Note 4 – Loans

The composition of the loan portfolio at the dates indicated, excluding loans held for sale, was as follows (in thousands):

	At September 30, 2016			At December 31, 2015
Real estate loans:
One- to four- family	$	151,992		$	141,125
Home equity		30,297			31,573
Commercial and multifamily		170,258			175,312
Construction and land		58,902			57,043
Total real estate loans	$	411,449		$	405,053
Consumer loans:
Manufactured homes		15,525			13,798
Other consumer		25,570			23,030
Total consumer loans		41,095			36,828
Commercial business loans		26,439			19,295
Total loans		478,983			461,176
Deferred fees		(1,917	)		(1,707	)
Total loans, gross		477,066			459,469
Allowance for loan losses		(4,859	)		(4,636	)
Total loans, net	$	472,207		$	454,833

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2016 (in thousands):

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	629	$	97	$	389	$	23	$	53	$	23	$	30	$	-	$	1,244
Collectively evaluated for impairment	$	1,029	$	327	$	971	$	350	$	124	$	175	$	151	$	488	$	3,615
Ending balance	$	1,658	$	424	$	1,360	$	373	$	177	$	198	$	181	$	488	$	4,859

Loans receivable:
Individually evaluated for impairment	$	5,278	$	885	$	3,869	$	85	$	372	$	23	$	633	$	-	$	11,145
Collectively evaluated for impairment	$	146,714	$	29,412	$	166,389	$	58,817	$	15,153	$	25,547	$	25,806	$	-	$	467,838
Ending balance	$	151,992	$	30,297	$	170,258	$	58,902	$	15,525	$	25,570	$	26,439	$	-	$	478,983

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2015 (in thousands):

	One-to- four family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	647	$	110	$	36	$	18	$	63	$	-	$	8	$	-	$	882
Collectively evaluated for impairment		1,192		497		885		364		238		188		149		241		3,754
Ending balance	$	1,839	$	607	$	921	$	382	$	301	$	188	$	157	$	241	$	4,636

Loans receivable:
Individually evaluated for impairment	$	5,779	$	904	$	1,966	$	91	$	361	$	5	$	114	$	-	$	9,220
Collectively evaluated for impairment		135,346		30,669		173,346		56,952		13,437		23,025		19,181		-		451,956
Ending balance	$	141,125	$	31,573	$	175,312	$	57,043	$	13,798	$	23,030	$	19,295	$	-	$	461,176

The following table summarizes the activity in the allowance for loan losses for the three months ended September 30, 2016 (in thousands):

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
One-to four- family	$	1,713	$	-		$	-	$	(55	)	$	1,658
Home equity		501		(14	)		10		(73	)		424
Commercial and multifamily		1,377		-			-		(17	)		1,360
Construction and land		388		-			18		(33	)		373
Manufactured homes		189		-			2		(14	)		177
Other consumer		221		(10	)		15		(28	)		198
Commercial business		171		-			-		10			181
Unallocated		278		-			-		210			488
Total	$	4,838	$	(24	)	$	45	$	0		$	4,859

The following table summarizes the activity in the allowance for loan losses for the nine months ended September 30, 2016 (in thousands):

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
One-to four- family	$	1,839	$	(72	)	$	-	$	(109	)	$	1,658
Home equity		607		(14	)		-		(169	)		424
Commercial and multifamily		921		-			-		439			1,360
Construction and land		382		-			18		(27	)		373
Manufactured homes		301		-			75		(199	)		177
Other consumer		188		(31	)		7		34			198
Commercial business		157		(29	)		19		34			181
Unallocated		241		-			-		247			488
Total	$	4,636	$	(146	)	$	119	$	250		$	4,859

The following table summarizes the activity in the allowance for loan losses for the three months ended September 30, 2015 (in thousands):

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
One-to four- family	$	1,594	$	-		$	-	$	174		$	1,768
Home equity		509		-			25		(15	)		519
Commercial and multifamily		1,507		-			-		(166	)		1,341
Construction and land		345		-			1		(229	)		117
Manufactured homes		193		-			-		(1	)		192
Other consumer		183		(18	)		2		2			169
Commercial business		145		-			-		(11	)		134
Unallocated		96		-			-		346			442
Total	$	4,572	$	(18	)	$	28	$	100		$	4,682

The following table summarizes the activity in the allowance for loan losses for the nine months ended September 30, 2015 (in thousands):

	Beginning Allowance		Charge-offs			Recoveries		Provision			Ending Allowance
One-to four- family	$	1,442	$	(21	)	$	-	$	347		$	1,768
Home equity		601		(19	)		35		(98	)		519
Commercial and multifamily		1,244		-			-		97			1,341
Construction and land		399		(40	)		1		(242	)		117
Manufactured homes		193		(32	)		5		24			192
Other consumer		167		(45	)		11		37			169
Commercial business		108		-			-		26			134
Unallocated		233		-			-		209			442
Total	$	4,387	$	(157	)	$	52	$	400		$	4,682

Credit Quality Indicators. Federal regulations provide for the classification of lower quality loans as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without establishment of a specific loss reserve is not warranted.

