Note 5 – Loans

The composition of the loan portfolio, including loans held for sale, at the dates indicated is as follows:

	September 30, 2012			December 31, 2011
	(in thousands)
Real Estate Loans:
One-to four- family	$	94,341		$	96,305
Home equity		35,883			39,656
Commercial and multifamily		119,938			106,016
Construction and land		20,694			17,805
Total real estate loans		270,856			259,782

Consumer loans:
Manufactured homes		17,010			18,444
Other consumer		9,085			10,920
Total consumer loans		26,095			29,364

Commercial business loans		14,761			13,163

Total loans		311,712			302,309
Deferred fees		(625	)		(406	)
Loans held for sale		(2,089	)		(1,807	)
Total loans, gross		308,998			300,096
Allowance for loan losses		(4,333	)		(4,455	)
Total loans, net	$	304,665		$	295,641

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2012:

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	837	$	280	$	74	$	25	$	120	$	41	$	153	$	-	$	1,530
Ending balance: collectively evaluated for impairment		938		786		566		135		152		133		82		11		2,803
Ending balance	$	1,775	$	1,066	$	640	$	160	$	272	$	174	$	235	$	11	$	4,333

Loans receivable:
Ending balance: individually evaluated for impairment	$	6,766	$	1,794	$	2,148	$	653	$	663	$	97	$	1,236	$	-	$	13,357
Ending balance: collectively evaluated for impairment		87,575		34,089		117,790		20,041		16,347		8,988		13,525		-		298,355
Ending balance	$	94,341	$	35,883	$	119,938	$	20,694	$	17,010	$	9,085	$	14,761	$	-	$	311,712

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2011:

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	541	$	447	$	38	$	37	$	11	$	48	$	132	$	-	$	1,254
Ending balance: collectively evaluated for impairment		576		979		931		68		279		165		122		81		3,201
Ending balance	$	1,117	$	1,426	$	969	$	105	$	290	$	213	$	254	$	81	$	4,455

Loans receivable:
Ending balance: individually evaluated for impairment	$	8,260	$	1,784	$	2,003	$	902	$	122	$	101	$	447	$	-	$	13,619
Ending balance: collectively evaluated for impairment		88,045		37,872		104,013		16,903		18,322		10,819		12,716		-		288,690
Ending balance	$	96,305	$	39,656	$	106,016	$	17,805	$	18,444	$	10,920	$	13,163	$	-	$	302,309

The following table summarizes the activity in loan losses for the three months ended September 30, 2012:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to four- family	$	1,676	$	(609	)	$	-	$	708		$	1,775
Home equity		1,212		(216	)		-		70			1,066
Commercial and multifamily		647		-			-		(7	)		640
Construction and land		181		(162	)		-		141			160
Manufactured homes		336		(46	)		-		(18	)		272
Other consumer		173		(126	)		6		121			174
Commercial business		215		(38	)		-		58			235
Unallocated		9		-			-		2			11
	$	4,449	$	(1,197	)	$	6	$	1,075		$	4,333

The following table summarizes the activity in loan losses for the nine months ended September 30, 2012:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to four- family	$	1,117	$	(2,008	)	$	4	$	2,662		$	1,775
Home equity		1,426		(951	)		132		459			1,066
Commercial and multifamily		969		(503	)		83		91			640
Construction and land		105		(203	)		-		258			160
Manufactured homes		290		(106	)		-		88			272
Other consumer		213		(232	)		22		171			174
Commercial business		254		(45	)		10		16			235
Unallocated		81		-			-		(70	)		11
	$	4,455	$	(4,048	)	$	251	$	3,675		$	4,333

The following table summarizes the activity in loan losses for the three months ended September 30, 2011:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to four- family	$	827	$	(261	)	$	-	$	407		$	973
Home equity		1,605		(352	)		1		(211	)		1,043
Commercial and multifamily		1,213		(807	)		16		667			1,089
Manufactured		273		(82	)		-		148			339
Other consumer		208		(37	)		8		25			204
Commercial business		172		(180	)		38		191			221
Unallocated		65		-			-		73			138
	$	4,363	$	(1,719	)	$	63	$	1,300		$	4,007

The following table summarizes the activity in loan losses for the nine months ended September 30, 2011:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to four- family	$	909	$	(794	)	$	12	$	846		$	973
Home equity		1,480		(1,144	)		7		700			1,043
Commercial and multifamily		664		(1,311	)		34		1,702			1,089
Manufactured		294		(283	)		-		328			339
Other consumer		309		(199	)		48		46			204
Commercial business		163		(188	)		39		207			221
Unallocated		617		-			-		(479	)		138
	$	4,436	$	(3,919	)	$	140	$	3,350		$	4,007

Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without establishment of a specific loss reserve is not warranted.

