NOTE

Allowance for Loan Losses and Credit Quality Information

The allowance for loan losses is summarized as follows:

(Dollars in thousands)	Single Family			Commercial Real Estate			Consumer			Commercial Business			Total
Balance, December 31, 2015	$	990			6,078			1,200			1,441			9,709

Provision for losses	$	262			(1,788	)		481			400			(645	)
Charge-offs		(66	)		(67	)		(108	)		(180	)		(421	)
Recoveries		0			730			40			490			1,260
Balance, December 31, 2016	$	1,186			4,953			1,613			2,151			9,903

Provision for losses	$	(280	)		(75	)		263			(431	)		(523	)
Charge-offs		(6	)		(50	)		(288	)		(311	)		(655	)
Recoveries		0			245			42			299			586
Balance, December 31, 2017	$	900			5,073			1,630			1,708			9,311

Provision for losses	$	(44	)		(421	)		202			(386	)		(649	)
Charge-offs		(24	)		0			(226	)		(270	)		(520	)
Recoveries		1			217			16			310			544
Balance, December 31, 201 8	$	833			4,869			1,622			1,362			8,686

Allocated to:
Specific reserves	$	192			441			263			177			1,073
General reserves		708			4,632			1,367			1,531			8,238
Balance, December 31, 2017	$	900			5,073			1,630			1,708			9,311

Allocated to:
Specific reserves	$	98			451			172			73			794
General reserves		735			4,418			1,450			1,289			7,892
Balance, December 31, 201 8	$	833			4,869			1,622			1,362			8,686

Loans receivable at December 31, 2017:
Individually reviewed for impairment	$	1,523			1,364			880			507			4,274
Collectively reviewed for impairment		105,482			332,753			72,887			79,402			590,524
Ending balance	$	107,005			334,117			73,767			79,909			594,798

Loans receivable at December 31, 201 8 :
Individually reviewed for impairment	$	1,226			1,311			856			303			3,696
Collectively reviewed for impairment		109,472			334,819			71,676			75,193			591,160
Ending balance	$	110,698			336,130			72,532			75,496			594,856

The following table summarizes the amount of classified and unclassified loans at

December 31, 2018

and

2017:

	December 31, 201 8
	Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
Single family	$	150		1,771		40		0		1,961		108,737		110,698
Commercial real estate:
Real estate rental and leasing		5,564		4,805		0		0		10,369		185,195		195,564
Other		4,879		5,118		0		0		9,997		130,569		140,566
Consumer		0		709		41		106		856		71,676		72,532
Commercial business		6,647		2,761		0		0		9,408		66,088		75,496
	$	17,240		15,164		81		106		32,591		562,265		594,856

	December 31, 2017
	Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
Single family	$	77		2,154		44		0		2,275		104,730		107,005
Commercial real estate:
Real estate rental and leasing		5,022		3,813		0		0		8,835		166,342		175,177
Other		9,135		4,257		0		0		13,392		145,548		158,940
Consumer		0		631		119		130		880		72,887		73,767
Commercial business		5,781		5,506		0		0		11,287		68,622		79,909
	$	20,015		16,361		163		130		36,669		558,129		594,798

Classified loans represent special mention, performing substandard, and non-performing loans categorized as substandard, doubtful and loss. Loans classified as special mention are loans that have potential weaknesses that, if left uncorrected,

may

result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Loans classified as substandard are loans that are generally inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are

not

corrected. Loans classified as doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is considered uncollectible and of such little value that continuance as an asset on the balance sheet is

not

warranted. Loans classified as substandard or doubtful require the Bank to perform an analysis of the individual loan and charge off any loans, or portion thereof, that are deemed uncollectible.

The aging of past due loans at

December 31, 2018

and

2017

is summarized as follows:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due and Still Accruing
201 8
Single family	$	680		325		77		1,082		109,616		110,698		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		195,564		195,564		0
Other		0		0		0		0		140,566		140,566		0
Consumer		391		100		279		770		71,762		72,532		0
Commercial business		21		0		0		21		75,475		75,496
	$	1,092		425		356		1,873		592,983		594,856		0

2017
Single family	$	727	294	669	1,690	105,315	107,005	0
Commercial real estate:
Real estate rental and leasing		0	0	0	0	175,177	175,177	0
Other		0	0	0	0	158,940	158,940	0
Consumer		734	117	235	1,086	72,681	73,767	0
Commercial business		34	0	180	214	79,695	79,909
	$	1,495	411	1,084	2,990	591,808	594,798	0

Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a TDR.

