NOTE 4 – LOANS RECEIVABLE

A summary of loans receivable at September 30, 2013 and December 31, 2012 is as follows:

	September 30,		December 31,
(Dollars in thousands)	2013		2012
Real estate loans:
One-to-four family	$	201,752	$	209,004
Multi-family and commercial real estate		125,746		133,549
Construction and land development		9,529		26,633
Total real estate loans		337,027		369,186
Commercial business loans		26,602		32,970
Consumer loans:
Home equity		27,557		28,829
Other consumer		706		1,297
Total consumer loans		28,263		30,126
Total loans		391,892		432,282
Less:
Allowance for loan losses		10,848		14,500
Deferred loan origination fees, net		70		169
Loans receivable, net	$	380,974	$	417,613

In June 2013, in connection with the Company’s plan to reduce the level of impaired loans, the Company sold $20.8 million in credit impaired loans in three separate transactions of a similar nature in which the financial assets transferred satisfy all of the criteria to be accounted for as sales of financial assets. In these transactions, the Company sold approximately $14.1 million in loans secured by commercial real estate properties, $6.0 million in construction and land development loans and $0.7 million in loans secured by owner occupied one-to-four family properties. Because of the credit impaired quality of these assets transferred, the impact of these sales resulted in $5.1 million in net charge-offs against the Company’s allowance for loan losses.

Credit quality of financing receivables

Management segregates the loan portfolio into portfolio segments which are defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.

During the second quarter of 2013, management analyzed the risk concentration within the loan portfolio. As a result of this analysis, the loan portfolio was further disaggregated by expanding the number of loan segments from six segments to ten segments as of June 30, 2013. The commercial real estate loan segment, the second largest grouping of loans after one-to-four family owner occupied loans, was expanded into five segments to increase the granularity of analysis of the risks inherent in the loans in these segments. The expanded commercial loan segments are: investor owned one-to-four family and multi-family properties, industrial and warehouse properties, office buildings, retail properties and special use properties.

The Company’s loan portfolio is segregated as follows:

One-to-four Family Owner Occupied Loans. This portfolio segment consists of the origination of first mortgage loans secured by one-to-four family owner occupied residential properties and residential construction loans to individuals to finance the construction of residential dwellings for personal use located in our market area. Although the Company has experienced an increase in foreclosures on its owner occupied loan portfolio over the past year, foreclosures are still at relatively low levels. Management believes this is due mainly to its conservative underwriting and lending strategies which do not allow for high risk loans such as “Option ARM,” “sub-prime” or “Alt-A” loans.

Multi-family and Commercial Real Estate Loans. As described above, this portfolio grouping has been further disaggregated into loans secured by:

⋅ Investor owned one-to-four family and multi-family properties;

⋅ Industrial and warehouse properties;

⋅ Office buildings;

⋅ Retail properties; and

⋅ Special use properties.

Loans secured by these types of commercial real estate collateral generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

Construction and Land Development Loans. This portfolio segment includes commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue with debt service which exposes the Company to greater risk of non-payment and loss. Additionally, economic factors such as the decline of property values may have an adverse affect on the ability of the borrower to sell the property.

Commercial Business Loans. This portfolio segment includes commercial business loans secured by real estate, assignments of corporate assets, and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

Real Estate Secured Consumer Loans. This portfolio segment includes home equity loans and home equity lines of credit secured by owner occupied one-to four-family residential properties. Loans of this type are written at a maximum of 75% of the appraised value of the property and we require that we have no lower than a second lien position on the property. These loans are written at a higher interest rate and a shorter term than mortgage loans.

The Company has experienced a low level of foreclosure in this type of loan during recent periods. These loans can be affected by economic conditions and the values of the underlying properties.

Other Consumer Loans. This portfolio segment includes loans secured by passbook or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan may entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.

Credit Quality Indicators

The Company’s policies provide for the classification of loans into the following categories: pass (1 - 5), special mention (6), substandard-accruing (7), substandard-nonaccruing (8), doubtful (9), and loss (10). In June 2013, the Company added substandard-accruing as an additional risk grade to further delineate the Bank’s risk profile in the previous substandard category. Consistent with regulatory guidelines, loans that are considered to be of lesser quality are considered adversely classified as substandard, doubtful or loss. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans (or portions of loans) classified as loss are those considered uncollectible. The Company generally charges off loans or portions of loans as soon as they are considered to be uncollectible and of little value. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention. When loans are classified as special mention, substandard or doubtful, management focuses increased monitoring and attention on these loans in assessing the credit risk and specific allowance requirements for these loans.

