Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term.

Generally, loans are placed on nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

For all loan portfolio segments except one-to-four family residential properties and consumer, the Corporation promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Corporation charges off one-to-four family residential and consumer loans, or portions thereof, when the Corporation reasonably determines the amount of the loss. The Corporation adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one-to-four family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Corporation can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

For all loan classes, when loans are placed on nonaccrual, or charged off, interest accrued but not collected is reversed against interest income. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. In general, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. However, for impaired loans, the Corporation requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

When cash payments are received on impaired loans in each loan class, the Corporation records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.

Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Corporation over the prior three years. Management believes the three-year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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 and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment 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. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Corporation utilizes the discounted cash flows to determine the level of impairment, the Corporation includes the entire change in the present value of cash flows as provision expense.

Segments of loans with similar risk characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment measurements.

	June 30, 2011			December 31, 2010
	(In Thousands)
Residential real estate
Construction	$	5,430		$	6,975
One-to-four family residential		113,894			117,616
Multi-family residential		15,861			14,997
Nonresidential real estate and agricultural land		88,635			89,607
Land (not used for agricultural purposes)		20,126			21,016
Commercial		17,330			16,413
Consumer and other		4,249			4,533
		265,525			271,157
Unamortized deferred loan costs		480			485
Undisbursed loans in process		(1,507	)		(2,388	)
Allowance for loan losses		(3,589	)		(3,806	)
Total loans	$	260,909		$	265,448

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest-rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

With respect to residential loans that are secured by one-to-four family residences and are generally owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to-four family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Nonresidential and multi-family residential real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Nonresidential and multi-family residential real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s nonresidential and multi-family real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates these loans based on collateral, geography and risk grade criteria. As a general rule, the Corporation avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied real estate loans versus non-owner occupied loans.

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

The following table presents the activity in the allowance for loan losses for the three and six months ended June 30, 2011 and information regarding the breakdown of the balance in the allowance for loan losses and the recorded investment in loans, both presented by portfolio segment and impairment method, as of June 30, 2011 and December 31, 2010.

	Residential
	Construction			1-4 Family			Multi-Family			Nonresidential			Land			Commercial			Consumer			Total
	(In Thousands)
Three Months Ended June 30, 2011
Balances at beginning of period:	$	30		$	889		$	138		$	1,469		$	950		$	157		$	75		$	3,708
Provision for losses		2			339			(30	)		16			92			(44	)		(1	)		374
Loans charged off		-			(140	)		-			(259	)		(83	)		-			(22	)		(504	)
Recoveries on loans		-			-			-			-			-			-			11			11
Balances at end of period	$	32		$	1,088		$	108		$	1,226		$	959		$	113		$	63		$	3,589

Six Months Ended June 30, 2011
Balances at beginning of period:	$	35		$	746		$	138		$	1,632		$	976		$	157		$	122		$	3,806
Provision for losses		(3	)		679			(30	)		221			66			(44	)		(41	)		848
Loans charged off		-			(337	)		-			(627	)		(83	)		-			(41	)		(1,088	)
Recoveries on loans		-			-			-			-			-			-			23			23
Balances at end of period	$	32		$	1,088		$	108		$	1,226		$	959		$	113		$	63		$	3,589

As of June 30, 2011
Allowance for losses:
Individually evaluated for impairment:	$	14		$	378		$	30		$	70		$	592		$	-		$	-		$	1,084
Collectively evaluated for impairment:		18			710			78			1,156			367			113			63			2,505
Balances at end of period	$	32		$	1,088		$	108		$	1,226		$	959		$	113		$	63		$	3,589
Loans:
Individually evaluated for impairment:	$	168		$	6,123		$	2,321		$	4,815		$	6,863		$	363		$	19		$	20,672
Collectively evaluated for impairment:		5,262			107,771			13,540			83,820			13,263			16,967			4,230			244,853
Balances at end of period	$	5,430		$	113,894		$	15,861		$	88,635		$	20,126		$	17,330		$	4,249		$	265,525

