(6) Loans and Servicing

Loans

A summary of loans is as follows.

	At					At
	March 31,					December 31,
	2013					2012
	Amount			Percent		Amount			Percent
	(Dollars in thousands)

Residential loans:
One- to four-family	$	94,689		51.46	%	$	95,546		52.54	%
Home equity loans and lines of credit	14,813			8.05		15,560			8.56
Total residential mortgage loans	109,502			59.51		111,106			61.10

Commercial loans:
One- to four-family investment property	12,164			6.61		11,355			6.25
Multi-family real estate	5,451			2.96		5,346			2.94
Commercial real estate	34,067			18.51		32,730			18.00
Commercial business	8,361			4.54		8,653			4.76
Total commercial loans	60,043			32.62		58,084			31.95

Construction loans:
One- to four-family	6,545			3.56		7,379			4.06
Multi-family	3,975			2.16		3,665			2.02
Non-residential	3,572			1.94		1,161			0.64
Total construction loans	14,092			7.66		12,205			6.72

Consumer	384			0.21		414			0.23

Total loans	184,021			100.00	%	181,809			100.00	%

Other items:
Net deferred loan costs	546					570
Allowance for loan losses	(1,741		)			(1,780		)

Total loans, net	$	182,826				$	180,599

An analysis of the allowance for loan losses at or for the three months ended March 31, 2013 and at or for the year ended December 31, 2012 is below. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	Residential						Commercial										Construction
	One- to four- family			Home equity loans and lines of credit			One- to four- family investment property		Multi-family real estate			Commercial real estate		Commercial business			One- to four- family			Multi-family			Non- residential		Consumer			Total
	(In thousands)
At March 31, 2013

Allowance for loan losses

Beginning Balance	$	378		$	254		$	62	$	40		$	668	$	159		$	149		$	34		$	25	$	11		$	1,780
Charge-offs	(130		)	—			—		—			—		—			—			—			—		(2		)	(132		)
Recoveries	—			—			—		—			—		—			—			—			—		3			3
Provision (benefit)	49			(12		)	5		1			20		(6		)	(20		)	3			52		(2		)	90
Ending Balance	$	297		$	242		$	67	$	41		$	688	$	153		$	129		$	37		$	77	$	10		$	1,741

Ending balance:
individually evaluated for impairment	$	14		$	13		$	—	$	—		$	213	$	—		$	—		$	—		$	—	$	—		$	240

Ending balance:
collectively evaluated for impairment	$	283		$	229		$	67	$	41		$	475	$	153		$	129		$	37		$	77	$	10		$	1,501

Loans

Ending Balance	$	94,689		$	14,813		$	12,164	$	5,451		$	34,067	$	8,361		$	6,545		$	3,975		$	3,572	$	384		$	184,021

Ending balance:
individually evaluated for impairment	$	280		$	443		$	—	$	—		$	2,410	$	—		$	—		$	—		$	—	$	—		$	3,133

Ending balance:
collectively evaluated for impairment	$	94,409		$	14,370		$	12,164	$	5,451		$	31,657	$	8,361		$	6,545		$	3,975		$	3,572	$	384		$	180,888

At December 31, 2012

Allowance for loan losses

Beginning Balance	$	346		$	341		$	59	$	98		$	400	$	234		$	228		$	98		$	11	$	9		$	1,824
Charge-offs	(144		)	—			—		—			—		(13		)	(191		)	—			—		(38		)	(386		)
Recoveries	137			—			—		—			—		—			—			—			—		5			142
Provision (benefit)	39			(87		)	3		(58		)	268		(62		)	112			(64		)	14		35			200
Ending Balance	$	378		$	254		$	62	$	40		$	668	$	159		$	149		$	34		$	25	$	11		$	1,780

Ending balance:
individually evaluated for impairment	$	93		$	13		$	—	$	—		$	214	$	—		$	—		$	—		$	—	$	—		$	320

Ending balance:
collectively evaluated for impairment	$	285		$	241		$	62	$	40		$	454	$	159		$	149		$	34		$	25	$	11		$	1,460

Loans

Ending Balance	$	95,546		$	15,560		$	11,355	$	5,346		$	32,730	$	8,653		$	7,379		$	3,665		$	1,161	$	414		$	181,809

Ending balance:
individually evaluated for impairment	$	658		$	45		$	—	$	—		$	2,412	$	—		$	—		$	—		$	—	$	—		$	3,115