The following tables are a summary of the loan portfolio credit quality indicators, by loan class, as of September 30, 2013 and December 31, 2012:

	Credit Risk Profile by Internally Assigned Grade:
	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
September 30, 2013
Risk Rating:
Pass	$	190,233	$	95,021	$	1,636	$	18,591	$	27,242	$	332,723
Special Mention		4,614		24,348		1,107		4,423		290		34,782
Substandard:
- Accruing		1,540		3,147		2,862		1,011		214		8,774
- Nonaccruing (1)		5,365		3,230		3,924		2,480		517		15,516
Subtotal - substandard		6,905		6,377		6,786		3,491		731		24,290
Doubtful		-		-		-		97		-		97
Total	$	201,752	$	125,746	$	9,529	$	26,602	$	28,263	$	391,892

		Multi-Family and Commercial Real Estate
	Credit Risk Profile by Internally Assigned Grade:
September 30, 2013	Investor Owned One-to-Four family and multi- family		Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties		Total Multi-Family and Commercial Real Estate
Risk Rating:
Pass	$	11,732	$	23,083	$	18,627	$	15,656	$	25,923	$	95,021
Special Mention		3,500		7,391		2,797		5,206		5,454		24,348
Substandard:
- Accruing		-		1,815		375		462		495		3,147
- Nonaccruing (1)		1,182		154		350		400		1,144		3,230
Subtotal - substandard		1,182		1,969		725		862		1,639		6,377
Doubtful		-		-		-				-		-
Total	$	16,414	$	32,443	$	22,149	$	21,724	$	33,016	$	125,746

(1)	Non-accrual loans included substandard nonaccruing loans and non-performing consumer loans.

	Credit Risk Profile by Internally Assigned Grade:
December 31, 2012	One-to-Four Family		Multi-Family and Commercial Real		Construction and Land		Commercial Business Loans		Total
Risk Rating:
Pass	$	198,800	$	90,544	$	12,817	$	24,271	$	326,432
Special Mention		4,807		26,198		2,159		3,255		36,419
Substandard:
- Accruing		1,709		7,776		2,402		2,043		13,930
- Nonaccruing (1)		3,688		9,031		9,255		3,401		25,375
Subtotal - substandard		5,397		16,807		11,657		5,444		39,305
Doubtful		-		-		-		-		-
Total	$	209,004	$	133,549	$	26,633	$	32,970	$	402,156

Consumer loans were not risk rated at December 31, 2012 and the credit risk profile was based on payment performance. The following table represents the credit risk profile on consumer loans as of December 31, 2012.

Consumer Loans - Credit Risk Profile Based on Payment Activity:
(In thousands)	At December 31, 2012
Grade:
Performing	$	29,853
Nonperforming (1)		273
Total	$	30,126

(1) Non-accrual loans included substandard nonaccruing loans and non-performing consumer loans.

(a) Delinquencies

When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contacts the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency and attempts to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, the Company will send the borrower a final demand for payment and may recommend foreclosure. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company each month.

Loans, including TDRs, are automatically placed on nonaccrual status when payment of principal or interest is more than 90 days delinquent. Loans may also be placed on nonaccrual status if collection of principal or interest in full, or in part, is in doubt or if the loan has been restructured. When loans are placed on nonaccrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent for a reasonable period of time (usually six consecutive months) to establish a reliable assessment of collectability.

