Edgar Filing: FIRST PACTRUST BANCORP INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

FIRST PACTRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

000-49806

(Commission File Number)

Maryland

(State of incorporation)

04-3639825

(IRS Employer Identification No.)

610 Bay Boulevard, Chula Vista, California

(Address of Principal Executive Offices)

91910

(ZIP Code)

(619) 691-1519

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (p232.405) of this chapter) during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer; an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12B-2 of the Exchange Act.


Large accelerated Filer ¨		Accelerated Filer ¨		Non-accelerated Filer ¨		Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of August 3, 2011 the Registrant had 11,588,361 outstanding shares of common stock.

FIRST PACTRUST BANCORP, INC.

Form 10-Q Quarterly Report

Index


		Page
PART I - Financial Information

Item 1	Financial Statements		4

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Item 3	Quantitative and Qualitative Disclosures About Market Risk		45

Item 4	Controls and Procedures		46

PART II - Other Information

Item 1	Legal Proceedings		47

Item 1A	Risk Factors		47

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		54

Item 3	Defaults Upon Senior Securities		54

Item 4	Reserved		54

Item 5	Other Information		54

Item 6	Exhibits		54

SIGNATURES			57

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This report contains certain forward-looking statements within the meaning of Section 27a of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. First PacTrust Bancorp, Inc. (the Company) and Pacific Trust Bank (the Bank) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, as amended, and are including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company and the Bank, are generally identifiable by use of the words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The ability of the Company and the Bank to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company, the Bank, and the Bank’s wholly owned subsidiaries include, but are not limited to, changes in: interest rates; the economic health of the local real estate market; general economic conditions; legislative/regulatory provisions; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Bank’s market area; and impact of new accounting pronouncements. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

ITEM 1 – FINANCIAL STATEMENTS

First PacTrust Bancorp, Inc.

Consolidated Statements of Financial Condition

(In thousands of dollars except share data)

(Unaudited)


	June 30, 2011			December 31, 2010
ASSETS
Cash and due from banks	$	5,447		$	5,371
Interest-bearing deposits		55,592			53,729

Total cash and cash equivalents		61,039			59,100
Securities available-for-sale		74,613			64,790
Federal Home Loan Bank stock, at cost		7,650			8,323
Loans, net of allowance of $8,431 at June 30, 2011 and $14,637 at December 31, 2010		671,905			678,175
Accrued interest receivable		3,466			3,531
Real estate owned, net		15,019			6,562
Premises and equipment, net		8,716			6,344
Bank owned life insurance investment		18,295			18,151
Prepaid FDIC assessment		2,781			3,521
Other assets		18,782			13,124

Total assets	$	882,266		$	861,621

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	21,702		$	15,171
Interest-bearing		45,943			44,860
Money market accounts		85,973			89,708
Savings accounts		135,438			124,620
Certificates of deposit		396,878			371,949

Total deposits		685,934			646,308
Advances from Federal Home Loan Bank		30,000			75,000
Accrued expenses and other liabilities		5,857			4,304

Total liabilities		721,791			725,612
Commitments and contingent liabilities		—			—
SHAREHOLDERS’ EQUITY
Preferred stock, $.01 par value per share, $1,000 per share liquidation preference, 50,000,000 shares authorized		—			—
Common stock, $.01 par value per share, 200,000,000 shares authorized; 11,654,391 shares issued and 10,483,911 shares outstanding at June 30, 2011; 9,863,390 shares issued and 8,693,228 shares outstanding at December 31, 2010		117			99
Class B non-voting non-convertible Common stock, $.01 par value per share, 2,836,156 shares authorized; 1,036,156 shares issued and outstanding at June 30, 2011 and December 31, 2010		10			10
Additional paid-in capital		145,421			119,998
Additional paid-in capital-warrants		3,172			3,172
Retained earnings		35,928			35,773
Treasury stock, at cost (June 30, 2011—1,154,950 shares, December 31, 2010—1,170,162 shares,)		(24,806	)		(25,135	)
Unearned Employee Stock Ownership Plan (ESOP) shares (June 30, 2011—21,160 shares, December 31, 2010—42,320 shares)		(254	)		(507	)
Accumulated other comprehensive income		887			2,599

Total shareholders’ equity		160,475			136,009

Total liabilities and shareholders’ equity	$	882,266		$	861,621

See accompanying notes to consolidated financial statements.

First PacTrust Bancorp, Inc.

Consolidated Statements of Income (Loss)

(In thousands of dollars except per share data)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011		2010
Interest and dividend income
Loans, including fees	$	7,513		$	8,638		$	15,179	$	17,803
Securities		1,002			1,287			2,246		2,616
Dividends and other interest-earning assets		67			65			106		89

Total interest income		8,582			9,990			17,531		20,508
Interest expense
Savings		97			245			187		487
NOW		16			31			32		63
Money market		61			171			127		343
Certificates of deposit		1,049			1,713			2,154		3,558
Federal Home Loan Bank advances		351			805			868		1,693

Total interest expense		1,574			2,965			3,368		6,144

Net interest income		7,008			7,025			14,163		14,364
Provision for loan losses		451			5,634			451		7,848

Net interest income after provision for loan losses		6,557			1,391			13,712		6,516
Noninterest income
Customer service fees		373			345			711		659
Mortgage loan prepayment penalties		26			—			26		—
Income from bank owned life insurance		80			61			144		108
Net gain on sales of securities available-for-sale		1,118			—			1,437		—
Other		38			(42	)		84		(36	)

Total noninterest income		1,635			364			2,402		731
Noninterest expense
Salaries and employee benefits		2,856			1,536			6,237		3,164
Occupancy and equipment		532			461			1,196		949
Advertising		51			50			111		160
Professional fees		414			141			749		309
Stationery, supplies, and postage		116			94			231		180
Data processing		323			289			616		569
ATM costs		78			77			142		150
FDIC expense		392			401			775		781
Loan servicing & foreclosure		532			198			456		766
Operating loss on equity investment		78			90			156		172
Valuation allowance for OREO		137			1,028			558		1,028
Loss on sale of other real estate owned		51			320			819		320
Other general and administrative		439			240			769		636

Total noninterest expense		5,999			4,925			12,815		9,184

Income before income taxes		2,193			(3,170	)		3,299		(1,937	)
Income tax expense/(benefit)		644			(713	)		1,057		(354	)

Net income/(loss)	$	1,549		$	(2,457	)	$	2,242	$	(1,583	)

Preferred stock dividends and discount accretion	$	—		$	251		$	—	$	501

Net income available to common shareholders		1,549			(2,708	)		2,242		(2,084	)
Basic earnings/(loss) per share	$	.16		$	(.65	)	$	.23	$	(.50	)

Diluted earnings/(loss) per share	$	.16		$	(.65	)	$	.23	$	(.50	)

Weighted average common shares outstanding-basic		9,753,153			4,191,665			9,707,554		4,186,398
Weighted average common shares outstanding-diluted		9,785,203			4,191,665			9,722,160		4,186,398
Comprehensive income (loss)		(507	)		(1,973	)		530		(349	)

See accompanying notes to consolidated financial statements.

