NOTE 6—LOANS RECEIVABLE

Loans receivable are summarized as follows:

	At
	September 30, 2012			December 31, 2011
	(in thousands)
Held for investment:
Residential
Residential mortgages	$	320,883		$	277,824

Commercial
Real estate-commercial		109,379			110,743
Real estate-residential		22,502			25,801
Real estate-multi-family		19,433			19,906
Construction loans		19,094			16,336
Commercial and industrial loans		4,316			4,414
Total commercial loans		174,724			177,200

Consumer
Home equity and second mortgage		41,751			44,165
Other consumer		1,925			1,971
Total consumer loans		43,676			46,136

Total loans		539,283			501,160
Net deferred loan origination costs and unamortized premiums		1,467			1,065
Less allowance for loan losses		(6,772	)		(8,100	)
Total loans receivable	$	533,978		$	494,125

Held for sale:
Residential
Residential mortgages	$	860		$	488

The following table presents the composition of the commercial loan portfolio by credit quality indicators:

Commercial credit exposure-credit risk profile by internally assigned grade

	At September 30, 2012
	Pass		Special mention		Substandard		Doubtful		Total
	(in thousands)
Real estate-commercial	$	96,008	$	4,221	$	9,150	$	—	$	109,379
Real estate-residential		19,419		1,023		2,060		—		22,502
Real estate-multi-family		13,526		2,532		3,375		—		19,433
Construction loans		7,360		5,398		6,336		—		19,094
Commercial and industrial loans		4,233		83		—		—		4,316
Total	$	140,546	$	13,257	$	20,921	$	—	$	174,724

	At December 31, 2011
		Pass		Special mention		Substandard		Doubtful		Total
	(in thousands)
Real estate-commercial	$	95,719	$	6,189	$	8,835	$	—	$	110,743
Real estate-residential		21,447		2,891		1,463		—		25,801
Real estate-multi-family		12,753		3,768		3,385		—		19,906
Construction loans		4,452		4,312		7,572		—		16,336
Commercial and industrial loans		4,139		100		175		—		4,414
Total	$	138,510	$	17,260	$	21,430	$	—	$	177,200

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 is adjusted upward or downward as needed. 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: A good quality loan is 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 the deterioration of the loan's repayment prospects or in the borrower'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 the borrower's 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 is 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 have been 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 table presents the composition of the residential mortgage and consumer loan portfolios by credit quality indicators:

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

	At September 30, 2012
	Performing		Non-performing		Total
	(in thousands)
Residential mortgages	$	318,761	$	2,122	$	320,883
Home equity and second mortgage		41,547		204		41,751
Other consumer		1,925		—		1,925
Total	$	362,233	$	2,326	$	364,559

	At December 31, 2011
	Performing		Non-performing		Total
	(in thousands)
Residential mortgages	$	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

In order to assess and monitor the credit risk associated with residential mortgage 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. Residential mortgage and other consumer loans 90 days or more past due are placed on non-accrual status and evaluated for impairment.

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

	At
	September 30, 2012		December 31, 2011
	(in thousands)
Residential
Residential mortgages	$	2,122	$	5,502
Commercial
Real estate-commercial		1,116		2,711
Real estate-residential		839		—
Construction loans		6,119		4,044
Commercial and industrial loans		—		6
Consumer
Home equity and second mortgage		204		277
Other consumer		—		1
Total non-performing loans	$	10,400	$	12,541
Total loans past due 90 days as to interest or principal and accruing interest	$	—	$	—

The following tables present loans individually evaluated for impairment by class:

	At September 30, 2012
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
	(in thousands)
With an allowance recorded:
Residential
Residential mortgages	$	2,236	$	2,331	$	295	$	2,042	$	—
Commercial
Real estate-commercial		565		1,497		185		734		—
Real estate-residential		719		838		57		360		—
Construction loans		3,118		3,815		329		3,321		—
Commercial and industrial loans		—		—		—		3		—
		6,638		8,481		866		6,460		—
With no allowance recorded:
Residential
Residential mortgages		—		—		—		1,030		—
Commercial
Real estate-commercial		551		551		—		1,089		—
Real estate-residential		120		121		—		337		—
Construction loans		3,001		3,258		—		2,399		—
		3,672		3,930		—		4,855		—
Total	$	10,310	$	12,411	$	866	$	11,315	$	—

