Note 5 – Loans

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

	At March 31, 2013			At December 31, 2012
Real estate loans:	(In thousands)
One- to four- family	$	98,993		$	95,784
Home equity		35,339			35,364
Commercial and multifamily		133,178			133,620
Construction and land		34,513			25,458
Total real estate loans		302,023			290,226

Consumer loans:
Manufactured homes		15,576			16,232
Other consumer		8,779			8,650
Total consumer loans		24,355			24,882

Commercial business loans		14,571			14,193

Total loans		340,949			329,301
Deferred fees		(957	)		(832	)
Loans held for sale		(2,083	)		(1,725	)
Total loans, gross		338,866			326,744
Allowance for loan losses		(4,046	)		(4,248	)
Total loans, net	$	334,820		$	322,496

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 March 31, 2013:

	One-to- four family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Unallocated		Total
Allowance for loan losses:	(In thousands)
Individually evaluated for impairment	$	336	$	334	$	69	$	25	$	107	$	27	$	108	$	-	$	1,006
Collectively evaluated for impairment		963		669		458		262		110		151		92		335		3,040
Ending balance	$	1,299	$	1,003	$	527	$	287	$	217	$	178	$	200	$	335	$	4,046

Loans receivable
Individually evaluated for impairment	$	6,305	$	1,748	$	1,015	$	99	$	623	$	52	$	1,027	$	-	$	10,869
Collectively evaluated for impairment		92,688		33,591		132,163		34,414		14,953		8,727		13,544		-		330,080
Ending balance	$	98,993	$	35,339	$	133,178	$	34,513	$	15,576	$	8,779	$	14,571	$	-	$	340,949

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
Allowance for loan losses:	(In thousands)
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 summarizes the activity in loan losses for the three months ended March 31, 2013:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(In thousands)
One-to-four family	$	1,417	$	(69	)	$	-	$	(49	)	$	1,299
Home equity		997		(147	)		2		151			1,003
Commercial and multifamily		492		(192	)		32		195			527
Construction and land		217		(7	)		-		77			287
Manufactured homes		260		(24	)		-		(19	)		217
Other consumer		146		(11	)		8		35			178
Commercial business		218		(44	)		-		26			200
Unallocated		501		-			-		(166	)		335
Total	$	4,248	$	(494	)	$	42	$	250		$	4,046

The following table summarizes the activity in loan losses for the three months ended March 31, 2012:

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
	(In thousands)
One-to-four family	$	1,117	$	(750	)	$	-	$	1,215		$	1,582
Home equity		1,426		(714	)		2		697			1,410
Commercial and multifamily		969		-			-		(461	)		508
Construction and land		105		(37	)		-		(2	)		66
Manufactured homes		290		(28	)		1		114			377
Other consumer		213		(78	)		7		2			142
Commercial business		254		(6	)		-		(14	)		234
Unallocated		81		-			-		(50	)		31
Total	$	4,455	$	(1,613	)	$	10	$	1,500		$	4,350

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 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 loans. 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 March 31, 2013 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	$	87,345	$	31,079	$	131,399	$	34,168	$	14,260	$	8,283	$	12,644	$	319,178
Watch		8,622		2,927		945		345		1,288		469		1,154		15,750
Special Mention		437		494		592		-		-		-		27		1,550
Substandard		2,589		839		242		-		28		27		746		4,471
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total	$	98,993	$	35,339	$	133,178	$	34,513	$	15,576	$	8,779	$	14,571	$	340,949

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

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 sooner 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 March 31, 2013 and December 31, 2012, by type of loan:

	March 31, 2013		December 31, 2012
	(In thousands)
One- to four- family	$	1,234	$	1,013
Home equity		306		332
Commercial and multifamily		-		1,106
Construction and land		-		471
Other consumer		3		1
Commercial business		12		80
Total	$	1,555	$	3,003

The following table represents the aging of the recorded investment in past due loans as of March 31, 2013 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	$	2,450	$	-	$	1,128	$	-	$	3,578	$	95,415	$	98,993
Home equity		759		305		306		-		1,370		33,969		35,339
Commercial and multifamily		-		-		-		-		-		133,178		133,178
Construction and land		134		-		-		-		134		34,379		34,513
Manufactured homes		152		21		-		-		173		15,403		15,576
Other consumer		27		17		3		-		47		8,732		8,779
Commercial business		368		-		12		-		380		14,191		14,571
Total	$	3,890	$	343	$	1,449	$	-	$	5,682	$	335,267	$	340,949

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

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"). 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. Nonperforming TDRs include TDRs that do not have sufficient payment history (typically six months) 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 March 31, 2013 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	$	97,710	$	34,697	$	132,938	$	34,513	$	15,576	$	8,776	$	14,444	$	338,654
Nonperforming		1,283		642		240		-		-		3		127		2,295
Total	$	98,993	$	35,339	$	133,178	$	34,513	$	15,576	$	8,779	$	14,571	$	340,949

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

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 March 31, 2013 by type of loan:

