NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio was as follows at December 31:


	December 31,		December 31,
	2019		2018
REAL ESTATE LOANS
Commercial	$	210,749	$	204,699
Construction and development		179,654		247,306
Home equity		38,167		40,258
One-to-four-family (excludes loans held for sale)		261,539		249,397
Multi-family		133,931		104,663
Total real estate loans		824,040		846,323
CONSUMER LOANS
Indirect home improvement		210,653		167,793
Solar		44,038		44,433
Marine		67,179		57,822
Other consumer		4,340		5,425
Total consumer loans		326,210		275,473
COMMERCIAL BUSINESS LOANS
Commercial and industrial		140,531		138,686
Warehouse lending		61,112		65,756
Total commercial business loans		201,643		204,442
Total loans receivable, gross		1,351,893		1,326,238
Allowance for loan losses		(13,229)		(12,349)
Deferred costs and fees, net		(3,273)		(2,907)
Premiums on purchased loans, net		955		1,537
Total loans receivable, net	$	1,336,346	$	1,312,519

The Company has defined its loan portfolio into three segments that reflect the structure of the lending function, the Company’s strategic plan and the manner in which management monitors performance and credit quality. The three loan portfolio segments are: (a) Real Estate Loans, (b) Consumer Loans and (c) Commercial Business Loans. Each of these segments is disaggregated into classes based on the risk characteristics of the borrower and/or the collateral type securing the loan. The following is a summary of each of the Company’s loan portfolio segments and classes:

Real Estate Loans

Commercial Lending. Loans originated by the Company primarily secured by income producing properties, including retail centers, warehouses, and office buildings located in our market areas.

Construction and Development Lending. Loans originated by the Company for the construction of, and secured by, commercial real estate, one-to-four-family, and multi-family residences and tracts of land for development that are not pre-sold. A small portion of the one-to-four-family construction portfolio is custom construction loans to the intended occupant of the residence.

Home Equity Lending. Loans originated by the Company secured by second mortgages on one-to-four-family residences, including home equity lines of credit in our market areas.

One-to-Four-Family Real Estate Lending. One-to-four-family residential loans include owner occupied properties (including second homes), and non-owner occupied properties with four or less units. These loans originated by the Company are secured by first mortgages on one-to-four-family residences in our market areas that the Company intends to hold (excludes loans held for sale).

Multi-family Lending. Apartment term lending (five or more units) to current banking customers and community reinvestment loans for low to moderate income individuals in the Company’s footprint.

Consumer Loans

Indirect Home Improvement. Fixture secured loans for home improvement are originated by the Company through its network of home improvement contractors and dealers and are secured by the personal property installed in, on, or at the borrower’s real property, and may be perfected with a UCC‑2 financing statement filed in the county of the borrower’s residence. These indirect home improvement loans include replacement windows, siding, roofing, pools, and other home fixture installations.

Solar. Fixture secured loans for solar related home improvement projects are originated by the Company through its network of contractors and dealers and are secured by the personal property installed in, on, or at the borrower’s real property, and which may be perfected with a UCC‑2 financing statement filed in the county of the borrower’s residence.

Marine. Loans originated by the Company, secured by boats, to borrowers primarily located in the states the Company originates consumer loans.

Other Consumer. Loans originated by the Company to consumers in our retail branch footprint, including automobiles, recreational vehicles, direct home improvement loans, loans on deposits, and other consumer loans, primarily consisting of personal lines of credit and credit cards.

Commercial Business Loans

Commercial and Industrial Lending (“C&I”). Loans originated by the Company to local small- and mid-sized businesses in our Puget Sound market area are secured primarily by accounts receivable, inventory, or personal property, plant and equipment. Some of the C&I loans purchased by the Company are outside of the Greater Puget Sound market area. C&I loans are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.

Warehouse Lending. Loans originated to non-depository financial institutions and secured by notes originated by the non-depository financial institution. The Company has two distinct warehouse lending divisions: commercial warehouse re-lending secured by notes on construction loans and mortgage warehouse re-lending secured by notes on one-to-four-family loans. The Company’s commercial construction warehouse lines are secured by notes on construction loans and typically guaranteed by principals with experience in construction lending. Mortgage warehouse lending loans are funded through third-party residential mortgage bankers. Under this program, the Company provides short-term funding to the mortgage banking companies for the purpose of originating residential mortgage loans for sale into the secondary market.

