Loans Receivable and Allowance For Loan Losses | NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES The composition of the loan portfolio was as follows at March 31, 2019 and December 31, 2018: March 31, December 31, 2019 2018 REAL ESTATE LOANS Commercial $ 208,607 $ 204,699 Construction and development 219,229 247,306 Home equity 40,714 40,258 One-to-four-family (excludes loans held for sale) 261,868 249,397 Multi-family 102,997 104,663 Total real estate loans 833,415 846,323 CONSUMER LOANS Indirect home improvement 174,792 167,793 Solar 44,494 44,433 Marine 59,884 57,822 Other consumer 5,246 5,425 Total consumer loans 284,416 275,473 COMMERCIAL BUSINESS LOANS Commercial and industrial 137,325 138,686 Warehouse lending 41,914 65,756 Total commercial business loans 179,239 204,442 Total loans receivable, gross 1,297,070 1,326,238 Allowance for loan losses (11,845) (12,349) Deferred costs and fees, net (2,710) (2,907) Premiums on purchased loans 1,408 1,537 Total loans receivable, net $ 1,283,923 $ 1,312,519 Most of the Company’s commercial and multi-family real estate, construction, residential, and/or commercial business lending activities are with customers located in Western Washington 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 and solar loans are originated through a network of home improvement contractors and dealers located throughout Washington, Oregon, California, Idaho, Colorado, and Arizona. 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. At March 31, 2019, the Bank held approximately $589.5 million in loans that qualify as collateral for FHLB advances and held approximately $274.8 million in loans that qualify as collateral for the Federal Reserve Bank line of credit. 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 with four or less units. 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 primarily located in the states we originate consumer loans. Other Consumer. Loans originated by the Company to consumers in our retail branch footprint, including automobiles, recreational vehicles, direct home improvement loans, loans on deposits, and other consumer loans, primarily consisting of personal lines of credit and credit cards. 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 the Greater 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 principals 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 months ended March 31, 2019 and 2018: At or For the Three Months Ended March 31, 2019 Commercial Real Estate Consumer Business Unallocated Total ALLOWANCE FOR LOAN LOSSES Beginning balance $ 5,761 $ 3,351 $ 3,191 $ 46 $ 12,349 Provision for loan losses 24 114 691 (79) 750 Charge-offs — (250) (1,152) — (1,402) Recoveries — 148 — — 148 Net charge-offs — (102) (1,152) — (1,254) Ending balance $ 5,785 $ 3,363 $ 2,730 $ (33) $ 11,845 Period end amount allocated to: Loans individually evaluated for impairment $ 173 $ 160 $ — $ — $ 333 Loans collectively evaluated for impairment 5,612 3,203 2,730 (33) 11,512 Ending balance $ 5,785 $ 3,363 $ 2,730 $ (33) $ 11,845 LOANS RECEIVABLE Loans individually evaluated for impairment $ 1,156 $ 457 $ 431 $ — $ 2,044 Loans collectively evaluated for impairment 832,259 283,959 178,808 — 1,295,026 Ending balance $ 833,415 $ 284,416 $ 179,239 $ — $ 1,297,070 At or For the Three Months Ended March 31, 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 14 84 295 (43) 350 Charge-offs (4) (228) — — (232) Recoveries — 264 2 — 266 Net (charge-offs) recoveries (4) 36 2 — 34 Ending balance $ 4,780 $ 2,934 $ 2,311 $ 1,115 $ 11,140 Period end amount allocated to: Loans individually evaluated for impairment $ 41 $ 87 $ — $ — $ 128 Loans collectively evaluated for impairment 4,739 2,847 2,311 1,115 11,012 Ending balance $ 4,780 $ 2,934 $ 2,311 $ 1,115 $ 11,140 LOANS RECEIVABLE Loans individually evaluated for impairment $ 472 $ 248 $ — $ — $ 720 Loans collectively evaluated for impairment 446,119 218,681 152,175 — 816,975 Ending balance $ 446,591 $ 218,929 $ 152,175 $ — $ 817,695 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 March 31, 2019 and December 31, 2018: March 31, 2019 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 $ — $ — $ — $ — $ 208,607 $ 208,607 $ — Construction and development — — — — 219,229 219,229 — Home equity 5 — 186 191 40,523 40,714 191 One-to-four-family 1,466 — 1,512 2,978 258,890 261,868 1,902 Multi-family — — — — 102,997 102,997 — Total real estate loans 1,471 — 1,698 3,169 830,246 833,415 2,093 CONSUMER LOANS Indirect home improvement 244 152 95 491 174,301 174,792 381 Solar — 58 16 74 44,420 44,494 59 Marine — — — — 59,884 59,884 5 Other consumer 28 16 16 60 5,186 5,246 12 Total consumer loans 272 226 127 625 283,791 284,416 457 COMMERCIAL BUSINESS LOANS Commercial and industrial 80 — 431 511 136,814 137,325 431 Warehouse