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:	(In thousands)
One-to-four family	$	2,160	$	2,478	$	-
Home equity		799		899		-
Commercial and multifamily		772		772		-
Construction and land		23		23		-
Manufactured homes		100		100		-
Other consumer		7		49		-
Commercial business		654		654		-
Total	$	4,515	$	4,975	$	-

With an allowance recorded:
One-to-four family	$	4,145	$	4,351	$	336
Home equity		949		1,014		334
Commercial and multifamily		243		242		69
Construction and land		76		76		25
Manufactured homes		523		523		107
Other consumer		44		44		27
Commercial business		373		373		108
Total	$	6,353	$	6,623	$	1,006

Totals:
One-to-four family	$	6,305	$	6,829	$	336
Home equity		1,748		1,912		334
Commercial and multifamily		1,015		1,015		69
Construction and land		99		99		25
Manufactured homes		623		623		107
Other consumer		51		93		27
Commercial business		1,027		1,027		108
Total	$	10,868	$	11,598	$	1,006

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
With no related allowance recorded:	(In thousands)
One-to-four family	$	2,521	$	2,826	$	-
Home equity		949		1,132		-
Commercial and multifamily		1,883		1,883		-
Construction and land		495		608		-
Manufactured homes		67		67		-
Other consumer		9		49		-
Commercial business		682		682		-
Total	$	6,606	$	7,247	$	-

With an allowance recorded:
One-to-four family	$	3,495	$	3,651	$	392
Home equity		782		782		247
Commercial and multifamily		244		244		70
Construction and land		76		76		25
Manufactured homes		587		587		117
Other consumer		46		46		22
Commercial business		157		196		145
Total	$	5,387	$	5,582	$	1,018

Totals:
One-to-four family	$	6,016	$	6,477	$	392
Home equity		1,731		1,914		247
Commercial and multifamily		2,127		2,127		70
Construction and land		571		684		25
Manufactured homes		654		654		117
Other consumer		55		95		22
Commercial business		839		878		145
Total	$	11,993	$	12,829	$	1,018

The following table presents loans individually evaluated for impairment as of March 31, 2013 and 2012 by type of loan:

	Three Months Ended
	March 31, 2013				March 31, 2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(In thousands)
One-to-four family	$	2,341	$	10	$	1,731	$	10
Home equity		874		3		542		3
Commercial and multifamily		1,328		2		453		2
Construction and land		259		-		-		-
Manufactured homes		84		1		46		1
Other consumer		8		-		55		-
Commercial business		668		33		147		33
Total	$	5,562	$	49	$	2,972	$	49

With an allowance recorded:
One-to-four family	$	3,820	$	30	$	4,135	$	30
Home equity		866		6		1,069		6
Commercial and multifamily		243		1		3,074		1
Construction and land		76		-		-		-
Manufactured homes		555		3		72		3
Other consumer		45		-		35		-
Commercial business		265		4		131		4
Total	$	5,870	$	44	$	8,516	$	44

Totals:
One-to-four family	$	6,161	$	40	$	5,866	$	40
Home equity		1,740		9		1,611		9
Commercial and multifamily		1,571		3		3,527		3
Construction and land		335		-		-		-
Manufactured homes		639		4		118		4
Other consumer		53		-		90		-
Commercial business		933		37		278		37
Total	$	11,432	$	93	$	11,489	$	93

Forgone interest on nonaccrual loans was $87,000 and $78,000 at March 31, 2013 and 2012, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual, TDR or impaired at March 31, 2013 or December 31, 2012.

Troubled debt restructurings. Loans classified as TDRs totaled $6.9 million and $7.7 million at March 31, 2013 and December 31, 2012, respectively, and are included in impaired loans. The Company has granted in its TDRs 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 three months ended March 31, 2013:

	Three months ended March 31, 2013
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
			(In thousands)
One- to- four family		3	$	-	$	-	$	-	$	878	$	878
Total		3	$	-	$	-	$	-	$	878	$	878

The following table presents new TDRs by type of modification that occurred during the three months ended March 31, 2012:

	Three months ended March 31, 2012
	Number of Contracts		Rate Modifications		Term Modifications		Payment Modifications		Combination Modifications		Total Modifications
			(In thousands)
One- to- four family		2	$	-	$	-	$	-	$	88	$	88
Home equity		1		-		-		-		49		49
Commercial and multifamily		1		-		-		-		243		243
Other consumer		1		-		-		-		12		12
Commercial business		2		121		-		-		160		281
Total		7	$	121	$	-	$	-	$	552	$	673

There were no post-modification changes for the recorded investment in loans that were recorded as a result of the TDRs for the three months ended March 31, 2013 and 2012, respectively.

The following table represents financing receivables modified as TDRs for which there was a payment default within the first twelve months of restructuring for the dates indicated below:

	Quarter ended March 31,
	2013		2012
	(In thousands)
One- to four- family	$	202	$	2,749
Home equity		115		767
Manufactured homes		-		574
Other consumer		-		42
Commercial business		540		540
Total	$	857	$	4,672

For the preceding table, a loan is considered in default when a payment is 31 days past due. No TDRs modified within the previous 12 months were three months past due as of March 31, 2013. A single one- to four- family first mortgage was three months past due as of March 30, 2012 and was on nonaccrual status.

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.