The following tables detail activity in the allowance for loan losses by loan categories for the years shown:


	At or For the Year Ended December 31, 2019
					Commercial
	Real Estate		Consumer		Business		Unallocated		Total
ALLOWANCE FOR LOAN LOSSES
Beginning balance	$	5,761	$	3,351	$	3,191	$	46	$	12,349
Provision (recapture) for loan losses		439		838		1,646		(43)		2,880
Charge-offs		(5)		(1,040)		(1,583)		—		(2,628)
Recoveries		11		617		—		—		628
Net recoveries (charge-offs)		6		(423)		(1,583)		—		(2,000)
Ending balance	$	6,206	$	3,766	$	3,254	$	3	$	13,229
Period end amount allocated to:
Loans individually evaluated for impairment	$	15	$	167	$	—	$	—	$	182
Loans collectively evaluated for impairment		6,191		3,599		3,254		3		13,047
Ending balance	$	6,206	$	3,766	$	3,254	$	3	$	13,229
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	2,635	$	493	$	—	$	—	$	3,128
Loans collectively evaluated for impairment		821,405		325,717		201,643		—		1,348,765
Ending balance	$	824,040	$	326,210	$	201,643	$	—	$	1,351,893


	At or For the Year Ended December 31, 2018
					Commercial
	Real Estate		Consumer		Business		Unallocated		Total
ALLOWANCE FOR LOAN LOSSES
Beginning balance	$	4,770	$	2,814	$	2,014	$	1,158	$	10,756
Provision (recapture) for loan losses		953		526		1,173		(1,112)		1,540
Charge-offs		(4)		(936)		—		—		(940)
Recoveries		42		947		4		—		993
Net recoveries		38		11		4		—		53
Ending balance	$	5,761	$	3,351	$	3,191	$	46	$	12,349
Period end amount allocated to:
Loans individually evaluated for impairment	$	125	$	150	$	700	$	—	$	975
Loans collectively evaluated for impairment		5,636		3,201		2,491		46		11,374
Ending balance	$	5,761	$	3,351	$	3,191	$	46	$	12,349
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	834	$	428	$	1,685	$	—	$	2,947
Loans collectively evaluated for impairment		845,489		275,045		202,757		—		1,323,291
Ending balance	$	846,323	$	275,473	$	204,442	$	—	$	1,326,238

Non-Accrual 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 non-accrual once the loan is 90 days past due or sooner if, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, or as required by regulatory authorities. The exception is the legacy Anchor credit card portfolio which is serviced externally and loans are manually placed on non-accrual once the credit card payment is 90 days past due.

The following tables provide information pertaining to the aging analysis of contractually past due loans and non-accrual loans for the years ended December 31, 2019 and 2018:


	December 31, 2019
	30-59		60-89
	Days		Days		90 Days		Total				Total
	Past		Past		or More		Past				Loans		Non-
	Due		Due		Past Due		Due		Current		Receivable		Accrual
REAL ESTATE LOANS
Commercial	$	—	$	—	$	—	$	—	$	210,749	$	210,749	$	1,086
Construction and development		533		—		—		533		179,121		179,654		—
Home equity		109		—		185		294		37,873		38,167		190
One-to-four-family		894		114		1,150		2,158		259,381		261,539		1,264
Multi-family		—		—		—		—		133,931		133,931		—
Total real estate loans		1,536		114		1,335		2,985		821,055		824,040		2,540
CONSUMER LOANS
Indirect home improvement		621		187		131		939		209,714		210,653		451
Solar		71		40		16		127		43,911		44,038		17
Marine		15		—		—		15		67,164		67,179		—
Other consumer		71		2		20		93		4,247		4,340		25
Total consumer loans		778		229		167		1,174		325,036		326,210		493
COMMERCIAL BUSINESS LOANS
Commercial and industrial		—		—		—		—		140,531		140,531		—
Warehouse lending		—		—		—		—		61,112		61,112		—
Total commercial business loans		—		—		—		—		201,643		201,643		—
Total loans	$	2,314	$	343	$	1,502	$	4,159	$	1,347,734	$	1,351,893	$	3,033


	December 31, 2018
	30-59		60-89
	Days		Days		90 Days		Total				Total
	Past		Past		or More		Past				Loans		Non-
	Due		Due		Past Due		Due		Current		Receivable		Accrual
REAL ESTATE LOANS
Commercial	$	—	$	—	$	—	$	—	$	204,699	$	204,699	$	—
Construction and development		—		—		—		—		247,306		247,306		—
Home equity		158		40		229		427		39,831		40,258		229
One-to-four-family		1,274		164		1,358		2,796		246,601		249,397		1,552
Multi-family		—		—		—		—		104,663		104,663		—
Total real estate loans		1,432		204		1,587		3,223		843,100		846,323		1,781
CONSUMER LOANS
Indirect home improvement		438		196		113		747		167,046		167,793		367
Solar		62		43		41		146		44,287		44,433		41
Marine		50		—		—		50		57,772		57,822		18
Other consumer		69		24		11		104		5,321		5,425		2
Total consumer loans		619		263		165		1,047		274,426		275,473		428
COMMERCIAL BUSINESS LOANS
Commercial and industrial		—		431		—		431		138,255		138,686		1,685
Warehouse lending		—		—		—		—		65,756		65,756		—
Total commercial business loans		—		431		—		431		204,011		204,442		1,685
Total loans	$	2,051	$	898	$	1,752	$	4,701	$	1,321,537	$	1,326,238	$	3,894

