ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR FIRST LOSS POSITION ON MULTIFAMILY LOANS SOLD TO FNMA

9 Months Ended

Sep. 30, 2011

ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR FIRST LOSS POSITION ON MULTIFAMILY LOANS SOLD TO FNMA [Abstract]

ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR FIRST LOSS POSITION ON MULTIFAMILY LOANS SOLD TO FNMA

9. ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR FIRST LOSS POSITION ON MULTIFAMILY LOANS SOLD TO FNMA

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of all or part of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using, among other factors, past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Allocations to the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

In determining its periodic allowance for loan losses, the Company has identified two portfolio segments: 1) real estate loans, and 2) consumer loans. Consumer loans represent a nominal portion of the Company's loan portfolio. Within the real estate loan segment, the Bank analyzes the allowance based upon: 1) their designation as an impaired, special mention or pass graded loan; and 2) within loans designated as pass, the underlying collateral type.

Real Estate Loans

The Bank's periodic evaluation of its allowance for loan losses on real estate loans has traditionally been comprised of three primary components. The first two components relate to problem loans and are divided between loans deemed impaired (primarily loans classified as substandard or doubtful, and TDR loans) and loans designated as special mention. The final component relates to pass graded or performing loans.

Impaired Loan Component

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Non-accrual loans and TDRs are deemed impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays or shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All multifamily residential, mixed use, commercial real estate and construction loans that are deemed to meet the definition of impaired are individually evaluated for impairment. In addition, all cooperative unit, one- to four-family residential and consumer loans in excess of the FNMA conforming loan limits for high-cost areas such as the Bank's

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primary lending area are individually evaluated for impairment. Impairment is typically measured using the difference between the outstanding loan principal balance and either: 1) the likely realizable value of a note sale; 2) the fair value of the underlying collateral, net of likely disposal costs, if repayment is expected solely from liquidation of the collateral; or 3) the present value of estimated future cash flows using the loan's existing rate. TDRs are typically separately identified for impairment and their impairment is measured with the present value of estimated future cash flows using the loan's effective rate at inception. If a non-performing TDR is considered to be a collateral dependent loan, it is reported, net, at the fair value of the collateral less estimated disposal costs. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

Prior to July 1, 2010, the Company recognized impairment of real estate loans through an allocated reserve balance within the allowance for loan losses. As a result, increases or decreases in either the amount of impaired loans, the magnitude of impairment of such loans, or the election to recognize the impairment as either an allocated reserve or a principal charge-off could create potential volatility within the allocated portion of the allowance for loan losses associated with such loans. Effective July 1, 2010, with the exception of performing TDRs, the Bank commenced a general practice of immediately charging off the specific components of the allowance related to loans individually classified as impaired, and not recognizing them through a reserve within the allowance for loan losses. As previously mentioned, the Bank has maintained the common industry practice of recognizing an allocated reserve within the allowance for loan losses for instances in which impairment is measured solely from a reduction in the present value of expected cash flows of a performing TDR. The general practice of immediately charging off the specific components of the allowance related to loans individually classified as impaired (other than performing TDRs), although not mandated under GAAP, has significantly reduced the level of volatility of the allowance for loan losses associated with impaired loans.

At September 30, 2011, there were $2.0 million of allocated reserves within the allowance for loan losses associated with impaired loans. There were no allocated reserves associated with impaired loans at December 31, 2010. Charge-offs of measured impairment of principal balances (full or partial) on impaired loans totaled $2.8 million and $3.1 million during the nine months ended September 30, 2011 and 2010, respectively. In addition, charge-offs of $5.8 million were recognized during the nine months ended September 30, 2010 on impaired loans that were disposed of during the period. As previously discussed, prior to July 1, 2010, if impairment was measured on a loan, a portion of the allowance was allocated so that the loan was reported, net of its measured impairment, once its allocated reserve within the allowance for loan losses was considered.

Large groups of smaller balance homogeneous real estate loans, such as cooperative unit and one-to four-family residential real estate loans with balances equal to or less than the FNMA conforming loan limits for high-cost areas such as the Bank's primary lending area, are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

Special Mention Component

In order to determine an expected loss percentage on its pool of Special Mention loans, the Bank calculates a rolling 12-month loss history analysis on its pool of such loans. The loss percentage resulting from this analysis is then applied to the aggregate pool of Special Mention loans at the measurement date. Based upon this methodology, increases or decreases in either the amount of Special Mention loans, or the magnitude of charge-offs recognized within the 12 months prior to the assessment date, will impact the estimated portion of the allowance for loan losses associated with such loans. As a result, the allowance for loan losses associated with Special Mention loans is subject to great volatility.

