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

The allowance for loan losses may consist of specific and general components. The Bank's periodic evaluation of its allowance for loan losses (specific or general) is comprised of four primary components: (1) impaired loans; (2) non-impaired substandard loans; (3) non-impaired special mention loans; and (4) pass graded loans. Within these components, the Company has identified the following portfolio segments for purposes of assessing its allowance for loan losses (specific or general): 1) real estate loans; and 2) consumer loans. Within the segments, the Bank analyzes the allowance based upon the underlying collateral type (classes). Consumer loans represent a nominal portion of the Company's loan portfolio, and were thus evaluated in aggregate as of both September 30, 2012 and December 31, 2011.

Impaired Loan Component

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 and one- to four-family residential loans in excess of the FNMA Limits 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. For impaired loans on non-accrual status, either of the initial two measurements is utilized.

All TDRs are considered impaired loans and are evaluated individually for measurable impairment, if any. If a TDR is substantially performing in accordance with its restructured terms, management will look to either the present value of the expected cash flows from the debt service or the potential net liquidation proceeds of the underlying collateral property in measuring impairment (whichever is deemed most appropriate under the circumstances). If a TDR has re-defaulted, the likely realizable net proceeds from either a note sale or the liquidation of the collateral is generally considered when measuring impairment. While measured impairment on TDRs is typically charged off immediately, impairment measured from a reduction in the present value of expected cash flows of a performing TDR was reflected as an allocated reserve within the allowance for loan losses at both September 30, 2012 and December 31, 2011.

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 Limits, are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

Non-Impaired Substandard Loan Component

At September 30, 2012, the reserve allocated within the allowance for loan losses associated with loans internally classified as Substandard (excluding impaired loans internally designated as Substandard) reflected expected loss percentages on the Bank's pool of such loans that were derived based upon an analysis of historical losses over a measurement timeframe. All non-impaired Substandard loans were deemed sufficiently well secured and performing to have remained on accrual status both prior and subsequent to their downgrade to the Substandard internal loan grade. This reserve allocation was determined in a manner substantially similar to non-impaired Special Mention loans at September 30, 2012.

Non-impaired Substandard loans were non-existent prior to September 30, 2011. As of December 31, 2011, the total population of such loans was not deemed significant enough to warrant a separate allocated reserve measurement.

The portion of the allowance for loan losses attributable to non-impaired Substandard loans was zero at December 31, 2011, and increased to $867 at September 30, 2012, due to an increase of $12,905 in non-impaired Substandard loans from December 31, 2011 to September 30, 2012 as well as an increase in the estimated loss percentage applied to such loans from December 31, 2011 to September 30, 2012.

Non-Impaired Special Mention Loan Component

At both September 30, 2012 and December 31, 2011, the reserve allocated within the allowance for loan losses associated with loans internally classified as Special Mention (excluding impaired loans internally designated as Special Mention) reflected an expected loss percentage on the Bank's pool of such loans that was derived based upon an analysis of historical losses over a measurement timeframe. The loss percentage resulting from this analysis was then applied to the aggregate pool of non-impaired Special Mention loans at September 30, 2012 and December 31, 2011. Based upon this methodology, increases or decreases in the amount of either non-impaired Special Mention loans or charge-offs associated with such loans, or a change in the measurement timeframe utilized to derive the expected loss percentage, would impact the level of reserves determined on non-impaired Special Mention loans. As a result, the allowance for loan losses associated with non-impaired Special Mention loans is subject to volatility.

The portion of the allowance for loan losses attributable to non-impaired Special Mention loans declined from $800 at December 31, 2011 to $100 at September 30, 2012, due to a reduction of $15,211 in non-impaired Special Mention loans from December 31, 2011 to September 30, 2012 as well as a reduction in the estimated loss percentage determined to be applied to such loans from December 31, 2011 to September 30, 2012.