	Residential
	Construction		1-4 Family		Multi-Family		Nonresidential		Land		Commercial		Consumer		Total

As of December 31, 2010
Allowance for losses:
Individually evaluated for impairment:	$	14	$	200	$	34	$	351	$	578	$	37	$	-	$	1,214
Collectively evaluated for impairment:		21		546		104		1,281		398		120		122		2,592
Balances at end of period	$	35	$	746	$	138	$	1,632	$	976	$	157	$	122	$	3,806

Loans:
Individually evaluated for impairment:	$	278	$	7,769	$	910	$	6,493	$	6,341	$	901	$	-	$	22,692
Collectively evaluated for impairment:		6,697		109,847		14,087		83,114		14,675		15,512		4,533		248,465
Balances at end of period	$	6,975	$	117,616	$	14,997	$	89,607	$	21,016	$	16,413	$	4,533	$	271,157

June 30, 2011	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction	$	5,430	$	5,091	$	172	$	167	$	-
1-4 family residential		113,894		105,573		2,366		5,695		260
Multi-family residential		15,861		13,541		-		2,320		-
Nonresidential		88,635		81,939		1,856		4,840		-
Land		20,126		12,807		2,637		4,682		-
Commercial		17,330		16,544		334		452		-
Consumer		4,249		4,205		18		26		-
Total Loans	$	265,525	$	239,700	$	7,383	$	18,182	$	260

December 31, 2010	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
	(In Thousands)
Construction	$	6,975	$	6,681	$	16	$	278	$	-
1-4 family residential		117,616		107,010		5,256		5,224		126
Multi-family residential		14,997		14,087		-		334		576
Nonresidential		89,607		81,624		1,471		6,512		-
Land		21,016		14,199		2,845		3,972		-
Commercial		16,413		15,290		230		893		-
Consumer		4,533		4,188		25		320		-
Total Loans	$	271,157	$	243,079	$	9,843	$	17,533	$	702

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually on an ongoing basis by classifying the loans as to credit risk, assigning grade classifications. Loan grade classifications of special mention, substandard, doubtful, or loss are reported to the Company’s board of directors monthly. The Company uses the following definitions for credit risk grade classifications:

Special Mention: These assets are currently protected, but potentially weak. They have credit deficiencies deserving a higher degree of attention by management. These assets do not presently exhibit a sufficient degree of risk to warrant adverse classification. Concerns may lie with cash flow, liquidity, leverage, collateral, or industry conditions. These are graded special mention so that the appropriate level of attention is administered to prevent a move to a “substandard” rating.

Substandard: By regulatory definition, “substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged. These types of loans have well defined weaknesses that jeopardize the liquidation of the debt. A distinct possibility exists that the institution will sustain some loss if the deficiencies are not corrected. These loans are considered workout credits. They exhibit at least one of the following characteristics.

Doubtful: These loans exhibit the same characteristics as those rated “substandard,” plus weaknesses that make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. This would include inadequately secured loans that are being liquidated, and inadequately protected loans for which the likelihood of liquidation is high. This classification is temporary. Pending events are expected to materially reduce the amount of the loss. This means that the “doubtful” classification will result in either a partial or complete loss on the loan (write-down or specific reserve), with reclassification of the asset as “substandard,” or removal of the asset from the classified list, as in foreclosure or full loss.

June 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(In Thousands, Except Share Amounts)
Construction	$	-	$	95	$	167	$	262	$	5,168	$	5,430	$	-
1-4 family residential		252		1,267		2,562		4,081		109,813		113,894		-
Multi-family residential		-		-		340		340		15,521		15,861		-
Nonresidential		-		380		1,876		2,256		86,379		88,635		-
Land		9		-		2,477		2,486		17,640		20,126		-
Commercial		98		131		357		586		16,744		17,330		-
Consumer		16		287		4		307		3,942		4,249		-
	$	375	$	2,160	$	7,783	$	10,318	$	255,207	$	265,525	$	-