	At December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
	(in thousands)
With an allowance recorded:
Residential
Residential mortgages	$	1,252	$	1,252	$	388	$	751	$	—
Commercial
Real estate-commercial		1,497		1,497		877		3,581		—
Real estate-residential		—		—		—		497		—
Construction loans		3,816		3,816		1,035		4,143		—
Commercial and industrial loans		6		6		3		72		—
		6,571		6,571		2,303		9,044		—
With no allowance recorded:
Residential
Residential mortgages		2,381		2,381		—		1,497		—
Commercial
Real estate-commercial		1,214		1,214		—		1,270		—
Real estate-residential		—		—		—		459		—
Construction loans		228		228		—		1,642		—
Commercial and industrial loans		—		—		—		—		—
		3,823		3,823		—		4,868		—
Total	$	10,394	$	10,394	$	2,303	$	13,912	$	—

The following tables present the contractual aging of delinquent loans by class:

	At September 30, 2012
	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)
Residential
Residential mortgages	$	317,534	$	1,098	$	129	$	2,122	$	3,349	$	320,883	$	—
Commercial
Real estate-commercial		108,263		—		—		1,116		1,116		109,379		—
Real estate-residential		21,663		—		—		839		839		22,502		—
Real estate-multi-family		19,433		—		—		—		—		19,433		—
Construction loans		12,975		—		—		6,119		6,119		19,094		—
Commercial and industrial loans		4,309		7		—		—		7		4,316		—
Consumer
Home equity and second mortgage		41,321		126		100		204		430		41,751		—
Other consumer		1,917		—		8		—		8		1,925		—
Total	$	527,415	$	1,231	$	237	$	10,400	$	11,868	$	539,283	$	—

	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)
Residential
Residential mortgages	$	273,231	$	98	$	153	$	4,342	$	4,593	$	277,824	$	—
Commercial
Real estate-commercial		108,382		—		—		2,361		2,361		110,743		—
Real estate-residential		25,489		312		—		—		312		25,801		—
Real estate-multi-family		19,906		—		—		—		—		19,906		—
Construction loans		9,151		—		3,141		4,044		7,185		16,336		—
Commercial and industrial loans		4,408		—		—		6		6		4,414		—
Consumer
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	$	—

Activity in the allowance for loan losses for the three and nine months ended September 30, 2012 is summarized as follows:

	Balance July 1, 2012		Provision			Charge-offs			Recoveries		Balance September 30, 2012
	(in thousands)
Residential
Residential mortgages	$	1,620	$	373		$	(126	)	$	46	$	1,913
Commercial
Real estate-commercial		1,913		100			(18	)		—		1,995
Real estate-residential		699		(52	)		(1	)		—		646
Real estate-multi-family		284		(34	)		—			—		250
Construction loans		1,002		166			(31	)		—		1,137
Commercial and industrial loans		137		(41	)		—			9		105
Consumer
Home equity and second mortgage		265		(25	)		(11	)		—		229
Other consumer		12		8			(9	)		—		11
Unallocated		231		255			—			—		486
Total	$	6,163	$	750		$	(196	)	$	55	$	6,772

	Balance January 1, 2012		Provision			Charge-offs			Recoveries		Balance September 30,2012
	(in thousands)
Residential
Residential mortgages	$	2,194	$	365		$	(702	)	$	56	$	1,913
Commercial
Real estate-commercial		2,819		108			(932	)		—		1,995
Real estate-residential		464		600			(418	)		—		646
Real estate-multi-family		358		(108	)		—			—		250
Construction loans		1,260		768			(891	)		—		1,137
Commercial and industrial loans		138		106			(156	)		17		105
Consumer
Home equity and second mortgage		448		(187	)		(32	)		—		229
Other consumer		22		9			(23	)		3		11
Unallocated		397		89			—			—		486
Total	$	8,100	$	1,750		$	(3,154	)	$	76	$	6,772

Activity in the allowance for loan losses for the three and nine months ended September 30, 2011 is summarized as follows:

	Balance July 1, 2011		Provision			Charge-offs			Recoveries		Balance September 30, 2011
	(in thousands)
Residential
Residential mortgages	$	1,693	$	12		$	(48	)	$	2	$	1,659
Commercial
Real estate-commercial		2,828		1,236			—			—		4,064
Real estate-residential		419		135			—			—		554
Real estate-multi-family		336		98			—			—		434
Construction loans		2,662		(678	)		—			—		1,984
Commercial and industrial loans		216		20			—			—		236
Consumer
Home equity and second mortgage		482		(14	)		—			—		468
Other consumer		22		1			(5	)		1		19
Unallocated		450		(282	)		—			—		168
Total	$	9,108	$	528		$	(53	)	$	3	$	9,586

	Balance January 1, 2011		Provision			Charge-offs			Recoveries		Balance September 30, 2011
	(in thousands)
Residential
Residential mortgages	$	1,839	$	(10	)	$	(172	)	$	2	$	1,659
Commercial
Real estate-commercial		3,281		783			—			—		4,064
Real estate-residential		534		749			(729	)		—		554
Real estate-multi-family		399		337			(302	)		—		434
Construction loans		1,363		775			(155	)		1		1,984
Commercial and industrial loans		77		197			(44	)		6		236
Consumer
Home equity and second mortgage		607		82			(221	)		—		468
Other consumer		16		9			(12	)		6		19
Unallocated		212		(44	)		—			—		168
Total	$	8,328	$	2,878		$	(1,635	)	$	15	$	9,586

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any portfolio segment.

Loans receivable include certain loans that have been modified as Troubled Debt Restructurings ("TDRs"), where economic concessions have been granted to borrowers experiencing financial difficulties. The objective for granting the concessions is to maximize the recovery of the investment in the loan and may include reductions in the interest rate, payment extensions, forgiveness of interest or principal, forbearance or other actions. TDRs are classified as nonperforming at the time of restructuring and typically return to performing status after considering the borrower's positive repayment performance for a reasonable period of time, usually six months.

Loans modified in a TDR are evaluated individually for impairment based on the present value of expected cash flows or the fair value of the underlying collateral less selling costs for collateral dependent loans. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through an increase to the allowance for loan losses. In periods subsequent to modification, TDRs are evaluated for possible additional impairment.

	For the three months ended September 30, 2012						For the nine months ended September 30, 2012
	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	(in thousands)						(in thousands)
Residential mortgage		-	$	-	$	-		1	$	852	$	814
Total		-	$	-	$	-		1	$	852	$	814

For the Bank, restructuring of loans is usually either an extension of the maturity date or a temporary reduction or moratorium on the payment terms. No modifications involved any reduction in principal balance.

During the first quarter of 2012, a TDR totaling $167,000 which had been previously identified as in default of its modified terms was repaid and a $40,000 loss was charged to the allowance for loan losses.

The following tables present the ending balance of the allowance for loan losses and ending loan balance by portfolio and by class based on impairment method as of September 30, 2012:

	Evaluated for impairment
Allowance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	295	$	1,618	$	1,913
Commercial
Real estate-commercial		185		1,810		1,995
Real estate-residential		57		589		646
Real estate-multi-family		—		250		250
Construction loans		329		808		1,137
Commercial and industrial loans		—		105		105
Consumer
Home equity and second mortgage		—		229		229
Other consumer		—		11		11
Unallocated		—		486		486
Total	$	866	$	5,906	$	6,772

	Evaluated for impairment
Loan balance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	2,236	$	318,647	$	320,883
Commercial
Real estate-commercial		1,116		108,263		109,379
Real estate-residential		839		21,663		22,502
Real estate-multi-family		—		19,433		19,433
Construction loans		6,119		12,975		19,094
Commercial and industrial loans		—		4,316		4,316
Consumer
Home equity and second mortgage		—		41,751		41,751
Other consumer		—		1,925		1,925
Total	$	10,310	$	528,973	$	539,283

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

	Evaluated for impairment
Allowance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	388	$	1,806	$	2,194
Commercial
Real estate-commercial		877		1,475		2,352
Real estate-residential		—		369		369
Real estate-multi-family		—		350		350
Construction loans		1,035		795		1,830
Commercial and industrial loans		3		135		138
Consumer
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)
Residential
Residential mortgages	$	3,633	$	274,191	$	277,824
Commercial
Real estate-commercial		2,711		108,032		110,743
Real estate-residential		—		25,801		25,801
Real estate-multi-family		—		19,906		19,906
Construction loans		4,044		12,292		16,336
Commercial and industrial loans		6		4,408		4,414
Consumer
Home equity and second mortgage		—		44,165		44,165
Other consumer		—		1,971		1,971
Total	$	10,394	$	490,766	$	501,160