Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $5.8 million as of June 30, 2022 and $4.9 million as of December 31, 2021. Net loans include unamortized net discounts on acquired loans of $568,000 and $751,000 as of June 30, 2022 and December 31, 2021, respectively. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $7.2 million as of June 30, 2022 and $6.3 million as of December 31, 2021 and was reported in accrued interest receivable on the Consolidated Balance Sheets.

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, near our newest loan production office in Vancouver, Washington, or near our 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, Minnesota, Nevada, and most recently, Texas and Utah. 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 June 30, 2022, the Bank held approximately $718.6 million in loans that are pledged as collateral for FHLB advances, compared to approximately $761.6 million at December 31, 2021. The Bank held approximately $491.4 million in loans that are pledged as collateral for the Federal Reserve Bank of San Francisco (“FRB”) line of credit at June 30, 2022, compared to approximately $428.7 million at December 31, 2021.

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 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 periodically 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, spas, 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 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. PPP loans originated by the Company are also included in this loan class.

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 credit losses on loans by loan categories at or for the three and six months ended June 30, 2022 and in the allowance for loan losses under the incurred loss methodology for the three and six months ended June 30, 2021:


	At or For the Three Months Ended June 30, 2022
	Real				Commercial
ALLOWANCE FOR CREDIT LOSSES ON LOANS	Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	10,560	$	9,792	$	3,013	$	—	$	23,365
Provision (recapture) for credit losses on loans		952		830		(163)		—		1,619
Loans charged-off		—		(297)		—		—		(297)
Recoveries		—		280		—		—		280
Total ending allowance balance	$	11,512	$	10,605	$	2,850	$	—	$	24,967


	At or For the Three Months Ended June 30, 2021
	Real				Commercial
ALLOWANCE FOR LOAN LOSSES	Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	13,615	$	6,815	$	5,669	$	1,276	$	27,375
Provision (recapture) for loan losses		693		349		5		(1,047)		—
Loans charged-off		—		(349)		—		—		(349)
Recoveries		—		208		—		—		208
Total ending allowance balance	$	14,308	$	7,023	$	5,674	$	229	$	27,234
Period end amount allocated to:
Loans individually evaluated for impairment	$	—	$	269	$	988	$	—	$	1,257
Loans collectively evaluated for impairment		14,308		6,754		4,686		229		25,977
Ending balance	$	14,308	$	7,023	$	5,674	$	229	$	27,234
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	1,049	$	768	$	4,487	$	—	$	6,304
Loans collectively evaluated for impairment		980,414		395,686		290,494		—		1,666,594
Ending balance	$	981,463	$	396,454	$	294,981	$	—	$	1,672,898


	At or For the Six Months Ended June 30, 2022
	Real				Commercial
ALLOWANCE FOR CREDIT LOSSES ON LOANS	Estate		Consumer		Business		Unallocated		Total
Beginning balance, prior to adoption of ASC 326	$	14,798	$	4,280	$	6,536	$	21	$	25,635
Impact of adopting ASC 326		(5,234)		6,078		(3,682)		(21)		(2,859)
Provision (recapture) for credit losses on loans		1,948		527		(4)		—		2,471
Loans charged-off		—		(820)		—		—		(820)
Recoveries		—		540		—		—		540
Total ending allowance balance	$	11,512	$	10,605	$	2,850	$	—	$	24,967


	At or For the Six Months Ended June 30, 2021
	Real				Commercial
ALLOWANCE FOR LOAN LOSSES	Estate		Consumer		Business		Unallocated		Total
Beginning balance	$	13,846	$	6,696	$	4,939	$	691	$	26,172
Provision (recapture) for loan losses		462		727		773		(462)		1,500
Loans charged-off		—		(852)		(38)		—		(890)
Recoveries		—		452		—		—		452
Total ending allowance balance	$	14,308	$	7,023	$	5,674	$	229	$	27,234
Period end amount allocated to:
Loans individually evaluated for impairment	$	—	$	269	$	988	$	—	$	1,257
Loans collectively evaluated for impairment		14,308		6,754		4,686		229		25,977
Ending balance	$	14,308	$	7,023	$	5,674	$	229	$	27,234
LOANS RECEIVABLE
Loans individually evaluated for impairment	$	1,049	$	768	$	4,487	$	—	$	6,304
Loans collectively evaluated for impairment		980,414		395,686		290,494		—		1,666,594
Ending balance	$	981,463	$	396,454	$	294,981	$	—	$	1,672,898

Nonaccrual 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 nonaccrual 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.

