Loans Receivable

6 Months Ended

Jun. 30, 2011

Note D Loans Receivable

The components of loans receivable at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011			December 31, 2010
	(In thousands)
Residential mortgages	$	87,825		$	90,033
Home equity loans		42,868			42,122
Consumer loans		34,994			35,879
Commercial real estate		80,890			77,851
Commercial loans		37,387			40,965
		283,964			286,850
Allowance for loan losses		(3,070	)		(4,276	)
Net loans	$	280,894		$	282,574

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 a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance required by using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocation of 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. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as 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.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if repayment is expected solely from collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of the lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: commercial mortgages, commercial loans, consumer loans, home equity loans and residential real estate loans.

Loans secured by commercial real estate and multi-family residential properties generally are larger than one-to-four family

residential loans and involve a greater degree of risk. Commercial and multi-family residential mortgage loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on the results of operations and management of the properties or underlying businesses, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of commercial real estate loans makes them more difficult for management to monitor and evaluate.

Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based, with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because equipment and other business assets may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

Consumer loans generally have shorter terms and higher interest rates than one-to-four family mortgage loans. In addition, consumer loans expand the products and services we offer to better meet the financial services needs of our customers. Consumer loans generally involve greater credit risk than residential mortgage loans because of the difference in the underlying collateral. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage to, loss of, or depreciation in the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections depend on the borrower’s personal financial stability. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Home equity loans are secured by a borrower’s primary residence. Home equity loans are underwritten under the same criteria that we use to underwrite one-to-four family fixed-rate loans. Home equity loans may be underwritten with a loan to value ratio of 90% when combined with the principal balance of an existing mortgage loan. Home equity loans generally involve greater credit risk than the primary residential mortgage loans due to the potential of declines in collateral values, collectability as a result of foreclosure processes if the Bank is considered to be in a secondary position as well as the amount of expenses incurred during the process.

Residential real estate loans have as collateral a borrower’s primary residence. The risk of loss on these loans would be due to collateral deficiencies due to market deterioration or location and condition of the property. The foreclosure process of a primary residence is usually the final course of action on these types of loans. Given our underwriting criteria and the volume and balance of the loans as compared to collateral, the risk in this portfolio segment is less than that of the other segments.

The following table sets forth the activity in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

For the Three Months Ended	Commercial			Commercial			Consumer			Home			Residential
June 30, 2011	Loans			Real Estate			Loans			Equity			Mortgages			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	2,649 $			930		$	330		$	259		$	473		$	4,641
Charge-offs		(2,019	)		(80	)		(48	)		(4	)		-			(2,151	)
Recoveries		3			-			26			1			-			30
Provision for loan losses		25			477			48			9			(9	)		550
Ending balance	$	658		$	1,327		$	356		$	265		$	464		$	3,070

For the Six Months Ended	Commercial			Commercial			Consumer			Home			Residential
June 30, 2011	Loans			Real Estate			Loans			Equity			Mortgages			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	2,668 $			576		$	337		$	264		$	431		$	4,276
Charge-offs		(2,038	)		(80	)		(88	)		(4	)		-			(2,210	)
Recoveries		5			2			45			2			-			54
Provision for loan losses		23			829			62			3			33			950
Ending balance	$	658		$	1,327		$	356		$	265		$	464		$	3,070

Ending balance attributable to loans:
Individually evaluated
for impairment	$	109		$	773		$	-		$	-		$	-		$	882
Collectively evaluated
for impairment		549			554			356			265			464			2,188
Total	$	658		$	1,327		$	356		$	265		$	464		$	3,070
Loans:
Individually evaluated
for impairment	$	212		$	1,383		$	-		$	-		$	-		$	1,595
Collectively evaluated
for impairment		37,175			79,507			34,994			42,868			87,825			282,369
Total	$	37,387		$	80,890		$	34,994		$	42,868		$	87,825		$	283,964

For the Three Months Ended	Commercial			Commercial			Consumer			Home			Residential
June 30, 2010	Loans			Real Estate			Loans			Equity			Mortgages			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	1,770		$	573		$	402		$	191		$	364		$	3,300
Charge-offs		(57	)		-			(66	)		(88	)		(4	)		(215	)
Recoveries		52			1			14			-			-			67
Provision for loan losses		206			(46	)		22			62			56			300
Ending balance	$	1,971		$	528		$	372		$	165		$	416		$	3,452

For the Six Months Ended
June 30, 2010

Beginning balance	$	1,259		$	635		$	431		$	191		$	385		$	2,901
Charge-offs		(57	)		-			(101	)		(134	)		(4	)		(296	)
Recoveries		68			2			77			-			-			147
Provision for loan losses		701			(109	)		(35	)		108			35			700
Ending balance	$	1,971		$	528		$	372		$	165		$	416		$	3,452

Ending balance attributable to loans:
Individually evaluated
for impairment	$	1,323		$	-		$	-		$	-		$	-		$	1,323
Collectively evaluated
for impairment		648			528			372			165			416			2,129
Total	$	1,971		$	528		$	372		$	165		$	416		$	3,452

Note D Loans Receivable (Continued)

December 31, 2010
Ending balance attributable to loans:
Individually evaluated
for impairment	$	2,043		$	98		$	-		$	-		$	-		$	2,141
Collectively evaluated
for impairment		625			478			337			264			431			2,135
Total	$	2,668		$	576		$	337		$	264		$	431		$	4,276
Loans:
Individually evaluated
for impairment	$	2,043		$	1,383		$	-		$	-		$	-		$	3,426
Collectively evaluated
for impairment		38,922			76,468			35,879			42,122			90,033			283,424
Total	$	40,965		$	77,851		$	35,879		$	42,122		$	90,033		$	286,850

