472		482
Consumer		5,195		4,540
Commercial		396		746

	$	45,900	$	43,374

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, 2013 and December 31, 2012 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, 2013
Residential real estate:
Originated by Bank	$	7,308	$	3,188	$	14,293	$	24,789	$	642,920	$	667,709
Originated by mortgage company		773		563		10,233		11,569		93,490		105,059
Originated by mortgage company – non-prime		368		329		2,322		3,019		1,071		4,090
Residential construction		—		—		—		—		12,879		12,879
Commercial real estate:
Commercial		2,675		135		2,626		5,436		456,595		462,031
Construction and land		—		—		472		472		15,097		15,569
Consumer		786		382		4,839		6,007		186,318		192,325
Commercial		1,000		515		113		1,628		65,296		66,924

	$	12,910	$	5,112	$	34,898	$	52,920	$	1,473,666	$	1,526,586

December 31, 2012
Residential real estate:
Originated by Bank	$	5,863	$	782	$	10,624	$	17,269	$	666,833	$	684,102
Originated by mortgage company		2,870		7		10,294		13,171		101,437		114,608
Originated by mortgage company – non-prime		431		47		2,369		2,847		1,402		4,249
Residential construction		—		—		—		—		9,013		9,013
Commercial real estate:
Commercial		2,422		608		2,863		5,893		457,394		463,287
Construction and land		—		—		482		482		11,386		11,868
Consumer		719		576		4,457		5,752		192,391		198,143
Commercial		—		—		112		112		57,855		57,967

	$	12,305	$	2,020	$	31,201	$	45,526	$	1,497,711	$	1,543,237

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, 2013 and December 31, 2012, 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, 2013
Commercial real estate:
Commercial	$	428,939	$	1,765	$	30,426	$	901	$	462,031
Construction and land		14,591		506		472		—		15,569
Commercial		66,565		—		359		—		66,924

	$	510,095	$	2,271	$	31,257	$	901	$	544,524

December 31, 2012
Commercial real estate:
Commercial	$	429,393	$	1,775	$	31,275	$	844	$	463,287
Construction and land		10,880		506		482		—		11,868
Commercial		57,341		—		391		235		57,967

	$	497,614	$	2,281	$	32,148	$	1,079	$	533,122

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, 2013 and December 31, 2012 (in thousands):


	Residential Real Estate
	Originated by Bank		Originated by mortgage company		Originated by mortgage company – non-prime		Residential construction		Consumer
June 30, 2013
Performing	$	652,851	$	94,246	$	1,316	$	12,879	$	187,130
Non-performing		14,858		10,813		2,774		—		5,195

	$	667,709	$	105,059	$	4,090	$	12,879	$	192,325

December 31, 2012
Performing	$	670,946	$	104,131	$	1,361	$	9,013	$	193,603
Non-performing		13,156		10,477		2,888		—		4,540

	$	684,102	$	114,608	$	4,249	$	9,013	$	198,143

The Company classifies certain loans as troubled debt restructurings (“TDR”) 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, 2013 and December 31, 2012 were $19,466,000 and $18,160,000, respectively, of troubled debt restructurings. At June 30, 2013 and December 31, 2012, the Company has allocated $2,503,000 and $2,418,000, 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, 2013 and December 31, 2012, which totaled $15,292,000 and $17,733,000, respectively. Non-accruing and accruing troubled debt restructurings at June 30, 2013 include $3,441,000 and $4,900,000, respectively, and at December 31, 2012 include $1,704,000 and $6,291,000, respectively, relating to the implementation of new guidance issued by the Bank’s regulator, the Office of the Comptroller of the Currency (“OCC”). The amount now includes one-to-four family and consumer loans where the borrower’s obligation was discharged due to bankruptcy. The updated guidance requires the Company to include certain loans as troubled debt restructurings due to the discharge of the borrower’s debt. These loans continue to make payments as agreed and the Bank retains its security interest in the real estate collateral. 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, 2013, and troubled debt restructurings modified within the previous year and which defaulted during the three and six months ended June 30, 2013 (dollars in thousands):


	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


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended June 30, 2012
Troubled Debt Restructurings:
Residential real estate:
Originated by Bank		2	$	559	$	545


	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, 2012
Troubled Debt Restructurings:
Residential real estate:
Originated by Bank		4	$	1,325	$	1,288
Commercial real estate:
Commercial		2		1,260		1,218


	Number of Loans		Recorded Investment

Troubled Debt Restructurings
Which Subsequently Defaulted:		None		None