At June 30, 2022 and December 31, 2021, the Company had no TDRs. There were no TDRs which incurred a payment default within twelve months of the restructure date during the three and six months ended June 30, 2022 and 2021.

The following tables provide information pertaining to the aging analysis of contractually past due loans and nonaccrual loans at June 30, 2022 and December 31, 2021:


	June 30, 2022
	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	$	—	$	—	$	—	$	—	$	299,181	$	299,181	$	—
Construction and development		—		—		—		—		304,387		304,387		—
Home equity		6		32		151		189		49,103		49,292		151
One-to-four-family		—		—		331		331		390,460		390,791		799
Multi-family		—		—		—		—		204,862		204,862		—
Total real estate loans		6		32		482		520		1,247,993		1,248,513		950
CONSUMER LOANS
Indirect home improvement		787		439		218		1,444		395,015		396,459		558
Marine		48		—		34		82		85,724		85,806		91
Other consumer		19		13		—		32		3,030		3,062		—
Total consumer loans		854		452		252		1,558		483,769		485,327		649
COMMERCIAL BUSINESS LOANS
Commercial and industrial		—		—		1,087		1,087		202,244		203,331		5,059
Warehouse lending		—		—		—		—		33,868		33,868		—
Total commercial business loans		—		—		1,087		1,087		236,112		237,199		5,059
Total loans	$	860	$	484	$	1,821	$	3,165	$	1,967,874	$	1,971,039	$	6,658


	December 31, 2021
	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	$	—	$	—	$	—	$	—	$	264,429	$	264,429	$	—
Construction and development		—		—		—		—		240,553		240,553		—
Home equity		—		—		179		179		40,838		41,017		301
One-to-four-family		593		264		480		1,337		364,809		366,146		480
Multi-family		—		—		—		—		178,158		178,158		—
Total real estate loans		593		264		659		1,516		1,088,787		1,090,303		781
CONSUMER LOANS
Indirect home improvement		1,047		280		295		1,622		334,663		336,285		554
Marine		119		—		—		119		82,659		82,778		57
Other consumer		11		2		18		31		2,949		2,980		18
Total consumer loans		1,177		282		313		1,772		420,271		422,043		629
COMMERCIAL BUSINESS LOANS
Commercial and industrial		791		—		—		791		207,761		208,552		4,419
Warehouse lending		—		—		—		—		33,277		33,277		—
Total commercial business loans		791		—		—		791		241,038		241,829		4,419
Total loans	$	2,561	$	546	$	972	$	4,079	$	1,750,096	$	1,754,175	$	5,829

There were no loans 90 days or more past due and still accruing interest at both June 30, 2022 and December 31, 2021.

Impaired Loans and the Allowance for Loan Losses - Prior to the implementation of Financial Instruments - Credit Losses (Topic 326) on January 1, 2022, a loan was considered impaired when, based on current information and circumstances, the Company determines it was probable that it would be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Factors involved in determining impairment included, but were not limited to, the financial condition of the borrower, the value of the underlying collateral and the status of the economy. Impaired loans were comprised of loans on nonaccrual, TDRs that were performing under their restructured terms, and loans that were 90 days or more past due, but were still on accrual.

The following table provides additional information on impaired loans with and without allowance reserves at December 31, 2021. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):


	December 31, 2021
	Unpaid
WITH NO RELATED ALLOWANCE RECORDED	Principal		Recorded		Related
Real estate loans:	Balance		Investment		Allowance
Home equity	$	259	$	227	$	—
One-to-four-family		497		480		—
		756		707		—
WITH RELATED ALLOWANCE RECORDED
Real estate loans:
Home equity		92		74		23
Consumer loans:
Indirect		551		554		193
Marine		56		57		20
Other consumer		18		18		6
Commercial business loans:
Commercial and industrial		4,417		4,419		921
		5,134		5,122		1,163
Total	$	5,890	$	5,829	$	1,163

The following tables present the average recorded investment in loans individually evaluated for impairment and the interest income recognized and received for the three and six months ended June 30, 2021:


