6. ALLOWANCE FOR LOAN LOSSES AND RESERVE FOR FIRST LOSS POSITION

As discussed in Note 1, 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 December 31, 2012 and 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 real estate 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 is 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 December 31, 2012 and 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 December 31, 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. This reserve allocation was determined in a manner substantially similar to non-impaired Special Mention loans at December 31, 2012.

As of December 31, 2011, the total population of non-impaired substandard rated 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 $795 at December 31, 2012, due to an increase of $11,614 in non-impaired Substandard loans from December 31, 2011 to December 31, 2012 as well as an increase in the estimated loss percentage applied to such loans from December 31, 2011 to December 31, 2012.

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.

Non-Impaired Special Mention Loan Component

At both December 31, 2012 and 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 December 31, 2012 and 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 $145 at December 31, 2012, due primarily to a reduction in the estimated loss percentage determined to be applied to such loans from December 31, 2011 to December 31, 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 December 31, 2012 and 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. Increased competition and commercial lending during 2012 resulted in a higher loss expectation being applied for this item as of December 31, 2012 compared to 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 December 31, 2012 and 2011 evaluations. The minimal consideration resulted from an analysis of the loss experience recognized during the recent recessionary period, 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 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 Year Ended December 31, 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		(777	)		(2,478	)		(821	)		(521	)		(3	)		(4600	)		(10	)
Recoveries		17			829			18			39			-			903			-
Transfer from reserve for loan commitments		-			52			5			25			-			82			-
Provision (credit) for loan losses		624			1,583			1,744			56			(97	)		3,910			11
Ending balance	$	344		$	14,299		$	2,474		$	3,382		$	24		$	20,523		$	27

Ending balance – loans individually evaluated for impairment	$	1,291		$	2,460		$	1,900		$	47,493		$	-		$	53,144		$	-
Ending balance – loans collectively evaluated for impairment		90,585			2,673,909			338,233			347,038			476			3,450,241			2,423
Allowance balance associated with loans individually evaluated for impairment		7			-			-			513			-			520			-
Allowance balance associated with loans collectivelly evaluated for impairment		337			14,299			2,474			2,869			24			20,003			27

At or for the Year Ended 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
Beginning balance	$	409		$	14,226		$	1,331		$	2,821		$	345		$	19,132		$	34
Charge-offs		(129	)		(2,803	)		(697	)		(1,720	)		(962	)		(6,311	)		(29	)
Recoveries		-			220			48			147		‑				415		‑
Transfer from (to) reserve for loan Commitments	‑				165			(15	)		(13	)		30			167		‑
Provision for loan losses		200			2,505			861			2,548			711			6,825			21
Ending balance	$	480		$	14,313		$	1,528		$	3,783		$	124		$	20,228		$	26

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 collectivelly evaluated for impairment		350			14,268			1,455			1,856			124			18,053			26

At or for the Year Ended December 31, 2010
	Real Estate Loans																		Consumer Loans
	One- to Four Family Residentail and Cooperative Unit			Multifamily Residential and Residential Mixed Use			Mixed Use Commercial Real Estate			Commercial Real Estate			Construction			Total Real Estate
Beginning balance	$	1,047		$	13,547		$	1,833		$	3,918		$	1,130		$	21,475		$	30
Charge-offs		(266	)		(10,062	)		(469	)		(1,964	)		(1,111	)		(13,872	)		(13	)
Recoveries	‑				55		‑				9		‑				64		‑
Transfer from (to) reserve for commitments	‑				188			65			(17	)		36			272		‑
Provision (credit) for loan losses		(372	)		10,498			(98	)		875			290			11,193			17
Ending balance	$	409		$	14,226		$	1,331		$	2,821		$	345		$	19,132		$	34

The following table summarizes impaired real estate loans as of and for the periods indicated (by collateral type within the real estate loan segment).

