LOANS

12 Months Ended

Dec. 31, 2012

LOANS

LOANS

NOTE 3 - LOANS

The components of loans are as follows:

	At December 31,
	2012			2011
Real estate loans:
One-to-four family	$	112,350,393		$	115,540,320
Multi-family	42,203,212			39,481,726
Commercial	138,766,873			128,656,804
Construction and land	30,143,957			44,192,020
	323,464,435			327,870,870
Commercial business	71,251,082			48,676,963
Consumer:
Home equity	12,062,108			19,139,850
Automobile and other	1,462,909			1,414,711
	13,525,017			20,554,561
Total gross loans	408,240,534			397,102,394
Undisbursed portion of construction loans	(7,376,713		)	(1,725,311		)
Deferred loan origination costs (fees), net	(50,610		)	46,825
Allowance for loan losses	(5,944,585		)	(7,789,262		)
Loans, net	$	394,868,626		$	387,634,646

The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers, their immediate families and companies in which these individuals have a 10% or more beneficial ownership.  Changes in these loans for the years ended December 31, 2012 and 2011 are summarized as follows:

	Year Ended
	December 31,
	2012			2011
Balance, beginning of year	$	19,402,842		$	10,347,217
Additions	1,748,927			9,753,434
Repayments	(13,023,026		)	(695,809		)
Change in status of borrower	—			(2,000		)
Balance, end of year	$	8,128,743		$	19,402,842

The loan portfolio includes a concentration of loans in commercial real estate amounting to approximately $138,767,000 and $128,657,000 as of December 31, 2012 and 2011, respectively.  The loans are expected to be repaid from cash flows or from proceeds from the sale of selected assets of the borrowers.  The concentration of credit within commercial real estate is taken into consideration by management in determining the allowance for loan losses.  The Company’s opinion as to the ultimate collectibility of these loans is subject to estimates regarding future cash flows from operations and the value of the property, real and personal, pledged as collateral.  These estimates are affected by changing economic conditions and the economic prospects of borrowers.

On occasion, the Company originates loans secured by single-family dwellings with loan to value ratios exceeding 90%.  The Company does not consider the level of such loans to be a significant concentration of credit as of December 31, 2012 or 2011.

The recorded investment in loans does not include accrued interest and loan origination fees due to immateriality.  The recorded investment in construction and land includes undisbursed commitments of $7,376,713 and $1,725,311 at December 31, 2012 and 2011, respectively.

The following tables present our past-due loans, segregated by class, as of December 31:

December 31, 2012

	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total		Accruing Loans 90 or More Days Past Due
Real estate loans:
One-to-four family	$	318,052	$	577,608	$	1,811,054	$	2,706,714	$	109,643,679	$	112,350,393	$	182,770
Multi-family	—		—		—		—		42,203,212		42,203,212		—
Commercial	638,330		—		535,402		1,173,732		137,593,141		138,766,873		—
Construction and land	—		—		375,418		375,418		29,768,539		30,143,957		—
	956,382		577,608		2,721,874		4,255,864		319,208,571		323,464,435		182,770
Commercial business	217,800		—		286,692		504,492		70,746,590		71,251,082		26,234
Consumer:
Home equity	48,383		34,980		49,090		132,453		11,929,655		12,062,108		—
Automobile and other	—		4,244		5,492		9,736		1,453,173		1,462,909		—
	48,383		39,224		54,582		142,189		13,382,828		13,525,017		—
Total	$	1,222,565	$	616,832	$	3,063,148	$	4,902,545	$	403,337,989	$	408,240,534	$	209,004

