NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio was as follows at March 31, 2020 and December 31, 2019:


	March 31,		December 31,
REAL ESTATE LOANS	2020		2019
Commercial	$	220,509	$	210,749
Construction and development		168,658		179,654
Home equity		37,503		38,167
One-to-four-family (excludes loans held for sale)		305,436		261,539
Multi-family		130,570		133,931
Total real estate loans		862,676		824,040
CONSUMER LOANS
Indirect home improvement		261,566		254,691
Marine		69,473		67,179
Other consumer		4,056		4,340
Total consumer loans		335,095		326,210
COMMERCIAL BUSINESS LOANS
Commercial and industrial		149,086		140,531
Warehouse lending		65,017		61,112
Total commercial business loans		214,103		201,643
Total loans receivable, gross		1,411,874		1,351,893
Allowance for loan losses		(16,872)		(13,229)
Deferred costs and fees, net		(3,425)		(3,273)
Premiums on purchased loans, net		1,493		955
Total loans receivable, net	$	1,393,070	$	1,336,346

Most of the Company’s commercial and multi-family real estate, construction, residential, and/or commercial business lending activities are with customers located in Western Washington and near the loan production office located in the Tri-Cities, Washington. The Company originates real estate, consumer, and commercial business loans and has concentrations in these areas, however, indirect home improvement loans, including solar-related home improvement loans, are originated through a network of home improvement contractors and dealers located throughout Washington, Oregon, California, Idaho, Colorado, Arizona, and just recently, Minnesota and Nevada. Loans are generally secured by collateral and rights to collateral vary and are legally documented to the extent practicable. Local economic conditions may affect borrowers’ ability to meet the stated repayment terms.

At March 31, 2020, the Bank held approximately $706.4 million in loans that qualify as collateral for FHLB advances, compared to approximately $646.1 million at December 31, 2019. The Bank held approximately $327.4 million in loans that qualify as collateral for the Federal Reserve Bank line of credit at March 31, 2020, compared to approximately $318.8 million at December 31, 2019.

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 or purchased from banks 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, including solar related home improvement projects.

Marine. Loans originated by the Company, secured by boats, to borrowers primarily located in the states we originate 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 at or for the three months ended March 31, 2020 and 2019:


	At or For the Three Months Ended March 31, 2020
					Commercial
ALLOWANCE FOR LOAN LOSSES	Real Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	6,206	$	3,766	$	3,254	$	3	$	13,229
Provision for loan losses		1,019		660		824		1,183		3,686
Charge-offs		—		(370)		(11)		—		(381)
Recoveries		18		143		177		—		338
Net recoveries (charge-offs)		18		(227)		166		—		(43)
Ending balance	$	7,243	$	4,199	$	4,244	$	1,186	$	16,872
Period end amount allocated to:
Loans individually evaluated for impairment	$	15	$	231	$	—	$	—	$	246
Loans collectively evaluated for impairment		7,228		3,968		4,244		1,186		16,626
Ending balance	$	7,243	$	4,199	$	4,244	$	1,186	$	16,872
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	2,528	$	664	$	—	$	—	$	3,192
Loans collectively evaluated for impairment		860,148		334,431		214,103		—		1,408,682
Ending balance	$	862,676	$	335,095	$	214,103	$	—	$	1,411,874


	At or For the Three Months Ended March 31, 2019
					Commercial
ALLOWANCE FOR LOAN LOSSES	Real Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	5,761	$	3,351	$	3,191	$	46	$	12,349
Provision (recapture) for loan losses		24		114		691		(79)		750
Charge-offs		—		(250)		(1,152)		—		(1,402)
Recoveries		—		148		—		—		148
Net charge-offs		—		(102)		(1,152)		—		(1,254)
Ending balance	$	5,785	$	3,363	$	2,730	$	(33)	$	11,845
Period end amount allocated to:
Loans individually evaluated for impairment	$	173	$	160	$	—	$	—	$	333
Loans collectively evaluated for impairment		5,612		3,203		2,730		(33)		11,512
Ending balance	$	5,785	$	3,363	$	2,730	$	(33)	$	11,845
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	1,156	$	457	$	431	$	—	$	2,044
Loans collectively evaluated for impairment		832,259		283,959		178,808		—		1,295,026
Ending balance	$	833,415	$	284,416	$	179,239	$	—	$	1,297,070

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 Bank 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.

As a result of the negative impact on employment from the COVID-19 pandemic, we are anticipating higher levels of financial hardship for our customers, which we expect will lead to higher levels of forbearance, delinquency and defaults. We expect that, left unabated, this deterioration in forbearance, delinquency and default rates will persist until such time as the economy and employment return to relatively normal levels. We assist customers with an array of payment programs during periods of financial hardship, including forbearance. Forbearance allows a borrower to temporarily not make scheduled payments or to make smaller than scheduled payments, in each case for a specified period of time. Forbearance does not grant any reduction in the total principal or interest repayment obligation. While a loan is in forbearance status, interest continues to accrue and is repaid over a specified time period when the loan re-enters repayment status.