First PacTrust Bancorp, Inc.

Consolidated Statements of ShareHolder’s Equity

(In thousands of dollars, except share and per share data)

(Unaudited)


	Preferred Stock			Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Unearned ESOP			Additional Paid in capital Warrants		Accumulated Other Comprehensive Income			Total
Balance at January 1, 2010	$	19,094		$	54	$	67,958		$	35,515		$	(25,788	)	$	(1,015	)		—	$	1,667		$	97,485
Net Income		—			—		—			2,825			—			—			—		—			2,825
Change in net unrealized gain (losses) on securities available-for-sale, net of reclassification and tax effects		—			—		—			—			—			—			—		932			932

Total comprehensive income																								3,757

Forfeiture and retirement of stock		—			—		10			—			(10	)		—			—		—			—
Stock option compensation expense		—			—		94			—			—			—			—		—			94
Stock awards earned		—			—		29			—			—			—			—		—			29
Amortization of preferred stock discount		35			—		—			(35	)		—			—			—		—			—
Repurchased of Preferred Stock		(19,129	)		—		(171	)		—			—			—			—		—			(19,300	)
Issuance of stock awards		—			—		(668	)		—			668			—			—		—			—
Issuance of warrants		—			—		—			—			—			—			3,172		—			3,172
Purchase of 506 shares of treasury stock		—			—		—			—			(5	)		—			—		—			(5	)
Employee stock ownership plan shares earned		—			—		(53	)		—			—			508			—		—			455
Tax benefit/(loss) of RRP shares vesting		—			—		(6	)		—			—			—			—		—			(6	)
Dividends declared ($.25 per common share)		—			—		—			(1,503	)		—			—			—		—			(1,503	)
Preferred stock dividends		—			—		—			(925	)		—			—			—		—			(925	)
Warrant dividends		—			—		—			(104	)		—			—			—		—			(104	)
Net proceeds from stock issuance		—			55		52,805			—			—			—			—		—			52,860

Balance at December 31, 2010	$	—		$	109	$	119,998		$	35,773		$	(25,135	)	$	(507	)	$	3,172	$	2,599		$	136,009

Net Income		—			—		—			2,242			—			—			—		—			2,242
Change in net unrealized gain (losses) on securities available-for-sale, net of reclassification and tax effects		—			—		—			—			—			—			—		(1,712	)		(1,712	)

Total comprehensive income																								530


	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Unearned ESOP			Additional Paid in capital Warrants		Accumulated Other Comprehensive Income		Total
Stock option compensation expense		—		—		347			—			—			—			—		—		347
Stock awards earned		—		—		66			—			—			—			—		—		66
Issuance of stock awards		—		—		(284	)		—			284			—			—		—		—
Purchase of 318 shares of treasury stock		—		—		—			—			(4	)		—			—		—		(4	)
Employee stock ownership plan shares earned		—		—		93			—			—			253			—		—		346
Tax benefit/(loss) of RRP shares vesting		—		—		(1	)					—			—			—		—		(1	)
Dividends declared ($.215 per common share)		—		—		—			(2,087	)		—			—			—		—		(2,087	)
Repurchase of Warrants-TARP		—		—		(1,003	)		—			—			—			—		—		(1,003	)
Tax Effect ESOP		—		—		148			—			—			—			—		—		148
Tax Effect Options Redeemed		—		—		147			—			—			—			—		—		147
Net proceeds from stock issuance		—		18		25,959			—			—			—			—		—		25,977
Balance at June 30, 2011	$	—	$	127	$	145,421		$	35,928		$	(24,806	)	$	(254	)	$	3,172	$	887	$	160,475

See accompanying notes to consolidated financial statements.

First PacTrust Bancorp, Inc.

Consolidated Statements of Cash Flows

(In thousands of dollars)

(Unaudited)


	Six months ended June 30,
	2011			2010
Cash flows from operating activities
Net income (loss)	$	2,242		$	(1,583	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Provision for loan losses		451			7,848
Net accretion of securities		(400	)		(877	)
Depreciation and amortization		283			190
Employee stock ownership plan compensation expense		346			163
Stock option compensation expense		347			7
Stock award compensation expense		66			12
Bank owned life insurance income		(144	)		(108	)
Operating loss on equity investment		156			172
Gain on sale of securities available-for-sale		(1,437	)		—
Loss on sale of real estate owned		819			320
Deferred income tax (benefit)/expense		(1,293	)		792
Decrease in valuation allowances on other real estate owned		3,243			1,028
Net change in:
Deferred loan costs		266			363
Accrued interest receivable		65			514
Other assets		(3,425	)		1,989
Accrued interest payable and other liabilities		1,997			(1,365	)

Net cash provided by operating activities		3,582			9,465
Cash flows from investing activities
Proceeds from sales of securities available-for-sale		18,192			—
Proceeds from maturities, calls, and principal repayments of securities available-for-sale		13,966			7,590
Purchases of securities available-for-sale		(43,220	)		(22,794	)
Loan originations and principal collections, net		(10,452	)		17,353
Redemption of Federal Home Loan Bank stock		673			348
Proceeds from sale of real estate owned		3,286			5,627
Additions to premises and equipment		(2,655	)		(149	)

Net cash from investing activities		(20,210	)		7,975
Cash flows from financing activities
Repurchase of Warrants, TARP		(1,003	)		—
Net increase/(decrease) in deposits		39,626			23,973
Repayments of Federal Home Loan Bank advances		(45,000	)		(35,000	)
Net proceeds from stock issuance		25,977			—
Purchase of treasury stock		(4	)		(3	)
Tax benefit/(loss) from RRP shares vesting		(1	)		(4	)
Tax Effect of ESOP		148			—
Tax Effect of Options redeemed		147			—
Dividends paid on preferred stock		—			(482	)
Dividends paid on common stock		(1,323	)		(416	)

Net cash from financing activities		18,567			11,932

Net change in cash and cash equivalents		1,939			5,508
Cash and cash equivalents at beginning of year		59,100			34,596

Cash and cash equivalents at end of year	$	61,039		$	40,104

Supplemental cash flow information
Interest paid on deposits and borrowed funds	$	3,412		$	6,220
Income taxes paid		950			2,700
Supplemental disclosure of noncash activities
Transfer from loans to loans provided for sales of other real estate owned		—			—
Transfer from loans to real estate owned, net		12,719			9,358

See accompanying notes to consolidated financial statements.

FIRST PACTRUST BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(Amounts in thousands of dollars, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of First PacTrust Bancorp, Inc. (the Company) and its wholly owned subsidiary Pacific Trust Bank (the Bank) as of June 30, 2011 and December 31, 2010 and for the three and six months periods ended June 30, 2011 and June 30, 2010. Significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission. The December 31, 2010 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission, but does not include all of the disclosures required by U.S. generally accepted accounting principles.

Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2011. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented.

The results of operations for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. All significant intercompany transactions and balances are eliminated in consolidation.