Ending balance:
collectively evaluated for impairment	$	94,888		$	15,515		$	11,355	$	5,346		$	30,318	$	8,653		$	7,379		$	3,665		$	1,161	$	414		$	178,694

The following is a summary of past-due and non-accrual loans at March 31, 2013 and December 31, 2012. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	Loans delinquent for:												90 days
					90 days		Total		Total		Total		or more		Non-accrual
	30 - 59 Days		60 - 89 Days		or more		Past Due		Current		Loans		and accruing		Loans
	(In thousands)
At March 31, 2013:

Residential loans:
One- to four-family	$	—	$	—	$	—	$	—	$	94,689	$	94,689	$	—	$	280
Home equity loans and lines of credit	—		—		399		399		14,414		14,813		—		412

Commercial loans:
One- to four-family investment property	—		—		—		—		12,164		12,164		—		—
Multi-family real estate	—		—		—		—		5,451		5,451		—		—
Commercial real estate	—		—		—		—		34,067		34,067		—		2,105
Commercial business	—		—		—		—		8,361		8,361		—		—

Construction loans:
One- to four-family	—		—		—		—		6,545		6,545		—		—
Multi-family	—		—		—		—		3,975		3,975		—		—
Non-residential	—		—		—		—		3,572		3,572		—		—

Consumer	1		—		—		1		383		384		—		—

Total	$	1	$	—	$	399	$	400	$	183,621	$	184,021	$	—	$	2,797

At December 31, 2012:

Residential loans:
One- to four-family	$	—	$	284	$	374	$	658	$	94,888	$	95,546	$	—	$	658
Home equity loans and lines of credit	16		—		399		415		15,145		15,560		—		412

Commercial loans:
One- to four-family investment property	—		—		—		—		11,355		11,355		—		—
Multi-family real estate	—		—		—		—		5,346		5,346		—		—
Commercial real estate	1,258		—		—		1,258		31,472		32,730		—		2,105
Commercial business	—		—		—		—		8,653		8,653		—		—

Construction loans:
One- to four-family	—		—		—		—		7,379		7,379		—		—
Multi-family	—		—		—		—		3,665		3,665		—		—
Non-residential	—		—		—		—		1,161		1,161		—		—

Consumer	20		2		—		22		392		414		—		—

Total	$	1,294	$	286	$	773	$	2,353	$	179,456	$	181,809	$	—	$	3,175

The following is an analysis of impaired loans at March 31, 2013 and December 31, 2012.

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)

At March 31, 2013

Impaired loans without a valuation allowance

Residential loans:
One- to four-family	$	—	$	—	$	—	$	—	$	—
Home equity loans and lines of credit	430		430		—		331		—
Commercial loans:
One- to four-family investment property	—		—		—		—		—
Multi-family real estate	—		—		—		—		—
Commercial real estate	—		—		—		—		—
Commercial business	—		—		—		—		—

Construction loans:
One- to four-family	—		—		—		—		—
Multi-family	—		—		—		—		—
Non-residential	—		—		—		—		—

Consumer	—		—		—		—		—

Total impaired with no related allowance	$	430	$	430	$	—	$	331	$	—

Impaired loans with a valuation allowance

Residential loans:
One- to four-family	$	280	$	280	$	14	$	563	$	4
Home equity loans and lines of credit	13		13		13		13		—

Commercial loans:
One- to four-family investment property	—		—		—		—		—
Multi-family real estate	—		—		—		—		—
Commercial real estate	2,410		2,517		213		2,411		26
Commercial business	—		—		—		—		—

Construction loans:
One- to four-family	—		—		—		—		—
Multi-family	—		—		—		—		—
Non-residential	—		—		—		—		—
Consumer	—		—		—		—		—

Total with an allowance recorded	$	2,703	$	2,810	$	240	$	2,987	$	30

At December 31, 2012

Impaired loans without a valuation allowance

Residential loans:
One- to four-family	$	—	$	—	$	—	$	176	$	—
Home equity loans and lines of credit	32		32		—		30		—

Commercial loans:
One- to four-family investment property	—		—		—		—		—
Multi-family real estate	—		—		—		—		—
Commercial real estate	—		—		—		—		—
Commercial business	—		—		—		—		—

Construction loans:
One- to four-family	—		—		—		801		—
Multi-family	—		—		—		344		23
Non-residential	—		—		—		—		—

