NOTE C – LOANS

The following tables set forth by portfolio segment as of December 31, 2011, 2010 and 2009: (1) the amount of loans individually evaluated for impairment and the portion of the allowance for loan losses allocable to such loans; and (2) the amount of loans collectively evaluated for impairment and the portion of the allowance for loan losses allocable to such loans. They also set forth by portfolio segment the activity in the allowance for loan losses for the years ended December 31, 2011, 2010 and 2009. Construction and land development loans, if any, are included with commercial mortgages in the following tables.

	Commercial & Industrial			Commercial Mortgages		Residential Mortgages		Home Equity		Other			Total
	(in thousands)
	2011
Loans:
Individually evaluated for impairment	$	12		$	3,949	$	4,399	$	1,124	$	-		$	9,484
Collectively evaluated for impairment		42,560			455,926		368,078		102,389		4,596			973,549
	$	42,572		$	459,875	$	372,477	$	103,513	$	4,596		$	983,033
Allocation of allowance for loan losses:
Individually evaluated for impairment	$	1		$	357	$	676	$	-	$	-		$	1,034
Collectively evaluated for impairment		698			8,712		4,552		1,415		161			15,538
	$	699		$	9,069	$	5,228	$	1,415	$	161		$	16,572
Activity in allowance for loan losses:
Beginning balance	$	803		$	7,680	$	4,059	$	1,415	$	57		$	14,014
Chargeoffs		-			1,490		8		100		36			1,634
Recoveries		115			9		1		-		6			131
Provision for loan losses (credit)		(219	)		2,870		1,176		100		134			4,061
Ending balance	$	699		$	9,069	$	5,228	$	1,415	$	161		$	16,572

		2010
Loans:
Individually evaluated for impairment	$	27		$	2,314	$	945	$	-	$	-		$	3,286
Collectively evaluated for impairment		39,028			414,632		333,823		103,829		5,790			897,102
	$	39,055		$	416,946	$	334,768	$	103,829	$	5,790		$	900,388
Allocation of allowance for loan losses:
Individually evaluated for impairment	$	27		$	870	$	-	$	-	$	-		$	897
Collectively evaluated for impairment		776			6,810		4,059		1,415		57			13,117
	$	803		$	7,680	$	4,059	$	1,415	$	57		$	14,014
Activity in allowance for loan losses:
Beginning balance	$	971		$	5,975	$	2,242	$	1,102	$	56		$	10,346
Chargeoffs		-			325		-		22		30			377
Recoveries		46			-		-		-		26			72
Provision for loan losses (credit)		(214	)		2,030		1,817		335		5			3,973
Ending balance	$	803		$	7,680	$	4,059	$	1,415	$	57		$	14,014

		2009
Loans:
Individually evaluated for impairment	$	45		$	-	$	352	$	80	$	-		$	477
Collectively evaluated for impairment		48,846			412,731		248,536		108,930		5,763			824,806
	$	48,891		$	412,731	$	248,888	$	109,010	$	5,763		$	825,283
Allocation of allowance for loan losses:
Individually evaluated for impairment	$	45		$	-	$	-	$	-	$	-		$	45
Collectively evaluated for impairment		926			5,975		2,242		1,102		56			10,301
	$	971		$	5,975	$	2,242	$	1,102	$	56		$	10,346
Activity in allowance for loan losses:
Beginning balance	$	933		$	3,111	$	1,227	$	706	$	99		$	6,076
Chargeoffs		162			-		-		-		13			175
Recoveries		148			-		-		-		12			160
Provision for loan losses (credit)		52			2,864		1,015		396		(42	)		4,285
Ending balance	$	971		$	5,975	$	2,242	$	1,102	$	56		$	10,346

The following table sets forth information regarding individually impaired loans by class of loans for the years ended December 31, 2011, 2010 and 2009, including the interest income recognized while the loans were impaired.

	2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(in thousands)
Commercial mortgages:
Multifamily	$	740	$	740	$	-	$	743	$	-
Other		39		39		-		40		32
Residential mortgages		174		174		-		174		1
Home equity		1,124		1,124		-		1,126		3

With an allowance recorded:
Commercial and industrial		12		12		1		20		2
Commercial mortgages:
Multifamily		1,393		1,393		312		1,419		-
Other		1,777		1,777		45		1,777		5
Residential mortgages		4,225		4,225		676		4,244		140

Total:
Commercial and industrial		12		12		1		20		2
Commercial mortgages:
Multifamily		2,133		2,133		312		2,162		-
Other		1,816		1,816		45		1,817		37
Residential mortgages		4,399		4,399		676		4,418		141
Home equity		1,124		1,124		-		1,126		3
	$	9,484	$	9,484	$	1,034	$	9,543	$	183

	2010

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(in thousands)
Multifamily commercial mortgages	$	447	$	447	$	-	$	451	$	20
Residential mortgages		945		945		-		945		22