Nature of Operations: The principal business of the Company is the ownership of the Bank. The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank (FHLB) system, which maintains insurance on deposit accounts with the Federal Deposit Insurance Corporation (FDIC).

The Bank is engaged in the business of retail banking, with operations conducted through its main office and ten branches located in San Diego and Riverside counties. In addition, the Bank opened a loan production office in Los Angeles, California during the first quarter of 2011. Loan production is expected to expand throughout southern California during the coming quarters. There are no significant concentrations of loans to any one industry or customer. However, the customer’s ability to repay their loans is dependent on the real estate market and general economic conditions in the area.

The accounting and reporting polices of the Company are based upon U.S. generally accepted accounting principles and conform to predominant practices within the banking industry. Significant accounting policies followed by the Company are presented below.

Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan losses, other real estate owned, realization of deferred tax assets, and the fair value of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash on hand, deposits with other financial institutions under 90 days, and daily federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased, including overnight borrowings with the Federal Home Loan Bank.

Interest-bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

Securities: Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized holding gains and losses, net of taxes, reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. See further discussion in Note 2- Securities.

Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Affordable Housing Fund: The Company has a 19% equity investment in an affordable housing fund originally totaling $4.2 million for purposes of obtaining tax credits and for Community Reinvestment Act purposes. This investment is accounted for using the equity method of accounting. Under the equity method of accounting, the Company recognizes its ownership share of the profits and losses of the fund. The Company obtains tax credits from these investments which reduce income tax expense for a period of 10 years. This investment is regularly evaluated for impairment by comparing the carrying value to the remaining tax credits expected to be received. For the six month periods ending June 30, 2011 and 2010 our share of the fund’s operating loss was $156 thousand and $172 thousand respectively. The balance of the investment at June 30, 2011 and December 31, 2010 was $1.7 million and $1.9 million, respectively, and is included in other assets.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 91 days delinquent unless the loan is well secured and in process of collection. Consumer loans, other than those secured by real estate, are typically charged off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual, is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The Company’s single family residential mortgage portfolio is comprised of a combination of traditional, fully-amortizing loans and non-traditional and/or interest only loans. In 2005 the Company introduced a fully-transactional flexible mortgage product called the “Green Account.” The Green Account is a mortgage line of credit which is secured by a first-deed of trust and which provides an associated “clearing account” that allows all types of deposits and withdrawals to be performed, including direct deposit, check, debit card, ATM, ACH debits and credits, and internet banking and bill payment transactions.

Concentration of Credit Risk: Most of the Company’s business activity is with customers located within San Diego and Riverside Counties. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in San Diego and Riverside County area.

Allowance for Loan Losses: The allowance for loan losses is maintained at a level considered adequate by management to provide for probable incurred loan losses. The allowance is increased by provisions charged against income, while loan losses are charged against the allowance when management deems a loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance. The Company performs an analysis of the adequacy of the allowance on a monthly basis. Management estimates the allowance balance required 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. Allocations 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 impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company evaluates all impaired loans individually under the guidance of ASC 310, primarily through the evaluation of collateral values and cash flows. 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. 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 at the fair value of collateral if repayment is expected solely from the collateral. Troubled debt restructurings are also measured at the present value of estimated future cash flows using the loan’s effective rate at inception or at the fair value of collateral if repayment is expected solely from the collateral. The general component covers loans that are not impaired and is determined by portfolio segment and is based on actual loss history experienced by the Company over the most recent 12 months. 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 lending management and other relevant staff; national and local economic trends and conditions; industry conditions; effects of changes in credit concentrations and other factors. The historical loss analysis is also combined with a comprehensive loan to value analysis to analyze the associated risks in the current loan portfolio. An updated loan to value analysis is obtained from an independent firm semi-annually, most recently in May 2011. Management uses available information to recognize loan losses, however, future loan loss provisions may be necessary based on changes in the above mentioned factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Bank to recognize additional provisions based on their judgment of information available to them at the time of their examination.

The following portfolio segments have been identified: commercial and industrial, real estate mortgage, multi-family, land, real estate one-to four- family first mortgage, real estate one-to four- family junior lien mortgage, and other revolving credit and installment. 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 all loans delinquent over 60 days and non-homogenous loans such as commercial and commercial real estate loans. Classification of problem single-family residential loans is performed on a monthly basis while analysis of non-homogenous loans is performed on a quarterly basis.

Loans secured by multi-family and commercial real estate properties generally involve a greater degree of credit risk than one-to four- family residential mortgage loans. Because payments on loan secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. Commercial business loans are also considered to have a greater degree of credit risk due to the fact these loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). Consumer and other real estate loans may entail greater risk than do one- to four- family residential mortgage loans given that collection of these loans is dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Negatively amortizing and interest only loans are also considered to carry a higher degree of credit risk due to their unique cash flows. The Green Mortgages tend to have lower levels of delinquencies as a result of the borrower’s ability to meet their monthly payments obligations by increasing the level of their line. Credit risk on this asset class is also managed through the completion of regular re-appraisals of the underlying collateral. In cases where the property values have declined to levels less than the original loan-to-value, or other levels deemed prudent by the Bank, the Bank may freeze the line and/or require monthly payments or principal reductions to bring the loan in balance.

Classified Assets: Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of Thrift Supervision, and, as of July 21, 2011, its successor regulator (collectively referred to as the “Office of Thrift Supervision”), to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset 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” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. The Bank includes in its classification of “Substandard Assets” loans that are performing under terms of a TDR, but where the borrower has yet to make six or more payments under the TDR, and where the loan is impaired, as well as loans where the borrower is current in his or her payments on the subject Classified Loan but may be a guarantor on another loan that is classified as a result of weakness in the credit or collateral (“Relationship”). As of June 30, 2011, the Bank had $6.8 million of loans classified as “substandard” that were performing under a TDR for less than six months, and $8.3 million of “substandard” loans where the borrower was current on all payments but where the Relationship was rated “Substandard” as result of the existence of personal guarantees. Additionally, two TDRs with an aggregate balance of $1.9 million have recently been modified and have not yet been required to make their first payment. Assets 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.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general or specific allowances for loan losses in an amount deemed prudent by management and approved by the Board of Directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision (OTS) and the FDIC, which may order the establishment of additional general or specific loss allowances.

In connection with the filing of our periodic reports with the Office of Thrift Supervision and in accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method with average useful lives ranging from five to forty years.

Building and leasehold improvements are depreciated using the straight-line method over estimated useful lives not to exceed the lease term. Lease terms range up to ten years. Furniture, fixtures, and equipment are depreciated using the straight-line method with useful lives ranging from five to seven years. Maintenance and repairs are charged to expense as incurred, and improvements that extend the useful lives of assets are capitalized.

Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. In general, the Bank assumes a 9% cost when recording fair value based on historical selling expenses. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized). Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Loan Commitments and Related Financial Statements: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2007 and for all state income taxes before 2006. The Company expects the total amount of unrecognized tax benefits to be recognized in 2011.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties at June 30, 2011 and December 31, 2010.