The following table summarizes impaired loans and related allowances for the years ended

December 31, 2018

and

2017:

	December 31, 201 8
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
Single family	$	458		477		0		465		21
Commercial real estate:
Real estate rental and leasing		0		0		0		27		0
Other		25		1,682		0		81		106
Consumer		515		515		0		510		14

Loans with an allowance recorded:
Single family		768		768		98		859		5
Commercial real estate:
Real estate rental and leasing		201		201		21		82		7
Other		1,085		1,085		430		1,673		0
Consumer		341		341		172		395		9
Commercial business		303		854		73		385		13

Total:
Single family		1,226		1,245		98		1,324		26
Commercial real estate:
Real estate rental and leasing		201		201		21		109		7
Other		1,110		2,767		430		1,754		106
Consumer		856		856		172		905		23
Commercial business		303		854		73		385		13
	$	3,696		5,923		794		4,477		175

	December 31, 2017
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
Single family	$	415		415		0		414		24
Commercial real estate:
Real estate rental and leasing		35		51		0		38		0
Other		25		1,682		0		26		96
Consumer		414		414		0		406		7
Commercial business		0		0		0		100		0

Loans with an allowance recorded:
Single family		1,108		1,108		192		878		31
Commercial real estate:
Real estate rental and leasing		0		0		0		155		0
Other		1,304		1,304		441		1,715		0
Consumer		466		483		263		457		14
Commercial business		507		1,358		177		443		22

Total:
Single family		1,523		1,523		192		1,292		55
Commercial real estate:
Real estate rental and leasing		35		51		0		193		0
Other		1,329		2,986		441		1,741		96
Consumer		880		897		263		863		21
Commercial business		507		1,358		177		543		22
	$	4,274		6,815		1,073		4,632		194

December 31, 2018,

2017

and

2016,

non-accruing loans totaled

$2.7

million,

$3.2

million and

$3.3

million, respectively, for which the related allowance for loan losses was

$0.7

million,

$0.9

million and

$0.8

million, respectively. Non-accruing loans for which

specific allowance has been recorded because management determined that the value of the collateral was sufficient to repay the loan totaled

$0.4

million,

$0.4

million and

$0.7

million at

December 31, 2018,

2017

and

2016,

respectively. Had the non-accruing loans performed in accordance with their original terms, the Company would have recorded gross interest income on the loans of

$0.3

million,

$0.3

million and

$0.6

million in

2018,

2017

and

2016,

respectively. For the years ended

December 31, 2018,

2017

and

2016,

the Company recognized interest income on these loans of

$0.1

million,

$0.1

million and

$0.4

million, respectively. All of the interest income that was recognized for non-accruing loans was recognized using the cash basis method of income recognition. Non-accrual loans also include some of the loans that have had terms modified in a TDR.

The following table summarizes non-accrual loans at

December 31, 2018

and

2017:

(Dollars in thousands)	2018		2017
Single family	$	730		949
Commercial real estate:
Real estate rental and leasing		201		35
Other		1,110		1,329
Consumer		489		553
Commercial business		148		278
	$	2,678		3,144

Included in loans receivable, net, are certain loans that have been modified in order to maximize collection of loan balances. If the Company, for legal or economic reasons related to the borrower’s financial difficulties, grants a concession compared to the original terms and conditions of the loan, the modified loan is considered a TDR.

December 31, 2018,

2017

and

2016,

there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling

$2.5

million,

$3.0

million and

$3.3

million, respectively. Had these loans been performing in accordance with their original terms throughout

2018,

2017

and

2016,

the Company would have recorded gross interest income of

$0.3

million,

$0.4

million and

$0.6

million, respectively. During

2018,

2017

and

2016,

the Company recognized interest income of

$0.2

million,

$0.2

million and

$0.4

million, respectively, on these loans. For the loans that were modified in

2018,

$0.4

million were classified and performing and

$1.2

million were non-performing at

December 31, 2018.

The following table summarizes TDRs at

December 31, 2018

and

2017:

(Dollars in thousands)	2018		2017
Single family	$	636		685
Commercial real estate:
Other		1,110		1,210
Consumer		522		758
Commercial business		208		391
	$	2,476		3,044

As of

December 31, 2018,

the Bank had commitments to lend an additional

$0.9

million to a borrower who has a TDR and non-accrual loans. These additional funds are for the construction of single family homes with a maximum loan-to-value ratio of

75%.

These loans are secured by the home under construction. There were commitments to lend additional funds of

$0.8

million to this same borrower at

December 31, 2017.

TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan modifications are

not

reported as TDRs after

months if the loan was modified at a market rate of interest for comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement. All loans classified as TDRs are considered to be impaired.