There were no loans 90 days or more past due and still accruing interest at December 31, 2019, compared to two other consumer loans 90 days or more past due of $11,000 and still accruing interest at December 31, 2018.

The following tables provide additional information about our impaired loans that have been segregated to reflect loans for which an allowance for loan losses has been provided and loans for which no allowance was provided for the years ended December 31, 2019 and 2018:


	December 31, 2019
	Unpaid
	Principal		Recorded		Related
WITH NO RELATED ALLOWANCE RECORDED	Balance		Investment		Allowance
Real estate loans:
Commercial	$	1,097	$	1,086	$	—
Home equity		278		225		—
One-to-four-family		1,293		1,264		—
Consumer loans:
Other consumer		17		17		—
		2,685		2,592		—
WITH RELATED ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		61		60		15
Consumer loans:
Indirect		451		451		158
Solar		17		17		6
Other consumer		8		8		3
		537		536		182
Total	$	3,222	$	3,128	$	182


	December 31, 2018
	Unpaid
	Principal		Recorded		Related
WITH NO RELATED ALLOWANCE RECORDED	Balance		Investment		Allowance
Real estate loans:
Home equity	$	305	$	229	$	—
One-to-four-family		991		718
Commercial business loans:
Commercial and industrial		431		431		—
		1,727		1,378		—
WITH RELATED ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		834		834		125
Consumer loans:
Indirect		367		367		128
Solar		41		41		15
Marine		18		18		6
Other consumer		2		2		1
Commercial business loans:
Commercial and industrial		1,254		1,254		700
		2,516		2,516		975
Total	$	4,243	$	3,894	$	975

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized and received for the years ended December 31, 2019 and 2018:


	At or For the Year Ended
	December 31, 2019				December 31, 2018
	Average Recorded		Interest Income		Average Recorded		Interest Income
	Investment		Recognized		Investment		Recognized
WITH NO RELATED ALLOWANCE RECORDED
Real estate loans:
Commercial	$	90	$	56	$	—	$	—
Home equity		206		3		404		8
One-to-four-family		1,500		34		719		—
Consumer loans:
Other consumer		4		2		—		—
Commercial business loans:
Commercial and industrial		180		—		431		22
		1,980		95		1,554		30
WITH RELATED ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		5		5		1,030		28
Consumer loans:
Indirect		427		41		295		32
Solar		36		1		31		3
Marine		13		—		11		2
Other consumer		5		1		1		—
Commercial business loans:
Commercial and industrial		96		—		757		59
		582		48		2,125		124
Total	$	2,562	$	143	$	3,679	$	154

Credit Quality Indicators

As part of the Company’s on-going monitoring of credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grading of loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) non-performing loans and (v) the general economic conditions in the Company’s markets.

The Company utilizes a risk grading matrix to assign a risk grade to its real estate and commercial business loans. Loans are graded on a scale of 1 to 10, with loans in risk grades 1 to 6 considered “Pass” and loans in risk grades 7 to 10 are reported as classified loans in the Company’s allowance for loan loss analysis.

A description of the 10 risk grades is as follows:

Grades 1 and 2 - These grades include loans to very high quality borrowers with excellent or desirable business credit.

Grade 3 - This grade includes loans to borrowers of good business credit with moderate risk.

Grades 4 and 5 - These grades include “Pass” grade loans to borrowers of average credit quality and risk.

Grade 6 - This grade includes loans on management’s “Watch” list and is intended to be utilized on a temporary basis for “Pass” grade borrowers where frequent and thorough monitoring is required due to credit weaknesses and where significant risk-modifying action is anticipated in the near term.

Grade 7 - This grade is for “Other Assets Especially Mentioned (OAEM)” in accordance with regulatory guidelines and includes borrowers where performance is poor or significantly less than expected.

Grade 8 - This grade includes “Substandard” loans in accordance with regulatory guidelines which represent an unacceptable business credit where a loss is possible if loan weakness is not corrected.