Employee Stock Ownership Plan: The cost of shares issued to the ESOP but not yet allocated to participants is shown as a reduction of shareholders’ equity. Compensation expense is based on the average market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduces retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest. There were no shares forfeited for the three and six months ending June 30, 2011 and 2010.

Earnings Per Common Share: Basic earnings per common share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options and stock awards. Dividends paid, and the accretion of discount on the Company’s preferred stock, reduce the earnings available to common shareholders.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of tax, which are also recognized as a separate component of equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis.

Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Adoption of New Accounting Standards: The FASB has issued Accounting Standard Update (ASU) No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This update clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures in Topic 805 when comparative financial statements are presented. The amendments in this update specify that if a public entity presets comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro form revenue and earnings. For public entities, the amendments are effective for fiscal years and interim periods within those years, beginning after December 15, 2010. The provisions of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

Newly Issued But Not Yet Effective Accounting Standards: The FASB has issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification^™ (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The provisions of this update are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The FASB has issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification^TM (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The provisions of this update are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The FASB has issued Accounting Standards Update (ASU) No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The FASB believes the guidance in this ASU will improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings. The ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments to FASB Accounting Standards Codification™ (Codification) Topic 310, Receivables, clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The provisions of this update are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE 3 – EMPLOYEE STOCK COMPENSATION

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for the Company’s stock compensation plans was $217 thousand and $413 thousand for the three and six months ended June 30, 2011, respectively. Total compensation cost that has been charged against income for the Company’s stock compensation plans was $10 thousand and $18 thousand for the three and six months ended June 30, 2010, respectively. The total income tax benefit and/or recovery was $4 thousand and $7 thousand, for the three and six months ended June 30, 2011, respectively.

Recognition and Retention Plan

A Recognition and Retention Plan (“RRP”) provides for the issuance of shares to directors, officers, and employees. Compensation expense is recognized over the vesting period of the shares based on the market value at date of grant. Pursuant to its 2003 stock-based incentive plan, total shares issuable under the plan are 211,600. At June 30, 2011, all 211,600 shares were issued. These shares vest over a five-year period. Compensation expense for the RRP awards totaled approximately $7 thousand and $13 thousand for the three and six months ended June 30, 2011 and $6 thousand and $12 thousand for the three and six months ended June 30, 2010. As of June 30, 2011, there was $123 thousand of total unrecognized compensation cost related to 11,078 nonvested awards. The cost is expected to be recognized over a weighted-average period of less than five years.

A summary of changes in the Company’s nonvested shares for the quarter ending June 30, 2011 follows:


Nonvested shares	Shares		Weighted-Average Grant-Date Fair-Value
Nonvested at March 31, 2011		11,518	$	17.67
Granted		—		—
Vested		—		—
Forfeited/expired		440		22.23

Nonvested at June 30, 2011		11,078	$	17.67

A summary of changes in the Company’s nonvested shares for the six months ended June 30, 2011 follows:


Nonvested shares	Shares		Weighted-Average Grant-Date Fair-Value
Nonvested at January 1, 2011		11,518	$	17.67
Granted		—		—
Vested		—		—
Forfeited/expired		440		22.23

Nonvested at June 30, 2011		11,078	$	17.67

A summary of changes in the Company’s nonvested shares for the quarter ending June 30, 2010 follows:


Nonvested shares	Shares		Weighted-Average Grant-Date Fair-Value
Nonvested at March 31, 2010		3,280	$	17.96
Granted		—		—
Vested		—		—
Forfeited/expired		—		—

Nonvested at June 30, 2010		3,280	$	17.96

A summary of changes in the Company’s nonvested shares for the six months ended June 30, 2010 follows:


Nonvested shares	Shares		Weighted-Average Grant-Date Fair-Value
Nonvested at January 1, 2010		3,580	$	17.96
Granted		—		—
Vested		—		—
Forfeited/expired		300		17.00

Nonvested at June 30, 2010		3,280	$	17.96

Additionally, one-time inducement restricted shares were granted during 2010 and 2011 to newly hired executive officers. During the quarter ended June 30, 2011, 5,000 shares were granted. No shares were granted during the three months ended March 31, 2011. Of these shares, none were exercised during 2011. No shares were awarded during the three or six month periods ended June 30, 2010. These one-time inducement shares vest over a three year period. Compensation expense for the inducement awards totaled approximately $22 thousand and $43 thousand for the three and six months ended June 30, 2011, respectively. As of June 30, 2011,

there was $271 thousand of total unrecognized compensation cost related to 26,500 nonvested inducement awards. The cost is expected to be recognized over a weighted-average period of less than three years.

A summary of changes related to the Company’s nonvested inducement awards for the quarter ending June 30, 2011 follows:


	Shares		Weighted Average Exercise Price
Nonvested at March 31, 2011		21,500	$	11.57
Granted		5,000		14.48
Vested		—		—
Forfeited or expired		—		—

Nonvested at June 31, 2011		26,500	$	12.12

A summary of changes related to the Company’s nonvested inducement awards for the six months ended June 30, 2011 follows:


	Shares		Weighted Average Exercise Price
Nonvested at January 1, 2011		21,500	$	11.57
Granted		5,000		14.48
Vested		—		—
Forfeited or expired		—		—

Nonvested at June 30, 2011		26,500	$	12.12

During June, 2011, the Company adopted an Omnibus Incentive Plan under the terms of which 950,000 shares may be awarded as either stock options or restricted shares of the Company. There were 5,292 shares awarded as restricted shares from this plan during the quarter ended June 30, 2011. These shares vest over a one year period. Compensation expense for these awards totaled approximately $2 thousand for the three and six months ended June 30, 2011. As of June 30, 2011, there was $121 thousand of total unrecognized compensation cost related to 5,000 nonvested awards. The cost is expected to be recognized over a weighted-average period of less than one year.

A summary of changes related to the Company’s nonvested inducement awards for the quarter ending June 30, 2011 follows:


	Shares		Weighted Average Exercise Price
Nonvested at March 31, 2011		—	$	—
Granted		5,000		15.81
Vested		—		—
Forfeited or expired		—		—

Nonvested at June 31, 2011		5,000	$	15.81

Stock Options

In addition to the Omnibus Incentive Plan discussed above, the Company has a Stock Option Plan (“SOP”) which provides for the issuance of options to directors, officers, and employees. The Company adopted the SOP during 2003 under the terms of which 529,000 shares of the Company’s common stock may be awarded. At June 30, 2011, the number of shares available for future awards was 16,500. The options become exercisable in equal installments over a five-year period from the date of grant. The options expire ten years from the date of grant. The fair value of options granted are computed using option pricing models, using the following weighted-average assumptions as of grant date. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted in 2011 or 2010 under the SOP. There were no options exercised or forfeited during the three months ended June 30, 2011.

During 2010 and 2011, 850,000 inducement options were issued to newly hired executive officers, of which, 80,000 inducement options were awarded during the quarter ended June 30, 2011. These one-time inducement options were granted outside of the existing SOP plan and the Omnibus Incentive Plan. None of these options were exercised during 2011. These options have a three year vesting. As of June 30, 2011, there was $1.8 million of total unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over a weighted-average period of less than three years.