December 31, 2011

	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total		Accruing Loans 90 or More Days Past Due
Real estate loans:
One-to-four family	$	679,214	$	49,977	$	946,915	$	1,676,106	$	113,864,214	$	115,540,320	$	404,984
Multi-family	—		—		235,837		235,837		39,245,889		39,481,726		—
Commercial	—		1,745,863		762,168		2,508,031		126,148,773		128,656,804		—
Construction and land	155,125		229,500		7,130,658		7,515,283		36,676,737		44,192,020		—
	834,339		2,025,340		9,075,578		11,935,257		315,935,613		327,870,870		404,984
Commercial business	202,874		126,674		193,697		523,245		48,153,718		48,676,963		—
Consumer:
Home equity	109,795		123,527		141,777		375,099		18,764,751		19,139,850		—
Automobile and other	—		—		—		—		1,414,711		1,414,711		—
	109,795		123,527		141,777		375,099		20,179,462		20,554,561		—
Total	$	1,147,008	$	2,275,541	$	9,411,052	$	12,833,601	$	384,268,793	$	397,102,394	$	404,984

All loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, there is reasonable probability of loss of principal or collection of additional interest is deemed insufficient to warrant further accrual.  Generally, we place all loans 90 days or more past due on non-accrual status.  However, exceptions may occur when a loan is in process of renewal, but it has not yet been completed.  In addition, we may place any loan on non-accrual status if any part of it is classified as loss or if any part has been charged-off.  When a loan is placed on non-accrual status, total interest accrued and unpaid to date is reversed Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectability of the loan.

Year-end non-accrual loans, segregated by class, are as follows:

	At December 31,
	2012		2011
Real estate loans:
One-to-four family	$	2,087,073	$	1,203,351
Multi-family	3,005,771		1,119,696
Commercial	3,466,342		762,168
Construction and land	2,456,419		7,690,156
	11,015,605		10,775,371
Commercial business	260,458		249,695
Consumer:
Home equity	185,531		141,777
Automobile and other	9,735		—
	195,266		141,777
Total non-accrual loans	$	11,471,329	$	11,166,843

The following tables present the activity in the allowance for loan losses for the years ended December 31, 2012 and 2011.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Year ended December 31, 2012

	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
Real estate loans:
One-to-four family	$	777,470	$	(263,026	)	$	1,565	$	331,276		$	847,285
Multi-family	779,680		—			34,312		144,311			958,303
Commercial	1,157,114		(576,046		)	235,354		451,659			1,268,081
Construction and land	3,934,573		(2,123,047		)	21,541		(420,065		)	1,413,002
	6,648,837		(2,962,119		)	292,772		507,181			4,486,671
Commercial business	969,669		(649,749		)	18,225		957,969			1,296,114
Consumer
Home equity	133,234		(92,056		)	—		110,447			151,625
Automobile and other	37,522		(2,297		)	547		(25,597		)	10,175
	170,756		(94,353		)	547		84,850			161,800
Total	$	7,789,262	$	(3,706,221	)	$	311,544	$	1,550,000		$	5,944,585

Year ended December 31, 2011

	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
Real estate loans:
One-to-four family	$	1,161,865	$	(421,102	)	$	37,211	(504		)	$	777,470
Multi-family	299,964		(227,662		)	—		707,378			779,680
Commercial	1,043,023		(378,921		)	7,740		485,272			1,157,114
Construction and land	2,151,810		(1,753,982		)	71,474		3,465,271			3,934,573
	4,656,662		(2,781,667		)	116,425		4,657,417			6,648,837
Commercial business	868,572		(482,744		)	22,294		561,547			969,669
Consumer
Home equity	193,756		(105,441		)	—		44,919			133,234
Automobile and other	9,405		—			—		28,117			37,522
	203,161		(105,441		)	—		73,036			170,756
Total	$	5,728,395	$	(3,369,852	)	$	138,719	$	5,292,000		$	7,789,262

The following tables separate the allocation of the allowance for loan losses and the loan balances between loans evaluated both individually and collectively as of December 31, 2012, and 2011:

