Loans Receivable

Loans receivable net of loans in process (“LIP”) at December 31, 2019, and 2018 are summarized as follows:



	December 31,
	2019		2018
	(In thousands)
One-to-four family residential:
Permanent owner occupied	$	210,898	$	194,141
Permanent non-owner occupied	161,630		147,825
	372,528		341,966
Multifamily:
Permanent	172,915		169,355
	172,915		169,355
Commercial real estate:
Permanent	395,152		373,798
	395,152		373,798
Construction/land: ⁽¹⁾
One-to-four family residential	44,491		51,747
Multifamily	40,954		40,502
Commercial	19,550		9,976
Land	8,670		6,629
	113,665		108,854

Business	37,779		30,486
Consumer	30,199		12,970
Total loans	1,122,238		1,037,429
Less:
Deferred loan fees, net	558		1,178
Allowance for loan and lease losses ("ALLL")	13,218		13,347
Loans receivable, net	$	1,108,462	$	1,022,904

____________

⁽¹⁾

Included in the construction/land category are “rollover” loans, which are loans that will convert upon completion of the construction period to permanent loans. At that time, the loans will be classified according to the underlying collateral. In addition, raw land or buildable lots, where the Company does not intend to finance the construction are included in the construction/land category. At December 31, 2019, we classified $38.6 million of multifamily loans, $8.7 million of commercial land loans, $3.5 million of one-to-four family residential and $18.3 million of commercial real estate loans as construction/land loans to facilitate the review of the composition of our loan portfolio. At December 31, 2018, $25.2 million of multifamily loans, $6.2 million of commercial land loans, $602,000 one-to-four family residential and $10.0 million of commercial real estate loans were reclassified to the construction/land category.

At December 31, 2019, and 2018, there were no loans classified as held for sale.

Concentrations of credit. Most of the Bank’s lending activity occurs within the state of Washington. The primary market areas include King and to a lesser extent Pierce, Snohomish and Kitsap counties. At December 31, 2019, the Company’s loan portfolio consists of one-to-four family residential loans which comprised 33.2%, commercial real estate and multifamily loans were 35.2% and 15.4%, respectively, and construction/land loans were 10.1% of the total loan portfolio. Consumer and business loans accounted for the remaining 6.1% of the loan portfolio. Included in the one-to-four family residential, multifamily, and commercial real estate loan portfolios at December 31, 2019 were $432,000, $8.4 million, and $78.0 million, respectively, to the Company’s five largest borrowing relationships.

The Company originates both adjustable and fixed interest rate loans. The composition of loans receivable at December 31, 2019, and 2018, was as follows:



December 31, 2019
Fixed Rate			Adjustable Rate
Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance
(In thousands)
Due within one year	$	29,997	Due within one year	$	297,221
After one year through three years	63,055		After one year through three years	102,248
After three years through five years	68,659		After three years through five years	137,487
After five years through ten years	126,762		After five years through ten years	86,404
Thereafter	207,055		Thereafter	3,350
	$	495,528		$	626,710



December 31, 2018
Fixed Rate			Adjustable Rate
Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance
(In thousands)
Due within one year	$	44,445	Due within one year	$	248,739
After one year through three years	53,076		After one year through three years	98,652
After three years through five years	56,194		After three years through five years	105,929
After five years through ten years	125,884		After five years through ten years	112,449
Thereafter	192,061		Thereafter	—
	$	471,660		$	565,769

Our adjustable-rate loans are tied to various indexes, including LIBOR, the prime rate as published in The Wall Street Journal, and the FHLB. Certain adjustable‑rate loans have interest rate adjustment limitations and are generally indexed to the FHLB Long-Term Bullet advance rates published by the FHLB. Future market factors may affect the correlation of the interest rate adjustment with the rates paid on short‑term deposits that have been primarily utilized to fund these loans.

Credit Quality Indicators. The Company assigns a risk rating to all credit exposures based on the risk rating system designed to define the basic characteristics and identified risk elements of each credit extension. The Company utilizes a nine‑point risk rating system. A description of the general characteristics of the risk grades is as follows:

•

Grades 1 through 5: These grades are considered to be “pass” credits. These include assets where there is virtually no credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on the Company’s watch list, where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the future.

•

Grade 6: These credits, classified as ”special mention”, possess weaknesses that deserve management’s close attention. Special mention assets do not expose the Company to sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. If left uncorrected, these potential weaknesses may result in deterioration in the Company’s credit position at a future date.


•	Grade 7: These credits, classified as “substandard”, present a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These credits have well defined weaknesses which jeopardize the orderly liquidation of the debt and are inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.


•	Grade 8: These credits are classified as “doubtful” have well defined weaknesses which make the full collection or liquidation of the loan highly questionable and improbable. This classification is used where significant risk exposures are perceived but the exact amount of the loss cannot yet be determined due to pending events.


