Loans Receivable and Allowance For Loan Losses | NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES The composition of the loan portfolio was as follows at June 30, 2018 and December 31, 2017: June 30, December 31, 2018 2017 REAL ESTATE LOANS Commercial $ 64,599 $ 63,611 Construction and development 160,521 143,068 Home equity 25,460 25,289 One-to-four-family (excludes loans held for sale) 177,988 163,655 Multi-family 47,695 44,451 Total real estate loans 476,263 440,074 CONSUMER LOANS Indirect home improvement 147,067 130,176 Solar 42,189 41,049 Marine 48,591 35,397 Other consumer 2,027 2,046 Total consumer loans 239,874 208,668 COMMERCIAL BUSINESS LOANS Commercial and industrial 110,962 83,306 Warehouse lending 66,681 41,397 Total commercial business loans 177,643 124,703 Total loans receivable, gross 893,780 773,445 Allowance for loan losses (11,571) (10,756) Deferred costs and fees, net (2,885) (2,708) Premiums on purchased loans 1,876 1,577 Total loans receivable, net $ 881,200 $ 761,558 Most of the Company’s commercial and multi-family real estate, construction, residential, and/or commercial business lending activities are with customers located in the greater Puget Sound area and near our one 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 are originated through a network of home improvement contractors and dealers located throughout Washington, Oregon, California, Idaho, Colorado, and Arizona. The Company also originates solar loans through contractors and dealers in the state of California. 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. 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 small 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. These loans originated by the Company 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, and other home fixture installations. Solar. Fixture secured loans for solar related home improvement projects are originated by the Company through its network of contractors and dealers, and are secured by the personal property installed in, on, or at the borrower’s real property, and which may be perfected with a UCC‑2 financing statement filed in the county of the borrower’s residence. Marine . Loans originated by the Company secured by boats to borrowers located in the states we originate consumer loans. Other Consumer. Loans originated by the Company, including automobiles, recreational vehicles, direct home improvement loans, loans on deposits, and other consumer loans, primarily consisting of personal lines of credit. 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 our standard 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. 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 principles 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 loan losses by loan categories at or for the three and six months ended June 30, 2018 and 2017: At or For the Three Months Ended June 30, 2018 Commercial Real Estate Consumer Business Unallocated Total ALLOWANCE FOR LOAN LOSSES Beginning balance $ 4,780 $ 2,934 $ 2,311 $ 1,115 $ 11,140 Provision for loan losses 330 285 255 (420) 450 Charge-offs (1) (223) — — (224) Recoveries 16 188 1 — 205 Net recoveries (charge-offs) 15 (35) 1 — (19) Ending balance $ 5,125 $ 3,184 $ 2,567 $ 695 $ 11,571 Period end amount allocated to: Loans individually evaluated for impairment $ 21 $ 109 $ — $ — $ 130 Loans collectively evaluated for impairment 5,104 3,075 2,567 695 11,441 Ending balance $ 5,125 $ 3,184 $ 2,567 $ 695 $ 11,571 LOANS RECEIVABLE Loans individually evaluated for impairment $ 317 $ 310 $ — $ — $ 627 Loans collectively evaluated for impairment 475,946 239,564 177,643 — 893,153 Ending balance $ 476,263 $ 239,874 $ 177,643 $ — $ 893,780 At or For the Six Months Ended June 30, 2018 Commercial Real Estate Consumer Business Unallocated Total ALLOWANCE FOR LOAN LOSSES Beginning balance $ 4,770 $ 2,814 $ 2,014 $ 1,158 $ 10,756 Provision for loan losses 343 370 550 (463) 800 Charge-offs (4) (451) — — (455) Recoveries 16 451 3 — 470 Net recoveries 12 — 3 — 15 Ending balance $ 5,125 $ 3,184 $ 2,567 $ 695 $ 11,571 Period end amount allocated to: Loans individually evaluated for impairment $ 21 $ 109 $ — $ — $ 130 Loans collectively