Note 4. Loans Receivable, Net

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


	March 31, 2014			December 31, 2013
Real estate:
One-to-four family	$	747,494		$	750,585
Commercial real estate, multi family and land		550,808			528,945
Residential construction		37,852			30,821
Consumer		199,926			200,683
Commercial and industrial		66,196			60,545

Total loans		1,602,276			1,571,579
Loans in process		(13,991	)		(12,715	)
Deferred origination costs, net		3,618			3,526
Allowance for loan losses		(20,934	)		(20,930	)

Loans receivable, net	$	1,570,969		$	1,541,460

At March 31, 2014 and December 31, 2013, loans in the amount of $45,321,000 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 March 31, 2014, the impaired loan portfolio totaled $41,662,000 for which there was a specific allocation in the allowance for loan losses of $3,938,000. 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 months ended March 31, 2014 and 2013 was $40,441,000 and $38,187,000 for the same prior year period.

An analysis of the allowance for loan losses for the three months ended March 31, 2014 and 2013 is as follows (in thousands):


	Three months ended
	March 31,
	2014			2013
Balance at beginning of period	$	20,930		$	20,510
Provision charged to operations		530			1,100
Charge-offs		(740	)		(1,361	)
Recoveries		214			245

Balance at end of period	$	20,934		$	20,494

The following table presents an analysis of the allowance for loan losses for the three months ended March 31, 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 March 31, 2014 and December 31, 2013 (in thousands):


	Residential Real Estate			Commercial Real Estate		Consumer			Commercial and Industrial			Unallocated			Total
For the three months ended March 31, 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		(182	)		1,034		115			(298	)		(139	)		530
Charge-offs		(590	)		—		(109	)		(41	)		—			(740	)
Recoveries		203			8		3			—			—			214

Balance at end of period	$	4,290		$	11,413	$	1,369		$	1,044		$	2,818		$	20,934

For the three months ended March 31, 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		830			324		(94	)		(21	)		61			1,100
Charge-offs		(950	)		—		(176	)		(235	)		—			(1,361	)
Recoveries		64			25		154			2			—			245

Balance at end of period	$	5,185		$	9,286	$	2,148		$	1,094		$	2,781		$	20,494

March 31, 2014
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	139		$	3,380	$	419		$	—		$	—		$	3,938
Collectively evaluated for impairment		4,151			8,033		950			1,044			2,818			16,996

Total ending allowance balance	$	4,290		$	11,413	$	1,369		$	1,044		$	2,818		$	20,934

Loans:
Loans individually evaluated for impairment	$	18,946		$	19,575	$	2,865		$	276		$	—		$	41,662
Loans collectively evaluated for impairment		766,400			531,233		197,061			65,920			—			1,560,614

Total ending loan balance	$	785,346		$	550,808	$	199,926		$	66,196		$	—		$	1,602,276

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 March 31, 2014 and December 31, 2013 is as follows (in thousands):


	March 31,		December 31,
	2014		2013
Impaired loans with no allocated allowance for loan losses	$	24,516	$	24,457
Impaired loans with allocated allowance for loan losses		17,146		15,446

	$	41,662	$	39,903

Amount of the allowance for loan losses allocated	$	3,938	$	3,647

At March 31, 2014, impaired loans include troubled debt restructuring loans of $31,652,000 of which $21,435,000 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 March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 follows (in thousands):


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
As of March 31, 2014
With no related allowance recorded:
Residential real estate:
Originated by Bank	$	10,051	$	9,280	$	—
Originated by mortgage company		7,948		7,543		—
Originated by mortgage company – non-prime		1,260		861		—
Commercial real estate:
Commercial		4,371		4,364		—
Construction and land		—		—		—
Consumer		2,709		2,192		—
Commercial and industrial		276		276		—

	$	26,615	$	24,516	$	—

With an allowance recorded:
Residential real estate:
Originated by Bank	$	868	$	868	$	112
Originated by mortgage company		394		394		27
Originated by mortgage company – non-prime		—		—		—
Commercial real estate:
Commercial		15,007		14,907		3,157
Construction and land		304		304		223
Consumer		673		673		419
Commercial and industrial		—		—		—

	$	17,246	$	17,146	$	3,938

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 March 31,
	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	$	9,233	$	83	$	11,622	$	93
Originated by mortgage company		7,417		61		7,338		72
Originated by mortgage company – non-prime		859		2		2,224		3
Commercial real estate:
Commercial		3,270		19		2,674		31
Construction and land		—		—		—		—
Consumer		2,181		22		1,794		15
Commercial and industrial		278		2		290		2

	$	23,238	$	189	$	25,942	$	216

With an allowance recorded:
Residential real estate:
Originated by Bank	$	872	$	9	$	828	$	11
Originated by mortgage company		395		7		402		7
Originated by mortgage company – non-prime		—		—		—		—
Commercial real estate:
Commercial		14,961		44		9,675		74
Construction and land		304		—		472		—
Consumer		671		10		868		14
Commercial and industrial		—		—		—		—

	$	17,203	$	70	$	12,245	$	106

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


	March 31, 2014		December 31, 2013
Residential real estate:
Originated by Bank	$	14,442	$	16,145
Originated by mortgage company		11,632		10,589
Originated by mortgage company – non-prime		1,412		1,479
Commercial real estate:
Commercial		11,706		11,995
Construction and land		304		309
Consumer		3,731		4,328
Commercial and industrial		2,094		515

	$	45,321	$	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 March 31, 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
March 31, 2014
Residential real estate:
Originated by Bank	$	5,158	$	2,204	$	13,323	$	20,685	$	634,482	$	655,167
Originated by mortgage company		57		—		10,858		10,915		78,889		89,804
Originated by mortgage company – non-prime		—		—		1,505		1,505		1,018		2,523
Residential construction		—		—		—		—		37,852		37,852
Commercial real estate:
Commercial		1,644		406		10,489		12,539		505,985		518,524
Construction and land		—		—		304		304		31,980		32,284
Consumer		1,433		39		3,650		5,122		194,804		199,926
Commercial and industrial		10		—		2,027		2,037		64,159		66,196

	$	8,302	$	2,649	$	42,156	$	53,107	$	1,549,169	$	1,602,276

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 March 31, 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
March 31, 2014
Commercial real estate:
Commercial	$	480,787	$	4,974	$	31,927	$	836	$	518,524
Construction and land		31,178		—		1,106		—		32,284
Commercial and industrial		64,898		683		615		—		66,196

	$	576,863	$	5,657	$	33,648	$	836	$	617,004

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 March 31, 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
March 31, 2014
Performing	$	640,725	$	78,172	$	1,111	$	37,852	$	196,195
Non-performing		14,442		11,632		1,412		—		3,731

	$	655,167	$	89,804	$	2,523	$	37,852	$	199,926

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 March 31, 2014 and December 31, 2013 were $10,217,000 and $9,663,000, respectively, of troubled debt restructurings. At March 31, 2014 and December 31, 2013, the Company has allocated $2,199,000 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 March 31, 2014 and December 31, 2013, which totaled $21,435,000 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 months ended March 31, 2014 and 2013 and troubled debt restructurings modified within the previous year and which defaulted during the three months ended March 31, 2014 and 2013 (dollars in thousands):


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended March 31, 2014
Troubled Debt Restructurings:
Residential real estate:
Originated by Bank		2	$	331	$	259
Originated by mortgage company		1		188		186
Consumer		2		77		77

	Number of Loans		Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:
Consumer		3		229

	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended March 31, 2013
Troubled Debt Restructurings:
Residential real estate:
Originated by Bank		3	$	83	$	75
Consumer		1		2		2

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