LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable at June 30, 2019 are reported net of unamortized discounts totaling $1.57 million.

Loans receivable by portfolio segment consisted of the following at June 30, 2019 and September 30, 2018 (dollars in thousands):



	June 30, 2019				September 30, 2018
	Amount		Percent		Amount		Percent
Mortgage loans:
One- to four-family (1)	$	129,050	13.2	%	$	115,941	14.1	%
Multi-family	70,374		7.2		61,928		7.5
Commercial	418,778		42.7		345,113		42.0
Construction - custom and owner/builder	130,516		13.3		119,555		14.6
Construction - speculative one- to four-family	18,165		1.9		15,433		1.9
Construction - commercial	41,805		4.3		39,590		4.8
Construction - multi-family	29,400		2.9		10,740		1.3
Construction - land development	3,047		0.3		3,040		0.4
Land	26,653		2.7		25,546		3.1
Total mortgage loans	867,788		88.5		736,886		89.8

Consumer loans:
Home equity and second mortgage	42,204		4.3		37,341		4.5
Other	4,450		0.5		3,515		0.5
Total consumer loans	46,654		4.8		40,856		5.0

Commercial business loans	65,185		6.7		43,053		5.2

Total loans receivable	979,627		100.0	%	820,795		100.0	%
Less:
Undisbursed portion of construction loans in process	93,176				83,237
Deferred loan origination fees, net	2,838				2,637
Allowance for loan losses	9,631				9,530
	105,645				95,404
Loans receivable, net	$	873,982			$	725,391
_____________________________
(1) Does not include one- to four-family loans held for sale totaling $3,338 and $1,785 at June 30, 2019 and September 30, 2018, respectively.

Allowance for Loan Losses

The following tables set forth information for the three and nine months ended June 30, 2019 and 2018 regarding activity in the allowance for loan losses by portfolio segment (dollars in thousands):



	Three Months Ended June 30, 2019
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,154	$	(36	)	$	—		$	—	$	1,118
Multi-family	470		(32		)	—			—		438
Commercial	4,122		(70		)	—			—		4,052
Construction – custom and owner/builder	666		36			—			—		702
Construction – speculative one- to four-family	249		(28		)	—			—		221
Construction – commercial	384		—			—			—		384
Construction – multi-family	272		95			—			—		367
Construction – land development	244		(118		)	—			—		126
Land	649		48			(46		)	5		656
Consumer loans:
Home equity and second mortgage	667		(21		)	(1		)	—		645
Other	112		(25		)	(1		)	1		87
Commercial business loans	752		151			(93		)	25		835
Total	$	9,741	$	—		$	(141	)	$	31	$	9,631



	Nine Months Ended June 30, 2019
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,086	$	(35	)	$	—		$	67	$	1,118
Multi-family	433		5			—			—		438
Commercial	4,248		(346		)	—			150		4,052
Construction – custom and owner/builder	671		31			—			—		702
Construction – speculative one- to four-family	178		43			—			—		221
Construction – commercial	563		(179		)	—			—		384
Construction – multi-family	135		232			—			—		367
Construction – land development	49		77			—			—		126
Land	844		(155		)	(46		)	13		656
Consumer loans:
Home equity and second mortgage	649		1			(5		)	—		645
Other	117		(29		)	(4		)	3		87
Commercial business loans	557		355			(102		)	25		835
Total	$	9,530	$	—		$	(157	)	$	258	$	9,631



	Three Months Ended June 30, 2018
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One- to four-family	$	1,060	$	(33	)	$	—		$	—	$	1,027
Multi-family	386		21			—			—		407
Commercial	4,198		(15		)	—			—		4,183
Construction – custom and owner/builder	705		(38		)	—			—		667
Construction – speculative one- to four-family	99		34			—			—		133
Construction – commercial	445		74			—			—		519
Construction – multi-family	284		(137		)	—			—		147
Construction – land development	48		32			—			—		80
Land	691		64			(16		)	5		744
Consumer loans:
Home equity and second mortgage	945		1			—			—		946
Other	120		2			(1		)	—		121
Commercial business loans	563		(5		)	—			—		558
Total	$	9,544	$	—		$	(17	)	$	5	$	9,532