•	Grade 9: Assets classified as “loss” are considered uncollectible and cannot be justified as a viable asset for the Company. There is little or no prospect of near term recovery and no realistic strengthening action of significance is pending.

As of December 31, 2019, and 2018, the Company had no loans rated as doubtful or loss. The following tables represent a summary of loans at December 31, 2019, and 2018 by type and risk category:



	December 31, 2019
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Risk Rating:
Pass	$	371,363	$	170,810	$	394,627	$	101,141	$	37,779	$	30,199	$	1,105,919
Special mention	536		2,105		525		12,524		—		—		15,690
Substandard	629		—		—		—		—		—		629
Total	$	372,528	$	172,915	$	395,152	$	113,665	$	37,779	$	30,199	$	1,122,238



	December 31, 2018
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction / Land		Business		Consumer		Total
	(In thousands)
Risk Rating:
Pass	$	339,310	$	169,355	$	372,690	$	108,854	$	30,486	$	12,926	$	1,033,621
Special mention	1,737		—		782		—		—		—		2,519
Substandard	919		—		326		—		—		44		1,289
Total	$	341,966	$	169,355	$	373,798	$	108,854	$	30,486	$	12,970	$	1,037,429

ALLL. When the Company classifies problem assets as either substandard or doubtful, pursuant to Federal regulations, it may establish a specific reserve in an amount deemed prudent to address the risk specifically or may allow the loss to be addressed in the general allowance. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to the particular problem assets. When an insured institution classifies problem assets as a loss, pursuant to Federal regulations, it is required to charge-off such assets in the period in which they are deemed uncollectible. The determination as to the classification of the Company’s assets and the amount of valuation allowances is subject to review by bank regulators, who can require the establishment of additional loss allowances.

Loan grades are used by the Company 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 problem loan reporting every three months.

The following tables summarize changes in the ALLL and loan portfolio by type of loan and reserve method for the periods indicated.



	At or For the Year Ended December 31, 2019
	One-to-Four Family Residential			Multifamily			Commercial Real Estate			Construction/ Land			Business		Consumer		Total
ALLL:	(In thousands)
Beginning balance	$	3,387		$	1,680		$	4,777		$	2,331		$	936	$	236	$	13,347
Charge-offs	—			—			—			—			—		—		—
Recoveries	73			45			—			—			—		53		171
(Recapture) provision	(426		)	(118		)	(218		)	(109		)	204		367		(300		)
Ending balance	$	3,034		$	1,607		$	4,559		$	2,222		$	1,140	$	656	$	13,218

General reserve	$	3,003		$	1,607		$	4,559		$	2,222		$	1,140	$	656	$	13,187
Specific reserve	31			—			—			—			—		—		31

Loans:
Total Loans	$	372,528		$	172,915		$	395,152		$	113,665		$	37,779	$	30,199	$	1,122,238
Loans collectively evaluated for impairment ⁽¹⁾	$	368,453		170,810			393,886			101,141			37,779		30,199		1,102,268
Loans individually evaluated for impairment ⁽²⁾	4,075			2,105			1,266			12,524			—		—		19,970

____________

⁽¹⁾ Loans collectively evaluated for general reserves.

⁽²⁾ Loans individually evaluated for specific reserves.



	At or For the Year Ended December 31, 2018
	One-to-Four Family Residential			Multifamily			Commercial Real Estate		Construction/ Land			Business		Consumer			Total
ALLL:	(In thousands)
Beginning balance	$	2,837		$	1,820		$	4,418	$	2,816		$	694	$	297		$	12,882
Charge-offs	—			—			—		—			—		—			—
Recoveries	4,279			—			14		171			—		1			4,465
(Recapture) provision	(3,729		)	(140		)	345		(656		)	242		(62		)	(4,000		)
Ending balance	$	3,387		$	1,680		$	4,777	$	2,331		$	936	$	236		$	13,347

General reserve	$	3,328		$	1,680		$	4,774	$	2,331		$	936	$	236		$	13,285
Specific reserve	59			—			3		—			—		—			62

Loans:
Total Loans	$	341,966		$	169,355		$	373,798	$	108,854		$	30,486	$	12,970		$	1,037,429
Loans collectively evaluated for impairment ⁽¹⁾	334,644			169,355			371,058		108,854			30,486		12,883			1,027,280
Loans individually evaluated for impairment ⁽²⁾	7,322			—			2,740		—			—		87			10,149

_____________

⁽¹⁾ Loans collectively evaluated for general reserves.

⁽²⁾ Loans individually evaluated for specific reserves.

Past Due Loans. At December 31, 2019, total past due loans comprised 0.19% of total loans as compared to 0.08% at December 31, 2018.