December 31, 2012

	Period-end allowance allocated to loans:						Loans evaluated for impairment:
	Individually evaluated for impairment		Collectively evaluated for impairment		Ending Balance		Individually		Collectively		Ending Balance
Real estate loans:
One-to-four family	$	210,336	$	636,949	$	847,285	$	2,060,316	$	110,290,077	$	112,350,393
Multi-family	533,850		424,453		958,303		3,005,771		39,197,441		42,203,212
Commercial	34,812		1,233,269		1,268,081		3,237,893		135,528,980		138,766,873
Construction and land	—		1,413,002		1,413,002		2,456,419		27,687,538		30,143,957
	778,998		3,707,673		4,486,671		10,760,399		312,704,036		323,464,435
Commercial business	22,713		1,273,401		1,296,114		260,458		70,990,624		71,251,082
Consumer:
Home equity	28,117		123,508		151,625		185,531		11,876,577		12,062,108
Automobile and other	2,572		7,603		10,175		9,735		1,453,174		1,462,909
	30,689		131,111		161,800		195,266		13,329,751		13,525,017
Total	$	832,400	$	5,112,185	$	5,944,585	$	11,216,123	$	397,024,411	$	408,240,534

December 31, 2011

	Period-end allowance allocated to loans:						Loans evaluated for impairment:
	Individually evaluated for impairment		Collectively evaluated for impairment		Ending Balance		Individually		Collectively		Ending Balance
Real estate loans:
One-to-four family	$	383,825	$	393,645	$	777,470	$	2,531,092	$	113,009,228	$	115,540,320
Multi-family	356,260		423,420		779,680		3,640,570		35,841,156		39,481,726
Commercial	98,754		1,058,360		1,157,114		3,357,048		125,299,756		128,656,804
Construction and land	2,080,706		1,853,867		3,934,573		7,845,281		36,346,739		44,192,020
	2,919,545		3,729,292		6,648,837		17,373,991		310,496,879		327,870,870
Commercial business	161,786		807,883		969,669		1,563,746		47,113,217		48,676,963
Consumer:
Home equity	13,814		119,420		133,234		651,248		18,488,602		19,139,850
Automobile and other	—		37,522		37,522		—		1,414,711		1,414,711
	13,814		156,942		170,756		651,248		19,903,313		20,554,561
Total	$	3,095,145	$	4,694,117	$	7,789,262	$	19,588,985	$	377,513,409	$	397,102,394

Credit Quality Indicators:  As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt and comply with various terms of their loan agreements.  The Company considers current financial information, historical payment experience, credit documentation, public information and current economic trends.  Generally, all sizeable credits receive a financial review no less than annually to monitor and adjust, if necessary, the credit’s risk profile.  Credits classified as watch generally receive a review more frequently than annually.  The risk category of homogeneous loans such as consumer loans and smaller balance loans is evaluated when the loan becomes delinquent.  For special mention, substandard, and doubtful credit classifications, the frequency of review is increased to no less than quarterly in order to determine potential impact on credit loss estimates.

The Company categorizes loans into the following risk categories based on relevant information about the ability of borrowers to service their debt:

Pass - A pass asset is well protected by the current worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.  Pass assets also include certain assets considered watch, which are still protected by the worth and paying capacity of the borrower but deserve closer attention and a higher level of credit monitoring.

Special Mention - A special mention asset has potential weaknesses that deserve management’s close attention.  The asset may also be subject to a weak or speculative market or to economic conditions, which may, in the future adversely affect the obligor.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.  Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

Substandard - A substandard asset is an asset with a well-defined weakness that jeopardizes repayment, in whole or in part, of the debt.  These credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged.   These assets are characterized by the distinct possibility that the institution will sustain some loss of principal and/or interest if the deficiencies are not corrected.  It is not necessary for a loan to have an identifiable loss potential in order to receive this rating.

Doubtful - An asset that has all the weaknesses inherent in the substandard classification, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.  The possibility of loss is extremely likely, but it is not identified at this point due to pending factors.