	May 6, 2011
Options granted		80,000
Estimated fair value of stock options granted		3.40
Risk-free interest rate		0.96	%
Expected term		3 year
Expected stock price volatility		40.87	%
Dividend yield		2.89	%

The following table represents inducement option activity during the three months ended June 30, 2011:


	Shares		Weighted Average Exercise Price
Outstanding at beginning of period April 1, 2011		770,000	$	11.42
Granted		80,000		14.48
Exercised		—		—
Forfeited or expired		—		—

Outstanding at end of period June 30, 2011		850,000	$	11.71

Fully vested and expected to vest		—		—

Options exercisable at June 30, 2011		—		—

The following table represents inducement option activity during the six months ended June 30, 2011:


	Shares		Weighted Average Exercise Price
Outstanding at beginning of period January 1, 2011		770,000	$	11.42
Granted		80,000		14.48
Exercised		—		—
Forfeited or expired		—		—

Outstanding at end of period June 30, 2011		850,000	$	11.71

Fully vested and expected to vest		—		—

Options exercisable at June 30, 2011		—		—

During the quarter ended June 30, 2011, 68,569 shares were awarded as stock options from the Omnibus Incentive Plan. The options become exercisable one-year from the date of grant. The options expire ten years from the date of grant. The fair value of options granted are computed using option pricing models, using the following weighted-average assumptions as of grant date. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

As of June 30, 2011, there was $231 thousand of total unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over a weighted-average period of less than 1 year.


	June 20, 2011
Options granted		68,569
Estimated fair value of stock options granted		3.65
Risk-free interest rate		0.67	%
Expected term		3 year
Expected stock price volatility		40.72	%
Dividend yield		2.89	%

The following table represents option activity under the Omnibus Incentive Plan during the three months ended June 30, 2011:


	Shares		Weighted Average Exercise Price
Outstanding at beginning of period April 1, 2011		—	$	—
Granted		68,569		15.81
Exercised		—		—
Forfeited or expired		—		—

Outstanding at end of period June 30, 2011		68,569	$	15.81

Fully vested and expected to vest		—		—

Options exercisable at June 30, 2011		—		—

The following table represents option activity under the Omnibus Incentive Plan during the six months ended June 30, 2011:


	Shares		Weighted Average Exercise Price
Outstanding at beginning of period January 1, 2011		—	$	—
Granted		68,569		15.81
Exercised		—		—
Forfeited or expired		—		—

Outstanding at end of period June 30, 2011		68,569	$	15.81

Fully vested and expected to vest		—		—

Options exercisable at June 30, 2011		—		—

Information related to the stock option plan during each year follows:

2011

2010

2009

Intrinsic value of options exercised

—

Cash received from option exercises

—

Tax benefit realized from option exercises

—

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. ASC 718 and 505 require the recognition of stock based compensation for the number of awards that are ultimately expected to vest. As a result, recognized stock compensation expense was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates of approximately 5% for senior management and the board of directors and 45% for all other employees. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances. The Company recorded stock compensation expense of $183 thousand and $347 thousand as salary and employee benefits expense during the three and six months ended June 30, 2011, respectively. The Company recorded stock compensation expense of $4 thousand and $6 thousand as salary and employee benefits expense during the three and six months ended June 30, 2010, respectively.

Warrants

On November 1, 2010, the Company issued warrants to TCW Shared Opportunity Fund V, L.P. for up to 240,000 shares of non-voting common stock at an exercise price of $11.00 per share, subject to anti-dilutive adjustments. These warrants are exercisable from the date of issuance through November 1, 2015. On November 1, 2010, the Company also issued warrants to COR Advisors LLC to purchase up to 1,395,000 shares of non-voting stock at an exercise price of $11.00 per share, subject to anti-dilutive adjustments. These warrants are exercisable with respect to 95,000 shares on January 1, 2011 and an additional 130,000 shares on the first day of each of the next ten calendar quarterly periods beginning on April 1, 2011, subject to earlier vesting upon a “change in control” of the Company or in the discretion of our board of directors. These warrants are exercisable with respect to each vesting tranche for five years after the tranche’s vesting date. The warrants are exercisable for voting common stock in lieu of non-voting common stock following the transfer of the warrants in a widely disbursed offering or in other limited circumstances.

NOTE 4 – EARNINGS/(LOSS) PER SHARE

Basic earnings/(loss) per share were computed by dividing net income/(loss) by the weighted average number of shares outstanding. Diluted earnings/(loss) per share were computed by dividing net income/(loss) by the weighted average number of shares outstanding, adjusted for the dilutive effect of the outstanding stock options and restricted stock awards. Computations for basic and diluted earnings/(loss) per share are provided below.


	Three Months Ended June 30, 2011		Three Months Ended June 30, 2010			Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
Basic
Net income/(loss)	$	1,549	$	(2,457	)	$	2,242	$	(1,583	)
Less: Dividends on preferred stock		—		(241	)		—		(482	)
Less Imputed dividends		—		(10	)		—		(19	)

Net income/(loss) available to common shareholders	$	1,549	$	(2,708	)	$	2,242	$	(2,084	)

Weighted average common shares outstanding		9,753,153		4,191,665			9,707,554		4,186,398

Basic earnings/(loss) per share	$	.16	$	(.65	)	$	.23	$	(.50	)

Diluted
Net income/(loss) available to common shareholders	$	1,549	$	(2,708	)	$	2,242	$	(2,084	)

Weighted average common shares outstanding for basic earnings per common share		9,753,153		4,191,665			9,707,554		4,186,398
Add: Dilutive effects of stock options		3,974		0			3,895		0
Add: Dilutive effects of stock awards		28,076		0			10,711		0

Average shares and dilutive potential common shares		9,785,203		4,191,665			9,722,160		4,186,398

Diluted earnings/(loss) per common share	$	.16	$	(.65	)	$	.23	$	(.50	)

There was a total of 156,580 and 236,580 stock options and award that were not considered in computing diluted earnings per common share for the three and six month period ending June 30, 2011, respectively, because they were anti-dilutive. All stock options and stock awards for the three and six month periods ended June 30, 2010 were anti-dilutive. They were anti-dilutive since the exercise prices were greater than the average market price of the common stock.

NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair Value Hierarchy. ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

Investment Securities Available for Sale. The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of the Company’s Level 3 securities are by the Company and an independent third-party provider using a discounted cash flow methodology. The methodology uses discount rates that are based upon observed market yields for similar securities. Prepayment speeds are estimated based upon the prepayment history of each bond and a detailed analysis of the underlying collateral. Gross weighted average coupon, geographic concentrations, loan to value, FICO and seasoning are among the different loan attributes that are factored into our prepayment curve. Default rates and severity are estimated based upon geography of the collateral, delinquency, modifications, loan to value ratios, FICO scores, and past performance.

Impaired Loans. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Real Estate Owned Assets. Real estate owned assets “OREO” are recorded at the lower of cost or fair value less estimated costs to sell at the time of foreclosure. The fair value of real estate owned assets is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring and Non Recurring Basis

Available for sale securities are measured at fair value on a recurring basis, impaired loans and real estate owned are measured at fair value on a non-recurring basis.


