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, 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, 2018	$	833			4,869			1,622			1,362			8,686

Provision for losses	$	25			(1,509	)		(29	)		297			(1,216	)
Charge-offs		(1	)		0			(107	)		(880	)		(988	)
Recoveries		0			1,700			21			361			2,082
Balance, December 31, 2019	$	857			5,060			1,507			1,140			8,564

Allocated to:
Specific reserves	$	98			451			172			73			794
General reserves		735			4,418			1,450			1,289			7,892
Balance, December 31, 2018	$	833			4,869			1,622			1,362			8,686

Allocated to:
Specific reserves	$	62			451			119			93			725
General reserves		795			4,609			1,388			1,047			7,839
Balance, December 31, 2019	$	857			5,060			1,507			1,140			8,564

Loans receivable at December 31, 2018:
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

Loans receivable at December 31, 2019:
Individually reviewed for impairment	$	974			1,166			976			735			3,851
Collectively reviewed for impairment		119,090			349,029			68,973			63,492			600,584
Ending balance	$	120,064			350,195			69,949			64,227			604,435

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

December 31, 2019

and

2018:

	December 31, 201 9
	Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
Single family	$	1,118		1,765		35		0		2,918		117,146		120,064
Commercial real estate:
Real estate rental and leasing		3,489		9,114		0		0		12,603		179,899		192,502
Other		4,451		5,253		0		0		9,704		147,989		157,693
Consumer		0		842		69		65		976		68,973		69,949
Commercial business		5,710		2,516		0		0		8,226		56,001		64,227
	$	14,768		19,490		104		65		34,427		570,008		604,435

	December 31, 2018
	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

Classified loans represent special mention, substandard (performing and non-performing), and non-performing loans categorized as 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 essentially uncollateralized and/or considered uncollectible and of such little value that continuance as an asset on the balance sheet

may

not

be 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, 2019

and

2018

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 9
Single family	$	786		77		59		922		119,142		120,064		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		192,502		192,502		0
Other		0		0		0		0		157,693		157,693		0
Consumer		527		31		206		764		69,185		69,949		0
Commercial business		147		13		550		710		63,517		64,227		0
	$	1,460		121		815		2,396		602,039		604,435		0
2018
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

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, 2019

and

2018:

	December 31, 201 9
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
Single family	$	544		563		0		508		33
Commercial real estate:
Other		0		0		0		10		0
Consumer		781		781		0		580		26

Loans with an allowance recorded:
Single family		430		430		62		633		3
Commercial real estate:
Real estate rental and leasing		184		184		16		193		0
Other		982		982		435		1,048		71
Consumer		195		195		119		231		14
Commercial business		735		1,287		93		476		24

Total:
Single family		974		993		62		1,141		36
Commercial real estate:
Real estate rental and leasing		184		184		16		193		0
Other		982		982		435		1,058		71
Consumer		976		976		119		811		40
Commercial business		735		1,287		93		476		24
	$	3,851		4,422		725		3,679		171

	December 31, 2018
(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, 2019,

2018

and

2017,

non-accruing loans totaled

$2.1

million,

$2.7

million and

$3.2

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

$0.2

million,

$0.7

million and

$0.9

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

$0.8

million,

$0.4

million and

$0.4

million at

December 31, 2019,

2018

and

2017,

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

$0.2

million,

$0.3

million and

$0.3

million in

2019,

2018

and

2017,

respectively. For each of the years ended

December 31, 2019,

2018

and

2017,

the Company recognized interest income on these loans of

$0.1

million. 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, 2019

and

2018:

(Dollars in thousands)	201 9		2018
Single family	$	617		730
Commercial real estate:
Real estate rental and leasing		184		201
Other		0		1,110
Consumer		659		489
Commercial business		621		148
	$	2,081		2,678

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, 2019,

2018

and

2017,

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

$2.5

million,

$2.5

million and

$3.0

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

2019,

2018

and

2017,

the Company would have recorded gross interest income of

$0.2

million,

$0.3

million and

$0.4

million, respectively. During

2019,

2018

and

2017,

the Company recognized interest income of

$0.1

million,

$0.2

million and

$0.2

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

2019,

$0.1

million were classified and performing and

$0.5

million were non-performing at

December 31, 2019.

The following table summarizes TDRs at

December 31, 2019

and

2018:

(Dollars in thousands)	201 9		2018
Single family	$	623		636
Commercial real estate:
Other		983		1,110
Consumer		745		522
Commercial business		114		208
	$	2,465		2,476

As of

December 31, 2019,

the Bank had commitments to lend an additional

$0.8

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

$0.9

million to this same borrower at

December 31, 2018.

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 ended

December 31, 2019

and

2018:

	Year ended December 31, 201 9						Year ended December 31, 2018
(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		4	$	215		220		2	$	217		220
Commercial real estate:
Real estate rental and leasing		0		0		0		1		54		54
Other		0		0		0		2		1,518		1,518
Consumer		10		371		371		10		373		373
Commercial business		0		0		0		1		70		70
Total		14	$	586		591		16	$	2,232		2,235

There were

loans that were restructured during the year ended

December 31, 2019

that subsequently defaulted during the year. There was

one

consumer loan with a balance of

$17,000

that was restructured during the year ended

December 31, 2018

that subsequently defaulted during

2018.

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

may

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

$8.6

million in allowance for loan losses at

December 31, 2019,

and

$0.6

million, or

7.2%,

of the total

$8.7

million in allowance for loan losses at

December 31, 2018.