The portion of the allowance for loan losses attributable to Special Mention loans increased from $1.9 million at December 31, 2010 to $2.5 million at September 30, 2011, primarily reflecting an increase of $13.7 million in Special Mention loans from December 31, 2010 to September 30, 2011.

Performing Loan Component (Pass Graded Loans)

The Bank initially looks to the underlying collateral type when determining the allowance for loan losses associated with performing real estate loans. The following underlying collateral types are analyzed separately: 1) one- to four family residential and cooperative unit; 2) multifamily residential and residential mixed use; 3)mixed use commercial real estate, 4) commercial real estate; and 5) construction. Within each of the analyses of the underlying collateral types, the following elements are additionally considered and provided weighting in determining the allowance for loan losses for performing loans:

i.	Charge-off experience

ii.	Economic conditions

iii.	Underwriting standards or experience

iv.	Loan concentrations

v.	The period of time the loan has been held and performing

The following is a brief synopsis of the manner in which each element is considered:

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(i) Charge-off experience - Loans within the performing loan portfolio are segmented by significant common characteristics, against which historical loss rates are applied. In late 2010, the Bank updated the historical period used in this methodology. Previously, 1992 to 1996 experience factors were used, since that period represented the most recent complete loss cycle experienced by the Bank for its geography and type of collateral. During the final quarter of 2010, the Bank updated its experience factors to include only the period 2008 to 2010; for although the current credit cycle may not have completely run its course, the Bank concluded that there was sufficient data to make the experience factors from this period relevant and meaningful.

(ii) Economic conditions - At both September 30, 2011 and December 31, 2010, the Bank assigned an expected loss rate to its entire performing mortgage loan portfolio based, in part, upon a review of economic conditions affecting the local real estate market. Specifically, the Bank considered both the level of and recent trends in: 1) the local unemployment rate, 2) real estate vacancy rates, 3) real estate sales and pricing, and 4) delinquencies in the Bank's loan portfolio. At September 30, 2010, the Bank considered the same set of variables in its analysis of expected economic loss from the performing mortgage loan portfolio, however, due to the relatively higher level of uncertainty surrounding the local real estate market at that time, the Bank arrived at a higher expected loss rate for the performing loan group as compared to September 30, 2011.

(iii) Underwriting standards or experience - Underwriting standards are reviewed to ensure that changes in the Bank's lending policies and practices are adequately evaluated for risk and reflected in its analysis of potential credit losses. Different loss expectations are incorporated into the methodology. Based upon the Bank's mitigation of only certain less critical underwriting practices during the year ended December 31, 2010 and the nine months ended September 30, 2011, this component did not impact the methodology at either September 30, 2011 or December 31, 2010.

(iv) Concentrations of credit - The Bank regularly reviews its loan concentrations (borrower, collateral type and location) in order to ensure that heightened risk has not evolved that has not been captured through other factors. The risk component of loan concentrations is regularly evaluated for reserve adequacy.

(v) The period of time loans have been held and performing (Loan Seasoning) - Generally, it is assumed that loans performing for a period of at least three years are likely to result in diminishing principal losses with the passage of time. As a result, it is assumed that a lower expected loss percentage should be applied to these loans. This element was given considerable weight in the evaluation of the allowance for loan losses at September 30, 2010, however, received significantly less consideration in the September 30, 2011 and December 31, 2010 evaluations. The decrease in consideration resulted from an analysis of the loss experience recognized during the 2008 to 2010 recessionary period (to which the Company migrated late in 2010), which concluded that, contrary to this common assumption, the age or seasoning of the loan did not inversely correlate to the Bank's loss experience.

Consumer Loans

Due to their small individual balances, the Bank does not evaluate individual consumer loans for impairment. Loss percentages are applied to aggregate consumer loans based upon both their delinquency status and loan type. These loss percentages are derived from a combination of the Company's historical loss experience and/or nationally published loss data on these loans. Consumer loans in excess of 120 days delinquent are typically fully charged off against the allowance for loan losses.

