7. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s ongoing quarterly assessment of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions and detailed analysis of individual loans for which full collectability may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific, general and unallocated components.

The specific component relates to loans that are considered impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value (less estimated selling costs, if applicable) of the impaired loan is lower than the carrying value of that loan.

The general component covers non-impaired loans based on the Company’s risk rating system and historical loss experience adjusted for qualitative factors. The Company calculates its historical loss rates using the average of the last four quarterly 24-month periods. The Company calculates and applies its historical loss rates by individual loan types in its loan portfolio. These historical loss rates are adjusted for qualitative and environmental factors.

An unallocated component is maintained to cover uncertainties that the Company believes have resulted in incurred losses that have not yet been allocated to specific elements of the general and specific components of the allowance for loan losses. Such factors include uncertainties in economic conditions, uncertainties in identifying triggering events that directly correlate to subsequent loss rates, changes in appraised value of underlying collateral, risk factors that have not yet manifested themselves in loss allocation factors and historical loss experience data that may not precisely correspond to the current portfolio or economic conditions. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The appropriate allowance level is estimated based upon factors and trends identified by the Company as of the date of the filing of the consolidated financial statements.

When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; and/or the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.

Management’s evaluation of the allowance for loan losses is based on ongoing, quarterly assessments of the known and inherent risks in the loan portfolio. Loss factors are based on the Company’s historical loss experience with additional consideration and adjustments made for changes in economic conditions, changes in the amount and composition of the loan portfolio, delinquency rates, changes in collateral values, seasoning of the loan portfolio, duration of the current business cycle, a detailed analysis of impaired loans and other factors as deemed appropriate. These factors are evaluated on a quarterly basis. Loss rates used by the Company are affected as changes in these factors increase or decrease from quarter to quarter. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The following tables present a reconciliation of the allowance for loan losses for the periods indicated (in thousands):


Three months ended	Commercial		Commercial				Multi-		Real Estate
December 31, 2019	Business		Real Estate		Land		Family		Construction		Consumer		Unallocated		Total

Beginning balance	$	2,051	$	5,038	$	219	$	779	$	1,381	$	1,347	$	621	$	11,436
Provision for (recapture of) loan losses		—		(20)		16		(14)		86		(76)		8		—
Charge-offs		—		—		—		—		—		(13)		—		(13)
Recoveries		—		—		—		—		—		10		—		10
Ending balance	$	2,051	$	5,018	$	235	$	765	$	1,467	$	1,268	$	629	$	11,433


Nine months ended
December 31, 2019

Beginning balance	$	1,808	$	5,053	$	254	$	728	$	1,457	$	1,447	$	710	$	11,457
Provision for (recapture of) loan losses		246		(35)		(19)		37		10		(158)		(81)		—
Charge-offs		(3)		—		—		—		—		(67)		—		(70)
Recoveries		—		—		—		—		—		46		—		46
Ending balance	$	2,051	$	5,018	$	235	$	765	$	1,467	$	1,268	$	629	$	11,433


Three months ended	Commercial		Commercial				Multi-		Real Estate
December 31, 2018	Business		Real Estate		Land		Family		Construction		Consumer		Unallocated		Total

Beginning balance	$	1,858	$	5,361	$	237	$	696	$	1,007	$	1,641	$	713	$	11,513
Provision for (recapture of) loan losses		84		(80)		31		19		186		(177)		(63)		—
Charge-offs		—		—		—		—		—		(52)		—		(52)
Recoveries		—		—		—		—		—		41		—		41
Ending balance	$	1,942	$	5,281	$	268	$	715	$	1,193	$	1,453	$	650	$	11,502


Nine months ended
December 31, 2018

Beginning balance	$	1,668	$	4,914	$	220	$	822	$	618	$	1,809	$	715	$	10,766
Provision for (recapture of) loan losses		274		(456)		48		(107)		575		(219)		(65)		50
Charge-offs		—		—		—		—		—		(236)		—		(236)
Recoveries		—		823		—		—		—		99		—		922
Ending balance	$	1,942	$	5,281	$	268	$	715	$	1,193	$	1,453	$	650	$	11,502

The following tables present an analysis of loans receivable and the allowance for loan losses, based on impairment methodology, at the dates indicated (in thousands):


	Allowance for Loan Losses						Recorded Investment in Loans
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
December 31, 2019	Impairment		Impairment		Total		Impairment		Impairment		Total

Commercial business	$	—	$	2,051	$	2,051	$	144	$	165,382	$	165,526
Commercial real estate		—		5,018		5,018		2,392		467,771		470,163
Land		—		235		235		716		14,447		15,163
Multi-family		—		765		765		1,563		56,229		57,792
Real estate construction		—		1,467		1,467		—		88,872		88,872
Consumer		8		1,260		1,268		439		88,578		89,017
Unallocated		—		629		629		—		—		—
Total	$	8	$	11,425	$	11,433	$	5,254	$	881,279	$	886,533

March 31, 2019

Commercial business	$	—	$	1,808	$	1,808	$	160	$	162,636	$	162,796
Commercial real estate		—		5,053		5,053		2,482		458,950		461,432
Land		—		254		254		728		16,299		17,027
Multi-family		—		728		728		1,598		49,972		51,570
Real estate construction		—		1,457		1,457		—		90,882		90,882
Consumer		22		1,425		1,447		697		91,712		92,409
Unallocated		—		710		710		—		—		—
Total	$	22	$	11,435	$	11,457	$	5,665	$	870,451	$	876,116

Non-accrual loans: Loans are reviewed regularly and it is the Company’s general policy that a loan is past due when it is 30 to 89 days delinquent. In general, when a loan is 90 days delinquent or when collection of principal or interest appears doubtful, it is placed on non-accrual status, at which time the accrual of interest ceases and a reserve for unrecoverable accrued interest is established and charged against operations. As a general practice, payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cost recovery method. Also, as a general practice, a loan is not removed from non-accrual status until all delinquent principal, interest and late fees have been brought current and the borrower has demonstrated a history of performance based upon the contractual terms of the note. A history of repayment performance generally would be a minimum of nine months. Interest income foregone on non-accrual loans was $57,000 and $75,000 for the nine months ended December 31, 2019 and 2018, respectively.