Pass Graded Loan Component

The Bank initially looks to the underlying collateral type when determining the allowance for loan losses associated with pass graded 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 and land acquisition. Within the analysis of each underlying collateral type, the following elements are additionally considered and provided weighting in determining the allowance for loan losses for pass graded real estate loans:

(i)	Charge-off experience

(ii)	Economic conditions

(iii)

Underwriting standards or experience

(iv)	Loan concentrations

(v)	Loan seasoning

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

(i) Charge-off experience – Loans within the pass graded loan portfolio are segmented by significant common characteristics, against which historical loss rates are applied.

(ii) Economic conditions - At both September 30, 2012 and December 31, 2011, the Bank assigned a loss allocation to its entire pass graded real estate 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 and national unemployment rate, 2) residential and commercial vacancy rates, 3) real estate sales and pricing, and 4) delinquencies in the Bank's loan portfolio.

(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 then incorporated into the methodology. The Bank modified only certain less critical underwriting practices during the nine months ended September 30, 2012 and the year ended December 31, 2011, and, as a result, this component did not impact the methodology at either September 30, 2012 or December 31, 2011.

(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) Loan Seasoning – The Bank analyzes its charge-off history in order to determine whether loans that are over three years past their origination date (referred to as seasoned loans) have experienced lower loss levels, and would thus warrant a lower expected loss percentage. This element was given minimal consideration in the September 30, 2012 and December 31, 2011 evaluations. The minimal consideration resulted from an analysis of the loss experience recognized during the recent recessionary period (to which the Company migrated late in 2010), which concluded that the age or seasoning of a 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.

The following table presents data regarding activity in 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, 2012
	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
Beginning balance	$258	$14,551	$2,181	$3,230	$-	$20,220	$23
Charge-offs	(134)	(243)	(8)	(14)	-	(398)	-
Recoveries	1	687	-	36	-	723	-
Transfer to the reserve for loan commitments	-	-	-	-	-	-	-
Provision (credit)	557	(761)	143	157	27	123	3
Ending balance	$682	$14,234	$2,316	$3,409	$27	$20,668	$26

Ending balance – loans individually evaluated for impairment	$621	$3,319	$1,456	$47,587	-	$52,983	$-
Ending balance – loans collectively evaluated for impairment	88,204	2,491,320	342,490	347,976	$528	3,270,518	$2,492
Allowance balance associated with loans individually evaluated for impairment	8	-	-	543	-	551	-
Allowance balance associated with loans collectively evaluated for impairment	674	14,234	2,316	2,866	27	20,117	26

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, 2012
	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
Beginning balance	$480	$14,313	$1,528	$3,783	$124	$20,228	$26
Charge-offs	(774)	(2,381)	(670)	(500)	(3)	(4,328)	(10)
Recoveries	17	773	11	37	-	838	-
Transfer to the reserve for loan commitments	-	52	5	25	-	82	-
Provision (reduction)	959	1,477	1,442	64	(94)	3,848	10
Ending balance	$682	$14,234	$2,316	$3,409	$27	$20,668	$26

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

	As of December 31, 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
Ending balance – loans individually evaluated for impairment	$2,547	$10,028	$6,739	$51,070	-	$70,384	-
Ending balance – loans collectively evaluated for impairment	98,165	2,592,891	331,531	362,246	$3,199	3,388,032	$2,449
Allowance balance associated with loans individually evaluated for impairment	130	45	73	1,927	-	2,175	-
Allowance balance associated with loans collectively evaluated for impairment	350	14,268	1,455	1,856	124	18,053	26

The following tables summarize impaired real estate loans as of or for the periods indicated (by collateral type within the real estate loan segment). For purposes of these tables, adjustments between the unpaid principal balance and recorded investment (including accrued interest receivable) are deemed to be immaterial:

