9.	LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the loan portfolio as of September 30, 2011 and June 30, 2011 (in thousands).


	September 30, 2011						June 30, 2011
	Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment		Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment

First mortgage loans:
1 - 4 family dwellings	$	13,745	$	-	$	13,745	$	14,984	$	-	$	14,984
Construction		10,898		701		10,197		11,569		1,024		10,545
Land acquisition & development		3,235		-		3,235		2,947		-		2,947
Multi-family dwellings		5,297		-		5,297		5,365		-		5,365
Commercial		7,803		-		7,803		7,732		-		7,732

Consumer Loans
Home equity		1,845		-		1,845		1,893		-		1,893
Home equity lines of credit		2,220		-		2,220		2,601		-		2,601
Other		339		-		339		322		-		322

Commercial Loans		3,151		-		3,151		3,210		-		3,210

	$	48,533	$	701	$	47,832	$	50,623	$	1,024	$	49,599

Less: Deferred loan fees		36						41
Allowance for loan losses		471						630

Total	$	48,026					$	49,952

Impaired loans are loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The following loan categories are collectively evaluated for impairment. First mortgage loans: 1 - 4 family dwellings and all consumer loan categories (home equity, home equity lines of credit and other). The following loan categories are individually evaluated for impairment. First mortgage loans: construction, land acquisition and development, multi-family dwellings and commercial. The Company evaluates commercial loans not secured by real property individually for impairment.

The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower, including the length of the delay, the borrower's prior payment record, and the amount of shortfall in relation to the principal and interest owed.

The following table is a summary of the loans considered to be impaired as of September 30, 2011 and September 30, 2010 (in thousands):


	September 30, 2011		September 30, 2010
Impaired construction loans with an allocated allowance	$	-	$	-
Impaired construction loans without an allocated allowance		701		-

Total impaired loans	$	701	$	-

Allocated allowance on impaired loans	$	-	$	-
Average impaired loans		1,020		-
Income recognized on impaired loans		-		-

Total nonaccrual loans and the related interest income recognized for the three months ended September 30, 2011 and September 30, 2010 are as follows (in thousands):


	Three Months Ended
	September 30, 2011		September 30, 2010
Principal outstanding	$	1,065	$	1,428

Interest income that would have been recognized		31		25
Interest income recognized		102		2


Interest income foregone	$	23	$	23

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance account. Subsequent recoveries, if any, are credited to the allowance. The allowance is maintained at a level believed adequate by management to absorb estimated potential loan losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio considering past experience, current economic conditions, composition of the loan portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change.

Effective December 13, 2006, the FDIC, in conjunction with the other federal banking agencies adopted a Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses ("ALLL"). The revised policy statement revised and replaced the banking agencies' 1993 policy statement on the ALLL. The revised policy statement provides that an institution must maintain an ALLL at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The banking agencies also revised the policy to ensure consistency with generally accepted accounting principles ("GAAP"). The revised policy statement updates the previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the ALLL, factors to be considered in the estimation of the ALLL, and the objectives and elements of an effective loan review system.

Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: "substandard", "doubtful" and "loss". Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of 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 questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated "asset watch" is also utilized by the Bank for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified as loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital.

The Company's general policy is to internally classify its assets on a regular basis and establish prudent general valuation allowances that are adequate to absorb losses that have not been identified but that are inherent in the loan portfolio. The Company maintains general valuation allowances that it believes are adequate to absorb losses in its loan portfolio that are not clearly attributable to specific loans. The Company's general valuation allowances are within the following general ranges: (1) 0% to 5% of assets subject to special mention; (2) 5.00% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company's past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at September 30, 2011, is adequate.