Loss - An asset, or portion thereof, classified as loss is considered uncollectible and of such little value that its continuance on the Company’s books as an asset is not warranted.   This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur.  As such, it is not practical or desirable to defer the write-off.  Therefore, there is no balance to report at December 31, 2012 or 2011.

The following tables present our credit quality indicators, segregated by class, as of December 31, 2012, and 2011:

December 31, 2012

	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	108,197,672	$	1,882,095	$	1,763,954	$	506,672	$	112,350,393
Multi-family	36,428,424		2,769,017		3,005,771		—		42,203,212
Commercial	121,242,335		11,221,414		6,303,124		—		138,766,873
Construction and land	26,808,635		120,699		2,839,205		375,418		30,143,957
	292,677,066		15,993,225		13,912,054		882,090		323,464,435
Commercial business	70,155,966		834,657		257,897		2,562		71,251,082
Consumer:
Home equity	11,840,875		35,703		185,530		—		12,062,108
Automobile and other	1,453,175		—		4,243		5,491		1,462,909
	13,294,050		35,703		189,773		5,491		13,525,017
Total	$	376,127,082	$	16,863,585	$	14,359,724	$	890,143	$	408,240,534

December 31, 2011

	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	111,752,817	$	1,245,332	$	2,126,651	$	415,520	$	115,540,320
Multi-family	35,841,156		—		3,640,570		—		39,481,726
Commercial	117,634,711		3,856,453		7,061,405		104,235		128,656,804
Construction and land	25,903,980		950,000		17,338,040		—		44,192,020
	291,132,664		6,051,785		30,166,666		519,755		327,870,870
Commercial business	44,805,581		474,961		3,396,421		—		48,676,963
Consumer:
Home equity	17,980,458		471,386		688,006		—		19,139,850
Automobile and other	1,411,319		—		3,392		—		1,414,711
	19,391,777		471,386		691,398		—		20,554,561
Total	$	355,330,022	$	6,998,132	$	34,254,485	$	519,755	$	397,102,394

The following tables provide details of impaired loans, segregated by class, as of and for periods indicated.  The unpaid contractual balance represents the recorded balance prior to any partial charge-offs.  The recorded investment represents customer balances net of any partial charge-offs recognized on the loans.

	As of December 31, 2012						As of December 31, 2011
	Unpaid Contractual Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Contractual Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Real estate loans:
One-to-four family	$	494,195	$	494,195	$	—	$	799,309	$	799,309	$	—
Multi-family	367,883		215,963		—		387,757		235,837		—
Commercial	3,015,172		2,702,491		—		1,954,587		1,954,587		—
Construction and land	4,480,653		2,456,419		—		2,227,340		1,976,340		—
	8,357,903		5,869,068		—		5,368,993		4,966,073		—
Commercial business	2,562		2,562		—		270,304		270,304		—
Consumer:
Home equity	157,413		157,413		—		637,433		637,434		—
Subtotal	$	8,517,878	$	6,029,043	$	—	$	6,276,730	$	5,873,811	$	—
With an allowance recorded:
Real estate loans:
One-to-four family	$	1,566,121	$	1,566,121	$	210,336	$	1,731,783	$	1,731,783	$	383,825
Multi-family	2,789,808		2,789,808		533,849		3,404,733		3,404,733		356,260
Commercial	535,402		535,402		34,812		1,402,461		1,402,461		98,754
Construction and land	—		—		—		6,799,046		5,868,941		2,080,706
	4,891,331		4,891,331		778,997		13,338,023		12,407,918		2,919,545
Commercial business	257,896		257,896		22,713		1,293,442		1,293,442		161,786
Consumer:
Home equity	28,118		28,118		28,118		13,814		13,814		13,814
Automobile and other	9,735		9,735		2,572		—		—		—
	37,853		37,853		30,690		13,814		13,814		13,814
Subtotal	5,187,080		5,187,080		832,400		14,645,279		13,715,174		3,095,145
Total	$	13,704,958	$	11,216,123	$	832,400	$	20,922,009	$	19,588,985	$	3,095,145