The following tables set forth certain information with respect to our loan portfolio delinquencies, by loan class, as of September 30, 2013 and December 31, 2012:

	Delinquencies
					Greater									Carrying Amount > 90
		31-60 Days Past		61-90 Days	Than		Total Past							Days and
	Due		Past Due		90 Days		Due		Current		Total Loans		Accruing
As of September 30, 2013
(In thousands)
Real estate loans
One-to-four family	$	2,059	$	327	$	2,384	$	4,770	$	196,982	$	201,752	$	-
Construction and land development		485		-		3,865		4,350		5,179		9,529		-
Multi-family and commercial real estate:														-
Investor owned one-to-four family and multi-family		1,041		-		623		1,664		14,750		16,414		-
Industrial and Warehouse		229		652		154		1,035		31,408		32,443		-
Office buildings		109		-		350		459		21,690		22,149
Retail properties		-		-		-		-		21,724		21,724		-
Special use properties		740		-		-		740		32,276		33,016		-
Subtotal Multi-family and commercial real estate		2,119		652		1,127		3,898		121,848		125,746		-
Commercial business loans		1,061		52		2,429		3,542		23,060		26,602
Consumer loans:
Home equity loans		70		33		321		424		27,133		27,557		-
Other consumer loans		1		-		-		1		705		706
Subtotal Consumer		71		33		321		425		27,838		28,263		-
Total	$	5,795	$	1,064	$	10,126	$	16,985	$	374,907	$	391,892	$	-

As of December 31, 2012
(In thousands)
Real estate loans
One-to-four family	$	1,820	$	735	$	1,329	$	3,884	$	205,120	$	209,004	$	-
Construction		489		136		8,654		9,279		17,354		26,633		-
Multi-family and commercial real estate		1,688		174		6,225		8,087		125,462		133,549		-
Commercial business loans		642		1,169		1,917		3,728		29,242		32,970		-
Consumer and other		1,353		184		100		1,637		28,489		30,126		-
Total	$	5,992	$	2,398	$	18,225	$	26,615	$	405,667	$	432,282	$	-

(b) Impaired loans and nonperforming assets

The following tables set forth certain information with respect to our nonperforming assets as of September 30, 2013 and December 31, 2012:

		September 30,			December 31,
	2013			2012
Nonperforming Assets		(Dollars in thousands)
Nonaccrual loans	$	10,053		$	22,306
TDRs nonaccruing		7,013			8,277
Subtotal nonperforming loans		17,066			30,583
Foreclosed real estate		887			735
Total nonperforming assets	$	17,953		$	31,318
Total nonperforming loans to total loans		4.35	%		7.07	%
Total nonperforming assets to total assets		3.68	%		5.95	%

Nonperforming loans (defined as nonaccrual loans and nonperforming troubled debt restructured loans (“TDRs”)) totaled $17.1 million at September 30, 2013 compared to $30.6 million at December 31, 2012. The amount of income that was contractually due but not recognized on nonperforming loans totaled $258,000 and $275,000 for the nine months ended September 30, 2013 and September 30, 2012, respectively.

At September 30, 2013, the Company had 97 loans on nonaccrual status of which 46 loans were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability.

At December 31, 2012, the Company had 111 loans on nonaccrual status of which 49 loans were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability.

The Company accounts for impaired loans in accordance with GAAP. An impaired loan generally is one for which it is probable, based on current information, that the Company will not collect all the amounts due under the contractual terms of the loan. All impaired loans are individually evaluated for impairment at least quarterly. As a result of this impairment evaluation, the Company provides a specific reserve for, or charges off, that portion of the asset that is deemed uncollectible.

The following tables summarize impaired loans by portfolio segment as of September 30, 2013 and December 31, 2012:

	Recorded Investment with		Recorded Investment with
As of September 30, 2013	No Specific Valuation Allowance		Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
		(In thousands)
Real estate loans
One-to four-family	$	5,470	$	1,353	$	6,823	$	7,557	$	55
Construction and land development		3,223		700		3,923		7,065		570
Multi-family and commercial real estate:
Investor owned one-to-four family and multi-family properties		951		230		1,181		1,278		22
Industrial and warehouse properties		34		120		154		293		6
Office buildings		-		350		350		406		75
Retail properties		-		400		400		467		34
Special use properties		513		631		1,144		1,608		18
Subtotal		1,498		1,731		3,229		4,052		155
Commercial business loans		1,747		1,063		2,810		3,264		590
Consumer loans		595		91		686		793		16
Total impaired loans	$	12,533	$	4,938	$	17,471	$	22,731	$	1,386

