LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable at December 31, 2019 are reported net of unamortized discounts totaling $1.24 million.

Loans receivable by portfolio segment consisted of the following at December 31, 2019 and September 30, 2019 (dollars in thousands):



	December 31, 2019				September 30, 2019
	Amount		Percent		Amount		Percent
Mortgage loans:
One- to four-family (1)	$	129,373	12.8	%	$	132,661	13.4	%
Multi-family	78,326		7.8		76,036		7.7
Commercial	439,024		43.6		419,117		42.3
Construction - custom and owner/builder	124,530		12.4		128,848		13.0
Construction - speculative one- to four-family	18,764		1.9		16,445		1.7
Construction - commercial	36,670		3.6		39,566		4.0
Construction - multi-family	33,290		3.2		36,263		3.6
Construction - land development	1,656		0.2		2,404		0.2
Land	29,419		2.9		30,770		3.1
Total mortgage loans	891,052		88.4		882,110		89.0

Consumer loans:
Home equity and second mortgage	39,103		3.9		40,190		4.1
Other	4,093		0.4		4,312		0.4
Total consumer loans	43,196		4.3		44,502		4.5

Commercial business loans	73,790		7.3		64,764		6.5

Total loans receivable	1,008,038		100.0	%	991,376		100.0	%
Less:
Undisbursed portion of construction loans in process	82,172				92,226
Deferred loan origination fees, net	2,834				2,798
Allowance for loan losses	9,882				9,690
	94,888				104,714
Loans receivable, net	$	913,150			$	886,662
_____________________________
(1) Does not include one- to four-family loans held for sale totaling $5,420 and $6,071 at December 31, 2019 and September 30, 2019, respectively.

Allowance for Loan Losses

The following tables set forth information for the three months ended December 31, 2019 and 2018 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):



	Three Months Ended December 31, 2019
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,167	$	(104	)	$	—		$	2	$	1,065
Multi-family	481		18			—			—		499
Commercial	4,154		252			—			4		4,410
Construction – custom and owner/builder	755		(6		)	—			5		754
Construction – speculative one- to four-family	212		36			—			—		248
Construction – commercial	338		65			—			—		403
Construction – multi-family	375		(42		)	—			—		333
Construction – land development	67		(19		)	—			—		48
Land	697		(48		)	—			5		654
Consumer loans:
Home equity and second mortgage	623		(14		)	—			—		609
Other	99		(3		)	(10		)	1		87
Commercial business loans	722		65			(15		)	—		772
Total	$	9,690	$	200		$	(25	)	$	17	$	9,882



	Three Months Ended December 31, 2018
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,086	$	73		$	—		$	—	$	1,159
Multi-family	433		16			—			—		449
Commercial	4,248		(9		)	—			—		4,239
Construction – custom and owner/builder	671		(28		)	—			—		643
Construction – speculative one- to four-family	178		28			—			—		206
Construction – commercial	563		(177		)	—			—		386
Construction – multi-family	135		74			—			—		209
Construction – land development	49		94			—			—		143
Land	844		(91		)	—			4		757
Consumer loans:
Home equity and second mortgage	649		17			—			—		666
Other	117		(15		)	(2		)	1		101
Commercial business loans	557		18			—			—		575
Total	$	9,530	$	—		$	(2	)	$	5	$	9,533

The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at December 31, 2019 and September 30, 2019 (dollars in thousands):



	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
December 31, 2019
Mortgage loans:
One- to four-family	$	—	$	1,065	$	1,065	$	1,431	$	127,942	$	129,373
Multi-family	—		499		499		—		78,326		78,326
Commercial	—		4,410		4,410		3,141		435,883		439,024
Construction – custom and owner/builder	—		754		754		—		75,026		75,026
Construction – speculative one- to four-family	—		248		248		—		12,473		12,473
Construction – commercial	—		403		403		—		27,151		27,151
Construction – multi-family	—		333		333		—		17,024		17,024
Construction – land development	—		48		48		—		1,064		1,064
Land	28		626		654		198		29,221		29,419
Consumer loans:
Home equity and second mortgage	—		609		609		581		38,522		39,103
Other	6		81		87		12		4,081		4,093
Commercial business loans	71		701		772		601		73,189		73,790
Total	$	105	$	9,777	$	9,882	$	5,964	$	919,902	$	925,866