The following tables represent a summary at December 31, 2019, and 2018, of the aging of loans by type:



	Loans Past Due as of December 31, 2019
	30-59 Days		60-89 Days		90 Days and Greater		Total		Current		Total Loans ⁽¹⁾
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	79	$	—	$	—	$	79	$	210,819	$	210,898
Non-owner occupied	—		—		—		—		161,630		161,630
Multifamily	2,105		—		—		2,105		170,810		172,915
Commercial real estate	—		—		—		—		395,152		395,152
Construction/land	—		—		—		—		113,665		113,665
Total real estate	2,184		—		—		2,184		1,052,076		1,054,260
Business	—		—		—		—		37,779		37,779
Consumer	—		—		—		—		30,199		30,199
Total	$	2,184	$	—	$	—	$	2,184	$	1,120,054	$	1,122,238

^{_________________________}

⁽¹⁾ There were no loans 90 days past due and still accruing interest at December 31, 2019.



	Loans Past Due as of December 31, 2018
	30-59 Days		60-89 Days		90 Days and Greater		Total		Current		Total Loans ⁽¹⁾
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	223	$	—	$	272	$	495	$	193,646	$	194,141
Non-owner occupied	—		—		—		—		147,825		147,825
Multifamily	—		—		—		—		169,355		169,355
Commercial real estate	—		—		326		326		373,472		373,798
Construction/land	—		—		—		—		108,854		108,854
Total real estate	223		—		598		821		993,152		993,973
Business	—		—		—		—		30,486		30,486
Consumer	—		—		—		—		12,970		12,970
Total	$	223	$	—	$	598	$	821	$	1,036,608	$	1,037,429

^{________________________}

⁽¹⁾ There were no loans 90 days past due and still accruing interest at December 31, 2018.

Nonaccrual Loans. The following table is a summary of nonaccrual loans at December 31, 2019, and 2018, by type of loan:



	December 31,
	2019		2018
	(In thousands)
One-to-four family residential	$	95	$	382
Commercial real estate	—		326
Consumer	—		44
Total nonaccrual loans	$	95	$	752

Nonperforming loans were $95,000 and $752,000 at December 31, 2019, and 2018, respectively. Foregone interest on nonaccrual loans for the years ended December 31, 2019, and 2018, were $12,000 and $18,000, respectively.

The following tables summarize the loan portfolio at December 31, 2019, and 2018, by type and payment activity:



	December 31, 2019
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction / Land		Business		Consumer		Total
	(In thousands)
Performing ⁽¹⁾	$	372,433	$	172,915	$	395,152	$	113,665	$	37,779	$	30,199	$	1,122,143
Nonperforming ⁽²⁾	95		—		—		—		—		—		95
Total	$	372,528	$	172,915	$	395,152	$	113,665	$	37,779	$	30,199	$	1,122,238

____________

⁽¹⁾ There were $210.8 million of owner-occupied one-to-four family residential loans and $161.6 million of non-owner occupied one to-four family residential loans classified as performing.

⁽²⁾ There were $95,000 of owner-occupied one-to-four family residential loans and no non-owner occupied one-to-four family residential loans classified as nonperforming.



	December 31, 2018
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Performing ⁽¹⁾	$	341,584	$	169,355	$	373,472	$	108,854	$	30,486	$	12,926	$	1,036,677
Nonperforming ⁽²⁾	382		—		326		—		—		44		752
Total	$	341,966	$	169,355	$	373,798	$	108,854	$	30,486	$	12,970	$	1,037,429

_____________

⁽¹⁾ There were $193.8 million of owner-occupied one-to-four family residential loans and $147.8 million of non-owner occupied one-to-four family residential loans classified as performing.

⁽²⁾ There were $382,000 of owner-occupied one-to-four family residential loans and no non-owner occupied one-to-four family residential loans classified as nonperforming.

Impaired loans. The loan portfolio is constantly being monitored by management for delinquent loans and changes in the financial condition of each borrower. When an issue is identified with a borrower and it is determined that the loan needs to be classified as nonperforming and/or impaired, an evaluation of the collateral is performed prior to the end of the financial reporting period and, if necessary, an appraisal is ordered in accordance with the Company’s appraisal policy guidelines. Based on this evaluation, any additional provision for loan loss or charge-offs that may be needed is recorded prior to the end of the financial reporting period.

At December 31, 2019, there was $3.1 million committed to be advanced on an impaired $12.5 million construction loan. At December 31, 2018, there were no commitments to advance funds related to impaired loans.