	Recorded Investment with		Recorded Investment with
As of December 31, 2012	No Specific Valuation Allowance		Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Real estate loans
One-to four-family	$	4,422	$	119	$	4,541	$	4,944	$	5
Construction and land development		5,884		2,402		8,286		15,298		119
Multi-family and commercial real estate		12,177		2,196		14,373		16,832		271
Commercial business loans		2,731		1,214		3,945		4,419		340
Consumer loans		255		45		300		385		1
Total impaired loans	$	25,469	$	5,976	$	31,445	$	41,878	$	736

In the above table, the unpaid contractual principal balance represents the aggregate amounts legally owed to the Bank under the terms of the borrowers’ loan agreements. The recorded investment amounts shown above represent the unpaid contractual principal balance owed to the Bank less any amounts charged off based on collectability assessments by the Bank and less any amounts paid by borrowers on nonaccrual loans which were recognized as principal curtailments. On nonaccrual loans, the Bank applies any borrower payments first against the principal balance of the loan and once the entire principal balance has been recovered, any subsequent payments are recognized as interest income.

The following table relates to interest income recognized by segment of impaired loans for the nine months ended September 30, 2013 and 2012:

	Nine Months Ended September 30,
	2013				2012
		Average Recorded Investments		Interest Income Recognized		Average Recorded Investments		Interest Income Recognized
	(In thousands)
Real estate loans
One-to four-family	$	6,896	$	144	$	4,925	$	122
Construction		3,953		6		11,178		120
Multi-family and commercial real estate		5,529		41		12,705		190
Commercial business loans		556		45		1,534		27
Consumer loans		696		15		340		12
Total	$	17,630	$	251	$	30,682	$	471

(c) Troubled Debt Restructured Loans

A TDR is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider. TDRs are considered impaired and are separately measured for impairment, whether on accrual or nonaccrual status.

Loan modifications are generally granted at the request of the individual borrower and may include concessions such as reduction in interest rates, changes in payments, maturity date extensions, or debt forgiveness/forbearance. TDRs are loans for which the original contractual terms of the loans have been modified and both of the following conditions exist: (i) the restructuring constitutes a concession (including reduction of interest rates or extension of maturity dates) and (ii) the borrower is either experiencing financial difficulties or absent such concessions, it is probable the borrower would experience financial difficulty complying with the original terms of the loan. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. The Company’s loan modifications are determined on a case-by-case basis in connection with ongoing loan collection processes.

The recorded investment balance of performing and nonperforming TDRs as of September 30, 2013 and December 31, 2012 are as follows:

(In thousands)	As of September 30, 2013		As of December 31, 2012
Aggregate recorded investment of impaired loans
performing under terms modified through a troubled debt restructuring:
Performing	$	3,889	$	3,573
Nonperforming		4,407		5,566
Total	$	8,296	$	9,139

The following table presents a summary of loans that were restructured during the nine months ended September 30, 2013 and September 30, 2012:

	For the Nine Months Ended September 30, 2013
(Dollars in thousands)	Number of Loans		Pre- Modification Recorded Investment		Funds Disbursed		Interest and Escrow Capitalized		Post- Modification Recorded Investment
Real estate loans:
One-to-four family		6	$	1,434	$	7	$	-	$	1,441
Multi-family and commercial real estate		5		395		46		-		441
Commercial business loans		5		1,087		10		-		1,097
Consumer loans - home equity		1		51		-		-		51
Total TDRs restructured during
the period		17	$	2,967	$	63	$	-	$	3,030

TDRs, still accruing interest		1	$	135	$	-	$	-	$	135
TDRs, included in nonaccrual		15		2,662		63		-		2,725
Sold		1		170		-		-		170
Total		17	$	2,967	$	63	$	-	$	3,030

	For the Nine Months Ended September 30, 2012
(Dollars in thousands)	Number of Loans		Pre- Modification Recorded Investment		Funds Disbursed		Interest and Escrow Capitalized		Post- Modification Recorded Investment
Real estate loans:
One-to four-family		6	$	1,440	$	3	$	3	$	1,446
Construction		-		-		-		-		-
Multi-family and commercial real estate		1		426		-		-		426
Commercial business loans		9		292		-		-		292
Consumer loans:
Home equity		4		168		-		-		168
Total TDRs restructured during the period		20	$	2,326	$	3	$	3	$	2,332
TDRs, still accruing interest		4	$	580	$	-	$	-	$	580
TDRs, included in nonaccrual		16		1,746		3		3		1,752
Total		20	$	2,326	$	3	$	3	$	2,332

The majority of the Bank’s TDRs are a result of granting extensions to troubled credits which have already been adversely classified. The Bank grants such an extension to reassess the borrower’s financial status and to develop a plan for repayment. Certain modifications with extension may also include interest rate reductions. These modifications did not have a material effect on the Company.