With an allowance recorded:
Commercial and industrial		27		27		27		31		2
Multifamily commercial mortgages		1,867		1,867		870		1,867		99

Total:
Commercial and industrial		27		27		27		31		2
Multifamily commercial mortgages		2,314		2,314		870		2,318		119
Residential mortgages		945		945		-		945		22
	$	3,286	$	3,286	$	897	$	3,294	$	143

	2009
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(in thousands)
Residential mortgages	$	352	$	352	$	-	$	353	$	21
Home equity		80		80		-		80		1

With an allowance recorded:
Commercial and industrial		45		45		45		45		-

Total:
Commercial and industrial		45		45		45		45		-
Residential mortgages		352		352		-		353		21
Home equity		80		80		-		80		1
	$	477	$	477	$	45	$	478	$	22

Interest income recorded by the Corporation during 2011, 2010 and 2009 on loans considered to be impaired was generally recognized using the accrual method of accounting. Any payments received on nonaccrual impaired loans are applied to the recorded investment in the loans.

Nonaccrual Loans. The following table presents the recorded investment in nonaccrual loans by class of loans as of December 31, 2011 and 2010.

	2011		2010
	(in thousands)
Multifamily commercial mortgages	$	1,393	$	2,314
Residential mortgages		768		622
Home equity		1,050		-
	$	3,211	$	2,936

Aging of Loans. The following table presents the aging of the recorded investment in loans as of December 31, 2011 and 2010 by class of loans.

	2011
	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More and Still Accruing		Nonaccrual Loans		Total Past Due Loans & Nonaccrual Loans		Current		Total Loans
	(in thousands)
Commercial and industrial	$	-	$	-	$	-	$	-	$	-	$	42,572	$	42,572
Commercial mortgages:
Multifamily		-		-		-		1,393		1,393		227,900		229,293
Owner-occupied		-		-		-		-		-		89,953		89,953
Other		-		-		-		-		-		140,629		140,629
Residential mortgages		649		-		-		768		1,417		371,060		372,477
Home equity		88		-		-		1,050		1,138		102,375		103,513
Other		3		-		-		-		3		4,593		4,596
	$	740	$	-	$	-	$	3,211	$	3,951	$	979,082	$	983,033

		2010
	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More and Still Accruing		Nonaccrual Loans		Total Past Due Loans & Nonaccrual Loans		Current		Total Loans
	(in thousands)
Commercial and industrial	$	-	$	-	$	-	$	-	$	-	$	39,055	$	39,055
Commercial mortgages:
Multifamily		-		-		-		2,314		2,314		205,785		208,099
Owner-occupied		-		-		-		-		-		83,386		83,386
Other		-		-		-		-		-		125,461		125,461
Residential mortgages		491		839		-		622		1,952		332,816		334,768
Home equity		328		-		-		-		328		103,501		103,829
Consumer		2		-		-		-		2		5,788		5,790
	$	821	$	839	$	-	$	2,936	$	4,596	$	895,792	$	900,388

Troubled Debt Restructurings. A restructuring constitutes a troubled debt restructuring when the restructuring includes a concession by the Bank and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Bank performs the evaluation under its internal underwriting policy.

For the year ended December 31, 2011, the Bank modified certain loans in troubled debt restructurings. The modifications included one or a combination of the following: (1) interest rate changes; (2) interest only periods; and (3) maturity date extensions. In some cases the new interest rate was lower than the current market rate for new debt with similar risk. Modifications involving interest rate changes were for periods ranging from 31 months to 9.5 years with pre-modification interest rates ranging from 5.99% to 6.00% and post modification interest rates ranging from 4.00% to 4.63%. One modification involved extending the maturity date by 23 months.

At December 31, 2011 and 2010, the Bank had an allowance for loan losses of $855,000 and $27,000, respectively, allocated to specific troubled debt restructurings. The Company had no commitments to lend additional amounts to loans that were classified as troubled debt restructurings.

The following table presents information about loans modified in troubled debt restructurings during the year ended December 31, 2011.

	For the Year Ended December 31, 2011
	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(dollars in thousands)
Loans modified during 2011:
Multifamily commercial mortgages		2	$	1,420	$	1,420
Other commercial mortgages		1		40		40
Residential mortgages		2		1,393		1,393
		5	$	2,853	$	2,853

The troubled debt restructurings described in the above table resulted in a $564,000 provision for loan losses during 2011. There were no chargeoffs related to these loans.

There are no troubled debt restructurings for which there was a payment default during 2011 that were modified during the twelve-month period prior to default. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators. The Corporation categorizes loans into risk categories based on relevant information about the borrower's ability to service their debt including, but not limited to, current financial information for the borrower and any guarantors, historical payment experience, credit documentation, public information and current economic trends.