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2011 and June 30, 2011 (in thousands):


	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days + Past Due Accruing		90 Days + Past Due Non-accrual		Total Past Due		Total Loans
September 30, 2011
First mortgage loans:
1 - 4 family dwellings	$	13,381	$	-	$	-	$	-	$	364	$	364	$	13,745
Construction		10,197		-		-		-		701		701		10,898
Land acquisition & development		3,203		32		-		-		-		32		3,235
Multi-family dwellings		5,297		-		-		-		-		-		5,297
Commercial		7,803		-		-		-		-		-		7,803

Consumer Loans
Home equity		4,065		-		-		-		-		-		4,065
Other		339		-		-		-		-		-		339

Commercial Loans		3,151		-		-		-		-		-		3,151

	$	47,436	$	32	$	-	$	-	$	1,065	$	1,097		48,533

Less: Deferred loan fees														36
Allowance for loan loss														471

Total													$	48,026


	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days + Past Due Accruing		90 Days + Past Due Non-accrual		Total Past Due		Total Loans
June 30, 2011
First mortgage loans:
1 - 4 family dwellings	$	14,200	$	-	$	-	$	-	$	784	$	784	$	14,984
Construction		10,545		-		-		-		1,024		1,024		11,569
Land acquisition & development		2,947		-		-		-		-		-		2,947
Multi-family dwellings		5,365		-		-		-		-		-		5,365
Commercial		7,732		-		-		-		-		-		7,732

Consumer Loans
Home equity		4,136		-		-		-		358		358		4,494
Other		321		1		-		-		-		1		322

Commercial Loans		3,206		4		-		-		-		4		3,210

	$	48,452	$	5	$	-	$	-	$	2,166	$	2,171		50,623

Less: Deferred loan fees														41
Allowance for loan loss														630

Total													$	49,952

Credit quality information

The following tables represent credit exposure by internally assigned grades for the period ended September 30, 2011. The grading system analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or not at all. The Company's internal credit risk grading system is based on experiences with similarly graded loans.

The Company's internally assigned grades are as follows:

Pass - loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

Special mention - loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard - loans that have a well-defined weakness based on objective evidence and can be characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful - loans classified as doubtful have all the weaknesses inherent in a substandard loan. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss - loans classified as loss are considered uncollectible, or of such value that continuance as a loan is not warranted.

The primary credit quality indicator used by Management in the 1 - 4 family and consumer loan portfolios is the performance status of the loans. Payment activity is reviewed by Management on a monthly basis to determine how loans are performing. Loans are considered to be non-performing when they become 90 days delinquent, have a history of delinquency, or have other inherent characteristics which Management deems to be weaknesses.

The following table presents the Company's internally classified construction, land acquisition and development, multi-family residential, commercial real estate and commercial (not secured by real estate) loans at September 30, 2011.


	Construction		Land Acquisition & Development Loans		Multi-family Residential		Commercial Real Estate		Commercial
Pass	$	10,197	$	3,203	$	5,297	$	7,803	$	3,151
Special Mention		-		-		-		-		-
Substandard		701		32		-		-		-
Doubtful		-		-		-		-		-

Ending Balance	$	10,898	$	3,235	$	5,297	$	7,803	$	3,151

The following table presents performing and non-performing 1 - 4 family residential and consumer loans based on payment activity for the period ended September 30, 2011.


	1 - 4 Family		Consumer
Performing	$	12,933	$	4,186
Non-performing		812		218


Total	$	13,745	$	4,404

The Company determines its allowance for loan losses in accordance with generally accepted accounting principles. The Company uses a systematic methodology as required by Financial Reporting Release No. 28 and the various Federal Financial Institutions Examination Council guidelines. The Company also endeavors to adhere to SEC Staff Accounting Bulletin No. 102 in connection with loan loss allowance methodology and documentation issues.

Our methodology used to determine the allocated portion of the allowance is as follows. For groups of homogenous loans, we apply a loss rate to the groups' aggregate balance. Our group loss rate reflects our historical loss experience. We may adjust these group rates to compensate for changes in environmental factors; but our adjustments have not been frequent due to a relatively stable charge-off experience. The Company also monitors industry loss experience on similar loan portfolio segments. We then identify loans for individual evaluation under ASC Topic 310. If the individually identified loans are performing, we apply a segment specific loss rate adjusted for relevant environmental factors, if necessary, for those loans reviewed individually and considered individually impaired, we use one of the three methods for measuring impairment mandated by ASC Topic 310. Generally the fair value of collateral is used since our impaired loans are generally real estate based. In connection with the fair value of collateral measurement, the Company generally uses an independent appraisal and determines costs to sell. The Company's appraisals for commercial income based loans, such as multi-family and commercial real estate loans, assess value based upon the operating cash flows of the business as opposed to merely "as built" values. The Company then validates the reasonableness of our calculated allowances by: (1) reviewing trends in loan volume, delinquencies, restructurings and concentrations; (2) reviewing prior period (historical) charge-offs and recoveries; and (3) presenting the results of this process, quarterly, to the Asset Classification Committee and the Savings Bank's Board of Directors. We then tabulate, format and summarize the current loan loss allowance balance for financial and regulatory reporting purposes.