September 30, 2019
Mortgage loans:
One- to four-family	$	—	$	1,167	$	1,167	$	1,192	$	131,469	$	132,661
Multi-family	—		481		481		—		76,036		76,036
Commercial	—		4,154		4,154		3,190		415,927		419,117
Construction – custom and owner/builder	—		755		755		—		75,411		75,411
Construction – speculative one- to four-family	—		212		212		—		10,779		10,779
Construction – commercial	—		338		338		—		24,051		24,051
Construction – multi-family	—		375		375		—		19,256		19,256
Construction – land development	—		67		67		—		1,803		1,803
Land	27		670		697		204		30,566		30,770
Consumer loans:
Home equity and second mortgage	—		623		623		603		39,587		40,190
Other	17		82		99		23		4,289		4,312
Commercial business loans	128		594		722		725		64,039		64,764
Total	$	172	$	9,518	$	9,690	$	5,937	$	893,213	$	899,150

The following tables present an analysis of loans by aging category and portfolio segment at December 31, 2019 and September 30, 2019 (dollars in thousands):



	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual (1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
December 31, 2019
Mortgage loans:
One- to four-family	$	—	$	277	$	942	$	—	$	1,219	$	128,154	$	129,373
Multi-family	—		—		—		—		—		78,326		78,326
Commercial	—		217		736		—		953		438,071		439,024
Construction – custom and owner/builder	—		—		—		—		—		75,026		75,026
Construction – speculative one- to four- family	—		—		—		—		—		12,473		12,473
Construction – commercial	—		—		—		—		—		27,151		27,151
Construction – multi-family	—		—		—		—		—		17,024		17,024
Construction – land development	—		—		—		—		—		1,064		1,064
Land	65		215		198		—		478		28,941		29,419
Consumer loans:
Home equity and second mortgage	28		—		581		—		609		38,494		39,103
Other	—		—		12		—		12		4,081		4,093
Commercial business loans	—		—		601		—		601		73,189		73,790
Total	$	93	$	709	$	3,070	$	—	$	3,872	$	921,994	$	925,866


September 30, 2019
Mortgage loans:
One- to four-family	$	—	$	286	$	699	$	—	$	985	$	131,676	$	132,661
Multi-family	—		—		—		—		—		76,036		76,036
Commercial	94		218		779		—		1,091		418,026		419,117
Construction – custom and owner/ builder	—		—		—		—		—		75,411		75,411
Construction – speculative one- to four- family	—		—		—		—		—		10,779		10,779
Construction – commercial	—		—		—		—		—		24,051		24,051
Construction – multi-family	—		—		—		—		—		19,256		19,256
Construction – land development	—		—		—		—		—		1,803		1,803
Land	5		193		204		—		402		30,368		30,770
Consumer loans:
Home equity and second mortgage	94		—		603		—		697		39,493		40,190
Other	—		—		23		—		23		4,289		4,312
Commercial business loans	—		2		725		—		727		64,037		64,764
Total	$	193	$	699	$	3,033	$	—	$	3,925	$	895,225	$	899,150

______________________

(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

Credit Quality Indicators

The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential. The Company categorizes loans into risk grade 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 such as the estimated fair value of the collateral. The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:

Pass: Pass loans are defined as those loans that meet acceptable quality underwriting standards.

Watch: Watch loans are defined as those loans that still exhibit acceptable quality, but have some concerns that justify greater attention. If these concerns are not corrected, a potential for further adverse categorization exists. These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.

Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan.

Substandard: Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

Loss: Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At December 31, 2019 and September 30, 2019, there were no loans classified as loss.