The following tables present a summary of loans individually evaluated for impairment at December 31, 2019, and 2018, by the type of loan:



	At December 31, 2019
	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	437	$	582	$	—
Non-owner occupied	1,486		1,486		—
Multifamily	2,105		2,105		—
Commercial real estate	1,266		1,266		—
Construction/land	12,524		15,650		—
Total	17,818		21,089		—
Loans with an allowance:
One-to-four family residential:
Owner occupied	505		552		13
Non-owner occupied	1,647		1,647		18
Total	2,152		2,199		31
Total impaired loans:
One-to-four family residential:
Owner occupied	942		1,134		13
Non-owner occupied	3,133		3,133		18
Multifamily	2,105		2,105		—
Commercial real estate	1,266		1,266		—
Construction/land	12,524		15,650		—
Total	$	19,970	$	23,288	$	31

_________________

⁽¹⁾ Represents the loan balance less charge-offs.

⁽²⁾ Contractual loan principal balance.



	At December 31, 2018
	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	1,308	$	1,477	$	—
Non-owner occupied	2,375		2,375		—
Commercial real estate	2,499		2,499		—
Consumer	87		141		—
Total	6,269		6,492		—
Loans with an allowance:
One-to-four family residential:
Owner occupied	513		560		22
Non-owner occupied	3,126		3,148		37
Commercial real estate	241		241		3
Total	3,880		3,949		62
Total impaired loans:
One-to-four family residential:
Owner occupied	1,821		2,037		22
Non-owner occupied	5,501		5,523		37
Commercial real estate	2,740		2,740		3
Consumer	87		141		—
Total	$	10,149	$	10,441	$	62

_____________

⁽¹⁾ Represents the loan balance less charge-offs.

⁽²⁾ Contractual loan principal balance.

The following table presents a summary of the average recorded investment in impaired loans, and interest income recognized on impaired loans for the years ended December 31, 2019 and 2018, by the type of loan:



	Year Ended December 31,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	852	$	36	$	1,207	$	82
Non-owner occupied	1,833		94		5,583		146
Multifamily	421		111		900		—
Commercial real estate	2,038		90		1,885		172
Construction/land	7,143		834		—		—
Consumer	43		—		91		8
Total	12,330		1,165		9,666		408

Loans with an allowance:
One-to-four family residential:
Owner occupied	509		34		518		35
Non-owner occupied	2,092		93		3,211		162
Commercial real estate	48		—		1,046		27
Total	2,649		127		4,775		224

Total impaired loans:
One-to-four family residential:
Owner occupied	1,361		70		1,725		117
Non-owner occupied	3,925		187		8,794		308
Multifamily	421		111		900		—
Commercial real estate	2,086		90		2,931		199
Construction/land	7,143		834		—		—
Consumer	43		—		91		8
Total	$	14,979	$	1,292	$	14,441	$	632

Troubled Debt Restructurings. The following is a summary of information pertaining to TDRs:



	December 31,
	2019		2018
	(In thousands)
Performing TDRs	$	5,246	$	9,399
Nonaccrual TDRs	—		—
Total TDRs	$	5,246	$	9,399

The accrual status of a loan may change after it has been classified as a TDR. Management considers the following in determining the accrual status of restructured loans: (1) if the loan was on accrual status prior to the restructuring, the borrower has demonstrated performance under the previous terms, and a credit evaluation shows the borrower’s capacity to continue to perform under the restructured terms (both principal and interest payments), the loan will remain on accrual at the time of the restructuring; (2) if the loan was on nonaccrual status before the restructuring, and the Company’s credit evaluation shows the borrower’s capacity to meet the restructured terms, the loan would remain as nonaccrual for a minimum of six months until the borrower has demonstrated a reasonable period of sustained repayment performance (thereby providing reasonable assurance as to the ultimate collection of principal and interest in full under the modified terms).

The following table presents for the periods indicated TDRs and their recorded investment prior to the modification and after the modification:



	Year Ended December 31,
	2019					2018
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
TDRs that occurred during the period:
One-to-four family residential:
Principal and interest with interest rate concession	7	$	1,360	$	1,360	1	$	563	$	563
Advancement of maturity date	3	694		694		—	—		—
Commercial real estate:
Advancement of maturity date	1	855		855		—	—		—
Total	11	$	2,909	$	2,909	1	$	563	$	563

At December 31, 2019 and 2018, the Company had no commitments to extend additional credit to borrowers whose loan terms have been modified in a TDR. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the ALLL.

TDRs resulted in no charge-offs to the ALLL for the years ended December 31, 2019 and 2018. For the years ended December 31, 2019 and 2018, there were no payment defaults on loans modified as TDRs within the previous 12 months.

At December 31, 2019, and 2018, the Bank had no loans outstanding with executive officers or directors. The change in the aggregate dollar amount of these loans outstanding to related parties is summarized as follows:



	Year Ended December 31,
	2019		2018
	(In thousands)
Balance at beginning of year	$	—	$	9
Repayments	—		(9		)
Balance at end of year	$	—	$	—