	Nine Months Ended June 30, 2018
	Beginning Allowance		Provision for (Recapture of) Loan Losses			Charge- offs			Recoveries		Ending Allowance
Mortgage loans:
One-to four-family	$	1,082	$	(55	)	$	—		$	—	$	1,027
Multi-family	447		(40		)	—			—		407
Commercial	4,184		27			(28		)	—		4,183
Construction – custom and owner/builder	699		(32		)	—			—		667
Construction – speculative one- to four-family	128		(6		)	—			11		133
Construction – commercial	303		216			—			—		519
Construction – multi-family	173		(26		)	—			—		147
Construction – land development	—		80			—			—		80
Land	918		(172		)	(16		)	14		744
Consumer loans:
Home equity and second mortgage	983		(37		)	—			—		946
Other	121		2			(3		)	1		121
Commercial business loans	515		43			—			—		558
Total	$	9,553	$	—		$	(47	)	$	26	$	9,532

The following tables present information on the loans evaluated individually and collectively for impairment in the allowance for loan losses by portfolio segment at June 30, 2019 and September 30, 2018 (dollars in thousands):



	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
June 30, 2019
Mortgage loans:
One- to four-family	$	—	$	1,118	$	1,118	$	1,220	$	127,830	$	129,050
Multi-family	—		438		438		—		70,374		70,374
Commercial	—		4,052		4,052		3,255		415,523		418,778
Construction – custom and owner/builder	—		702		702		—		70,237		70,237
Construction – speculative one- to four-family	—		221		221		—		10,545		10,545
Construction – commercial	—		384		384		—		27,567		27,567
Construction – multi-family	—		367		367		—		18,418		18,418
Construction – land development	—		126		126		—		2,990		2,990
Land	37		619		656		422		26,231		26,653
Consumer loans:
Home equity and second mortgage	—		645		645		606		41,598		42,204
Other	8		79		87		14		4,436		4,450
Commercial business loans	214		621		835		749		64,436		65,185
Total	$	259	$	9,372	$	9,631	$	6,266	$	880,185	$	886,451


September 30, 2018
Mortgage loans:
One- to four-family	$	—	$	1,086	$	1,086	$	1,054	$	114,887	$	115,941
Multi-family	—		433		433		—		61,928		61,928
Commercial	—		4,248		4,248		2,446		342,667		345,113
Construction – custom and owner/builder	—		671		671		—		67,024		67,024
Construction – speculative one- to four-family	—		178		178		—		7,107		7,107
Construction – commercial	—		563		563		—		23,440		23,440
Construction – multi-family	—		135		135		—		5,983		5,983
Construction – land development	—		49		49		—		1,567		1,567
Land	34		810		844		243		25,303		25,546
Consumer loans:
Home equity and second mortgage	—		649		649		359		36,982		37,341
Other	—		117		117		—		3,515		3,515
Commercial business loans	63		494		557		170		42,883		43,053
Total	$	97	$	9,433	$	9,530	$	4,272	$	733,286	$	737,558

The following tables present an analysis of loans by aging category and portfolio segment at June 30, 2019 and September 30, 2018 (dollars in thousands):



	30–59 Days Past Due		60-89 Days Past Due		Non- Accrual (1)		Past Due 90 Days or More and Still Accruing		Total Past Due		Current		Total Loans
June 30, 2019
Mortgage loans:
One- to four-family	$	161	$	—	$	723	$	—	$	884	$	128,166	$	129,050
Multi-family	—		—		—		—		—		70,374		70,374
Commercial	—		—		836		—		836		417,942		418,778
Construction – custom and owner/builder	—		—		—		—		—		70,237		70,237
Construction – speculative one- to four- family	—		—		—		—		—		10,545		10,545
Construction – commercial	—		—		—		—		—		27,567		27,567
Construction – multi-family	—		—		—		—		—		18,418		18,418
Construction – land development	—		—		—		—		—		2,990		2,990
Land	—		—		422		—		422		26,231		26,653
Consumer loans:
Home equity and second mortgage	—		—		606		—		606		41,598		42,204
Other	10		—		14		—		24		4,426		4,450
Commercial business loans	—		—		749		—		749		64,436		65,185
Total	$	171	$	—	$	3,350	$	—	$	3,521	$	882,930	$	886,451


September 30, 2018
Mortgage loans:
One- to four-family	$	557	$	—	$	545	$	—	$	1,102	$	114,839	$	115,941
Multi-family	—		—		—		—		—		61,928		61,928
Commercial	574		—		—		—		574		344,539		345,113
Construction – custom and owner/ builder	—		—		—		—		—		67,024		67,024
Construction – speculative one- to four- family	—		—		—		—		—		7,107		7,107
Construction – commercial	—		—		—		—		—		23,440		23,440
Construction – multi-family	—		—		—		—		—		5,983		5,983
Construction – land development	—		—		—		—		—		1,567		1,567
Land	40		—		243		—		283		25,263		25,546
Consumer loans:
Home equity and second mortgage	42		—		359		—		401		36,940		37,341
Other	10		16		—		—		26		3,489		3,515
Commercial business loans	—		—		170		—		170		42,883		43,053
Total	$	1,223	$	16	$	1,317	$	—	$	2,556	$	735,002	$	737,558

______________________

(1) Includes non-accrual loans past due 90 days or more and other loans classified as non-accrual.

Credit Quality Indicators

The Company uses credit risk grades which reflect the Company’s assessment of a loan’s risk or loss potential. The Company categorizes loans into risk grade categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors such as the estimated fair value of the collateral. The Company uses the following definitions for credit risk ratings as part of the on-going monitoring of the credit quality of its loan portfolio:

Pass: Pass loans are defined as those loans that meet acceptable quality underwriting standards.

Watch: Watch loans are defined as those loans that still exhibit acceptable quality, but have some concerns that justify greater attention. If these concerns are not corrected, a potential for further adverse categorization exists. These concerns could relate to a specific condition peculiar to the borrower, its industry segment or the general economic environment.

Special Mention: Special mention loans are defined as those loans deemed by management to have some potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the payment prospects of the loan.

Substandard: Substandard loans are defined as those loans that are inadequately protected by the current net worth and paying capacity of the obligor, or of the collateral pledged. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. If the weakness or weaknesses are not corrected, there is the distinct possibility that some loss will be sustained.

Loss: Loans in this classification are considered uncollectible and of such little value that continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. At June 30, 2019 and September 30, 2018, there were no loans classified as loss.

The following tables present an analysis of loans by credit quality indicator and portfolio segment at June 30, 2019 and September 30, 2018 (dollars in thousands):



	Loan Grades
June 30, 2019	Pass		Watch		Special Mention		Substandard		Total
Mortgage loans:
One- to four-family	$	126,094	$	302	$	566	$	2,088	$	129,050
Multi-family	70,374		—		—		—		70,374
Commercial	408,798		8,237		636		1,107		418,778
Construction – custom and owner/builder	70,004		233		—		—		70,237
Construction – speculative one- to four-family	10,545		—		—		—		10,545
Construction – commercial	27,567		—		—		—		27,567
Construction – multi-family	18,418		—		—		—		18,418
Construction – land development	2,766		—		—		224		2,990
Land	24,049		956		1,226		422		26,653
Consumer loans:
Home equity and second mortgage	41,369		42		—		793		42,204
Other	4,402		34		—		14		4,450
Commercial business loans	64,374		13		49		749		65,185
Total	$	868,760	$	9,817	$	2,477	$	5,397	$	886,451

September 30, 2018
Mortgage loans:
One- to four-family	$	113,148	$	882	$	581	$	1,330	$	115,941
Multi-family	61,928		—		—		—		61,928
Commercial	334,908		8,375		988		842		345,113
Construction – custom and owner/builder	66,720		304		—		—		67,024
Construction – speculative one- to four-family	7,107		—		—		—		7,107
Construction – commercial	23,440		—		—		—		23,440
Construction – multi-family	5,983		—		—		—		5,983
Construction – land development	1,567		—		—		—		1,567
Land	22,810		988		1,505		243		25,546
Consumer loans:
Home equity and second mortgage	36,697		82		—		562		37,341
Other	3,480		—		—		35		3,515
Commercial business loans	42,812		22		49		170		43,053
Total	$	720,600	$	10,653	$	3,123	$	3,182	$	737,558