lending — — — — 41,914 41,914 — Total commercial business loans 80 — 431 511 178,728 179,239 431 Total loans $ 1,823 $ 226 $ 2,256 $ 4,305 $ 1,292,765 $ 1,297,070 $ 2,981 December 31, 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 $ — $ — $ — $ — $ 204,699 $ 204,699 $ — Construction and development — — — — 247,306 247,306 — Home equity 158 40 229 427 39,831 40,258 229 One-to-four-family 1,274 164 1,358 2,796 246,601 249,397 1,552 Multi-family — — — — 104,663 104,663 — Total real estate loans 1,432 204 1,587 3,223 843,100 846,323 1,781 CONSUMER LOANS Indirect home improvement 438 196 113 747 167,046 167,793 367 Solar 62 43 41 146 44,287 44,433 41 Marine 50 — — 50 57,772 57,822 18 Other consumer 69 24 11 104 5,321 5,425 2 Total consumer loans 619 263 165 1,047 274,426 275,473 428 COMMERCIAL BUSINESS LOANS Commercial and industrial — 431 — 431 138,255 138,686 1,685 Warehouse lending — — — — 65,756 65,756 — Total commercial business loans — 431 — 431 204,011 204,442 1,685 Total loans $ 2,051 $ 898 $ 1,752 $ 4,701 $ 1,321,537 $ 1,326,238 $ 3,894 There was one other consumer loan and two other consumer loans 90 days or more past due and still accruing interest of $5,000 and $11,000 at March 31, 2019 and at December 31, 2018, respectively. The following tables provide additional information about our impaired loans that have been segregated to reflect loans for which an allowance for loan losses has been provided and loans for which no allowance was provided at March 31, 2019 and December 31, 2018: March 31, 2019 Unpaid Principal Recorded Related Balance Investment Allowance WITH NO RELATED ALLOWANCE RECORDED Home equity $ 191 $ 191 $ — One-to-four-family 746 746 — Total real estate loans 937 937 — Commercial business loans 431 431 — 1,368 1,368 — WITH RELATED ALLOWANCE RECORDED One-to-four-family 1,156 1,156 173 Consumer loans 457 457 160 1,613 1,613 333 Total $ 2,981 $ 2,981 $ 333 December 31, 2018 Unpaid Principal Recorded Related Balance Investment Allowance WITH NO RELATED ALLOWANCE RECORDED Home equity $ 229 $ 229 $ — WITH RELATED ALLOWANCE RECORDED One-to-four-family 1,552 1,552 125 Consumer loans 428 428 150 Commercial business loans 1,685 1,685 700 3,665 3,665 975 Total $ 3,894 $ 3,894 $ 975 The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized and received for the three months ended March 31, 2019 and 2018: At or For the Three Months Ended March 31, 2019 March 31, 2018 Average Recorded Interest Income Average Recorded Interest Income Investment Recognized Investment Recognized WITH NO RELATED ALLOWANCE RECORDED Home equity $ 267 $ — $ 203 $ 2 One-to-four-family 830 15 — — Total real estate loans 1,097 15 203 2 Commercial business loans 431 — — — 1,528 15 203 2 WITH RELATED ALLOWANCE RECORDED One-to-four-family 1,156 — 271 2 Consumer loans 459 9 259 6 Commercial business loans 1,152 7 — — 2,767 16 530 8 Total $ 4,295 $ 31 $ 733 $ 10 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: March 31, 2019 Special Pass Watch Mention Substandard Doubtful Loss (1 - 5) (6) (7) (8) (9) (10) Total REAL ESTATE LOANS Commercial $ 206,655 $ 1,952 $ — $ — $ — $ — $ 208,607 Construction and development 213,708 5,521 — — — — 219,229 Home equity 40,485 — 38 191 — — 40,714 One-to-four-family 259,697 206 63 1,902 — — 261,868 Multi-family 101,774 1,223 — — — — 102,997 Total real estate loans 822,319 8,902 101 2,093 — — 833,415 CONSUMER LOANS Indirect home improvement 174,411 — — 381 — — 174,792 Solar 44,435 — — 59 — — 44,494 Marine 59,879 — — 5 — — 59,884 Other consumer 5,227 — 7 12 — — 5,246 Total consumer loans 283,952 — 7 457 — — 284,416 COMMERCIAL BUSINESS LOANS Commercial and industrial 124,066 8,658 20 4,581 — — 137,325 Warehouse lending 41,914 — — — — — 41,914 Total commercial business loans 165,980 8,658 20 4,581 — — 179,239 Total loans receivable, gross $ 1,272,251 $ 17,560 $ 128 $ 7,131 $ — $ — $ 1,297,070 December 31, 2018 Special Pass Watch Mention Substandard Doubtful Loss (1 - 5) (6) (7) (8) (9) (10) Total REAL ESTATE LOANS Commercial $ 203,557 $ 1,142 $ — $ — $ — $ — $ 204,699 Construction and development 244,577 2,729 — — — — 247,306 Home equity 39,846 — 183 229 — — 40,258 One-to-four-family 247,575 207 63 1,552 — — 249,397 Multi-family 103,447 1,216 — — — — 104,663 Total real estate loans 839,002 5,294 246 1,781 — — 846,323 CONSUMER LOANS Indirect home improvement 167,426 — — 367 — — 167,793 Solar 44,392 — — 41 — — 44,433 Marine 57,804 — — 18 — — 57,822 Other consumer 5,415 — 8 2 — — 5,425 Total consumer loans 275,037 — 8 428 — — 275,473 COMMERCIAL BUSINESS LOANS Commercial and industrial 124,089 8,813 — 5,784 — — 138,686 Warehouse lending 65,756 — — — — — 65,756 Total commercial business loans 189,845 8,813 — 5,784 — — 204,442 Total loans receivable, gross $ 1,303,884 $ 14,107 $ 254 $ 7,993 $ — $ — $ 1,326,238 |