December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
	(In Thousands, Except Share Amounts)
Construction	$	-	$	-	$	165	$	165	$	6,810	$	6,975	$	-
1-4 family residential		132		839		2,304		3,275		114,341		117,616		-
Multi-family residential		-		-		910		910		14,087		14,997		-
Nonresidential		-		-		4,673		4,673		84,934		89,607		-
Land		-		372		1,749		2,121		18,895		21,016		-
Commercial		542		-		265		807		15,606		16,413		-
Consumer		37		-		315		352		4,181		4,533		-
	$	711	$	1,211	$	10,381	$	12,303	$	258,854	$	271,157	$	-

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Impaired loans without a specific allowance:
Construction	$	-	$	-	$	-
1-4 family residential		3,928		4,031		-
Multi-family residential		1,981		1,981		-
Nonresidential		4,544		5,953		-
Land		3,350		3,944		-
Commercial		363		392		-
Consumer		19		19		-
	$	14,185	$	16,320	$	-

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Impaired loans with a specific allowance:
Construction	$	168	$	168	$	14
1-4 family residential		2,195		2,269		378
Multi-family residential		340		340		30
Nonresidential		271		419		70
Land		3,513		3,513		592
Commercial		-		-		-
Consumer		-		-		-
	$	6,487	$	6,709	$	1,084

	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Total Impaired Loans:
Construction	$	168	$	168	$	14
1-4 family residential		6,123		6,300		378
Multi-family residential		2,321		2,321		30
Nonresidential		4,815		6,372		70
Land		6,863		7,457		592
Commercial		363		392		-
Consumer		19		19		-
	$	20,672	$	23,029	$	1,084

	For the six months ended				For the three months ended
	June 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	20	$	1	$	-	$	-
1-4 family residential		3,582		96		2,904		42
Multi-family residential		1,468		22		1,959		12
Nonresidential		4,413		70		3,907		37
Land		2,720		63		2,628		36
Commercial		385		8		359		3
Consumer		1		-		1		-
	$	12,589	$	260	$	11,758	$	130

	For the six months ended				For the three months ended
	June 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	167	$	-	$	166	$	-
1-4 family residential		2,086		18		2,072		13
Multi-family residential		338		-		336		-
Nonresidential		271		-		268		-
Land		3,492		22		3,456		10
Commercial		29		-		-		-
Consumer		-		-		-		-
	$	6,383	$	40	$	6,298	$	23

	For the six months ended				For the three months ended
	June 30, 2011
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Total impaired loans:
Construction	$	187	$	1	$	166	$	-
1-4 family residential		5,668		114		4,976		55
Multi-family residential		1,806		22		2,295		12
Nonresidential		4,684		70		4,175		37
Land		6,212		85		6,084		46
Commercial		414		8		359		3
Consumer		1		-		1		-
	$	18,972	$	300	$	18,056	$	153

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	113	$	113	$	-	$	260	$	9
1-4 family residential		5,834		6,011		-		2,602		67
Multi-family residential		334		334		-		875		16
Nonresidential		5,106		6,405		-		6,125		141
Land		2,856		3,366		-		1,609		51
Commercial		381		410		-		713		32
Consumer		-		-		-		-		-
	$	14,624	$	16,639	$	-	$	12,184	$	316

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	165	$	165	$	14		165	$	1
1-4 family residential		1,935		1,935		200		1,866		43
Multi-family residential		576		576		34		230		-
Nonresidential		1,387		1,387		351		792		-
Land		3,485		3,485		578		1,779		8
Commercial		520		520		37		520		34
Consumer		-		-		-		-		-
	$	8,068	$	8,068	$	1,214	$	5,352	$	86

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Total Impaired Loans:
Construction	$	278	$	278	$	14	$	425	$	10
1-4 family residential		7,769		7,946		200		4,468		110
Multi-family residential		910		910		34		1,105		16
Nonresidential		6,493		7,792		351		6,917		141
Land		6,341		6,851		578		3,388		59
Commercial		901		930		37		1,233		66
Consumer		-		-		-		-		-
	$	22,692	$	24,707	$	1,214	$	17,536	$	402