Grade 9 - This grade includes “Doubtful” loans in accordance with regulatory guidelines where a loss is highly probable.

Grade 10 - This grade includes “Loss” loans in accordance with regulatory guidelines for which total loss is expected and when identified are charged off.

Homogeneous loans are risk rated based upon the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. Loans classified under this policy at the Company are consumer loans which include indirect home improvement, solar, marine, other consumer, and one-to-four-family first and second liens. Under the Uniform Retail Credit Classification Policy, loans that are current or less than 90 days past due are graded “Pass” and risk graded “4” or “5” internally. Loans that are past due more than 90 days are classified “Substandard” risk graded “8” internally until the loan has demonstrated consistent performance, typically six months of contractual payments. Closed-end loans that are 120 days past due and open-end loans that are 180 days past due are charged off based on the value of the collateral less cost to sell.

Commercial real estate, construction and development, multi-family and commercial business loans are evaluated individually for their risk classification and may be classified as “Substandard” even if current on their loan payment obligations.

The following tables summarize risk rated loan balances by category at the dates indicated:


	December 31, 2019
					Special
	Pass		Watch		Mention		Substandard		Doubtful		Loss
	(1 - 5)		(6)		(7)		(8)		(9)		(10)		Total
REAL ESTATE LOANS
Commercial	$	203,703	$	2,274	$	3,686	$	1,086	$	—	$	—	$	210,749
Construction and development		177,109		2,545		—		—		—		—		179,654
Home equity		37,942		—		35		190		—		—		38,167
One-to-four-family		259,580		635		60		1,264		—		—		261,539
Multi-family		127,792		6,139		—		—		—		—		133,931
Total real estate loans		806,126		11,593		3,781		2,540		—		—		824,040
CONSUMER LOANS
Indirect home improvement		210,202		—		—		451		—		—		210,653
Solar		44,021		—		—		17		—		—		44,038
Marine		67,179		—		—		—		—		—		67,179
Other consumer		4,315		—		—		25		—		—		4,340
Total consumer loans		325,717		—		—		493		—		—		326,210
COMMERCIAL BUSINESS LOANS
Commercial and industrial		125,025		10,435		1,442		3,629		—		—		140,531
Warehouse lending		61,112		—		—		—		—		—		61,112
Total commercial business loans		186,137		10,435		1,442		3,629		—		—		201,643
Total loans receivable, gross	$	1,317,980	$	22,028	$	5,223	$	6,662	$	—	$	—	$	1,351,893


	December 31, 2018
					Special
	Pass		Watch		Mention		Substandard		Doubtful		Loss
	(1 - 5)		(6)		(7)		(8)		(9)		(10)		Total
REAL ESTATE LOANS
Commercial	$	203,557	$	1,142	$	—	$	—	$	—	$	—	$	204,699
Construction and development		244,577		2,729		—		—		—		—		247,306
Home equity		39,846		—		183		229		—		—		40,258
One-to-four-family		247,575		207		63		1,552		—		—		249,397
Multi-family		103,447		1,216		—		—		—		—		104,663
Total real estate loans		839,002		5,294		246		1,781		—		—		846,323
CONSUMER LOANS
Indirect home improvement		167,426		—		—		367		—		—		167,793
Solar		44,392		—		—		41		—		—		44,433
Marine		57,804		—		—		18		—		—		57,822
Other consumer		5,415		—		8		2		—		—		5,425
Total consumer loans		275,037		—		8		428		—		—		275,473
COMMERCIAL BUSINESS LOANS
Commercial and industrial		124,089		8,813		—		5,784		—		—		138,686
Warehouse lending		65,756		—		—		—		—		—		65,756
Total commercial business loans		189,845		8,813		—		5,784		—		—		204,442
Total loans receivable, gross	$	1,303,884	$	14,107	$	254	$	7,993	$	—	$	—	$	1,326,238

At December 31, 2019, there were no troubled debt restructured loans (“TDRs”) that were modified in the previous 12 months that subsequently defaulted in the reporting year. The Company had no TDRs at December 31, 2019 or 2018.

Related Party Loans

Certain directors and executive officers or their related affiliates are customers of and have had banking transactions with the Company. Total loans to directors, executive officers, and their affiliates are subject to regulatory limitations.

Outstanding loan balances were as follows and were within regulatory limitations:


	At December 31,
	2019		2018
Beginning balance	$	3,325	$	655
Additions		—		2,688
Repayments		(76)		(18)
Ending balance	$	3,249	$	3,325

The aggregate maximum loan balance of extended credit was $3.6 million at December 31, 2019 and December 31, 2018, and includes the ending balances from the tables above.

These loans and lines of credit were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectability.