NOTE 5-LOANS RECEIVABLE

Loans receivable are summarized as follows:

	At December 31,
	2011			2010
	(in thousands)
Held for investment:
First mortgage loans
Secured by one-to four-family residences	$	277,824		$	269,077
Secured by non-residential properties or non-owner occupied residential properties		140,887			137,307
Construction loans		16,091			18,799
Total first mortgage loans		434,802			425,183

Other loans
Commercial-business, real estate secured		15,808			26,603
Commercial-business, non-real estate secured		4,414			5,575
Home equity and second mortgage		44,165			49,430
Other consumer		1,971			2,407
Total other loans		66,358			84,015

Total loans		501,160			509,198
Net deferred loan origination costs		1,065			658
Less allowance for loan losses		(8,100	)		(8,328	)
Total loans receivable	$	494,125		$	501,528

Held for sale:
First mortgage loans
Secured by one-to four-family residences	$	488		$	130

The following tables present the composition of the commercial loan portfolio by credit quality indicator:

Commercial credit exposure-credit risk profile by internally assigned grade

	At December 31, 2011
			Special
	Pass		mention		Substandard		Doubtful		Total
	(in thousands)
Secured by non-residential properties or non-owner occupied residential properties	$	121,579	$	12,804	$	6,504	$	-	$	140,887
Construction loans		5,077		4,312		6,702		-		16,091
Commercial-business, real estate secured		7,446		144		8,218		-		15,808
Commercial-business, non-real estate secured		4,408		-		6		-		4,414
Total	$	138,510	$	17,260	$	21,430	$	-	$	177,200


	At December 31, 2010
	Pass		Special mention		Substandard		Doubtful		Total

	(in thousands)
Secured by non-residential properties or non-owner occupied residential properties	$	108,484	$	19,299	$	9,524	$	-	$	137,307
Construction loans		3,482		6,269		9,048		-		18,799
Commercial-business, real estate secured		15,778		1,007		9,818		-		26,603
Commercial-business, non-real estate secured		5,531		-		-		44		5,575
Total	$	133,275	$	26,575	$	28,390	$	44	$	188,284

In order to assess and monitor the credit risk associated with commercial loans, the Company employs a risk rating methodology whereby each commercial loan is initially assigned a risk grade. At least annually, all risk ratings are reviewed in light of information received such as tax returns, rent rolls, cash flow statements, appraisals, and any other information which may affect the then current risk rating, which may be adjusted upward or downward as a result of this review. At the end of each quarter the risk ratings are summarized and become a component of the evaluation of the allowance for loan losses. The Company's risk rating definitions mirror those promulgated by banking regulators and are as follows:

Pass: Good quality loan characterized by satisfactory liquidity; reasonable debt capacity and coverage; acceptable management in all critical positions and normal operating results for its peer group. The Company has grades 1 through 6 within the Pass category which reflect the increasing amount of attention paid to the individual loan because of, among other things, trends in debt service coverage, management weaknesses, or collateral values.

Special mention: A loan that has potential weaknesses that deserves management's close attention. Although the loan is currently protected, if left uncorrected, potential weaknesses may result in deterioration of the loan's repayment prospects or in the Company's future credit position. Potential weaknesses include: weakening financial condition; an unrealistic repayment program; inadequate sources of funds; lack of adequate collateral, credit information, or documentation. There is currently the capacity to meet interest and principal payments, but further adverse business, financial, or economic conditions may impair capacity or willingness to pay interest and repay principal.

Substandard: A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Although no loss of principal or interest is presently apparent, there is the distinct possibility that a partial loss of interest and/or principal will be sustained if the deficiencies are not corrected. There is a current identifiable vulnerability to default and the dependence upon favorable business, financial, or economic conditions to meet timely payment of interest and repayment of principal.

Doubtful: A loan which has all the weaknesses inherent in a substandard asset 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. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to strengthen the asset, classification as an estimated loss if deferred until a more exact status is determined. Pending factors include: proposed merger, acquisition, liquidation, capital injection, perfecting liens on additional collateral, and refinancing plans.

Loss: Loans which are considered uncollectible and should be charged off. The Company has charged-off all loans classified as loss.

Loans classified as special mention, substandard or doubtful are evaluated for potential impairment. All impaired loans are placed on non-accrual status and are classified as substandard or doubtful.

The following tables present the composition of the residential mortgage and consumer loan portfolios by credit quality indicator:

Mortgage and consumer credit exposure-credit risk profile by payment activity

	At December 31, 2011
	Performing		Non-performing		Total
	(in thousands)
Secured by one-to four-family residences	$	272,322	$	5,502	$	277,824
Home equity and second mortgage		43,888		277		44,165
Other consumer		1,970		1		1,971
Total	$	318,180	$	5,780	$	323,960

	At December 31, 2010
		Performing		Non-performing		Total
		(in thousands)
Secured by one-to four-family residences		$	265,459	$	3,618	$	269,077
Home equity and second mortgage			48,018		1,412		49,430
Other consumer			2,404		3		2,407
Total		$	315,881	$	5,033	$	320,914

In order to assess and monitor the credit risk associated with one-to four-family residential loans and consumer loans which include second mortgage loans and home equity secured lines of credit, the Company relies upon the payment status of the loan. Mortgage and other consumer loans 90 days or more past due are placed on non-accrual status and evaluated for impairment on a pooled basis with the exception of loans with balances in excess of $1 million and loans that have been modified as TDRs. An individual impairment analysis is performed using a recent appraisal or current sales contract for TDRs as well as nonperforming mortgage and consumer loans with balances in excess of $1 million.

The following table presents non-performing loans including impaired loans and loan balances past due over 90 days for which the accrual of interest has been discontinued by class:


	At December 31,
	2011		2010
	(in thousands)
Secured by one-to four-family residences	$	5,502	$	3,618
Secured by non-residential properties or non-owner occupied residential properties		1,442		4,993
Construction loans		3,317		4,307
Commercial-business, real estate secured		1,996		4,601
Commercial-business, non-real estate secured		6		44
Home equity and second mortgage		277		1,412
Other consumer		1		3
Total non-performing loans	$	12,541	$	18,978
Total loans past due 90 days as to interest or principal and accruing interest	$	-	$	-

Additional interest income that would have been recorded under the original terms of the loan agreements amounted to $616,000, and $768,000, for the years ended December 31, 2011 and 2010, respectively.

The following table presents loans individually evaluated for impairment by class at December 31, 2011:

	Impaired loans
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
	(in thousands)
With an allowance recorded:
Secured by one-to four-family residences	$	1,252	$	1,252	$	388	$	751	$	-
Secured by non-residential properties or non-owner occupied residential properties		-		-		-		873		-
Construction loans		3,317		3,317		1,502		4,865		-
Commercial-business, real estate secured		1,996		1,996		410		2,483		-
Commercial-business, non-real estate secured		6		6		3		72		-

With no allowance recorded:
Secured by one-to four-family residences		2,381		2,381		-		1,497		-
Secured by non-residential properties or non-owner occupied residential properties		1,442		1,442		-		1,607		-
Construction loans		-		-		-		168		-
Commercial-business, real estate secured		-		-		-		1,596		-
Total	$	10,394	$	10,394	$	2,303	$	13,912	$	-

The following table presents loans individually evaluated for impairment by class at December 31, 2010:

	Impaired loans
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
	(in thousands)
With an allowance recorded:
Secured by non-residential properties or non-owner occupied residential properties	$	1,855	$	1,855	$	218	$	925	$	-
Construction loans		3,887		3,887		1,627		3,887		-
Commercial-business, real estate secured		2,605		2,605		373		1,563		-
Commercial-business, non-real estate secured		44		44		44		18		-

With no allowance recorded:
Secured by non-residential properties or non-owner occupied residential properties		2,830		2,830		-		3,479		-
Construction loans		420		420		-		492		-
Commercial-business, real estate secured		1,996		1,996		-		4,717		-
Commercial-business, non-real estate secured		-		-		-		22		-
Total	$	13,637	$	13,637	$	2,262	$	15,103	$	-

The following table presents the contractual aging of delinquent loans by class at December 31, 2011:

	Current		30-59 Days past due		60-89 Days past due		Loans past due 90 days or more		Total past due		Total loans		Recorded investment over 90 days and accruing interest
	(in thousands)
Secured by one-to four- family residences	$	273,231	$	98	$	153	$	4,342	$	4,593	$	277,824	$	-
Secured by non-residential properties or non-owner occupied residential properties		139,483		312		-		1,092		1,404		140,887		-
Construction loans		12,774		-		-		3,317		3,317		16,091		-
Commercial-business, real estate secured		10,671		-		3,141		1,996		5,137		15,808		-
Commercial-business, non- real estate secured		4,408		-		-		6		6		4,414		-
Home equity and second mortgage		43,712		165		11		277		453		44,165		-
Other consumer		1,956		6		8		1		15		1,971		-
Total	$	486,235	$	581	$	3,313	$	11,031	$	14,925	$	501,160	$	-

The following table presents the contractual aging of delinquent loans by class at December 31, 2010:

	Current		30-59 Days past due		60-89 Days past due		Loans past due 90 days or more		Total past due		Total loans		Recorded investment over 90 days and accruing interest
	(in thousands)
Secured by one-to four- family residences	$	267,885	$	424	$	26	$	742	$	1,192	$	269,077	$	-
Secured by non-residential properties or non-owner occupied residential properties		131,566		748		754		4,239		5,741		137,307		-
Construction loans		14,492		-		-		4,307		4,307		18,799		-
Commercial-business, real estate secured		18,877		3,125		-		4,601		7,726		26,603		-
Commercial-business, non- real estate secured		5,531		-		-		44		44		5,575		-
Home equity and second mortgage		48,285		60		9		1,076		1,145		49,430		-
Other consumer		2,381		13		10		3		26		2,407		-
Total	$	489,017	$	4,370	$	799	$	15,012	$	20,181	$	509,198	$	-

The following table presents loans classified as TDRs segregated by class for the periods indicated:

	For the Year ended Decemeber 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment
			(in thousands)
Secured by one-to four-family residences		2	$	510	$	507
Total		2	$	510	$	507

The following table presents loans classified as TDRs that subsequently defaulted:


	For the Year ended Decemeber 31, 2011
	Number of Contracts		Recorded Investment
			(in thousands)
Secured by one-to four-family residences		1	$	169
Total		1	$	169

The restructuring of the majority of loans was either an extension of the maturity date or temporary reduction or moratorium on the payment terms or amounts. No modifications involved any reduction in principal balance for 2011.

Activity in the allowance for loan losses is summarized as follows:

	Balance at January 1, 2011		Provision charged to income		Charge-offs			Recoveries		Balance at December 31, 2011
	(in thousands)
Secured by one-to four- family residences	$	1,839	$	515	$	(172	)	$	12	$	2,194
Secured by non-residential properties or non-owner occupied residential properties		2,124		831		(1,186	)		-		1,769
Construction loans		2,479		1,338		(1,521	)		1		2,297
Commercial-business, real estate secured		974		716		(855	)		-		835
Commercial-business, non- real estate secured		77		67		(44	)		38		138
Home equity and second mortgage		607		62		(221	)		-		448
Other consumer		16		14		(16	)		8		22
Unallocated		212		185		-			-		397
Total	$	8,328	$	3,728	$	(4,015	)	$	59	$	8,100

	For the year ended
	December 31, 2010
	(in thousands)
Balance at beginning of year	$	5,215
Provision charged to income		4,241
(Charge-offs), net of recoveries		(1,128	)
Balance at end of year	$	8,328

The following tables present the ending balance of the allowance for loan losses and ending loan balance by class based on impairment method as of December 31, 2011:

	Evaluated for impairment
Allowance	Individually		Collectively		Total
	(in thousands)
Secured by one-to four-family residences	$	388	$	1,806	$	2,194
Secured by non-residential properties or non-owner occupied residential properties		-		1,769		1,769
Construction loans		1,502		795		2,297
Commercial-business, real estate secured		410		425		835
Commercial-business, non-real estate secured		3		135		138
Home equity and second mortgage		-		448		448
Other consumer		-		22		22
Unallocated		-		397		397
Total	$	2,303	$	5,797	$	8,100

	Evaluated for impairment
Loan balance	Individually		Collectively		Total
	(in thousands)
Secured by one-to four-family residences	$	3,633	$	274,191	$	277,824
Secured by non-residential properties or non-owner occupied residential properties		1,442		139,445		140,887
Construction loans		3,317		12,774		16,091
Commercial-business, real estate secured		1,996		13,812		15,808
Commercial-business, non-real estate secured		6		4,408		4,414
Home equity and second mortgage		-		44,165		44,165
Other consumer		-		1,971		1,971
Total	$	10,394	$	490,766	$	501,160

The following tables present the ending balance of the allowance for loan losses and ending loan balance by class based on impairment method as of December 31, 2010:

	Evaluated for impairment
Allowance	Individually		Collectively		Total
	(in thousands)
Secured by one-to four-family residences	$	-	$	1,839	$	1,839
Secured by non-residential properties or non-owner occupied residential properties		218		1,906		2,124
Construction loans		1,627		852		2,479
Commercial-business, real estate secured		373		601		974
Commercial-business, non-real estate secured		44		33		77
Home equity and second mortgage		-		607		607
Other consumer		-		16		16
Unallocated		-		212		212
Total	$	2,262	$	6,066	$	8,328

	Evaluated for impairment
Loan balance	Individually		Collectively		Total
	(in thousands)
Secured by one-to four-family residences	$	-	$	269,077	$	269,077
Secured by non-residential properties or non-owner occupied residential properties		4,685		132,622		137,307
Construction loans		4,307		14,492		18,799
Commercial-business, real estate secured		4,601		22,002		26,603
Commercial-business, non-real estate secured		44		5,531		5,575
Home equity and second mortgage		-		49,430		49,430
Other consumer		-		2,407		2,407
Total	$	13,637	$	495,561	$	509,198

The Bank has no concentration of loans to borrowers engaged in similar activities that exceeded 10% of loans at December 31, 2011 and 2010. In the ordinary course of business, the Bank has granted loans to certain executive officers, directors and their related interests. Related party loans are made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was approximately $138,000 and $156,000 at December 31, 2011 and 2010, respectively. New loans to related parties of $5,000 were made during 2011. For the year ended December 31, 2011, principal repayments of $23,000 of related party loans were received. Unused lines of credit available were $360,000 at December 31, 2011 and 2010.