When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address the risk specifically or we may allow the loss to be addressed in the general allowance. General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are required to be classified as either watch or special mention assets. Our determination as to the classification of our assets and the amount of our valuation allowances and related provision for loan losses is subject to review by the OCC, which can order the establishment of additional loss allowances.

Early indicator loan grades are used to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful or loss. The grades for watch and special mention are assigned to loans which have been criticized based upon known characteristics such as periodic payment delinquency or stale financial information from the borrower and/or guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful or loss) are subject to monthly problem loan reporting.

The following table represents the internally assigned grades as of September 30, 2012 by type of loan:

	One-to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial Business		Total
Grade:	(in thousands)
Pass	$	76,595	$	28,687	$	113,700	$	19,366	$	14,656	$	8,186	$	11,342	$	272,532
Watch		14,536		5,791		4,271		778		2,331		849		2,819		31,375
Special Mention		493		502		598		-		-		-		-		1,593
Substandard		2,717		903		1,369		550		23		50		600		6,212
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total	$	94,341	$	35,883	$	119,938	$	20,694	$	17,010	$	9,085	$	14,761	$	311,712

The following table represents the internally assigned grades as of December 31, 2011 by type of loan:

	One-to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial Business		Total
Grade:	(in thousands)
Pass	$	70,392	$	31,943	$	100,002	$	16,087	$	16,062	$	9,507	$	10,331	$	254,324
Watch		18,088		6,138		4,048		778		2,260		1,312		2,385		35,009
Special Mention		1,505		183		-		-		-		4		11		1,703
Substandard		6,320		1,392		1,966		940		122		97		436		11,273
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total	$	96,305	$	39,656	$	106,016	$	17,805	$	18,444	$	10,920	$	13,163	$	302,309

Nonaccrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are automatically placed on nonaccrual once the loan is 90 days past due or if, in management's opinion, the borrower may be unable to meet payment of obligations as they become due, as well as when required by regulatory provisions.

The following table presents the recorded investment in nonaccrual loans as of September 30, 2012 and December 31, 2011 by type of loan:

	September 30, 2012		December 31, 2011
	(in thousands)
One- to four- family	$	1,358	$	3,124
Home equity		404		731
Commercial and multifamily		1,124		1,299
Construction and land		550		-
Other consumer		3		64
Commercial business		91
Total	$	3,530	$	5,218

The following table represents the aging of the recorded investment in past due loans as of September 30, 2012 by type of loan:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Recorded Investment 90 Days or Greater and Accruing		Total Past Due		Current		Total Loans
	(in thousands)
One- to four- family	$	-	$	411	$	1,592	$	-	$	2,003	$	92,338	$	94,341
Home equity		324		108		358		-		790		35,093		35,883
Commercial and multifamily		-		-		-		-		-		119,938		119,938
Construction and land		-		-		551		-		551		20,143		20,694
Manufactured homes		76		-		-		-		76		16,934		17,010
Other consumer		113		2		3		-		118		8,967		9,085
Commercial business		30		-		90		-		120		14,641		14,761
Total	$	543	$	521	$	2,594	$	-	$	3,658	$	308,054	$	311,712

The following table represents the aging of the recorded investment in past due loans as of December 31, 2011 by type of loan:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Recorded Investment 90 Days or Greater and Accruing		Total Past Due		Current		Total Loans
	(in thousands)
One- to four- family	$	4,321	$	935	$	2,683	$	-	$	7,939	$	88,366	$	96,305
Home equity		583		176		683		-		1,442		38,214		39,656
Commercial and multifamily		-		-		-		-		-		106,016		106,016
Construction and land		-		123		80		-		203		17,602		17,805
Manufactured homes		327		7		-		-		334		18,110		18,444
Other consumer		172		3		-		-		175		10,745		10,920
Commercial business		669		-		-		-		669		12,494		13,163
Total	$	6,072	$	1,244	$	3,446	$	-	$	10,762	$	291,547	$	302,309

Nonperforming Loans. Loans are considered nonperforming when they are 90 days past due, placed on nonaccrual, or when they are past due troubled debt restructurings, ("TDRs"). The following table represents the credit risk profile based on payment activity as of September 30, 2012 by type of loan:

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Total
(in thousands)
Performing	$	92,934	$	35,093	$	118,572	$	20,144	$	16,991	$	9,082	$	14,552	$	307,368
Nonperforming		1,407		790		1,366		550		19		3		209		4,344
Total	$	94,341	$	35,883	$	119,938	$	20,694	$	17,010	$	9,085	$	14,761	$	311,712

The following table represents the credit risk profile based on payment activity as of December 31, 2011 by type of loan:

	One-to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Total
(in thousands)
Performing	$	91,904	$	38,783	$	104,797	$	17,725	$	18,444	$	10,856	$	13,163	$	295,672
Nonperforming		4,401		873		1,219		80		-		64		-		6,637
Total	$	96,305	$	39,656	$	106,016	$	17,805	$	18,444	$	10,920	$	13,163	$	302,309

Impaired Loans. A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance. Impairment is measured on a loan by loan basis for all loans in the portfolio.

The following table presents loans individually evaluated for impairment as of September 30, 2012 by type of loan:

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:	(in thousands)
One-to four-family	$	2,172	$	2,329	$	-
Home equity		935		1,252		-
Commercial and multifamily		1,904		1,904		-
Construction and land		552		730		-
Manufactured homes		68		68		-
Other consumer		13		54		-
Commercial business		846		846		-
Total	$	6,490	$	7,183	$	-

With an allowance recorded:
One-to four-family	$	4,594	$	4,611	$	837
Home equity		859		859		280
Commercial and multifamily		244		244		74
Construction and land		101		102		25
Manufactured homes		595		595		120
Other consumer		84		84		41
Commercial business		390		430		153
Total	$	6,867	$	6,925	$	1,530

Totals:
One-to four- family	$	6,766	$	6,940	$	837
Home equity		1,794		2,111		280
Commercial and multifamily		2,148		2,148		74
Construction and land		653		832		25
Manufactured homes		663		663		120
Other consumer		97		138		41
Commercial business		1,236		1,276		153
Total	$	13,357	$	14,108	$	1,530

The following table presents loans individually evaluated for impairment as of December 31, 2011 by type of loan:

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:	(in thousands)
One-to four-family	$	3,104	$	3,104	$	-
Home equity		773		773		-
Commercial and multifamily		1,784		1,784		-
Construction and land		779		785		-
Manufactured homes		-		-		-
Other consumer		14		55		-
Commercial business		233		233		-
Total	$	6,687	$	6,734	$	-

With an allowance recorded:
One-to four-family	$	5,156	$	5,280	$	541
Home equity		1,011		1,038		447
Commercial and multifamily		219		219		38
Construction and land		123		178		37
Manufactured homes		122		122		11
Other consumer		87		87		48
Commercial business		214		214		132
Total	$	6,932	$	7,138	$	1,254

Totals:
One-to four-family	$	8,260	$	8,384	$	541
Home equity		1,784		1,811		447
Commercial and multifamily		2,003		2,003		38
Construction and land		902		963		37
Manufactured homes		122		122		11
Other consumer		101		142		48
Commercial Business		447		447		132
Total	$	13,619	$	13,872	$	1,254

The following table presents loans individually evaluated for impairment as of September 30, 2012 and 2011 by type of loan:

	Three Months Ended
	September 30, 2012				September 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One-to four-family	$	1,908	$	28	$	2,437	$	44
Home equity		783		9		623		5
Commercial and multifamily		1,938		26		1,915		20
Construction and land		574		-		-		-
Manufactured homes		70		1		13		1
Other consumer		8		1		39		1
Commercial business		847		3		82		-
Total	$	6,126	$	68	$	5,109	$	71

With an allowance recorded:
One-to four-family	$	5,132	$	37	$	3,658	$	5
Home equity		1,141		9		865		3
Commercial and multifamily		245		4		1,227		2
Construction and land		161		1		-		-
Manufactured homes		648		10		145		2
Other consumer		127		2		46		2
Commercial business		255		4		163		1
Total	$	7,708	$	67	$	6,104	$	15

Totals:
One-to four-family	$	7,040	$	65	$	6,095	$	49
Home equity		1,923		18		1,488		8
Commercial and multifamily		2,183		30		3,142		22
Construction and land		735		1		-		-
Manufactured homes		718		11		158		3
Other consumer		134		3		85		3
Commercial Business		1,101		7		245		1
Total	$	13,833	$	135	$	11,212	$	86