The following tables provide information pertaining to the aging analysis of contractually past due loans and non-accrual loans at March 31, 2020 and December 31, 2019:


	March 31, 2020
	30-59		60-89
	Days		Days		90 Days		Total				Total
	Past		Past		or More		Past				Loans		Non-
REAL ESTATE LOANS	Due		Due		Past Due		Due		Current		Receivable		Accrual
Commercial	$	—	$	—	$	—	$	—	$	220,509	$	220,509	$	1,083
Construction and development		—		—		—		—		168,658		168,658		—
Home equity		204		289		220		713		36,790		37,503		220
One-to-four-family		2,203		—		1,112		3,315		302,121		305,436		1,225
Multi-family		—		—		—		—		130,570		130,570		—
Total real estate loans		2,407		289		1,332		4,028		858,648		862,676		2,528
CONSUMER LOANS
Indirect home improvement		654		266		171		1,091		260,475		261,566		533
Marine		14		—		124		138		69,335		69,473		124
Other consumer		22		12		2		36		4,020		4,056		7
Total consumer loans		690		278		297		1,265		333,830		335,095		664
COMMERCIAL BUSINESS LOANS
Commercial and industrial		—		—		—		—		149,086		149,086		—
Warehouse lending		—		—		—		—		65,017		65,017		—
Total commercial business loans		—		—		—		—		214,103		214,103		—
Total loans	$	3,097	$	567	$	1,629	$	5,293	$	1,406,581	$	1,411,874	$	3,192


	December 31, 2019
	30-59		60-89
	Days		Days		90 Days		Total				Total
	Past		Past		or More		Past				Loans		Non-
REAL ESTATE LOANS	Due		Due		Past Due		Due		Current		Receivable		Accrual
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		692		227		147		1,066		253,625		254,691		468
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

There were no loans 90 days or more past due and still accruing interest at March 31, 2020, or at December 31, 2019.

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 at March 31, 2020 and December 31, 2019:


	March 31, 2020
	Unpaid
WITH NO RELATED ALLOWANCE RECORDED	Principal		Recorded		Related
Real estate loans:	Balance		Investment		Allowance
Commercial	$	1,094	$	1,083	$	—
Home equity		271		220		—
One-to-four-family		1,193		1,165		—
Consumer loans:
Other consumer		5		5		—
		2,563		2,473		—
WITH RELATED ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		61		60		15
Consumer loans:
Indirect		533		533		187
Marine		124		124		43
Other consumer		2		2		1
		720		719		246
Total	$	3,283	$	3,192	$	246


	December 31, 2019
	Unpaid
WITH NO RELATED ALLOWANCE RECORDED	Principal		Recorded		Related
Real estate loans:	Balance		Investment		Allowance
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		468		468		164
Other consumer		8		8		3
		537		536		182
Total	$	3,222	$	3,128	$	182

The following tables present the average recorded investment in loans individually evaluated for impairment and the interest income recognized and received for the three months ended March 31, 2020 and 2019:


	At or For the Three Months Ended
	March 31, 2020				March 31, 2019
WITH NO RELATED ALLOWANCE RECORDED	Average Recorded		Interest Income		Average Recorded		Interest Income
Real estate loans:	Investment		Recognized		Investment		Recognized
Commercial	$	1,084	$	8	$	—	$	—
Home equity		220		—		267		—
One-to-four-family		1,230		5		830		15
Consumer loans:
Other consumer		5		—		—		—
Commercial business loans:
Commercial and industrial		—		—		431		—
		2,539		13		1,528		15
WITH RELATED ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		60		—		1,156		—
Consumer loans:
Indirect		548		13		441		9
Marine		41		—		13		—
Other consumer		1		—		5		—
Commercial business loans:
Commercial and industrial		—		—		1,152		7
		650		13		2,767		16
Total	$	3,189	$	26	$	4,295	$	31

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.

Consumer, Home Equity, and One-to-Four-Family Real Estate Loans

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 rated “4” or “5” internally. Loans that are past due more than 90 days are classified “Substandard” and risk rated “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:


	March 31, 2020
					Special
	Pass		Watch		Mention		Substandard		Doubtful		Loss
REAL ESTATE LOANS	(1 - 5)		(6)		(7)		(8)		(9)		(10)		Total
Commercial	$	168,015	$	46,802	$	3,675	$	2,017	$	—	$	—	$	220,509
Construction and development		165,848		2,810		—		—		—		—		168,658
Home equity		37,283		—		—		220		—		—		37,503
One-to-four-family		304,046		165		—		1,225		—		—		305,436
Multi-family		130,570		—		—		—		—		—		130,570
Total real estate loans		805,762		49,777		3,675		3,462		—		—		862,676
CONSUMER LOANS
Indirect home improvement		261,033		—		—		533		—		—		261,566
Marine		69,349		—		—		124		—		—		69,473
Other consumer		4,049		—		—		7		—		—		4,056
Total consumer loans		334,431		—		—		664		—		—		335,095
COMMERCIAL BUSINESS LOANS
Commercial and industrial		105,396		32,119		8,058		3,513		—		—		149,086
Warehouse lending		61,202		3,815		—		—		—		—		65,017
Total commercial business loans		166,598		35,934		8,058		3,513		—		—		214,103
Total loans receivable, gross	$	1,306,791	$	85,711	$	11,733	$	7,639	$	—	$	—	$	1,411,874


	December 31, 2019
					Special
	Pass		Watch		Mention		Substandard		Doubtful		Loss
REAL ESTATE LOANS	(1 - 5)		(6)		(7)		(8)		(9)		(10)		Total
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		254,223		—		—		468		—		—		254,691
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