	At or For the Three Months Ended
	June 30, 2021
WITH NO RELATED ALLOWANCE RECORDED	Average Recorded		Interest Income
Real estate loans:	Investment		Recognized
Construction and development	$	1,233	$	—
Home equity		506		7
One-to-four-family		645		4
		2,384		11
WITH AN ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		20		—
Consumer loans:
Indirect		671		8
Marine		102		2
Other consumer		19		1
Commercial business loans:
Commercial and industrial		4,487		105
		5,299		116
Total	$	7,683	$	127


	At or For the Six Months Ended
	June 30, 2021
WITH NO RELATED ALLOWANCE RECORDED	Average Recorded		Interest Income
Real estate loans:	Investment		Recognized
Commercial	$	1,541	$	—
Home equity		579		9
One-to-four-family		594		6
		2,714		15
WITH RELATED ALLOWANCE RECORDED
Real estate loans:
One-to-four-family		40		—
Consumer loans:
Indirect		728		22
Marine		69		3
Other consumer		11		1
Commercial business loans:
Commercial and industrial		5,082		105
		5,930		131
Total	$	8,644	$	146

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 credit 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 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. Management may more conservatively risk rate credits even if paying in accordance with the loan’s repayment terms.

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 as of June 30, 2022. Revolving loans that are converted to term loans are presented by year of origination. Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of the most recent renewal or extension.


	June 30, 2022
REAL ESTATE LOANS	Term Loans by Year of Origination
Commercial	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total Loans
Pass	$	44,338	$	77,669	$	49,204	$	40,786	$	14,987	$	63,451	$	229	$	290,664
Watch		—		—		220		409		—		132		—		761
Special mention		—		—		1,704		304		590		5,158		—		7,756
Total commercial	$	44,338	$	77,669	$	51,128	$	41,499	$	15,577	$	68,741	$	229	$	299,181
Construction and development
Pass		87,315		146,937		50,098		19,325		—		712		—		304,387
Total construction and development	$	87,315	$	146,937	$	50,098	$	19,325	$	—	$	712	$	—	$	304,387
Home equity
Pass		4,308		2,088		7,138		4		1,411		1,939		32,253		49,141
Substandard		—		—		—		—		12		139		—		151
Total home equity	$	4,308	$	2,088	$	7,138	$	4	$	1,423	$	2,078	$	32,253	$	49,292
One-to-four-family
Pass		71,358		140,226		84,623		32,577		16,443		42,805		—		388,032
Special mention		—		—		—		—		1,960		—		—		1,960
Substandard		—		—		—		—		—		799		—		799
Total one-to-four-family	$	71,358	$	140,226	$	84,623	$	32,577	$	18,403	$	43,604	$	—	$	390,791
Multi-family
Pass		29,298		63,418		33,971		48,319		4,236		25,620		—		204,862
Total multi-family	$	29,298	$	63,418	$	33,971	$	48,319	$	4,236	$	25,620	$	—	$	204,862
Total real estate loans	$	236,617	$	430,338	$	226,958	$	141,724	$	39,639	$	140,755	$	—	$	1,248,513


	June 30, 2022
CONSUMER LOANS	Term Loans by Year of Origination
Indirect home improvement	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total Loans
Pass	$	115,241	$	142,356	$	55,040	$	35,897	$	21,115	$	26,242	$	10	$	395,901
Substandard		—		134		92		97		83		152		—		558
Total indirect home improvement	$	115,241	$	142,490	$	55,132	$	35,994	$	21,198	$	26,394	$	10	$	396,459
Marine
Pass		15,020		16,430		23,266		9,376		11,373		10,250		—		85,715
Substandard		—		—		—		—		—		91		—		91
Total marine	$	15,020	$	16,430	$	23,266	$	9,376	$	11,373	$	10,341	$	—	$	85,806
Other consumer
Pass		532		800		203		45		43		208		1,231		3,062
Total other consumer	$	532	$	800	$	203	$	45	$	43	$	208	$	1,231	$	3,062
Total consumer loans	$	130,793	$	159,720	$	78,601	$	45,415	$	32,614	$	36,943	$	1,241	$	485,327


