Note 6 – Loans

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

	December 31,
	2012			2011
Real Estate Loans:	(in thousands)
One- to four- family	$	95,784		$	96,305
Home equity		35,364			39,656
Commercial and multifamily		133,620			106,016
Construction and land		25,458			17,805
Total real estate loans		290,226			259,782

Consumer loans:
Manufactured homes		16,232			18,444
Other consumer		8,650			10,920
Total consumer loans		24,882			29,364

Commercial business loans		14,193			13,163

Total loans		329,301			302,309
Deferred fees		(832	)		(406	)
Loans held for sale		(1,725	)		(1,807	)
Total loans, gross		326,744			300,096
Allowance for loan losses		(4,248	)		(4,455	)
Total loans, net	$	322,496		$	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 December 31, 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:
Individually evaluated for impairment	$	392	$	247	$	70	$	25	$	117	$	22	$	145		-	$	1,018
Collectively evaluated for impairment		1,025		750		422		192		143		124		73		501		3,230
Ending balance	$	1,417	$	997	$	492	$	217	$	260	$	146	$	218	$	501	$	4,248

Loans receivable:
Individually evaluated for impairment	$	6,016	$	1,731	$	2,127	$	571	$	654	$	55	$	839	$	-	$	11,993
Collectively evaluated for impairment		89,768		33,633		131,493		24,887		15,578		8,595		13,354		-		317,308
Ending balance	$	95,784	$	35,364	$	133,620	$	25,458	$	16,232	$	8,650	$	14,193	$	-	$	329,301

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:
Individually evaluated for impairment	$	541	$	447	$	38	$	37	$	11	$	48	$	132	$	-	$	1,254
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:
Individually evaluated for impairment	$	8,260	$	1,784	$	2,003	$	902	$	122	$	101	$	447	$	-	$	13,619
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 year ended December 31, 2012:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to-four family	$	1,117	$	(2,740	)	$	4	$	3,036		$	1,417
Home equity		1,426		(1,084	)		158		497			997
Commercial and multifamily		969		(503	)		83		(57	)		492
Construction and land		105		(222	)		-		334			217
Manufactured homes		290		(152	)		11		111			260
Other consumer		213		(286	)		33		186			146
Commercial business		254		(44	)		10		(2	)		218
Unallocated		81		-			-		420			501
	$	4,455	$	(5,031	)	$	299	$	4,525		$	4,248

The following table summarizes the activity in loan losses for the year ended December 31, 2011:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(in thousands)
One-to-four family	$	909	$	(834	)	$	11	$	1,031		$	1,117
Home equity		1,480		(1,652	)		10		1,588			1,426
Commercial and multifamily		664		(1,353	)		96		1,562			969
Construction and land		205		(159	)		-		59			105
Manufactured homes		293		(239	)		8		228			290
Other consumer		309		(255	)		53		106			213
Commercial business		163		(310	)		43		358			254
Unallocated		413		-			-		(332	)		81
	$	4,436	$	(4,802	)	$	221	$	4,600		$	4,455

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 pay 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 loans as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address the risk specifically (if the loan is impaired) or we may allow the loss to be addressed in the general allowance (if the loan is not impaired). 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 the Company classifies problem loans as a loss, we 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 classified as either watch or special mention assets. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the FDIC, which can order the establishment of additional loss allowances. Pass rated loans are loans that are not otherwise classified or criticized.

The following table represents the internally assigned grades as of December 31, 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	$	84,685	$	30,927	$	130,721	$	24,641	$	14,898	$	8,102	$	12,290	$	306,264
Watch		8,279		3,064		954		347		1,312		520		1,087		15,563
Special Mention		490		499		595		-		-		-		-		1,584
Substandard		2,329		874		1,350		471		23		28		815		5,890
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total	$	95,784	$	35,364	$	133,620	$	25,458	$	16,232	$	8,650	$	14,193	$	329,301

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 three months 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 December 31, by type of loan:

	2012		2011
	(in thousands)
One- to four- family	$	1,013	$	3,124
Home equity		332		731
Commercial and multifamily		1,106		1,299
Construction and land		471		-
Other consumer		1		-
Commercial business		80		64
Total	$	3,003		5,218

The following table represents the aging of the recorded investment in past due loans as of December 31, 2012 by type of loan:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Recorded Investment > 90 Days and Accruing		Total Past Due		Current		Total Loans
	(in thousands)
One-to-four family	$	2,238	$	572	$	836	$	81	$	3,727	$	92,057	$	95,784
Home equity		886		364		332		-		1,582		33,782		35,364
Commercial and multifamily		-		-		-		-		-		133,620		133,620
Construction and land		243		-		471		-		714		24,744		25,458
Manufactured homes		326		2		-		-		328		15,904		16,232
Other consumer		65		2		1		-		68		8,582		8,650
Commercial business		63		-		80		-		143		14,050		14,193
Total	$	3,821	$	940	$	1,720	$	81	$	6,562	$	322,739	$	329,301

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		Greater Than 90 Days Past Due		Recorded Investment > 90 Days 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 placed on nonaccrual and/or when they are considered to be nonperforming troubled debt restructurings ("TDRs"). Nonperforming TDRs include TDRs that do not have sufficient payment history to be considered performing or performing TDRs that have become 31 or more days past due.