Consumer	—		—		—		—		—

Total impaired with no related allowance	$	32	$	32	$	—	$	1,351	$	23

Impaired loans with a valuation allowance

Residential loans:
One- to four-family	$	658	$	684	$	93	$	734	$	10
Home equity loans and lines of credit	13		13		13		13		1

Commercial loans:
One- to four-family investment property	—		—		—		—		—
Multi-family real estate	—		—		—		—		—
Commercial real estate	2,412		2,519		214		958		19
Commercial business	—		—		—		6		—

Construction loans:
One- to four-family	—		—		—		—		—
Multi-family	—		—		—		—		—
Non-residential	—		—		—		—		—

Consumer	—		—		—		—		—

Total with an allowance recorded	$	3,083	$	3,216	$	320	$	1,711	$	30

There were no loan modifications made that resulted in the classification of a troubled debt restructure (TDR) during the three months ended March 31, 2013. There was one loan modification made during the three months ended March 31, 2012 that was classified as a TDR. This one- to four-family construction loan was subsequently paid in full during 2012 according to its modified terms.

At March 31, 2013 and December 31, 2012 there were no TDRs in default of their modified terms.

The following table represents the Company’s loans by risk rating at March 31, 2013 and December 31, 2012. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	Residential				Commercial								Construction
	One- to four- family		Home equity loans and lines of credit		One- to four- family investment property		Multi-family real estate		Commercial real estate		Commercial business		One- to four- family		Multi-family		Non- residential		Consumer		Total
	(In thousands)
At March 31, 2013

Classification:
Not formally rated	$	94,409	$	14,370	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	384	$	109,163
Pass	—		—		12,164		5,451		30,949		8,294		6,545		3,975		3,572		—		70,950
Special mention	—		—		—		—		—		—		—		—		—		—		—
Substandard	280		443		—		—		3,118		67		—		—		—		—		3,908
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—		—
Total loans	$	94,689	$	14,813	$	12,164	$	5,451	$	34,067	$	8,361	$	6,545	$	3,975	$	3,572	$	384	$	184,021

At December 31, 2012

Classification:
Not formally rated	$	94,888	$	15,116	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	414	$	110,418
Pass	—		—		11,355		5,346		29,147		8,486		7,379		3,665		1,161		—		66,539
Special mention	—		—		—		—		—		—		—		—		—		—		—
Substandard	658		444		—		—		3,583		167		—		—		—		—		4,852
Doubtful	—		—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—		—
Total loans	$	95,546	$	15,560	$	11,355	$	5,346	$	32,730	$	8,653	$	7,379	$	3,665	$	1,161	$	414	$	181,809

Credit Quality Information

The Bank utilizes a nine grade internal loan rating system for all commercial and construction loans as follows:

Loans rated 1 - 5: Loans in these categories are considered “pass” rated loans with low to average risk and are not formally rated.

Loans rated 6: Loans in this category are considered “special mention.” These loans have risk profiles that are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 7: Loans in this category are considered “substandard.” These loans have a well defined weakness that jeopardizes the liquidation of the debt and is inadequately protected by the current sound worth and paying capacity of the borrower or pledged collateral. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9: Loans in this category are considered a “loss”. The loan has been determined to be uncollectible and the chance of loss is inevitable. Loans in this category will be charged-off.

On an annual basis, or more often if needed, the Bank formally reviews the ratings on all commercial and construction loans.

Loans serviced for others and mortgage servicing rights

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $107.5 million and $96.8 million at March 31, 2013 and December 31, 2012, respectively.

The risks inherent in the mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of servicing rights was $1.4 million at March 31, 2013 and was determined using the moving average 10-year, U.S. Treasury rate plus 5.0%, adjusted to reflect the current credit spreads and conditions in the market as a discount rate. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Securities Industry and Financial Markets Association and an independent third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the independent third party valuation specialist.

The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity-related valuation allowances.

	Three Months Ended
	March 31,
	2013			2012
	(In thousands)

Mortgage servicing rights:
Balance at beginning of period	$	910		$	475
Additions	227			80
Disposals	—			—
Amortization	(79		)	(42		)
Balance at end of period	1,058			513

Valuation allowances:
Balance at beginning of period	20			17
Additions	—			54
Recoveries	(15		)	—
Write-downs	—			—
Balance at end of period	5			71

Mortgage servicing assets, net	$	1,053		$	442

Fair value of mortgage servicing assets	$	1,403		$	459