COMMERCIAL	June 30, 2022
BUSINESS LOANS	Term Loans by Year of Origination
Commercial and industrial	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total Loans
Pass	$	17,244	$	30,206	$	22,527	$	2,909	$	4,154	$	8,438	$	100,584	$	186,062
Watch		—		14		—		1,325		—		222		607		2,168
Special mention		—		1,602		1,652		585		21		59		2,154		6,073
Substandard		—		1,087		—		2,267		193		4,559		922		9,028
Total commercial and industrial	$	17,244	$	32,909	$	24,179	$	7,086	$	4,368	$	13,278	$	104,267	$	203,331
Warehouse lending
Pass		—		—		—		—		—		—		33,868		33,868
Total warehouse lending	$	—	$	—	$	—	$	—	$	—	$	—	$	33,868	$	33,868
Total commercial business loans	$	17,244	$	32,909	$	24,179	$	7,086	$	4,368	$	13,278	$	138,135	$	237,199

TOTAL LOANS RECEIVABLE, GROSS
Pass	$	384,654	$	620,130	$	326,070	$	189,238	$	73,762	$	179,665	$	168,175	$	1,941,694
Watch		—		14		220		1,734		—		354		607		2,929
Special mention		—		1,602		3,356		889		2,571		5,217		2,154		15,789
Substandard		—		1,221		92		2,364		288		5,740		922		10,627
Total loans receivable, gross	$	384,654	$	622,967	$	329,738	$	194,225	$	76,621	$	190,976	$	171,858	$	1,971,039


	December 31, 2021
					Special
	Pass		Watch		Mention		Substandard		Doubtful		Loss
REAL ESTATE LOANS	(1 - 5)		(6)		(7)		(8)		(9)		(10)		Total
Commercial	$	253,092	$	4,652	$	5,769	$	916	$	—	$	—	$	264,429
Construction and development		240,553		—		—		—		—		—		240,553
Home equity		40,716		—		—		301		—		—		41,017
One-to-four-family		363,682		—		—		2,464		—		—		366,146
Multi-family		178,158		—		—		—		—		—		178,158
Total real estate loans		1,076,201		4,652		5,769		3,681		—		—		1,090,303
CONSUMER LOANS
Indirect home improvement		335,731		—		—		554		—		—		336,285
Marine		82,721		—		—		57		—		—		82,778
Other consumer		2,962		—		—		18		—		—		2,980
Total consumer loans		421,414		—		—		629		—		—		422,043
COMMERCIAL BUSINESS LOANS
Commercial and industrial		188,767		4,182		1,829		13,774		—		—		208,552
Warehouse lending		33,277		—		—		—		—		—		33,277
Total commercial business loans		222,044		4,182		1,829		13,774		—		—		241,829
Total loans receivable, gross	$	1,719,659	$	8,834	$	7,598	$	18,084	$	—	$	—	$	1,754,175

The following table presents the amortized cost basis of loans on nonaccrual status and loans 90 days or more past due and still accruing interest as of June 30, 2022:


	June 30, 2022
	Nonaccrual with No		Nonaccrual with				90-Days or More
	Allowance for Credit		Allowance for Credit		Total		Past Due and Still
REAL ESTATE LOANS	Losses		Losses		Nonaccrual		Accruing Interest
Home equity	$	16	$	135	$	151	$	—
One-to-four-family		799		—		799		—
		815		135		950		—
CONSUMER LOANS
Indirect home improvement		—		558		558		—
Marine		—		91		91		—
		—		649		649		—
COMMERCIAL BUSINESS LOANS
Commercial and industrial		1,087		3,972		5,059		—

Total	$	1,902	$	4,756	$	6,658	$	—

The Company recognized interest income on nonaccrual loans of $128,000 and $127,000 during the three months ended June 30, 2022 and 2021, respectively and $226,000 and $146,000 during the six months ended June 30, 2022 and 2021, respectively.

The following table presents the amortized cost basis of collateral dependent loans by class of loans as of June 30, 2022:


	June 30, 2022

REAL ESTATE LOANS	Real Estate		Equipment		Total
Home equity	$	151	$	—	$	151
One-to-four-family		799		—		799
		950		—		950
CONSUMER LOANS
Indirect home improvement		—		558		558
Marine		—		91		91
		—		649		649
COMMERCIAL BUSINESS LOANS
Commercial and industrial		1,087		3,972		5,059

Total	$	2,037	$	4,621	$	6,658