Of the seventeen loans modified during the nine months ended September 30, 2013, eleven loans with a total outstanding principal balance of $1.7 million were granted term extensions as a concession. Two TDRs with an outstanding principal balance of $232,000 were granted forebearance of interest only payments over their remaining term to maturity. Three TDRs with an outstanding principal balance of $1.0 million were granted principal payment deferrals. The remaining TDR with an outstanding balance of $51,000 was granted a rate reduction. For the eleven TDRs granted term extentions, new funds in the amount of $63,000 were advanced to cover past due property taxes and other expenses based upon cross-collateralization with related loans to better improve the Bank’s collateral position. One of the two TDRs granted forebearance was part of the second quarter loan sale.

The financial effects of each modification will vary based on the specific restructure. For some of the Bank’s TDRs, the loans were interest-only with a balloon payment at maturity. If the interest rate is not adjusted and the terms are consistent with the market, the Bank might not experience any loss associated with the restructure. If, however, the restructure involves forebearance agreements or interest rate modifications, the Bank might not collect all the principal and interest based on the original contractual terms. The Bank applies its procedures for placing TDRs on accrual or nonaccrual status using the same general guidance as for loans. The Bank estimates the necessary allowance for loan losses on TDRs using the same guidance as for other impaired loans.

There were no TDRs that had been modified during the previous twelve months ended September 30, 2013 that subsequently defaulted or were charged off during the nine months ended September 30, 2013.

(d) Allowance for Loan Losses

The allowance for loan losses (“ALLL”) is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio.

The allowance for loan losses is established through a provision for loan losses charged to operations. Management periodically reviews the allowance for loan losses in order to identify those known and inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process begins with an individual evaluation of loans that are considered impaired. For these loans, an allowance is established based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or for loans that are considered collateral dependent, the fair value of the collateral.

All other loans are segregated into segments based on similar risk factors. Each of these groups is then evaluated based on several factors to estimate credit losses. Management will determine for each category of loans with similar risk characteristics the historical loss rate. Historical loss rates provide a reasonable starting point for the Bank’s analysis; however, this analysis and loss trends do not form a sufficient basis, by themselves, to determine the appropriate level of the loan loss allowance. Management also considers qualitative and environmental factors for each loan segment that are likely to impact, directly or indirectly, the inherent loss exposure of the loan portfolio. These factors include but are not limited to: changes in the amount and severity of delinquencies, non-accrual and adversely classified loans, changes in local, regional, and national economic conditions that will affect the collectability of the portfolio, changes in the nature and volume of loans in the portfolio, changes in concentrations of credit, lending area, industry concentrations, or types of borrowers, changes in lending policies, procedures, competition, management, portfolio mix, competition, pricing, loan to value trends, extension and modification requests, and loan quality trends. As of June 30, 2013, management added factors to more granularly assess loan quality trends, specifically, the changes and the trend in charge-offs and recoveries, changes in volume of Watch and Special Mention loans and the changes in the quality of the Bank’s loan review system. This analysis establishes factors that are applied to each of the segregated groups of loans to determine an appropriate level of loan loss allowance.

The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is likelihood that different amounts would be reported under different conditions or assumptions. The OCC, as an integral part of its examination process, periodically reviews the allowance for loan losses and may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.

The allowance generally consists of specific (or allocated) and general components. The specific component relates to loans that are recognized as impaired. For such impaired loans, an allowance is established when the discounted cash flows (or observable market price or collateral value, if the loan is collateral dependent) 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 loss experience adjusted for qualitative factors.