evaluated for impairment 5,104 3,075 2,567 695 11,441 Ending balance $ 5,125 $ 3,184 $ 2,567 $ 695 $ 11,571 LOANS RECEIVABLE Loans individually evaluated for impairment $ 317 $ 310 $ — $ — $ 627 Loans collectively evaluated for impairment 475,946 239,564 177,643 — 893,153 Ending balance $ 476,263 $ 239,874 $ 177,643 $ — $ 893,780 At or For the Three Months Ended June 30, 2017 Commercial Real Estate Consumer Business Unallocated Total ALLOWANCE FOR LOAN LOSSES Beginning balance $ 3,813 $ 2,588 $ 2,169 $ 1,577 $ 10,147 Provision for loan losses 331 87 282 (700) — Charge-offs — (179) — — (179) Recoveries — 173 2 — 175 Net (charge-offs) recoveries — (6) 2 — (4) Ending balance $ 4,144 $ 2,669 $ 2,453 $ 877 $ 10,143 Period end amount allocated to: Loans individually evaluated for impairment $ — $ — $ — $ — $ — Loans collectively evaluated for impairment 4,144 2,669 2,453 877 10,143 Ending balance $ 4,144 $ 2,669 $ 2,453 $ 877 $ 10,143 LOANS RECEIVABLE Loans individually evaluated for impairment $ 439 $ — $ — $ — $ 439 Loans collectively evaluated for impairment 397,256 190,729 131,878 — 719,863 Ending balance $ 397,695 $ 190,729 $ 131,878 $ — $ 720,302 At or For the Six Months Ended June 30, 2017 Commercial Real Estate Consumer Business Unallocated Total ALLOWANCE FOR LOAN LOSSES Beginning balance $ 3,547 $ 2,082 $ 2,675 $ 1,907 $ 10,211 Provision for loan losses 596 661 (227) (1,030) — Charge-offs — (384) — — (384) Recoveries 1 310 5 — 316 Net recoveries (charge-offs) 1 (74) 5 — (68) Ending balance $ 4,144 $ 2,669 $ 2,453 $ 877 $ 10,143 Period end amount allocated to: Loans individually evaluated for impairment $ — $ — $ — $ — $ — Loans collectively evaluated for impairment 4,144 2,669 2,453 877 10,143 Ending balance $ 4,144 $ 2,669 $ 2,453 $ 877 $ 10,143 LOANS RECEIVABLE Loans individually evaluated for impairment $ 439 $ — $ — $ — $ 439 Loans collectively evaluated for impairment 397,256 190,729 131,878 — 719,863 Ending balance $ 397,695 $ 190,729 $ 131,878 $ — $ 720,302 Non-accrual 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 non-accrual 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. The following tables provide information pertaining to the aging analysis of contractually past due loans and non-accrual loans at June 30, 2018 and December 31, 2017: June 30, 2018 30-59 60-89 Days Days 90 Days Total Total Past Past or More Past Loans Non- Due Due Past Due Due Current Receivable Accrual REAL ESTATE LOANS Commercial $ — $ — $ — $ — $ 64,599 $ 64,599 $ — Construction and development — — — — 160,521 160,521 — Home equity — — 72 72 25,388 25,460 176 One-to-four-family — 141 — 141 177,847 177,988 141 Multi-family — — — — 47,695 47,695 — Total real estate loans — 141 72 213 476,050 476,263 317 CONSUMER LOANS Indirect home improvement 360 127 114 601 146,466 147,067 274 Solar 24 44 16 84 42,105 42,189 35 Marine 16 — — 16 48,575 48,591 — Other consumer 11 1 — 12 2,015 2,027 1 Total consumer loans 411 172 130 713 239,161 239,874 310 COMMERCIAL BUSINESS LOANS Commercial and industrial — — — — 110,962 110,962 — Warehouse lending — — — — 66,681 66,681 — Total commercial business loans — — — — 177,643 177,643 — Total loans $ 411 $ 313 $ 202 $ 926 $ 892,854 $ 893,780 $ 627 December 31, 2017 30-59 60-89 Days Days 90 Days Total Total Past Past or More Past Loans Non- Due Due Past Due Due Current Receivable Accrual REAL ESTATE LOANS Commercial $ — $ — $ — $ — $ 63,611 $ 63,611 $ — Construction and development — — — — 143,068 143,068 — Home equity 122 — 136 258 25,031 25,289 151 One-to-four-family 142 — — 142 163,513 163,655 142 Multi-family — — — — 44,451 44,451 — Total real estate loans 264 — 136 400 439,674 440,074 293 CONSUMER LOANS Indirect home improvement 255 215 99 569 129,607 130,176 195 Solar 49 19 — 68 40,981 41,049 — Marine — — — — 35,397 35,397 — Other consumer — — — — 2,046 2,046 — Total consumer loans 304 234 99 637 208,031 208,668 195 COMMERCIAL BUSINESS LOANS Commercial and industrial — 551 — 551 82,755 83,306 551 Warehouse lending — — — — 41,397 41,397 — Total commercial business loans — 551 — 551 124,152 124,703 551 Total loans $ 568 $ 785 $ 235 $ 1,588 $ 771,857 $ 773,445 $ 1,039 There were no loans 90 days or more past due and still