When we classify problem loans as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent to address the risk specifically (if the loan is impaired) or we may allow the loss to be addressed in the general allowance (if the loan is not impaired). General allowances represent loss reserves which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem loans. When the Company classifies problem loans as a loss, we charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as substandard, doubtful or loss but possess identified weaknesses are classified as either watch or special mention assets. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s federal regulatory, and the Washington Department of Financial Institutions, the Bank’s state banking regulator, which can order the establishment of additional loss allowances. Pass rated loans are loans that are not otherwise classified or criticized.

The following table represents the internally assigned grades as of September 30, 2016 by type of loan (in thousands):

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Total
Grade:
Pass	$	148,008	$	29,106	$	164,970	$	58,057	$	15,277	$	25,496	$	26,037	$	466,951
Watch		1,167		537		1,943		845		77		51		22		4,642
Special Mention		1,408		-		-		-		31		-		-		1,439
Substandard		1,409		654		3,345		-		140		23		380		5,951
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total	$	151,992	$	30,297	$	170,258	$	58,902	$	15,525	$	25,570	$	26,439	$	478,983

The following table represents the internally assigned grades as of December 31, 2015 by type of loan (in thousands):

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Total
Grade:
Pass	$	136,879	$	30,310	$	169,072	$	55,984	$	13,621	$	22,967	$	18,449	$	447,282
Watch		1,015		609		4,810		1,059		96		58		846		8,493
Special Mention		1,409		-		1,430		-		33		-		-		2,872
Substandard		1,822		654		-		-		48		5		-		2,529
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total	$	141,125	$	31,573	$	175,312	$	57,043	$	13,798	$	23,030	$	19,295	$	461,176

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 of obligations as they become due, as well as when required by regulatory authorities.

The following table presents the recorded investment in nonaccrual loans as of September 30, 2016 and December 31, 2015, by type of loan (in thousands):

	September 30, 2016		December 31, 2015
One- to four- family	$	1,189	$	1,157
Home equity		427		344
Commercial and multifamily		2,337		-
Construction and land		-		-
Manufactured homes		112		27
Other consumer		154		-
Total	$	4,219	$	1,528

The following table represents the aging of the recorded investment in past due loans as of September 30, 2016 by type of loan (in thousands):

	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		90 Days and Greater Past Due and Still Accruing		Total Past Due		Current		Total Loans
One-to four- family	$	-	$	459	$	977	$	-	$	1,436	$	150,556	$	151,992
Home equity		348		153		231		-		732		29,565		30,297
Commercial and multifamily		-		-		228		-		228		170,030		170,258
Construction and land		-		-		-		-		-		58,902		58,902
Manufactured homes		177		-		112		-		289		15,236		15,525
Other consumer		1		28		-		-		29		25,541		25,570
Commercial business		147		-		-		-		147		26,292		26,439
Total	$	673	$	640	$	1,548	$	-	$	2,861	$	476,122	$	478,983

The following table represents the aging of the recorded investment in past due loans as of December 31, 2015 by type of loan (in thousands):

	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		90 Days and Greater Past Due and Still Accruing		Total Past Due		Current		Total Loans
One-to four- family	$	2,453	$	265	$	881	$	117	$	3,716	$	137,409	$	141,125
Home equity		352		60		296		-		708		30,865		31,573
Commercial and multifamily		203		-		-		-		203		175,109		175,312
Construction and land		65		-		-		-		65		56,978		57,043
Manufactured homes		103		27		-		-		130		13,668		13,798
Other consumer		17		26		-		-		43		22,987		23,030
Commercial business		154		8		-		-		162		19,133		19,295
Total	$	3,347	$	386	$	1,177	$	117	$	5,027	$	456,149	$	461,176

Nonperforming Loans. Loans are considered nonperforming when they are placed on nonaccrual and/or when they are considered to be nonperforming troubled debt restructurings (“TDRs”) and/or when they are 90 days or greater past due and still accruing. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind. Nonperforming TDRs include TDRs that do not have sufficient payment history (typically greater than nine months) to be considered performing or TDRs that have become 30 or more days past due.