The following table represents the credit risk profile based on payment activity as of December 31, 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	$	94,641	$	34,647	$	132,273	$	24,987	$	16,203	$	8,642	$	13,996	$	325,389
Nonperforming		1,143		717		1,347		471		29		8		197		3,912
Total	$	95,784	$	35,364	$	133,620	$	25,458	$	16,232	$	8,650	$	14,193	$	329,301

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 December 31, 2012 by type of loan:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(in thousands)
One-to-four family	$	2,521	$	2,826	$	-	$	2,549	$	124
Home equity		949		1,132		-		792		39
Commercial and multifamily		1,883		1,883		-		1,898		81
Construction and land		495		608		-		592		19
Manufactured homes		67		67		-		70		5
Other consumer		9		49		-		13		2
Commercial business		682		682		-		800		10
Total	$	6,606	$	7,247	$	-	$	6,714	$	280

With an allowance recorded:
One-to-four family	$	3,495	$	3,651	$	392	$	4,902	$	142
Home equity		782		782		247		1,117		35
Commercial and multifamily		244		244		70		290		9
Construction and land		76		76		25		119		4
Manufactured homes		587		587		117		670		43
Other consumer		46		46		22		91		3
Commercial business		157		196		145		203		8
Total	$	5,387	$	5,582	$	1,018	$	7,392	$	244

Totals:
One-to-four family	$	6,016	$	6,477	$	392	$	7,451	$	266
Home equity		1,731		1,914		247		1,909		74
Commercial and multifamily		2,127		2,127		70		2,188		90
Construction and land		571		684		25		711		23
Manufactured homes		654		654		117		740		48
Other consumer		55		95		22		104		5
Commercial business		839		878		145		1,003		18
Total	$	11,993	$	12,829	$	1,018	$	14,106	$	524

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		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(in thousands)
One-to-four family	$	3,104	$	3,104	$	-	$	2,338	$	80
Home equity		773		773		-		641		17
Commercial and multifamily		1,784		1,784		-		1,151		3
Construction and land		779		785		-		195		39
Manufactured homes		-		-		-		42		-
Other consumer		14		55		-		44		3
Commercial business		233		233		-		135		2
Total	$	6,687	$	6,734	$	-	$	4,546	$	144

With an allowance recorded:
One-to-four family	$	5,156	$	5,280	$	541	$	3,819	$	110
Home equity		1,011		1,038		447		864		11
Commercial and multifamily		219		219		38		1,847		6
Construction and land		123		178		37		112		8
Manufactured homes		122		122		11		97		13
Other consumer		87		87		48		52		2
Commercial business		214		214		132		178		3
Total	$	6,932	$	7,138	$	1,254	$	6,969	$	153

Totals:
One-to-four family	$	8,260	$	8,384	$	541	$	6,157	$	190
Home equity		1,784		1,811		447		1,505		28
Commercial and multifamily		2,003		2,003		38		2,998		9
Construction and land		902		963		37		307		47
Manufactured homes		122		122		11		139		13
Other consumer		101		142		48		96		5
Commercial business		447		447		132		313		5
Total	$	13,619	$	13,872	$	1,254	$	11,515	$	297

Forgone interest on nonaccrual loans was $269,000 and $306,000 at December 31, 2012 and 2011, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual, TDR or impaired at December 31, 2012 and 2011.

Troubled debt restructurings. Loans classified as TDRs totaled $7.7 million and $6.9 million at December 31, 2012 and 2011, respectively. A troubled debt restructuring 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 table presents new TDRs by type of modification that occurred during the year ended December 31, 2012:

	Twelve months ended December 31, 2012
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
			(in thousands)
One- to- four family		3	$	-	$	-	$	-	$	673	$	673
Home equity		1		-		-		-		116		116
Commercial and multifamily		2		-		-		-		422		422
Commercial business		3		-		-		-		564		564
Total		9	$	-	$	-	$	-	$	1,775	$	1,775

The following table presents new TDRs by type of modification that occurred during the year ended December 31, 2011:

	Twelve months ended December 31, 2011
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
			(in thousands)
One- to- four family		5	$	1,350	$	-	$	-	$	-	$	1,350
Home equity		2		391		-		-		-		391
Commercial and multifamily		3		1,963		-		-		-		1,963
Commercial business		1		26		-		-		-		26
Other consumer		1		4		-		-		-		4
Total		12	$	3,734	$	-	$	-	$	-	$	3,734

There were no post-modification changes for the recorded investment in loans that were recorded as a result of the TDRs for the years ended December 31, 2012 and 2011.

The following table represents financing receivables modified as TDRs within the previous 12 months for which there was a payment default during the twelve months ended December 31, 2012 and 2011:

	2012		2011
	(in thousands)
One- to four- family	$	673	$	2,882
Home equity		116		955
Commercial and multifamily		241		1,357
Construction and land		-		80
Commercial business		540		26
Total	$	1,570	$	5,300

For the preceding table, a loan is considered in default when a payment is 31 days past due. None of the defaults have reached 90 days past due, but one commercial real estate loan was on nonaccrual at December 31, 2012.

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.

In the ordinary course of business, the Company makes loans to its directors and officers. Certain loans to directors, officers, and employees are offered at discounted rates as compared to other customers as permitted by federal regulations. Employees, officers, and directors are eligible for mortgage loans with an adjustable rate that resets annually to 1% over the rolling cost of funds. Employees and officers are eligible for consumer loans that are 1% below the market loan rate at the time of origination. Director and officer loans are summarized as follows:

	December 31,
	2012			2011
	(in thousands)
Balance, beginning of period	$	5,376		$	5,695
Advances		417			1,269
Repayments		(301	)		(1,588	)
Balance, end of period	$	5,492		$	5,376

At December 31, 2012 and 2011, respectively, loans totaling $1.1 million and $1.5 million represent real estate secured loans that had current loan-to-value ratios above supervisory guidelines.