The ALLL balance decreased from $14.5 million at December 31, 2012 to $10.8 million at September 30, 2013, a decrease of $3.7 million, or 25.2%. This decrease in the ALLL was directionally consistent with the improvement in the Bank’s asset quality trends during this nine month period. During this period, the Bank’s nonperforming loans decreased $13.8 million, or 45.2%, and its adversely classified loans decreased by $15.2 million or 38.7%. Furthermore, the improvement in the risk profile of the loan portfolio can also be demonstrated by the significant reduction in multi-family construction and land development loans of $17.7 million or 66.5%, and, to a lesser extent, reductions in commercial business loans of $7.4 million or 22.6%, one-to-four family loans of $7.3 million or 3.5% and commercial real estate loans of $6.4 million or 4.8%. These improvements in the Bank’s asset quality were attributable to the more aggressive workout efforts in the past nine months, and the loan sale transactions consummated in June 2013.

As of June 30, 2013, the Company adopted significant changes to its ALLL methodology, which are summarized as follows:

⋅ Further disaggregated the commercial real estate loan segment to increase the granularity of the risks inherent in the loans in the expanded segments;

⋅ A different basis on which historical loss experience is calculated to determine inherent losses on the collectively evaluated portion of the loan portfolio; and

⋅ Changes in the utilization of qualitative risk adjustment factors (“Q Factors”) including an increased number of these Q Factors and a change in the calibration and application of the Q Factors.

Previously, the Company’s historical loss experience was derived from the net loan charge-offs incurred in the prior four quarters and apportioned against the related loan portfolio segment to determine an average loss history factor for each segment. Beginning with the June 30, 2013 calculation, the Company adopted a two year weighted average as the basis for the calculation of its historical loss experience in which the current year is weighted 56% versus 44% for the prior year experience. While the Company is mindful of its loss history, loss experience from the past four quarters may not accurately reflect losses embedded in the older vintages of loans originated in prior years. It is therefore considered by the Company to be more appropriate to look back at least two years in establishing loss history, albeit more heavily weighted to the current year. As discussed above, the Company believes it has significantly improved its risk grades through its increased workout efforts and as evidenced by the sale of $15.2 million in adversely classified loans in June 2013. The general loan loss component derived from the loss history utilizing a longer time period which contains more heightened, recent losses will be more consistent with, and reflective of, the inherent loss experience in the loan portfolio. The new methodology for the calculation of historical loss factors has generated higher levels of general loan loss allowance reserves, which is in line with the most recent experience, which is itself driven by the acceleration of charge-offs due to the June 2013 loan sale.

With respect to the Q Factors, the new methodology increased the number of Q factors, in particular, factors to measure the changes in the level and trends in net charge-offs. Despite the addition to the number of Q Factors, the overall impact of the Q Factors is greatly diminished due to the improvement in the Bank’s asset quality cited above. The related charge-offs and their impact on the recent and more heavily weighted loss experience, limits, to a large extent, the need for additions to reserves resulting from Q Factors, and increases the confidence level in historical loss experience as an indicator of losses inherent in the loan portfolio.

The impact of the changes in the Company’s ALLL methodology implemented as of June 30, 2013 related to the Q Factors and the recalculation of the historical loan loss factors resulted in a reduction in the ALLL balance of a combined $3.8 million when implemented as of June 30, 2013.

The Company continues to monitor and modify its allowance for loan losses as conditions dictate. No assurances can be given that the level of allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.

The following tables set forth the balance of and transactions in the allowance for loan losses at September 30, 2013, December 31, 2012 and September 30, 2012, by portfolio segment, disaggregated by impairment methodology, which is then further segregated by loans evaluated for impairment individually and collectively.

As of and for the Nine Months	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
Ended September 30, 2013
(In thousands)
Allowance for loan losses:
Beginning balance	$	1,988	$	4,892	$	4,468	$	2,725	$	427	$	14,500
Provision for loan losses		34		4,117		(570)		526		43		4,150
Charge-offs		(585)		(4,418)		(2,147)		(1,808)		(55)		(9,013)
Recoveries		-		590		102		514		5		1,211
Balance at September 30, 2013	$	1,437	$	5,181	$	1,853	$	1,957	$	420	$	10,848
Allowance related to loans:
Individually evaluated for impairment	$	55	$	155	$	570	$	590	$	16	$	1,386
Collectively evaluated for impairment		1,382		5,026		1,283		1,367		404		9,462
Total Allowance	$	1,437	$	5,181	$	1,853	$	1,957	$	420	$	10,848
Ending loan balance individually evaluated for impairment	$	6,823	$	3,230	$	3,923	$	2,810	$	685	$	17,471
Ending loan balance collectively evaluated for impairment		194,929		122,516		5,606		23,792		27,578		374,421
Total Loans	$	201,752	$	125,746	$	9,529	$	26,602	$	28,263	$	391,892