Commercial and industrial loans and commercial mortgage loans are risk rated utilizing a ten point rating system. The risk ratings are defined as follows:

1 – 2	Cash flow is of high quality and stable. Borrower has very good liquidity and ready access to traditional sources of credit. This category also includes loans to borrowers secured by cash and/or marketable securities within approved margin requirements.
3 – 4	Cash flow quality is strong, but shows some variability. Borrower has good liquidity and asset quality. Borrower has access to traditional sources of credit with minimal restrictions.
5 – 6	Cash flow quality is acceptable but shows some variability. Liquidity varies with operating cycle and assets provide an adequate margin of protection. Borrower has access to traditional sources of credit, but generally on a secured basis.
7	Watch - Cash flow has a high degree of variability and subject to economic downturns. Liquidity is strained and the ability of the borrower to access traditional sources of credit is diminished.
8	Special Mention - The borrower has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan 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 risk sufficient to warrant adverse classification.
9	Substandard - Loans are inadequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
10	Doubtful - Loans have all the inherent weaknesses of those classified 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.

Risk ratings are initially assigned by the lending officer together with any necessary approval authority. The ratings are periodically assessed through borrower contact, independent loan review, the analysis of the allowance for loan losses and delinquency trends. Commercial and industrial loans and commercial mortgage loans with balances in excess of $750,000 are generally reviewed no less often than annually. Other loans are reviewed periodically, the frequency of which is determined by the Bank's ongoing assessments of the borrower's condition.

The recorded investment in commercial and industrial loans and commercial real estate loans by class of loans and credit quality indicator at December 31, 2011 and 2010, is as follows:

2011
Internally
Assigned	Commercial		Commercial Mortgages
Risk Rating	and Industrial		Multifamily		Owner-occupied		Other		Total
	(in thousands)
1 - 2	$	4,911	$	-	$	-	$	-	$	-
3 - 4		3,720		-		-		1,986		1,986
5 - 6		33,604		222,136		82,870		130,476		435,482
7		325		5,024		1,018		4,699		10,741
8		-		-		537		1,652		2,189
9		12		2,133		5,528		1,816		9,477
10		-		-		-		-		-
	$	42,572	$	229,293	$	89,953	$	140,629	$	459,875

2010
Internally
Assigned	Commercial		Commercial Mortgages
Risk Rating	and Industrial		Multifamily		Owner-occupied		Other		Total
	(in thousands)
1 - 2	$	6,678	$	-	$	-	$	-	$	-
3 - 4		410		-		-		-		-
5 - 6		30,485		202,196		69,781		121,691		393,668
7		910		3,534		6,202		3,323		13,059
8		-		502		3,813		-		4,315
9		572		1,867		3,590		447		5,904
10		-		-		-		-		-
	$	39,055	$	208,099	$	83,386	$	125,461	$	416,946

Residential mortgage loans, home equity loans and other consumer loans are risk rated utilizing a three point rating system. Loans in these categories that are on management's watch list or have been criticized or classified by management are assigned the highest risk rating. All other loans are risk rated based on Fair Isaac Corporation (“FICO”) scores. A FICO score is a tool used in the Bank's loan approval process, and a minimum score of 680 is generally required. FICO scores for each borrower are updated at least annually. The risk ratings are defined as follows:

Internally Assigned Risk Rating		Basis For Risk Rating
1		FICO score is equal to or greater than 680.
2		FICO score is 635 to 679.
3		FICO score is below 635 or the loan is on management's watch list or has been criticized or classified by management.

At December 31, 2011 and 2010, and based on the most recent FICO score obtained by the Corporation, the recorded investment in residential mortgages, home equity loans, and other consumer loans by credit quality indicator is as follows:

2011
Internally Assigned Risk Rating	Residential Mortgages		Home Equity		Other
	(in thousands)
1	$	335,839	$	85,744	$	3,600
2		18,823		9,809		612
3		17,815		7,960		128
Not Rated		-		-		256
	$	372,477	$	103,513	$	4,596

2010

Internally Assigned Risk Rating	Residential Mortgages		Home Equity		Other
	(in thousands)
1	$	290,820	$	81,987	$	1,489
2		26,095		11,276		3,505
3		17,853		10,566		382
Not Rated		-		-		414
	$	334,768	$	103,829	$	5,790

Non-rated loans in the above tables represent transaction account overdrafts.

Loans to Directors and Executive Officers. Certain directors, including their immediate families and companies in which they are principal owners, and executive officers were loan customers of the Bank during 2011 and 2010. The aggregate amount of these loans was $1,537,000 and $1,826,000 at December 31, 2011 and 2010, respectively. During 2011, $59,000 of new loans to such persons were made representing advances on existing lines. Repayments totaled $348,000 in 2011. There were no loans to directors or executive officers that were nonaccruing at December 31, 2011 or 2010.