	For the year ended December 31, 2012						For the year ended December 31, 2011
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Real estate loans:
One-to-four family	$	825,566	$	8,634	$	—	$	1,556,530	$	33,329	$	5,193
Multi-family	180,524		—		—		2,190,031		88,194		3,995
Commercial	2,045,209		—		—		3,226,800		179,230		2,012
Construction and land	2,171,336		10,322		—		3,837,418		3,876		—
	5,222,635		18,956		—		10,810,779		304,629		11,200
Commercial business	142,047		925		—		460,871		13,465		—
Consumer:
Home equity	241,267		—		—		583,781		21,051		—
Automobile and other	688		—		—		—		—		—
	241,955		—		—		583,781		21,051		—
Subtotal	$	5,606,637	$	19,881	$	—	$	11,855,431	$	339,145	$	11,200
With an allowance recorded:
Real estate loans:
One-to-four family	$	986,926	$	604	$	—	$	1,114,300	$	3,144	$	—
Multi-family	3,201,616		27,971		—		1,790,613		19,853		—
Commercial	1,404,895		8,000		—		619,241		38,585		4,827
Construction and land	2,345,953		3,746		—		3,003,567		—		—
	7,939,390		40,321		—		6,527,721		61,582		4,827
Commercial business	593,375		1,132		—		642,990		24,732		—
Consumer:
Home equity	57,724		—		—		23,851		—		—
Automobile and other	3,032		—		—		2,368		—		—
	60,756		—		—		26,219		—		—
Subtotal	8,593,521		41,453		—		7,196,930		86,314		4,827
Total	$	14,200,158	$	61,334	$	—	$	19,052,361	$	425,459	$	16,027

Troubled Debt Restructurings:

The Company has allocated $584,810 of specific reserves on $8,934,496 of loans to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2012.  The Company had $1,275,718 of allocations of specific reserves on $9,349,510 of loans to customers whose loan terms were modified in troubled debt restructurings as of December 31, 2011.  The Company has no commitments to lend additional amounts as of December 31, 2012 and 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

During the years ending December 31, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; payment and maturity changes not available in the market; forbearance agreements; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 6 months to one year.

The following tables present loans, by class, modified as troubled debt restructurings that occurred during the years ended December 31, 2012 and 2011:

Year ended December 31, 2012

	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans:
One-to-four family	4	$	447,799	$	444,508
Multi-family	1	449,055		215,963
Commercial	3	2,978,384		2,702,490
Construction and land	2	1,609,566		1,094,688
Total	10	$	5,484,804	$	4,457,649

The troubled debt restructurings described above resulted in a net decrease in the allowance for loan losses of $26,610 and charge offs of $312,682 during the year ended December 31, 2012.

Year ended December 31, 2011

	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans:
One-to-four family	2	$	1,025,174	$	1,025,174
Multi-family	2	5,894,771		5,894,771
Commercial	1	657,933		657,933
Construction and land	2	3,413,137		2,232,002
	7	10,991,015		9,809,880
Commercial Business	1	55,998		55,998
Consumer:
Home equity	2	338,737		338,737
Total	10	$	11,385,750	$	10,204,615

The troubled debt restructurings described above resulted in a net increase in the allowance for loan losses of $1,275,718 and charge offs of $1,181,135 during the year ended December 31, 2011.

The following table presents the troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2012.  There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2011.

Year ended December 31, 2012

	Number of Contracts	Recorded Investment (as of period end)
Real estate loans:
One-to-four family	1	$	303,503
Total	1	$	303,503

The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $14,407 but resulted in no charge offs during the year ending December 31, 2012.

A loan is considered to be in payment default once it is 60 days contractually past due under the modified terms.