The Company had no unallocated loss allowance balance at September 30, 2011.

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management's periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term.

The following table summarizes the primary segments of the ALLL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2011 and June 30, 2011. Activity in the allowance is presented for the three months ended September 30, 2011 (in thousands).


	First Mortgage Loans
	1 - 4 Family			Construction			Land Acquisition & Development			Multi- family		Commercial		Consumer Loans			Commercial Loans		Total
ALLL balance at June 30, 2011	$	87		$	243		$	55		$	27	$	79	$	85		$	54	$	630
Charge-offs		-			(140	)		-			-		-		-			-		(140	)
Recoveries		-			-			-			-		-		-			-		-
Provisions		(8	)		32			(23	)		-		-		(26	)		6		(19	)

ALLL balance at September 30, 2011	$	79		$	135		$	32		$	27	$	79	$	59		$	60	$	471

Individually evaluated for impairment		-			-			-			-		-		-			-		-
Collectively evaluated for impairment		79			135			32			27		79		59			60		471

	$	79		$	135		$	32		$	27	$	79	$	59		$	60	$	471


ALLL balance at June 30, 2011	$	87		$	243		$	55		$	27	$	79	$	85		$	54	$	630

Individually evaluated for impairment		-			67			-			-		-		-			-		67
Collectively evaluated for impairment		87			176			55			27		79		85			54		563

	$	87		$	243		$	55		$	27	$	79	$	85		$	54	$	630

During the three months ended September 30, 2011, the Company reduced its ALLL by $159 thousand. A $140 thousand charge-off was recorded on one single-family construction loan which was taken into real estate owned ("REO"). The charge-off amount was calculated using an independent internal and external appraisal of the property, adjusted for costs to complete and costs to sell the property.

During the three months ended September 30, 2011, the Company also reduced the ALLL on the remaining loan portfolio by $19 thousand. The decrease was primarily attributable to a $26 thousand decrease in the ALLL related to consumer loans due to the payoff in full of two non-accrual home equity lines of credit, a $23 thousand decrease in the ALLL related to land acquisition and development loans due to reduced balances associated with payoffs in this segment of the loan portfolio, and a $8 thousand decrease in the ALLL related to single-family residential mortgage loans due to the paydown on one previously classified non-accrual loan, which were partially offset by a $32 thousand increase in the ALLL related to construction loans due to the larger than anticipated charge-off on the single-family construction taken into REO and a $6 thousand increase in the ALLL related to commercial loans.

At September 30, 2011, the Company had one collateral dependent non-accrual construction loan totaling $701 thousand that was considered to be impaired.

The impaired construction loan is almost entirely complete and currently being marketed for sale. The loan was originated as a construction loan to build a spec home with a well known and respected builder within our market. At September 30, 2011, the loan was nine months past due for interest. The borrower communicates regularly with management of the Company. Management has interviewed several real estate agencies as part of this process and they all have indicated that sales of similar properties in this market support the asking price and that the property is in an affluent market that tends to take somewhat longer to sell. The loan's appraised value is $950 thousand, the current listing price is $899 thousand, and our book value is $701 thousand. The loan is considered impaired primarily due to its delinquency status. Management weighed several factors in considering whether a discount to the appraised valuation was appropriate. In its analysis, management considered several qualitative factors including the length of time that the property has been on the market, the recent change in real estate agents and the associated $26 thousand reduction in the listing price, and the limited number of buyers for homes in this price range. Based upon the significant difference between the loan's $701 thousand book value and the home's current listing price of $899 thousand, management has concluded that no specific allocation of the ALLL is needed as of September 30, 2011. The Company will continue to monitor marketing efforts with the builder and his real estate agent.

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogenous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALLL that is representative of the risk found in the components of the portfolio at any given time.