Changes in the aggregate allowance for loan losses for loans owned by the Bank were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Dollars in Thousands)
Balance at beginning of period	$	19,518		$	23,350		$	19,166		$	21,505
Provision for loan losses		2,217			667			5,305			7,948
Loans charged off		(175	)		(6,838	)		(3,387	)		(12,638	)
Recoveries		27			21			325			28
Transfer from (to) reserves on loan commitments		(48	)		(258	)		130			99
Balance at end of period	$	21,539		$	16,942		$	21,539		$	16,942

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The following table presents data regarding the allowance for loan losses and loans evaluated for impairment by class of loan within the real estate loan segment as well as for the aggregate consumer loan segment:

At or for the Three Months Ended September 30, 2011
	Real Estate Loans						Consumer Loans
	One- to Four Family Residential and Cooperative Unit	Multifamily Residential and Residential Mixed Use	Mixed Use Commercial Real Estate	Commercial Real Estate	Construction	Total Real Estate
	(Dollars in Thousands)
Beginning balance	$399	$14,396	$1,108	$3,407	$179	$19,489	$29
Charge-offs	(5)	(40)	(79)	(46)	-	(170)	(5)
Recoveries	-	1	14	12	-	27	-
Transfer (to) from reserve for loan commitments	-	(39)	(5)	(9)	5	(48)	-
Provision	(12)	230	432	1,562	1	2,213	4
Ending balance	$382	$14,548	$1,470	$4,926	$185	$21,511	$28

At or for the Nine Months Ended September 30, 2011
	Real Estate Loans						Consumer Loans
	One- to Four Family Residential and Cooperative Unit	Multifamily Residential and Residential Mixed Use	Mixed Use Commercial Real Estate	Commercial Real Estate	Construction	Total Real Estate
	(Dollars in Thousands)
Beginning balance	$409	$14,226	$1,331	$2,821	$345	$19,132	$34
Charge-offs	(88)	(552)	(362)	(1,642)	(725)	(3,369)	(18)
Recoveries	-	143	36	146	-	325	-
Transfer from (to) reserve for loan commitments	-	121	(11)	5	15	130	-
Provision	61	610	476	3,596	550	5,293	12
Ending balance	$382	$14,548	$1,470	$4,926	$185	$21,511	$28

At September 30, 2011
	Real Estate Loans						Consumer Loans
	One- to Four Family Residential and Cooperative Unit	Multifamily Residential and Residential Mixed Use	Mixed Use Commercial Real Estate	Commercial Real Estate	Construction	Total Real Estate
	(Dollars in Thousands)
Ending balance - loans individually evaluated for impairment	$-	$28,412	$5,299	$39,044	$3,297	$76,052	$-
Ending balance - loans collectively evaluated for impairment	102,340	2,519,096	346,743	376,623	7,291	3,352,093	2,244
Allowance balance associated with loans individually evaluated for impairment	-	1,440	225	1,156	-	2,821	-
Allowance balance associated with loans collectivelly evaluated for impairment	382	13,108	1,242	3,767	185	18,684	28

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At December 31, 2010
	Real Estate Loans						Consumer Loans
	One- to Four Family Residential and Cooperative Unit	Multifamily Residential and Residential Mixed Use	Mixed Use Commercial Real Estate	Commercial Real Estate	Construction	Total Real Estate
	(Dollars in Thousands)
Ending balance - loans individually evaluated for impairment	$-	$16,368	$2,387	$20,842	$4,500	$44,097	$-
Ending balance - loans collectively evaluated for impairment	117,268	2,483,897	362,678	447,261	10,738	3,421,842	2,540
Allowance balance associated with loans individually evaluated for impairment	-	-	-	-	-	-	-
Allowance balance associated with loans collectivelly evaluated for impairment	409	14,226	1,331	2,821	345	19,132	34

The following table summarizes impaired real estate loans for the periods indicated:

At September 30, 2011				For the Three Months Ended September 30, 2011		For the Nine Months Ended September 30, 2011
	Unpaid Principal Balance at Period End	Recorded Investment at Period End	Reserve Balance Allocated within the Allowance for Loan Losses at Period End	Average Recorded Balance	Interest Income Recognized	Average Recorded Balance	Interest Income Recognized
	(Dollars in Thousands)
Multifamily Residential and Residential Mixed Use
With no allocated reserve	$14,390	$13,902	-	$11,809	$193	$12,660	$456
With an allocated reserve	14,959	14,511	1,440	7,256	82	2,419	82
Mixed Use Commercial Real Estate
With no allocated reserve	2,822	2,595	-	3,532	67	4,011	153
With an allocated reserve	2,868	2,704	225	1,352	8	451	8
Commercial Real Estate
With no allocated reserve	13,027	11,908	-	12,607	141	14,836	286
With an allocated reserve	27,173	27,135	1,156	16,476	365	8,409	623
Construction
With no allocated reserve	4,022	3,297	-	3,297	-	3,159	213
With an allocated reserve	-	-	-	-	-	-	-
Total
With no allocated reserve	$34,261	$31,702	$-	$31,245	$401	$34,666	$1,108
With an allocated reserve	$45,000	$44,350	$2,821	$25,768	$455	$11,279	$713

