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)

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
For the three months ended September 30, 2020:
Balance, June 30, 2020	$	938		5,382			1,464			865			8,649
Provision for losses		27		878			(64	)		(71	)		770
Charge-offs		0		0			(29	)		(8	)		(37	)
Recoveries		0		0			5			145			150
Balance, September 30, 2020	$	965		6,260			1,376			931			9,532

For the nin e months ended September 30, 2020 :
Balance, December 31, 2019	$	857		5,060			1,507			1,140			8,564
Provision for losses		108		1,913			(79	)		(394	)		1,548
Charge-offs		0		(730	)		(74	)		(8	)		(812	)
Recoveries		0		17			22			193			232
Balance, September 30, 2020	$	965		6,260			1,376			931			9,532

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

Allocated to:
Specific reserves	$	31		5			63			17			116
General reserves		934		6,255			1,313			914			9,416
Balance, September 30, 2020	$	965		6,260			1,376			931			9,532

Loans receivable at December 31, 201 9 :
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

Loans receivable at September 30, 2020:
Individually reviewed for impairment	$	708		1,537			707			45			2,997
Collectively reviewed for impairment		130,135		382,370			58,564			106,751			677,820
Ending balance	$	130,843		383,907			59,271			106,796			680,817

(Dollars in thousands)	Single Family			Commercial Real Estate			Consumer			Commercial Business			Total
For the three months ended September 30, 2019:
Balance, June 30, 2019	$	867			4,762			1,632			1,363			8,624
Provision for losses		24			(42	)		(37	)		(365	)		(420	)
Charge-offs		(2	)		0			(46	)		0			(48	)
Recoveries		0			0			2			37			39
Balance, September 30, 2019	$	889			4,720			1,551			1,035			8,195

For the nine months ended September 30, 2019:
Balance, December 31, 2018	$	833			4,869			1,622			1,362			8,686
Provision for losses		58			(1,834	)		13			311			(1,452	)
Charge-offs		(2	)		0			(92	)		(869	)		(963	)
Recoveries		0			1,685			8			231			1,924
Balance, September 30, 2019	$	889			4,720			1,551			1,035			8,195

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

September 30, 2020

and

December 31, 2019:

	September 30, 2020
	Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
Single family	$	274		2,313		31		0		2,618		128,225		130,843
Commercial real estate:
Real estate rental and leasing		5,194		3,451		0		0		8,645		205,051		213,696
Other		5,537		5,574		0		0		11,111		159,100		170,211
Consumer		0		624		63		20		707		58,564		59,271
Commercial business		3,575		1,884		0		0		5,459		101,337		106,796
	$	14,580		13,846		94		20		28,540		652,277		680,817

	December 31, 2019
	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

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

September 30, 2020

and

December 31, 2019

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
September 30, 2020
Single family	$	550		223		144		917		129,926		130,843		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		213,696		213,696		0
Other		0		0		185		185		170,026		170,211		0
Consumer		360		49		300		709		58,562		59,271		0
Commercial business		0		0		0		0		106,796		106,796		0
	$	910		272		629		1,811		679,006		680,817		0
December 31, 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

Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a troubled debt restructuring (TDR). The following table summarizes impaired loans and related allowances as of

September 30, 2020

and

December 31, 2019:

	September 30, 2020						December 31, 2019
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Loans with no related allowance recorded:
Single family	$	588		607		0		544		563		0
Commercial real estate:
Real estate rental and leasing		968		1,618		0		0		0		0
Other		399		479		0		0		0		0
Consumer		596		596		0		781		781		0
Loans with an allowance recorded:
Single family		120		120		31		430		430		62
Commercial real estate:
Real estate rental and leasing		170		170		5		184		184		16
Other		0		0		0		982		982		435
Consumer		111		111		63		195		195		119
Commercial business		45		597		17		735		1,287		93
Total:
Single family		708		727		31		974		993		62
Commercial real estate:
Real estate rental and leasing		1,138		1,788		5		184		184		16
Other		399		479		0		982		982		435
Consumer		707		707		63		976		976		119
Commercial business		45		597		17		735		1,287		93
	$	2,997		4,298		116		3,851		4,422		725

The following tables summarize average recorded investment and interest income recognized on impaired loans during the

three

and

nine

months ended

September 30, 2020

and

2019.

	For the three months ended September 30, 2020				For the nine months ended September 30, 2020
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
Single family	$	606		6		585		23
Commercial real estate:
Real estate rental and leasing		985		0		493		33
Other		401		0		340		2
Consumer		586		3		640		9
Commercial business		4		0		2		0
Loans with an allowance recorded:
Single family		121		0		273		0
Commercial real estate:
Real estate rental and leasing		173		0		177		0
Other		0		0		487		0
Consumer		142		0		169		2
Commercial business		50		1		242		2
Total:
Single family		727		6		858		23
Commercial real estate:
Real estate rental and leasing		1,158		0		670		33
Other		401		0		827		2
Consumer		728		3		809		11
Commercial business		54		1		244		2
	$	3,068		10		3,408		71

	For the three months ended September 30, 2019				For the nine months ended September 30, 2019
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
Single family	$	551		6		499		17
Commercial real estate:
Other		0		0		13		0
Consumer		612		3		530		17
Loans with an allowance recorded:
Single family		579		1		684		2
Commercial real estate:
Real estate rental and leasing		191		0		195		0
Other		1,061		20		1,065		22
Consumer		192		3		241		8
Commercial business		248		3		286		8
Total:
Single family		1,130		7		1,183		19
Commercial real estate:
Real estate rental and leasing		191		0		195		0
Other		1,061		20		1,078		22
Consumer		804		6		771		25
Commercial business		248		3		286		8
	$	3,434		36		3,513		74

September 30, 2020

and

December 31, 2019,

non-accruing loans totaled

$2.5

million and

$2.1

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

$0.1

million and

$0.2

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-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

$2.2

million and

$0.8

million, at

September 30, 2020

and

December 31, 2019,

respectively. Non-accrual loans also include certain loans that have had terms modified in a TDR.