The following table represents the credit risk profile of our loan portfolio based on payment activity as of September 30, 2016 by type of loan (in thousands):

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Total
Performing	$	150,437	$	29,717	$	167,921	$	58,902	$	15,377	$	25,570	$	26,190	$	474,114
Nonperforming		1,555		580		2,337		-		148		-		249		4,869
Total	$	151,992	$	30,297	$	170,258	$	58,902	$	15,525	$	25,570	$	26,439	$	478,983

The following table represents the credit risk profile of our loan portfolio based on payment activity as of December 31, 2015 by type of loan (in thousands):

	One- to four- family		Home equity		Commercial and multifamily		Construction and land		Manufactured homes		Other consumer		Commercial business		Total
Performing	$	139,484	$	31,146	$	175,312	$	57,043	$	13,736	$	23,030	$	19,295	$	459,046
Nonperforming		1,641		427		-		-		62		-		-		2,130
Total	$	141,125	$	31,573	$	175,312	$	57,043	$	13,798	$	23,030	$	19,295	$	461,176

Impaired Loans. A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the loan. In the process of identifying loans as impaired, we take into consideration factors which include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered on a case by case basis, after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history. Impairment is measured on a loan by loan basis for all loans in the portfolio. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the allowance for loan losses.

Impaired loans at September 30, 2016 and December 31, 2015 by type of loan were as follows (in thousands):

	September 30, 2016
			Recorded Investment
	Unpaid Principal Balance		Without Allowance		With Allowance		Related Allowance

One- to four- family	$	5,617	$	2,405	$	2,873	$	629
Home equity		985		445		440		97
Commercial and multifamily		3,871		1,237		2,632		389
Construction and land		85		-		85		23
Manufactured homes		387		112		260		53
Other consumer		23		-		23		23
Commercial business		638		146		487		30
Total	$	11,606	$	4,345	$	6,800	$	1,244

	December 31, 2015
			Recorded Investment
	Unpaid Principal Balance		Without Allowance		With Allowance		Related Allowance

One- to four- family	$	6,011	$	499	$	5,280	$	647
Home equity		994		162		742		110
Commercial and multifamily		1,966		1,430		536		36
Construction and land		91		-		91		18
Manufactured homes		366		-		361		63
Other consumer		5		-		5		-
Commercial business		114		-		114		8
Total	$	9,547	$	2,091	$	7,129	$	882

Income on impaired loans for the three and nine months ended September 30, 2016 and September 30, 2015 by type of loan were as follows (in thousands):

	Three Months Ended September 30, 2016				Three Months Ended September 30, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

One- to four- family	$	5,445	$	58	$	5,760	$	70
Home equity		968		4		1,006		10
Commercial and multifamily		4,365		19		2,388		30
Construction and land		86		1		135		2
Manufactured homes		383		6		366		7
Other consumer		24		-		93		2
Commercial business		640		9		138		2
Total	$	11,911	$	97	$	9,886	$	123

	Nine months Ended September 30, 2016				Nine months Ended September 30, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

One- to four- family	$	5,533	$	197	$	4,957	$	198
Home equity		944		31		1,115		28
Commercial and multifamily		3,902		152		2,616		78
Construction and land		88		3		157		4
Manufactured homes		377		23		385		20
Other consumer		20		2		63		2
Commercial business		474		27		151		5
Total	$	11,338	$	435	$	9,444	$	335

Forgone interest on nonaccrual loans was $95,000 and $72,000 for the nine months ended September 30, 2016 and 2015, respectively. There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual, TDR or impaired at September 30, 2016 or December 31, 2015.

Troubled debt restructurings. Loans classified as TDRs totaled $3.8 million and $6.0 million at September 30, 2016 and December 31, 2015, respectively, and are included in impaired loans. The Company has granted in its TDRs a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed. Interest only modifications in which a loan in converted to interest only payments for a period of time are included in this category.

Combination Modification: Any other type of modification, including the use of multiple categories above.

There were no new TDRs that occurred during the nine months ended September 30, 2016 and 2015. There were no loans modified as TDRs within the previous 12 months. For the three and nine months ended September 30, 2016 and 2015, no TDR loans defaulted in the reporting period for which the default occurred within 12 months of the restructure date.

There were no post-modification changes for the recorded investment in TDR loans during the three and nine months ended September 30, 2016 and 2015, respectively. The allowance for loan losses allocated to TDRs at September 30, 2016 and December 31, 2015 was $630,000 and $599,000, respectively.