At September 30, 2012
	Unpaid Principal Balance at Period End	Recorded Investment at Period End	Reserve Balance Allocated within the Allowance for Loan Losses at Period End
One- to Four Family Residential and Cooperative Unit
With no allocated reserve	$409	$409	-
With an allocated reserve	212	212	$8
Multifamily Residential and Residential Mixed Use
With no allocated reserve	3,319	3,319	-
With an allocated reserve	-	-	-
Mixed Use Commercial Real Estate
With no allocated reserve	1,456	1,456	-
With an allocated reserve	-	-	-
Commercial Real Estate
With no allocated reserve	32,329	32,329	-
With an allocated reserve	15,258	15,258	543
Construction
With no allocated reserve	-	-	-
With an allocated reserve	-	-	-
Total
With no allocated reserve	$37,513	$37,513	$-
With an allocated reserve	$15,470	$15,470	$551

At December 31, 2011
	Unpaid Principal Balance at Period End	Recorded Investment at Period End	Reserve Balance Allocated within the Allowance for Loan Losses at Period End
One- to Four Family Residential and Cooperative Unit
With no allocated reserve	$1,136	$1,136	$-
With an allocated reserve	1,411	1,411	130
Multifamily Residential and Residential Mixed Use
With no allocated reserve	9,338	9,338	-
With an allocated reserve	690	690	45
Mixed Use Commercial Real Estate
With no allocated reserve	5,780	5,780	-
With an allocated reserve	959	959	73
Commercial Real Estate
With no allocated reserve	11,812	11,812	-
With an allocated reserve	39,258	39,258	1,927
Construction
With no allocated reserve	-	-	-
With an allocated reserve	-	-	-
Total
With no allocated reserve	$28,066	$28,066	$-
With an allocated reserve	$42,318	$42,318	$2,175

	Three Months Ended September 30, 2012		Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011
	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
One- to Four Family Residential and Cooperative Unit
With no allocated reserve	$629	$15	$1,121	$7	$814	$48	$1,475	$24
With an allocated reserve	212	5	706	-	511	14	353	-
Multifamily Residential and Residential Mixed Use
With no allocated reserve	4,787	49	10,904	181	6,178	305	11,912	427
With an allocated reserve	-	-	6,549	82	525	-	3,275	82
Mixed Use Commercial Real Estate
With no allocated reserve	1,459	12	3,131	67	2,670	56	3,431	152
With an allocated reserve	-	-	4,253	8	240	-	2,126	8
Commercial Real Estate
With no allocated reserve	35,596	404	17,290	141	28,648	1,318	16,100	286
With an allocated reserve	15,284	189	13,573	51	21,290	567	9,711	310
Construction
With no allocated reserve	-	-	4,883	-	-	-	4,137	213
With an allocated reserve	-	-	-	-	-	-	-	-
Total
With no allocated reserve	$40,471	$480	$37,329	$396	$38,310	$1,727	$37,055	$1,102
With an allocated reserve	$15,496	$194	$25,083	$141	$22,566	$581	$15,465	$400

Liability for First Loss Position

The Bank maintains a liability in relation to the First Loss Position that reflects estimated losses associated with loans to which the First Loss Position applies at each period end. For performing loans within the FNMA serviced pool, the liability recognized is computed in a similar manner to the calculation of the allowance for loan losses associated with performing 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 liability:

	At or for the Three Months Ended September 30,					At or for the Nine Months Ended September 30,
	2012			2011		2012			2011
Outstanding balance of multifamily loans serviced for FNMA at period end	$	279,830		$	318,113	$	279,830		$	318,113
Total First Loss Position at end of period		16,356			16,356		16,356			16,356
Liability on the First Loss Position
Balance at beginning of period	$	1,684		$	2,993	$	2,993		$	2,993
Transfer of specific reserve for serviced loans re-acquired by the Bank		-		‑			-		‑
Credit for losses on problem loans⁽¹⁾		(140	)	‑			(1,107	)	‑
Charge-offs and other net reductions in balance		-		‑			(342	)	‑
Balance at period end	$	1,544		$	2,993	$	1,544		$	2,993

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