The non-accrual loans at

September 30, 2020

and

December 31, 2019

are summarized as follows:

(Dollars in thousands)	September 30, 2020		December 31, 2019

Single family	$	352		617
Commercial real estate:
Real estate rental and leasing		1,138		184
Other		399		0
Consumer		641		659
Commercial business		11		621
	$	2,541		2,081

September 30, 2020

and

December 31, 2019

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

$1.5

million and

$2.5

million, respectively. There were

loans that were restructured as TDR's in the

third

quarter of

2020.

Of the loans that were restructured as TDR's in the

third

quarter of

2019,

none

were classified but performing, and

$0.1

million were non-performing at

September 30, 2019.

The following table summarizes TDRs at

September 30, 2020

and

December 31, 2019:

	September 30, 2020						December 31, 2019
(Dollars in thousands)	Accrual		Non-Accrual		Total		Accrual		Non-Accrual		Total
Single family	$	356		261		617		357		266		623
Commercial real estate		0		214		214		983		0		983
Consumer		66		589		655		316		429		745
Commercial business		35		0		35		114		0		114
	$	457		1,064		1,521		1,770		695		2,465

As of

September 30, 2020,

the Bank had commitments to lend an additional

$1.3

million to a borrower who has 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 homes under construction. At

December 31, 2019,

there were commitments to lend additional funds of

$0.8

million to this same borrower.

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 for the entire

month period. 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 tables and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the

three

month and

nine

month periods ended

September 30, 2020

and

2019.

	Three Months Ended September 30, 2020						Nine Months Ended September 30, 2020
(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		0	$	0		0		1	$	94		101
Commercial real estate:
Other		0		0		0		2		293		293
Total		0	$	0		0		3	$	387		394

	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
(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		0	$	0		0		3	$	176		181
Consumer		1		58		58		4		118		118
Total		1	$	58		58		7	$	294		299

There were

loans that were restructured in the

months preceding

September 30, 2020

and

2019

that subsequently defaulted during the

three

and

nine

months ended

September 30, 2020

and

2019,

respectively.

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 on non-accrual status 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 accrual 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 to specific reserves as needed. Loans that are

not

collateral-dependent

may

have additional reserves established if deemed necessary. The reserves for TDRs were

$0.1

million, or

1.1%,

of the total

$9.5

million in loan loss reserves at

September 30, 2020

and

$0.6

million, or

7.2%,

of the total

$8.6

million in loan loss reserves at

December 31, 2019.

In the

first

nine

months of

2020

the Company deferred loan payments for up to

six

months for some borrowers that were negatively impacted by the COVID-

pandemic. In accordance with the regulatory guidance in the

Interagency Statement on Loan Modification and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus

that was issued on

April 7, 2020,

these deferred amounts were

not

included in the TDR information noted above. Furthermore, based on management's review the risk ratings on these loans were

not

changed and the loans continue to accrue interest based on the applicable guidance. Management will continue to monitor the performance and condition of these loans and make any necessary changes to their classification that

may

be required based on future regulatory guidance. A summary of deferred loans at

September 30, 2020

and

June 30, 2020

by industry and collateral type is as follows:

(Dollars in thousands)	Balance September 30, 2020		Balance June 30, 2020
Commercial real estate loans by industry:
Hotels (1)	$	54,660		54,660
Retail/Office		7,127		20,322
Theaters		11,269		11,269
Multi-family		0		11,195
Single family		0		4,675
Restaurant/Bar		2,876		4,477
Other		5,747		9,449
Total commercial loans		81,679		116,047

Consumer loans by collateral type:
Single family		366		2,955
Other		0		77
Total consumer loans		366		3,032
Total deferred loans	$	82,045		119,079

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)

Approximately

$38.5

million of the hotel properties are located in Minnesota with approximately

$21.3

million located in Rochester, Minnesota,

$13.8

million in the Minneapolis/St. Paul, Minnesota metro area, and

$3.4

million in St. Cloud, Minnesota.

All of the borrowers whose loan deferral period ended during the

third

quarter of

2020

had resumed making their normal payments and

none

of the loans removed from the deferral list were classified as non-performing as of

September 30, 2020.

The initial deferral period for all remaining deferred loans at

September 30, 2020

is scheduled to end in the

fourth

quarter of

2020.

The Company's commercial credit department continues to communicate regularly with the borrowers that have had their loan payments deferred and monitors their activity closely. This information is used to analyze the performance of these borrowers and to help anticipate any potential issues that these borrowers

may

have when their initial deferral period ends. It is anticipated that some of the remaining borrowers with deferred loan payments will be in a position to resume making their regular loan payments, while other borrowers, particularly in the hospitality and restaurant industries,

may

need to have their loan terms modified for a period of time until their operations recover more fully from the impacts of the pandemic.