.	Carrying Value		Fair Value Measurements at June 30, 2011 Using
.	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level One)		Significant Other Observable Inputs (Level Two)		Significant Unobservable Inputs (Level Three)
Assets
U.S. government sponsored entities and agency securities (recurring)	$	11,671	$	—	$	11,671	$	—
Private label residential mortgage-backed securities (recurring)		57,042		—		—		57,042
Federal National Mortgage Association securities (recurring)		3		—		3		—
Government National Mortgage Association securities (recurring)		4,394		—		4,394		—
Impaired loans (non recurring)		32,708		—		—		32,708
Real estate owned assets (non recurring)		15,019		—		—		15,019

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six month period ended June 30, 2011 :


	Investment Securities Available-for-sale
Balance of recurring Level 3 assets at April 1, 2011	$	54,246
Total gains or losses (realized/unrealized):
Included in earnings—realized		1,421
Included in earnings—unrealized		—
Included in other comprehensive income		(2,992	)
Purchases		31,203
Sales, issuances and settlements		(26,836	)
Net transfers in and/or out of Level 3		—

Balance of recurring Level 3 assets at June 30, 2011	$	57,042

There were no significant transfers between Level 1 and Level 2 during the quarter ended June 30, 2011.

Impaired loans with specific valuation allowances are measured for impairment using the fair value of the collateral for collateral dependent loans. At June 30, 2011, impaired loans, net of specific valuation allowances totaled $32.1 million. Other real estate owned which is measured at fair value less costs to sell, had a net carrying amount of $15.0 million, which is made up of the outstanding balance of $15.2 million, net of a valuation allowance of $137 thousand at June 30, 2011.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2010:


	Carrying Value		Fair Value Measurements at December 31, 2010 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level One)		Significant Other Observable Inputs (Level Two)		Significant Unobservable Inputs (Level Three)
Assets
U.S. government sponsored entities and agency securities (recurring)	$	5,055	$	—	$	5,055	$	—
Private label residential mortgage-backed securities (recurring)		54,246		—		—		54,246
Federal National Mortgage Association securities (recurring)		3		—		3		—
Government National Mortgage Association securities (recurring)		5,485		—		5,485		—
Impaired loans (non recurring)		23,936		—		—		23,936
Real estate owned assets (non recurring)		6,562		—		—		6,562

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period ended December 31, 2010:


	Investment Securities Available-for-sale
Balance of recurring Level 3 assets at January 1, 2010	$	47,131
Total gains or losses (realized/unrealized):		—
Included in earnings—realized		—
Included in earnings—unrealized		—
Included in other comprehensive income		1,590
Purchases		29,110
Sales, issuances and settlements		(23,585	)
Net transfers in and/or out of Level 3		—
Balance of recurring Level 3 assets at December 31, 2010		54,246

There were no significant transfers between Level 1 and Level 2 during 2010.

Impaired loans, with specific valuation allowances are measured for impairment using the fair value of the collateral for collateral dependent loans totaled $23.9 million and had a carrying amount of $19.6 million, net of a valuation allowance of $4.4 million at December 31, 2010. At December 31, 2010, these impaired loans consisted of $15.3 million single-family loans, $8.5 million multi-family loans and one HELOC totaling $108 thousand. During the year ended December 31, 2010, a provision of $4.4 million was made for these loans, net of charge-offs previously provided.

Other real estate owned which is measured at fair value less costs to sell, had a net carrying amount of $6.5 million, which is made up of the outstanding balance of $9.9 million, net of a valuation allowance of $3.4 million at December 31, 2009, resulting in expense of $2.7 million for the year ending December 31, 2010.

In accordance with ASC 825-10, the carrying amounts and estimated fair values of financial instruments, at June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents	$	61,039	$	61,039	$	59,100	$	59,100
Securities available-for-sale		74,613		74,613		64,790		64,790
FHLB stock		7,650		N/A		8,323		N/A

	June 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Loans receivable, net		671,905		683,638		678,175		690,229
Real estate owned, net		15,019		15,019		6,562		6,562
Accrued interest receivable		3,466		3,466		3,531		3,531
Financial liabilities
Deposits	$	685,934	$	688,096	$	646,308	$	628,319
Advances from the FHLB		30,000		30,240		75,000		75,959
Accrued interest payable		187		187		225		225

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits in other financial institutions, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that re-price frequently and fully. The methods for determining the fair values for securities were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material (or is based on the current fees or cost that would be charged to enter into or terminate such arrangements).

NOTE 6 – SECURITIES

The following tables summarize the amortized cost and fair value of the available-for-sale securities investment securities portfolio at June 30, 2011 and December 31, 2010, respectively, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
2011
Available-for sale
U.S. government-sponsored entities and agencies	$	11,671	$	117	$	—		$	11,788
Private label residential mortgage-backed securities		57,042		1,640		(320	)		58,362
Federal National Mortgage Association		3		—		—			3
Government National Mortgage Association		4,394		66		—			4,460

Total securities available for sale	$	73,110	$	1,823	$	(320	)	$	74,613


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
2010
Available-for sale
U.S. government-sponsored entities and agencies	$	5,036	$	19	$	—		$	5,055
Private label residential mortgage-backed securities		49,933		4,545		(232	)		54,246
Federal National Mortgage Association		3		—		—			3
Government National Mortgage Association		5,402		84		—			5,486

Total securities available for sale	$	60,374	$	4,648	$	(232	)	$	64,790

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	June 30, 2011
	Amortized Cost		Fair Value
Maturity
Available-for-sale
Within one year	$	—	$	—
One to five years		11,671		11,788
Five to ten years		—		—
Private label residential mortgage backed and agency securities		61,439		62,826

Total	$	73,110	$	74,613

At June 30, 2011 and December 31, 2010, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

The following table summarizes the investment securities with unrealized losses at June 30, 2011 by aggregated major security type and length of time in a continuous unrealized loss position:


	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale
U.S. government-sponsored entities and agencies			$			$	—	$	—				$
Private label residential mortgage-backed securities		6,790		(51	)		16,373		(269	)		23,163		(320	)

Total available-for-sale	$	6,790	$	(51	)	$	16,373	$	(269	)	$	23,163	$	(320	)

The following table summarizes the investment securities with unrealized losses at December 31, 2010 by aggregated major security type and length of time in a continuous unrealized loss position:


	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale
Private label residential mortgage-backed securities	$	11,547	$	(232	)	$	—	$	—	$	11,547	$	(232	)

Total available-for-sale	$	11,547	$	(232	)	$	—	$	—	$	11,547	$	(232	)

Other-Than-Temporary Impairment. Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under Statement of Financial Accounting Standards ASC 320, Accounting for Certain Investments in Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets.

In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by ASC 325 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the ASC 325 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of June 30, 2011, the Company’s security portfolio consisted of thirty-eight securities, seven of which were in an unrealized loss position. The unrealized losses are related to the Company’s private label residential mortgage-backed securities as discussed below.