Impaired Loans

A loan is considered impaired when it is probable that the Company will be unable to collect all amounts (principal and interest) when due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, may be collectively evaluated for impairment. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when, as an alternative, the current estimated fair value of the collateral (reduced by estimated costs to sell, if applicable) or observable market price is used. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling real estate, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest and net deferred loan origination fees or costs), impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

The categories of non-accrual loans and impaired loans overlap, although they are not identical.

The following table is a summary of information related to impaired loans by portfolio segment as of and for the year ended September 30, 2018 (dollars in thousands):



	Recorded Investment		Unpaid Principal Balance (Loan Balance Plus Charge Off)		Related Allowance		Average Recorded Investment (1)		Interest Income Recognized (1)		Cash Basis Interest Income Recognized (1)
With no related allowance recorded:
Mortgage loans:
One- to four-family	$	1,054	$	1,200	$	—	$	1,422	$	80	$	69
Commercial	2,446		2,446		—		2,389		121		93
Land	90		195		—		283		11		10
Consumer loans:
Home equity and second mortgage	359		359		—		210		3		3
Subtotal	3,949		4,200		—		4,304		215		175

With an allowance recorded:
Mortgage loans:
One- to four-family	—		—		—		9		—		—
Commercial	—		—		—		760		28		21
Land	153		153		34		383		9		8
Consumer loans:
Home equity and second mortgage	—		—		—		310		16		13
Commercial business loans	170		170		63		141		—		—
Subtotal	323		323		97		1,603		53		42
Total:
Mortgage loans:
One- to four-family	1,054		1,200		—		1,431		80		69
Commercial	2,446		2,446		—		3,149		149		114
Land	243		348		34		666		20		18
Consumer loans:
Home equity and second mortgage	359		359		—		520		19		16
Commercial business loans	170		170		63		141		—		—
Total	$	4,272	$	4,523	$	97	$	5,907	$	268	$	217

______________________________________________

(1) For the year ended September 30, 2018.

A troubled debt restructured loan ("TDR") is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. Examples of such concessions include, but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market rates; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-amortizations, extensions, deferrals and renewals. TDRs are considered impaired and are individually evaluated for impairment. TDRs are classified as non-accrual (and considered to be non-performing) unless they have been performing in accordance with modified terms for a period of at least six months. The Company had $3.21 million and $3.28 million in TDRs included in impaired loans at June 30, 2019 and September 30, 2018, respectively, and had no commitments at these dates to lend additional funds on these loans. The allowance for loan losses allocated to TDRs at June 30, 2019 and September 30, 2018 was $69,000 and $97,000, respectively. There were no TDRs for which there was a payment default within the first 12 months of the modification during the nine months ended June 30, 2019.

The following tables set forth information with respect to the Company’s TDRs by interest accrual status as of June 30, 2019 and September 30, 2018 (dollars in thousands):



	June 30, 2019
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	497	$	143	$	640
Commercial	2,419		—		2,419
Commercial business loans	—		149		149
Total	$	2,916	$	292	$	3,208



	September 30, 2018
	Accruing		Non- Accrual		Total
Mortgage loans:
One- to four-family	$	509	$	—	$	509
Commercial	2,446		—		2,446
Land	—		153		153
Commercial business loans	—		170		170
Total	$	2,955	$	323	$	3,278

There were no new TDRs during the nine months ended June 30, 2019.

There were three new TDRs for the year ended September 30, 2018. The following table sets forth information with respect to the Company's TDRs, by portfolio segment, during the year ended September 30, 2018 (dollars in thousands):



2018	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		End of Period Balance
Land loans (1)	1	$	244	$	155	$	153
Commercial business loans (2)	2	183		183		170
Total	3	$	427	$	338	$	323
(1) Modification was a result of a reduction in principal balance.
(2) Modifications were a result of reduction in monthly payment amounts.