When a loan is modified as a TDR, there

may

be a direct, material impact on the loans within the Consolidated Balance Sheets, as principal balances

may

be partially forgiven. The financial effects of TDRs are presented in the following table and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the periods ending

December 31, 2018

and

2017:

	Year ended December 31, 201 8						Year ended December 31, 2017
(Dollars in thousands)	Number of Contracts		Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment		Number of Contracts		Pre- modification Outstanding Recorded Investment		Post -modification Outstanding Recorded Investment
Troubled debt restructurings:
Single family		2	$	217		220		3	$	282		514
Commercial real estate:
Real estate rental and leasing		1		54		54		0		0		0
Other		2		1,518		1,518		0		0		0
Consumer		10		373		373		15		588		591
Commercial business		1		70		70		1		416		116
Total		16	$	2,232		2,235		19	$	1,286		1,221

Loans that were restructured within the

months preceding

December 31, 2018

and

2017

and defaulted during the year are presented in the table below:

	Year ended December 31, 201 8				Year ended December 31, 2017
(Dollars in thousands)	Number of Contracts		Outstanding Recorded Investment		Number of Contracts		Outstanding Recorded Investment
TDRs that subsequently defaulted:
Consumer		1	$	17		1	$	65
Total		1	$	17		1	$	65

The Company considers a loan to have defaulted when it becomes

or more days past due under the modified terms, when it is placed in non-accrual status, when it becomes other real estate owned, or when it becomes non-compliant with some other material requirement of the modification agreement.

Loans that were non-accrual prior to modification remain non-accrual for at least

six

months following modification. Non-accrual TDR loans that have performed according to the modified terms for

six

months

may

be returned to accruing status. Loans that were accruing prior to modification remain on accrual status after the modification as long as the loan continues to perform under the new terms.

TDRs are reviewed for impairment following the same methodology as other impaired loans. For loans that are collateral dependent, the value of the collateral is reviewed and additional reserves

may

be added as needed. Loans that are

not

collateral dependent

may

have additional reserves established if deemed necessary. The allocated reserves for TDRs was

$0.6

million, or

7.2%,

of the total

$8.7

million in allowance for loan losses at

December 31, 2018,

and

$0.9

million, or

9.8%,

of the total

$9.3

million in allowance for loan losses at

December 31, 2017.

Loans acquired in a business combination are segregated into

two

types: purchased performing loans with a discount attributable at least in part to credit quality and PCI loans with evidence of significant credit deterioration. Purchased performing loans are accounted for in accordance with ASC

310

“Nonrefundable Fees and Other Costs”

as these loans do

not

have evidence of credit deterioration since origination. PCI loans are accounted for in accordance with ASC

310

“Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality”

as they display significant credit deterioration since origination. In accordance with ASC

310

30,

for PCI loans, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. This amount is

not

recognized as a yield adjustment or as a loss accrual or a valuation allowance. Furthermore, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loans when there is a reasonable expectation about the amount and timing of such cash flows. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through an adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as an impairment through the provision for loan losses.

The following is additional information with respect to loans acquired through acquisitions:

(Dollars in thousands)	Contractual Principal Receivable			Accretable Difference			Net Carrying Amount
Purchased Performing Loans:
Balance at December 31, 2015	$	18,539			(459	)		18,080

Loans acquired during the period	$	11,772			(211	)		11,561
Change due to payments/refinances		(13,413	)		340			(13,073	)
Change due to loan charge-off		(156	)		(2	)		(158	)
Balance at December 31, 2016	$	16,742			(332	)		16,410

Change due to payments/refinances	$	(6,594	)		101			(6,493	)
Transferred to foreclosed assets		(2	)		0			(2	)
Change due to loan charge-off		(18	)		0			(18	)
Balance at December 31, 2017	$	10,128			(231	)		9,897

Change due to payments/refinances	$	(2,815	)		49			(2,766	)
Balance at December 31, 201 8	$	7,313			(182	)		7,131

(Dollars in thousands)	Contractual Principal Receivable			Non-Accretable Difference			Accretable Difference			Net Carrying Amount
Purchased Credit Impaired Loans:
Balance at December 31, 2015	$	555			(162	)		0			393

Loans acquired during the period	$	329			(37	)		0			292
Transfer to accretable difference		0			199			(199	)		0
Change due to payments/refinances		(449	)		0			147			(302	)
Balance at December 31, 2016	$	435			0			(52	)		383

Change due to payments/refinances	$	(33	)		0			13			(20	)
Balance at December 31, 2017	$	402			0			(39	)		363

Change due to payments/refinances	$	(214	)		0			33			(181	)
Balance at December 31, 201 8	$	188			0			(6	)		182

As a result of acquisitions, the Company has PCI loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable at acquisition that all contractually required payments would

not

be collected. The carrying amount of those loans as of

December 31, 2018

was

$0.2

million.

material provision for loan losses was recognized during the period ended

December 31, 2018

related to acquired loans as there was

significant change to the credit quality of the loans.