	At December 31, 2012						For the Year Ended Ended December 31, 2012
	Unpaid Principal Balance at Period End		Recorded Investment at Period End(1)		Reserve Balance Allocated within the Allowance for Loan Losses at Period End		Average Recorded Investment(1)		Interest Income Recognized
One- to Four Family Residential and Cooperative Unit
With no allocated reserve	$	1,079	$	1,079	$	-	$	867	$	55
With an allocated reserve		258		212		7		452		19
Multifamily Residential and Residential Mixed Use
With no allocated reserve		2,767		2,460		-		5,434		341
With an allocated reserve		-		-		-		420		-
Mixed Use Commercial Real Estate
With no allocated reserve		1,900		1,900	‑			2,516		74
With an allocated reserve		-		-		-		192		-
Commercial Real Estate
With no allocated reserve		33,416		32,217	‑			29,362		1,675
With an allocated reserve		15,276		15,276		513		20,087		746
Construction
With no allocated reserve		-		-	‑			-		-
With an allocated reserve		-		-	‑			-		-
Total
With no allocated reserve	$	39,162	$	37,656	$	-	$	38,179	$	2,145
With an allocated reserve	$	15,534	$	15,488	$	520	$	21,151	$	765

(1)	The recorded investment excludes accrued interest receivable and loan origination fees, net, due to immateriality.

	At December 31, 2011						For the Year Ended Ended December 31, 2011
	Unpaid Principal Balance at Period End		Recorded Investment at Period End(1)		Reserve Balance Allocated within the Allowance for Loan Losses at Period End		Average Recorded Investment(1)		Interest Income Recognized
One- to Four Family Residential and Cooperative Unit
With no allocated reserve	$	1,136	$	1,136	$	-	$	1,406	$	38
With an allocated reserve		1,773		1,411		130		565		31
Multifamily Residential and Residential Mixed Use
With no allocated reserve		10,709		9,338		-		11,194		795
With an allocated reserve		776		690		45		3,040		86
Mixed Use Commercial Real Estate
With no allocated reserve		5,780		5,780	‑			3,901		191
With an allocated reserve		1,145		959		73		1,893		11
Commercial Real Estate
With no allocated reserve		14,317		11,812	‑			15,243		407
With an allocated reserve		39,296		39,258		1,927		15,620		868
Construction
With no allocated reserve		-		-	‑			3,835		227
With an allocated reserve		-		-	‑			-		-
Total
With no allocated reserve	$	31,942	$	28,066	$	-	$	35,579	$	1,658
With an allocated reserve	$	42,990	$	42,318	$	2,175	$	21,118	$	996

(1) The recorded investment excludes accrued interest receivable and loan origination fees, net, due to immateriality.

The following table summarizes the average recorded investment and interest income recognized on impaired loans during the year ended December 31, 2010. For purposes of this table, adjustments between the unpaid principal balance of the loans and their recorded investment (including accrued interest receivable) are deemed to be immaterial:

	For the Year Ended Ended December 31, 2010
	Average Recorded Investment(1)		Interest Income Recognized
With no allocated reserve	$	8,945	$	2,628
With an allocated reserve		22,915	‑
Total	$	31,860	$	2,628

(1) The recorded investment excludes accrued interest receivable and loan origination fees, net, due to immateriality.

Reserve for First Loss Position

At both December 31, 2012 and 2011, the Bank serviced a pool of loans that were sold to FNMA and were subject to the 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 based upon the historical loss experience on this loan pool. 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 Year Ended December 31,
	2012			2011		2010
Outstanding balance of multifamily loans serviced for FNMA at period end	$	256,731		$	308,104	$	371,887
Total First Loss Position at end of period		15,428			16,356		16,789
Reserve Liability on the First Loss Position
Balance at beginning of period	$	2,993		$	2,993	$	4,373
Transfer of specific reserve for serviced loans re-acquired by the Bank		-			-		(1,123	)
Credit for losses on problem loans⁽¹⁾		(1,286	)		-		-
Charge-offs and other net reductions in balance		(342	)		-		(257	)
Balance at period end	$	1,383		$	2,993	$	2,993

¹ Amount recognized as a portion of mortgage banking income during the period.

During the years ended December 31, 2011 and 2010, the Bank received approval from FNMA to reduce the total First Loss Position by $433 and $3,457, respectively, for losses incurred. No such approval was received during the year ended December 31, 2012, however, the Bank was contractually permitted to reduce the total First Loss Position by $928 due to the satisfaction of certain loans within the FNMA pool.