The Company’s private label residential mortgage-backed securities that are in a loss position had a market value of $23.2 million with unrealized losses of approximately $320 thousand at June 30, 2011. These non-agency private label residential mortgage-backed securities were rated AAA at purchase and are not within the scope of ASC 325. The Company monitors to insure it has adequate credit support and as of June 30, 2011, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. Of the $74.6 million securities portfolio, $69.7 million were rated AAA or AA and $4.9 million were rated between BBB to CCC based on the most recent credit rating as of June 30, 2011.

During the quarter ended June 30, 2011 and December 31, 2010, the Company determined that no securities were other-than-temporarily impaired due to current market conditions.

NOTE 7 – LOANS

Loans receivable consist of the following:


	June 2011			December 2010
Commercial:
Commercial and industrial	$	9,285		$	6,744
Real estate mortgage		65,933			46,568
Multi-family		30,224			33,040
Real estate construction		—			—
Land		4,933			14,828
Consumer:
Real estate 1-4 family first mortgage		548,994			568,854
Real estate 1-4 family junior lien mortgage		9,118			9,923
Other revolving credit and installment		10,290			11,031

Total		678,777			690,988
Allowance for loan losses		(8,431	)		(14,637	)
Net deferred loan costs		1,559			1,824

Loans receivable, net	$	671,905		$	678,175

At June 30, 2011, the Company had a total of $371.5 million in interest only mortgage loans and $28.7 million in loans with potential for negative amortization. At December 31, 2010, the Company had a total of $423.4 million in interest only mortgage loans (including Green Account loans) and $29.7 million in loans with potential for negative amortization. These loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization. However, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on loan-to-value ratios.

Activity in the allowance for loan losses is summarized as follows for the six months ended June 30, 2011 and the twelve months ended December 31, 2010 and 2009:


	2011			2010			2009
Balance at beginning of year	$	14,637		$	13,079		$	18,286
Loans charged off		(6,735	)		(7,531	)		(22,505	)
Recoveries of loans previously charged off		78			132			2
Provision for loan losses		451			8,957			17,296

Balance at end of period	$	8,431		$	14,637		$	13,079

The following table presents the activity in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on impairment method as of June 30, 2011:


	Commercial and Industrial		Real Estate Mortgage		Multi-family			Real estate construction		Land			Real Estate 1-4 family first mortgage			Real Estate 1-4 family junior lien mortgage		Other Revolving Credit			TOTAL
Allowance for loan losses:
Balance as of December 31, 2010	$	50	$	332	$	2,389		$	—	$	1,067		$	10,191		$	258	$	350		$	14,637
Charge-offs		—		—		(2,136	)		—		(1,843	)		(2,746	)		—		(10	)		(6,735	)
Recoveries		—		—		—			—		23			49			—		6			78
Provision		34		307		439			—		1,031			(1,332	)		102		129			452

Balance as of June 30, 2011	$	84	$	639	$	692		$	—	$	278		$	6,162		$	360	$	217		$	8,432

Individually evaluated for impairment		—		—		349			—		—			945			—		—			1,294
Collectively evaluated for impairment		84		639		343			—		278			5,216			360		217			7,138

Total ending allowance balance	$	84	$	639	$	692		$	—	$	278		$	6,162		$	360	$	217		$	8,432

Loans:
Loans individually evaluated for impairment	$	485	$	2,291	$	5,028		$	—	$	2,404		$	26,794		$	—	$	1,045		$	38,047
Loans collectively evaluated for impairment		8,800		63,641		21,907			—		729			522,200			9,118		9,246			635,642

Total ending loans balance	$	9,285	$	65,933	$	26,935		$	—	$	3,133		$	548,994		$	9,118	$	10,291		$	673,689

The following table presents the activity in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on impairment method as of December 31, 2010:


	Commercial and Industrial		Real Estate Mortgage			Multi-family		Real estate construction		Land			Real Estate 1-4 family first mortgage			Real Estate 1-4 family junior lien mortgage			Other Revolving Credit			TOTAL
Allowance for loan losses:
Balance as of December 31, 2009	$	17	$	742		$	1,474	$	—	$	1,348		$	8,787		$	412		$	299		$	13,078
Charge-offs		—		—			—		—		(2,695	)		(4,747	)		(47	)		(42	)		(7,531	)
Recoveries		—		—			—		—		6			92			14			20			132
Provision		33		(410	)		915		—		2,408			(6,059	)		(121	)		73			8,957

Balance as of December 31, 2010	$	50	$	332		$	2,389	$	—	$	1,067		$	10,191		$	258		$	350		$	14,637

Individually evaluated for impairment		—		—			2,084		—		—			2,235			—			44			4,363
Collectively evaluated for impairment		50		332			305		—		1,067			7,956			258			306			10,274

Total ending allowance balance	$	50	$	332		$	2,389	$	—	$	1,067		$	10,191		$	258		$	350		$	14,637

Loans:
Loans individually evaluated for impairment	$	14	$	2,310		$	10,466	$	—	$	9,715		$	27,297		$	—		$	113		$	49,915
Loans collectively evaluated for impairment		6,730		44,259			22,574		—		5,113			541,556			9,923			10,918			641,073

Total ending loans balance	$	6,744	$	46,569		$	33,040	$	—	$	14,828		$	568,853		$	9,923		$	11,031		$	690,988

Individually impaired loans were as follows:


	June 2011		December 2010
Year-end loans with no allocated allowance for loan losses	$	22,128	$	25,979
Year-end loans with allocated allowance for loan losses		10,580		23,936

Total		32,708		49,915

Amount of the allowance for loan losses allocated	$	1,294	$	4,363


	2011		2010		2009
Average of individually impaired loans during the period	$	42,999	$	33,662	$	47,214
Interest income recognized during impairment		418		1,785		820
Cash-basis interest income recognized		212		1,555		595

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011. The recorded investment included represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs and accrued interest.


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment YTD		Interest Income Recognized YTD
With no related allowance recorded:
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Real estate mortgage		—		—		—		—		—
Multi-family		3,277		3,543		—		4,925		—
Real estate construction		—		—		—		—		—
Land		4,689		5,056		—		4,982		11
Consumer:
Real estate 1-4 family first mortgage	$	14,051	$	14,104	$	—	$	14,575	$	147
Real estate 1-4 family junior lien mortgage		—		—		—		—		—
Other revolving credit and installment		111		113		—		113		3
With an allowance recorded:
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Real estate mortgage		—		—		—		—		—
Multi-family		5,028		5,033		349		5,046		127
Real estate construction		—		—		—		—		—
Land		—		—		—		—		—
Consumer:
Real estate 1-4 family first mortgage and green	$	5,485	$	5,489	$	879	$	5,489	$	105
Real estate 1-4 family junior lien mortgage and green		67		68		67		68		—
Other revolving credit and installment		—		—		—		—		—