The following tables present an analysis of loans by credit quality indicator and portfolio segment at December 31, 2019 and September 30, 2019 (dollars in thousands):



	Loan Grades
December 31, 2019	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	126,562	$	1,300	$	557	$	954	$	129,373
Multi-family	78,326		—		—		—		78,326
Commercial	427,832		9,246		673		1,273		439,024
Construction – custom and owner/builder	73,984		1,042		—		—		75,026
Construction – speculative one- to four-family	12,473		—		—		—		12,473
Construction – commercial	27,151		—		—		—		27,151
Construction – multi-family	17,024		—		—		—		17,024
Construction – land development	926		—		—		138		1,064
Land	27,075		1,556		590		198		29,419
Consumer loans:
Home equity and second mortgage	38,303		41		—		759		39,103
Other	4,048		33		—		12		4,093
Commercial business loans	72,824		235		82		649		73,790
Total	$	906,528	$	13,453	$	1,902	$	3,983	$	925,866

September 30, 2019
Mortgage loans:
One- to four-family	$	129,748	$	296	$	562	$	2,055	$	132,661
Multi-family	76,036		—		—		—		76,036
Commercial	405,165		11,944		683		1,325		419,117
Construction – custom and owner/builder	75,178		233		—		—		75,411
Construction – speculative one- to four-family	10,779		—		—		—		10,779
Construction – commercial	24,051		—		—		—		24,051
Construction – multi-family	19,256		—		—		—		19,256
Construction – land development	1,659		—		—		144		1,803
Land	28,390		952		1,217		211		30,770
Consumer loans:
Home equity and second mortgage	39,364		41		—		785		40,190
Other	4,257		33		—		22		4,312
Commercial business loans	63,669		232		85		778		64,764
Total	$	877,552	$	13,731	$	2,547	$	5,320	$	899,150

Impaired Loans

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

The categories of non-accrual loans and impaired loans overlap, although they are not identical.



	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		YTD Average Recorded Investment (1)		YTD Interest Income Recognized (1)		YTD Cash Basis Interest Income Recognized (1)
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,192	$	1,236	$	—	$	1,110	$	71	$	62
Commercial	3,190		3,190		—		2,920		227		192
Land	63		126		—		100		3		3
Consumer loans:
Home equity and second mortgage	603		603		—		459		—		—
Commercial business loans	189		291		—		142		30		30
Subtotal	5,237		5,446		—		4,731		331		287

With an allowance recorded:
Mortgage loans:
Land	141		141		27		246		—		—
Consumer loans:
Other	23		23		17		10		—
Commercial business loans	536		536		128		350		30		30
Subtotal	700		700		172		606		30		30
Total
Mortgage loans:
One- to four-family	1,192		1,236		—		1,110		71		62
Commercial	3,190		3,190		—		2,920		227		192
Land	204		267		27		346		3		3
Consumer loans:
Home equity and second mortgage	603		603		—		459		—		—
Other	23		23		17		10		—		—
Commercial business loans	725		827		128		492		60		60
Total	$	5,937	$	6,146	$	172	$	5,337	$	361	$	317

_____________________________________________

(1) For the year ended September 30, 2019.

A troubled debt restructured loan ("TDR") is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Examples of such concessions include, but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals. TDRs are considered impaired and are individually evaluated for impairment. TDRs are classified as non-accrual (and considered to be non-performing) unless they have been performing in accordance with modified terms for a period of at least six months. The Company had $3.25 million and $3.27 million in TDRs included in impaired loans at December 31, 2019 and September 30, 2019, respectively, and had no commitments at these dates to lend additional funds on these loans. The allowance for loan losses allocated to TDRs at December 31, 2019 and September 30, 2019 was $53,000 and $56,000, respectively. There were no TDRs for which there was a payment default within the first 12 months of the modification during the three months ended December 31, 2019.

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of December 31, 2019 and September 30, 2019 (dollars in thousands):



	December 31, 2019
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	489	$	139	$	628
Commercial	2,405		—		2,405
Consumer loans:
Home equity and second mortgage	—		79		79
Commercial business loans	—		136		136
Total	$	2,894	$	354	$	3,248



	September 30, 2019
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	493	$	141	$	634
Commercial	2,410		—		2,410
Consumer loans:
Home equity and second mortgage	—		82		82
Commercial business loans	—		143		143
Total	$	2,903	$	366	$	3,269

There were no new TDRs during the three months ended December 31, 2019.

There was one new TDR during the year ended September 30, 2019. The following table sets forth information with respect to the Company's TDRs, by portfolio segment, during the year ended September 30, 2019 (dollars in thousands):



2019	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
Home equity and second mortgage loan (1)	1	$	85	$	85	$	82
Total	1	$	85	$	85	$	82
(1) Modification was a result of a reduction in interest rate and monthly payment.