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At December 31, 2010
	Unpaid Principal Balance at Period End	Recorded investment at Period End	Reserve Balance Allocated within the Allowance for Loan Losses at Period End
	(Dollars in Thousands)
Multifamily Residential and Residential Mixed Use
With no allocated reserve	$19,460	$16,368	$-
With an allocated reserve		-	-
Mixed Use Commercial Real Estate
With no allocated reserve	2,387	2,387	-
With an allocated reserve	-	-	-
Commercial Real Estate
With no allocated reserve	23,771	20,842	-
With an allocated reserve	-	-	-
Construction
With no allocated reserve	4,500	4,500	-
With an allocated reserve	-	-	-
Total
With no allocated reserve	$50,118	$44,097	-
With an allocated reserve	$-	$-	$-

Reserve for First Loss Position

The Bank maintains a reserve liability in relation to the First Loss Position that reflects estimated losses on this loan pool at each period end. For performing loans within the FNMA serviced pool, the reserve recognized is the present value of the estimated losses calculated based upon the historical loss experience for comparable multifamily loans owned by the Bank. For problem loans within the pool, the estimated losses are determined in a manner consistent with impaired loans within the Bank's loan portfolio.

The following is a summary of the aggregate balance of multifamily loans serviced for FNMA, the period-end First Loss Position associated with these loans, and activity in the related reserve liability:

	At or for the Three Months Ended September 30,				At or for the Nine Months Ended September 30,
	2011		2010		2011		2010
	(Dollars in Thousands)
Outstanding balance of multifamily loans serviced for FNMA at period end	$	318,113	$	392,582	$	318,113	$	392,582
Total First Loss Position at end of period		16,356		18,697		16,356		18,697
Reserve Liability on the First Loss Position
Balance at beginning of period	$	2,993	$	2,993	$	2,993	$	4,373
Transfer of specific reserve for serviced loans re-acquired by the Bank		-		-		-		(1,123	)
Provision for losses on problem loans(1)		-		-		-		-
Charge-offs and other net reductions in balance		-		-		-		(257	)
Balance at period end	$	2,993	$	2,993	$	2,993	$	2,993

(1) Amount recognized as a component of mortgage banking income during the period.

During the nine months ended September 30, 2011, the Bank received approval from FNMA to reduce the total First Loss Position by $434,000 for losses incurred. During the nine months ended September 30, 2010, the Bank received approval from FNMA to reduce the total First Loss Position by $1.5 million for losses incurred.

During the years ended December 31, 2009 and 2010, the Bank elected to periodically repurchase problematic loans from within the FNMA serviced loan pool. The repurchase of these problematic loans was made in order to expedite their resolution and control losses. All such elections were made on an individual loan/borrower basis. All such repurchases from FNMA were made at par, and any reserves recognized on the re-acquired loan within the FNMA reserve analysis reduced the recorded balance of the loan when it was transferred

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to the Bank's portfolio. In most instances, all economic losses realized by the Bank on the re-acquired loans were applied against the First Loss Position, and any material exceptions for individual loans were disclosed in the Company's public filings. Since the Bank is fully responsible for all losses on FNMA serviced loans up to the First Loss Position, it has greater incentive to minimize losses. Had the resolution of these loans been left to FNMA to manage, management believes that the ultimate losses recognized would have been greater. During the nine months ended September 30, 2010, the Bank re-acquired sixteen loans (problematic or non-problematic) within the pool of loans serviced for FNMA having an aggregate principal balance of $22.3 million, none of which were re-acquired during the three months ended September 30, 2010. Upon re-acquisition, aggregate liabilities of $1.1 million that were recorded related to problematic loans within the liability for the First Loss Position served to reduce the outstanding principal balance of the loans (reflecting a write-down of their outstanding principal balance to the likely realizable value of the loan or underlying collateral).

During the nine months ended September 30, 2011, the Bank re-acquired $31.8 million of loans from FNMA. All such re-acquisitions were of non-problematic loans and were made for the sole purpose of facilitating the borrowers' refinancing. At re-acquisition, all such loans were in the process of being either satisfied or refinanced with the Bank. As a result, these re-acquisitions had no impact upon the reserve for the First Loss Position.