Total	$	32,708	$	33,406	$	1,294	$	35,197	$	393

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment YTD		Interest Income Recognized YTD
With no related allowance recorded:
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Real estate mortgage		2,310		2,359		—		2,201		27
Multi-family		—		—		—		32		3
Real estate construction		—		—		—		—		—
Land		9,715		10,625		—		4,952		171
Consumer:
Real estate 1-4 family first mortgage	$	13,934	$	14,643	$	—	$	16,711	$	273
Real estate 1-4 family junior lien mortgage		—		—		—		161		—
Other revolving credit and installment		20		21		—		40		3
With an allowance recorded:
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Real estate mortgage		10,466		8,421		2,084		8,696		808
Multi-family		—		—		—		—		—
Real estate construction		—		—		—		—		—
Land		—		—		—		7,240		250
Consumer:
Real estate 1-4 family first mortgage	$	13,362	$	11,415	$	2,235	$	16,415	$	237
Real estate 1-4 family junior lien mortgage		—		—		—		—		—
Other revolving credit and installment		108		74		44		100		12

Total	$	49,915	$	47,558	$	4,363	$	56,556	$	1,786

Nonaccrual loans and loans past due 90 days still on accrual were as follows:


	2011		2010
Loans past due over 90 days still on accrual	$	—	$	—
Nonaccrual loans, net of specific valuation allowances ($945 and $3,423)	$	22,067	$	35,407

Nonaccrual loans consist of the following:


	June 2011		December 2010
Commercial:
Commercial and industrial	$	—	$	—
Real estate mortgage		—		—
Multi-family		3,277
Real estate construction		—		6,691
Land		4,204		9,715
Consumer:
Real estate 1-4 family first mortgage		14,585		18,999
Real estate 1-4 family junior lien mortgage		—		—


	June 2011		December 2010
Other revolving credit and installment		1		2

Total	$	22,067	$	35,407

Of the $22.1 million in nonaccrual loans, $16.5 million represents trouble debt restructured loans that are nonaccrual due to the fact that these loans are currently in the first six months of payment.

Troubled Debt Restructurings:

The Company has allocated $746 thousand and $3.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2011 and December 31, 2010, respectively. The Company did not have any commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at June 30, 2011 or December 31, 2010.

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 performs an historical loss analysis that is combined with a comprehensive loan to value analysis to analyze the associated risks in the current loan portfolio. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans delinquent over 60 days and non-homogenous loans such as commercial and commercial real estate loans. Classification of problem single family residential loans is performed on a monthly basis while analysis of non-homogenous loans is performed on a quarterly 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 uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of 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 of 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 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 not rated are evaluated based on payment history.

The following table displays the Company’s risk categories as of June 30, 2011.


	Pass		Special Mention		Substandard		Doubtful		Not Rated		TOTAL
Commercial:
Commercial and industrial		8,800		485		—		—		—		9,285
Real estate mortgage		58,781		—		2,291		—		4,861		65,933
Multi-family		17,490		—		8,305		—		4,429		30,224
Real estate construction		—		—		—		—		—		—
Land		729		334		3,870		—		—		4,933
Consumer:
Real estate 1-4 family first mortgage		469,368		16,707		19,859		—		43,060		548,994
Real estate 1-4 family junior lien mortgage		8,156		698		248		—		16		9,118
Other revolving credit and installment		7,768		114		935		—		1,473		10,290

Total	$	571,092	$	18,337	$	35,509	$	—	$	53,839	$	678,777

The following table displays the Company’s risk categories as of December 31, 2010.


	Pass		Special Mention		Substandard		Doubtful		Not Rated		TOTAL
Commercial:
Commercial and industrial		6,244		500		—		—		—		6,744
Real estate mortgage		34,882		4,431		2,310		—		4,945		46,568
Multi-family		18,085		1,965		8,502		—		4,488		33,040
Real estate construction		—		—		—		—		—		—
Land		4,376		1,071		9,381		—		—		14,828
Consumer:
Real estate 1-4 family first mortgage		467,970		27,341		22,771		—		50,772		568,854
Real estate 1-4 family junior lien mortgage		9,044		863		108		—		16		9,923
Other revolving credit and installment		9,290		180		—		—		1,453		11,031

Total	$	549,891	$	36,351	$	43,072	$	—	$	61,674	$	690,988

The following table presents the aging of the principal balances in past due loans as of June 30, 2011 by class of loans:


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Total Carrying Amount > 90 Days and Accruing		Considered Current That Have been Modified in Previous Year
June 30, 2011
Commercial:
Commercial and industrial	$	485		—		—		485		8,800		9,285		—		485
Real estate mortgage		—		—		—		—		65,933		65,933		—		—
Multi-family		182		—		3,277		3,459		26,765		30,224		—		6,367
Real estate construction		—		—		—		—		—		—		—		—
Land		—		—		4,204		4,204		729		4,933		—		1,800
Consumer:
Real estate 1-4 family first mortgage		15,296		3,278		6,969		26,543		523,451		548,994		—		4,973
Real estate 1-4 family junior lien mortgage		—		698		67		765		8,353		9,118		—		—
Other revolving credit and installment		148		11		1		160		10,130		10,290		—		—

Total	$	16,111	$	3,987	$	14,518	$	34,616	$	644,161	$	678,777		—	$	13,625

The following table displays the Company’s non-performing and performing substandard loan portfolio.


	# of Loans		Balance
Substandard Loans:
Non-Performing		43	$	35,509
Performing:
TDR on non-accrual (not yet made 6 consecutive payments)		17		15,221
Impaired TDR on accrual		1		3,090
Rated Sub due to borrower relationship to distress loan		15		11,052

Total Performing:		33	$	29,363

The following table presents the aging of the principal balances in past due loans as of December 31, 2010 by class of loans:


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Total Carrying Amount > 90 Days and Accruing		Considered Current That Have been Modified in Previous Year
December 31, 2010
Commercial:
Commercial and industrial		—		—		—		—		6,744		6,744		—		—
Real estate mortgage		665		—		—		665		45,903		46,568		—		14
Multi-family		540		—		—		540		32,500		33,040		—		—
Real estate construction		—		—		—		—		—		—		—		—
Land		2,538		—		7,582		10,120		4,708		14,828		—		—
Consumer:
Real estate 1-4 family first mortgage		17,125		9,945		13,518		40,588		528,265		568,853		—		3,702
Real estate 1-4 family junior lien mortgage		698		—		—		698		9,225		9,923		—		—
Other revolving credit and installment		4		2		2		8		11,023		11,031		—		111

Total	$	21,570	$	9,947	$	21,102	$	52,619	$	638,369	$	690,988		—	$	3,827

NOTE 8 – REAL ESTATE OWNED

Activity in the valuation allowance was as follows for the six months ended June 30, 2011 and the twelve months ended December 31, 2010:


	2011			2010
Beginning of year	$	3,379		$	700
Additions charged to expense		558			2,679
Direct write-downs		(3,800	)		—

Balance at end of period	$	137		$	3,379

Expenses related to foreclosed assets included in loan servicing and foreclosure expenses on the consolidated statement of operations are as follows for the six months ended June 30, 2011 and the twelve months ended December 31, 2010:


	2011		2010
Net loss on sales	$	819

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