	Multi-Family and Commercial Real Estate
As of and for the Nine Months	Investor one- to-four family and multi- family		Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties		Total Multi- Family and Commercial Real Estate
Ended September 30, 2013
(In thousands)
Allowance for loan losses:
Beginning balance	$	-	$	-	$	-	$	-	$	-	$	4,892
Provision for loan losses		-		-		-		-		-		3,689
Charge-offs		-		-		-		-		-		(4,351)
Recoveries		-		-		-		-		-		590
Subtotal												4,820
Redistributed through segment expansion		526		818		421		519		2,536		4,820
Segment ending balance as of June 30, 2013		526		818		421		519		2,536		4,820
Provision for loan losses in third quarter		(48)		150		33		186		107		428
Charge-offs in third quarter		-		-		-		(67)		-		(67)
Recoveries in third quarter		-		-		-		-		-		-
Segment balance at September 30, 2013	$	478	$	968	$	454	$	638	$	2,643	$	5,181
Allowance related to loans:
Individually evaluated for impairment	$	22	$	6	$	75	$	34	$	18	$	155
Collectively evaluated for impairment		456		962		379		604		2,625		5,026
Total Allowance	$	478	$	968	$	454	$	638	$	2,643	$	5,181
Ending loan balance individually evaluated for impairment	$	1,182	$	155	$	350	$	400	$	1,143	$	3,230
Ending loan balance collectively evaluated for impairment		15,232		32,288		21,799		21,324		31,873		122,516
Total Loans	$	16,414	$	32,443	$	22,149	$	21,724	$	33,016	$	125,746

	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
As of and for the Nine Months
Ended September 30, 2012
(In thousands)
Allowance for Loan Losses:
Beginning Balance	$	1,745	$	3,745	$	1,327	$	754	$	482	$	8,053
Provision for loan losses		2,233		4,897		6,070		3,249		556		17,005
Charge-offs		(571)		(934)		(5,504)		(2,260)		-		(9,269)
Recoveries		4		-		-		6		2		12
Ending Balance	$	3,411	$	7,708	$	1,893	$	1,749	$	1,040	$	15,801
Allowance related to loans:
Individually evaluated for impairment	$	-	$	1,306	$	-	$	-	$	-	$	1,306
Collectively evaluated for impairment		3,411		6,402		1,893		1,749		1,040		14,495
Total Allowance	$	3,411	$	7,708	$	1,893	$	1,749	$	1,040	$	15,801

Ending loan balance individually evaluated for impairment	$	7,050	$	15,146	$	13,382	$	1,858	$	262	$	37,698
Ending loan balance collectively evaluated for impairment		203,261		9,242		128,139		32,421		30,735		403,798
Total Loans	$	210,311	$	24,388	$	141,521	$	34,279	$	30,997	$	441,496

At December 31, 2012
Allowance for loan losses:
Ending balance	$	1,988	$	4,892	$	4,468	$	2,725	$	427	$	14,500
Allowance related to loans:
Individually evaluated for impairment	$	5	$	271	$	119	$	340	$	1	$	736
Collectively evaluated for impairment		1,983		4,621		4,349		2,385		426		13,764
Total Allowance	$	1,988	$	4,892	$	4,468	$	2,725	$	427	$	14,500

Ending loan balance individually evaluated for impairment	$	4,541	$	14,373	$	8,286	$	3,945	$	300	$	31,445
Ending loan balance collectively evaluated for impairment		204,463		119,176		18,347		29,025		29,826		400,837
Total Loans	$	209,004	$	133,549	$	26,633	$	32,970	$	30,126	$	432,282

The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examination may require us to make additional provisions for loan losses based on judgments different from ours. The Company also periodically engages an independent consultant to review our credit risk grading process and the risk grades on selected portfolio segments as well as the methodology, analysis and adequacy of the allowance for loan and lease losses.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.