The following table presents loans individually evaluated for impairment by segment of loans as of June 30, 2011 and December 31, 2010:

	June 30, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related	(In thousands)
allowance recorded:
Commercial real estate	$	-	$	-	$	-
Commercial loans				-		-
Consumer loans		-		-		-
Home equity		-		-		-
Residential mortgages		-		-		-
With an allowance
recorded:
Commercial real estate		1,383		1,383		773
Commercial loans		212		212		109
Consumer loans		-		-		-
Home equity		-		-		-
Residential mortgages		-		-		-
Total	$	1,595	$	1,595	$	882

	December 31, 2010
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related	(In thousands)
allowance recorded:
Commercial real estate	$	-	$	-	$	-
Commercial loans		-		-		-
Consumer loans		-		-		-
Home equity		-		-		-
Residential mortgages		-		-		-
With an allowance
recorded:
Commercial real estate		1,383		1,383		98
Commercial loans		2,043		2,043		2,043
Consumer loans		-		-		-
Home equity		-		-		-
Residential mortgages		-		-		-
Total	$	3,426	$	3,426	$	2,141

The following table presents the average recorded investment and cash basis interest income recognized by segment of loans for loans individually evaluated for impairment for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended
	June 30, 2011				June 30, 2010
	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized
With no related	(In thousands)
allowance recorded:
Commercial real estate	$	-	$	-	$	-	$	-
Commercial loans		-		-		-		-
Consumer loans		-		-		-		-
Home equity		-		-		-		-
Residential mortgages		-		-		-		-
With an allowance
recorded:
Commercial real estate		1,383		-		-		-
Commercial loans		1,446		-		2,171		-
Consumer loans		-		-		-		-
Home equity		-		-		-		-
Residential mortgages		-		-		-		-
Total	$	2,829	$	-	$	2,171		-

	Six Months Ended
	June 30, 2011				June 30, 2010
	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized
With no related	(In thousands)
allowance recorded:
Commercial real estate	$	-	$	-	$	-	$	-
Commercial loans		-		-		-		-
Consumer loans		-		-		-		-
Home equity		-		-		-		-
Residential mortgages		-		-		-		-
With an allowance
recorded:
Commercial real estate		1,383		-		-		-
Commercial loans		1,964		9		2,164		35
Consumer loans		-		-		-		-
Home equity		-		-		-		-
Residential mortgages		-		-		-		-
Total	$	3,347	$	9	$	2,164		35

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified as impaired loans.

The following table presents the recorded investment in nonaccrual and past due loans over 90 days still on accrual by class as of June 30, 2011 and December 31, 2010:

	June 30, 2011
	Nonaccrual		Loans Past Due Over 90 days still Accruing
	(In thousands)
Commercial real estate	$	1,383	$	-
Commercial loans		286		-
Consumer loans		16		-
Home equity		13		-
Residential mortgages		61		-
Total	$	1,759	$	-

	December 31, 2010
	Nonaccrual		Loans Past Due Over 90 days still Accruing
	(In thousands)
Commercial real estate	$	1,555	$	-
Commercial loans		2,175		-
Consumer loans		-		-
Home equity		-		-
Residential mortgages		247		-
Total	$	3,977	$	-

The following represents the aging of the recorded investment in past due loans as of June 30, 2011 and December 31, 2010 by class of loans.

	June 30, 2011
	Total		30-59Days Past Due		60-89Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
	(In thousands)
Commercial real estate	$	80,890	$	-	$	-	$	1,383	$	1,383	$	79,507
Commercial loans		37,387		-		244		212		456		36,931
Consumer loans		34,994		125		-		16		141		34,853
Home equity		42,868		12		5		13		30		42,838
Residential mortgages		87,825		-		86		61		147		87,678
Total	$	283,964	$	137	$	335	$	1,685	$	2,157	$	281,807

	June 30, 2011
	Total		30-59Days Past Due		60-89Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
	(In thousands)
Commercial real estate	$	77,851	$	99	$	1,522	$	90	$	1,711	$	76,140
Commercial loans		40,965		11		275		53		339		40,626
Consumer loans		35,879		90		-		-		90		35,789
Home equity		42,122		5		-		-		5		42,117
Residential mortgages		90,033		-		95		247		342		89,691
Total	$	286,850	$	205	$	1,892	$	390	$	2,487	$	284,363

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of 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 by classifying the loans as to credit risk. This analysis includes non-homogenous loans, such as commercial and commercial real estate with an outstanding relationship greater than $250,000. Homogenous loans are reviewed when appropriate given foreclosures, bankruptcies or relationships that include non-homogenous loans. This analysis is performed on at least an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncovered, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debts. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $250,000 or are included in groups of homogenous loans. As of June 30, 2011 and December 31, 2010, and based on the most recent analysis performed (all loans graded within past 12 months), the risk category:

	June 30, 2011
	Not Rated		Pass		Special Mention		Substandard		Doubtful
	(In thousands)
Commercial real estate	$	16,991	$	62,484	$	-	$	610	$	805
Commercial loans		17,934		18,817		246		72		318
Total	$	34,925	$	81,301	$	246	$	682	$	1,123

	December 31, 2010
	Not Rated		Pass		Special Mention		Substandard		Doubtful
	(In thousands)
Commercial real estate	$	17,051	$	59,250	$	-	$	1,550	$	-
Commercial loans		13,097		24,858		436		340		2,234
Total	$	30,148	$	84,108	$	436	$	1,890	$	2,234