	Nine Months Ended
	September 30, 2012				September 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One-to four-family	$	2,694	$	84	$	2,307	$	111
Home equity		749		32		625		20
Commercial and multifamily		1,874		60		1,409		68
Construction and land		663		21		-		-
Manufactured homes		62		4		39		2
Other consumer		14		2		55		2
Commercial business		688		13		106		1
Total	$	6,743	$	216	$	4,541	$	204

With an allowance recorded:
One-to four-family	$	5,268	$	129	$	3,441	$	35
Home equity		1,146		28		808		11
Commercial and multifamily		284		7		2,109		4
Construction and land		131		4		-		-
Manufactured homes		554		32		105		8
Other consumer		101		5		49		5
Commercial business		217		16		168		9
Total	$	7,700	$	221	$	6,680	$	72

Totals:
One-to four-family	$	7,962	$	213	$	5,748	$	146
Home equity		1,895		60		1,433		31
Commercial and multifamily		2,157		67		3,518		72
Construction and land		794		25		-		-
Manufactured homes		615		36		144		10
Other consumer		115		7		104		7
Commercial Business		905		29		274		10
Total	$	14,443	$	437	$	11,222	$	276

Forgone interest on nonaccrual loans was $191,000 and $276,000 at September 30, 2012 and 2011, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual, TDR or impaired at September 30, 2012 and December 31, 2011.

Troubled debt restructurings. Loans classified as TDRs totaled $7.3 million and $6.9 million at September 30, 2012 and December 31, 2011, respectively and are included in impaired loans. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind. The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed. Interest only modifications in which a loan in converted to interest only payments for a period of time are included in this category.

Combination Modification: Any other type of modification, including the use of multiple categories above.

The following tables presents newly restructured loans by type of modification for the three and nine month periods ended September 30, 2012:

	Three Months Ended September 30, 2012
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
	(in thousands, except for number of contracts)
One- to four- family		1	$	-	$	-	$	-	$	197	$	197
Home equity		1		-		-		-		117		117
Commercial and multifamily		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-
Manufactured homes		-		-		-		-		-		-
Other consumer		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-
Total		2	$	-	$	-	$	-	$	314	$	314

	Nine Months Ended September 30, 2012
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
	(in thousands, except for number of contracts)
One- to four- family		5	$	-	$	-	$	-	$	561	$	561
Home equity		2		-		-		-		166		166
Commercial and multifamily		2		-		-		-		426		426
Construction and land		2		-		-		-		26		26
Manufactured homes		-		-		-		-		-		-
Other consumer		2		-		-		-		14		14
Commercial business		3		121		-		-		186		307
Total		16	$	121	$	-	$	-	$	1,379	$	1,500

The following tables presents newly restructured loans by type of modification for the three and nine month periods ended September 30, 2011:

	Three Months Ended September 30, 2011
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
	(in thousands, except for number of contracts)
One- to four- family		-	$	-	$	-	$	-	$	-	$	-
Home equity		-		-		-		-				-
Commercial and multifamily		1		-		-		-		997		997
Construction and land		-		-		-		-		-		-
Manufactured homes		-		-		-		-		-		-
Other consumer		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-
Total		1	$	-	$	-	$	-	$	997	$	997

	Nine Months Ended September 30, 2011
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
	(in thousands, except for number of contracts)
One- to four- family		-	$	-	$	-	$	-	$	-	$	-
Home equity		-		-		-		-				-
Commercial and multifamily		1		-		-		-		997		997
Construction and land		-		-		-		-		-		-
Manufactured homes		-		-		-		-		-		-
Other consumer		1		-		-		-		44		44
Commercial business		-		-		-		-		-		-
Total		2	$	-	$	-	$	-	$	1,041	$	1,041

There were no post-modification changes that were recorded as a result of the TDRs for the year ended September 30, 2012 and 2011.

The following is a summary of all loans modified as TDRs within the previous twelve months and for which there was a payment default during the periods shown below:

	Three Months Ended September 30, 2012		Nine Months Ended September 30, 2012
	(in thousands)
One-to four-family	$	1,246	$	1,246
Home equity		215		215
Commercial and multifamily		1,366		1,366
Manufactured homes		390		471
Other consumer		27		27
Commercial business		540		540
Total	$	3,784	$	3,865

For the preceding table, a loan is considered in default when a payment is 30 days or more past due. At September 30, 2012, there was one commercial and multifamily real estate TDR loan on nonaccrual.

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in troubled debt restructurings. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.