accruing interest at June 30, 2018 and December 31, 2017. The following tables provide additional information about our impaired loans that have been segregated to reflect loans for which an allowance for credit losses has been provided and loans for which no allowance was provided at June 30, 2018 and December 31, 2017: June 30, 2018 Unpaid Principal Recorded Related Balance Impairment Investment Allowance WITH NO RELATED ALLOWANCE RECORDED Home equity $ 176 $ — $ 176 $ — WITH RELATED ALLOWANCE RECORDED One-to-four-family 141 — 141 21 Consumer loans 310 — 310 109 451 — 451 130 Total $ 627 $ — $ 627 $ 130 December 31, 2017 Unpaid Principal Recorded Related Balance Impairment Investment Allowance WITH NO RELATED ALLOWANCE RECORDED Home equity $ 151 $ — $ 151 $ — One-to-four-family 67 (12) 55 — Total real estate loans 218 (12) 206 — Commercial business loans 551 — 551 — 769 (12) 757 — WITH RELATED ALLOWANCE RECORDED One-to-four-family 142 — 142 21 Consumer loans 195 — 195 68 337 — 337 89 Total $ 1,106 $ (12) $ 1,094 $ 89 The following table presents 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, 2018 and 2017: At or For the Three Months Ended June 30, 2018 June 30, 2017 Average Recorded Interest Income Average Recorded Interest Income Investment Recognized Investment Recognized WITH NO RELATED ALLOWANCE RECORDED Home equity $ 148 $ 1 $ 240 $ — One-to-four-family (1) — — 201 1 Total real estate loans 148 1 441 1 WITH RELATED ALLOWANCE RECORDED One-to-four-family 271 1 — — Consumer loans 292 6 — — 563 7 — — Total $ 711 $ 8 $ 441 $ 1 ________________________ (1) Includes loans supported by Federal Housing Administration (“FHA”) guarantees. At or For the Six Months Ended June 30, 2018 June 30, 2017 Average Recorded Interest Income Average Recorded Interest Income Investment Recognized Investment Recognized WITH NO RELATED ALLOWANCE RECORDED Home equity $ 182 $ 3 $ 230 $ — One-to-four-family (1) — — 178 4 Total real estate loans 182 3 408 4 WITH AN ALLOWANCE RECORDED One-to-four-family 271 3 — — Consumer loans 276 11 — — 547 14 — — Total $ 729 $ 17 $ 408 $ 4 _______________________ (1) Includes loans supported by FHA guarantees. 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 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 rated “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. The following tables summarize risk rated loan balances by category at the dates indicated: June 30, 2018 Special Pass Watch Mention Substandard Doubtful Loss (1 - 5) (6) (7) (8) (9) (10) Total REAL ESTATE LOANS Commercial $ 64,599 $ — $ — $ — $ — $ — $ 64,599 Construction and development 160,521 — — — — — 160,521 Home equity 25,284 — — 176 — — 25,460 One-to-four-family 177,847 — — 141 — — 177,988 Multi-family 47,695 — — — — — 47,695 Total real estate loans 475,946 — — 317 — — 476,263 CONSUMER LOANS Indirect home improvement 146,793 — — 274 — — 147,067 Solar 42,154 — — 35 — — 42,189 Marine 48,591 — — — — — 48,591 Other consumer 2,026 — — 1 — — 2,027 Total consumer loans 239,564 — — 310 — — 239,874 COMMERCIAL BUSINESS LOANS Commercial and industrial 103,262 2,228 338 5,134 — — 110,962 Warehouse lending 66,681 — — — — — 66,681 Total commercial business loans 169,943 2,228 338 5,134 — — 177,643 Total loans receivable, gross $ 885,453 $ 2,228 $ 338 $ 5,761 $ — $ — $ 893,780 December 31, 2017 Special Pass Watch Mention Substandard Doubtful Loss (1 - 5) (6) (7) (8) (9) (10) Total REAL ESTATE LOANS Commercial $ 62,057 $ — $ 1,554 $ — $ — $ — $ 63,611 Construction and development 143,068 — — — — — 143,068 Home equity 25,138 — — 151 — — 25,289 One-to-four-family 163,513 — — 142 — — 163,655 Multi-family 44,451 — — — — — 44,451 Total real estate loans 438,227 — 1,554 293 — — 440,074 CONSUMER LOANS Indirect home improvement 129,981 — — 195 — — 130,176 Solar 41,049 — — — — — 41,049 Marine 35,397 — — — — — 35,397 Other consumer 1,998 — — 48 — — 2,046 Total consumer loans 208,425 — — 243 — — 208,668 COMMERCIAL BUSINESS LOANS Commercial and industrial 76,942 — 425 5,939 — — 83,306 Warehouse lending 40,724 673 — — — — 41,397 Total commercial business loans 117,666 673 425 5,939 — — 124,703 Total loans receivable, gross $ 764,318 $ 673 $ 1,979 $ 6,475 $ — $ — $ 773,445 |