The following tables present an analysis of loans by aging category at the dates indicated (in thousands):


			90 Days and				Total Past
	30‑89 Days		Greater				Due and				Total Loans
December 31, 2019	Past Due		Past Due		Non-accrual		Non- accrual		Current		Receivable

Commercial business	$	—	$	—	$	299	$	299	$	165,227	$	165,526
Commercial real estate		—		—		1,019		1,019		469,144		470,163
Land		—		—		—		—		15,163		15,163
Multi-family		—		—		—		—		57,792		57,792
Real estate construction		—		—		—		—		88,872		88,872
Consumer		505		8		191		704		88,313		89,017
Total	$	505	$	8	$	1,509	$	2,022	$	884,511	$	886,533


March 31, 2019

Commercial business	$	—	$	—	$	225	$	225	$	162,571	$	162,796
Commercial real estate		—		—		1,081		1,081		460,351		461,432
Land		—		—		—		—		17,027		17,027
Multi-family		—		—		—		—		51,570		51,570
Real estate construction		—		—		—		—		90,882		90,882
Consumer		345		3		210		558		91,851		92,409
Total	$	345	$	3	$	1,516	$	1,864	$	874,252	$	876,116

Credit quality indicators: The Company monitors credit risk in its loan portfolio using a risk rating system (on a scale of one to nine) for all commercial (non-consumer) loans. The risk rating system is a measure of the credit risk of the borrower based on their historical, current and anticipated future financial characteristics. The Company assigns a risk rating to each commercial loan at origination and subsequently updates these ratings, as necessary, so that the risk rating continues to reflect the appropriate risk characteristics of the loan. Application of appropriate risk ratings is key to management of loan portfolio risk. In determining the appropriate risk rating, the Company considers the following factors: delinquency, payment history, quality of management, liquidity, leverage, earnings trends, alternative funding sources, geographic risk, industry risk, cash flow adequacy, account practices, asset protection and extraordinary risks. Consumer loans, including custom construction loans, are not assigned a risk rating but rather are grouped into homogeneous pools with similar risk characteristics. When a consumer loan is delinquent 90 days, it is placed on non-accrual status and assigned a substandard risk rating. Loss factors are assigned to each risk rating and homogeneous pool based on historical loss experience for similar loans. This historical loss experience is adjusted for qualitative factors that are likely to cause the estimated credit losses to differ from the Company’s historical loss experience. The Company uses these loss factors to estimate the general component of its allowance for loan losses.

Pass – These loans have a risk rating between 1 and 4 and are to borrowers that meet normal credit standards. Any deficiencies in satisfactory asset quality, liquidity, debt servicing capacity and coverage are offset by strengths in other areas. The borrower currently has the capacity to perform according to the loan terms. Any concerns about risk factors such as stability of margins, stability of cash flows, liquidity, dependence on a single product/supplier/customer, depth of management, etc. are offset by strengths in other areas. Typically, these loans are secured by the operating assets of the borrower and/or real estate. The borrower’s management is considered competent. The borrower has the ability to repay the debt in the normal course of business.

Watch – These loans have a risk rating of 5 and are included in the “pass” rating. However, there would typically be some reason for additional management oversight, such as the borrower’s recent financial setbacks and/or deteriorating financial position, industry concerns and failure to perform on other borrowing obligations. Loans with this rating are monitored closely in an effort to correct deficiencies.

Special mention – These loans have a risk rating of 6 and are rated in accordance with regulatory guidelines. These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the credit position at some future date. These loans pose elevated risk but their weakness does not yet justify a “substandard” classification.

Substandard – These loans have a risk rating of 7 and are rated in accordance with regulatory guidelines, for which the accrual of interest may or may not be discontinued. By definition under regulatory guidelines, a “substandard” loan has defined weaknesses which make payment default or principal exposure likely but not yet certain. Repayment of such loans is likely to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business.

Doubtful – These loans have a risk rating of 8 and are rated in accordance with regulatory guidelines. Such loans are placed on non-accrual status and repayment may be dependent upon collateral which has value that is difficult to determine or upon some near-term event which lacks certainty.

Loss – These loans have a risk rating of 9 and are rated in accordance with regulatory guidelines. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

The following tables present an analysis of loans by credit quality indicators at the dates indicated (in thousands):


			Special								Total Loans
December 31, 2019	Pass		Mention		Substandard		Doubtful		Loss		Receivable

Commercial business	$	162,291	$	1,375	$	1,860	$	—	$	—	$	165,526
Commercial real estate		469,080		64		1,019		—		—		470,163
Land		15,163		—		—		—		—		15,163
Multi-family		57,725		32		35		—		—		57,792
Real estate construction		88,872		—		—		—		—		88,872
Consumer		88,826		—		191		—		—		89,017
Total	$	881,957	$	1,471	$	3,105	$	—	$	—	$	886,533


March 31, 2019
Commercial business	$	159,997	$	840	$	1,959	$	—	$	—	$	162,796
Commercial real estate		454,013		4,030		3,389		—		—		461,432
Land		16,299		—		728		—		—		17,027
Multi-family		51,093		457		20		—		—		51,570
Real estate construction		90,882		—		—		—		—		90,882
Consumer		92,199		—		210		—		—		92,409
Total	$	864,483	$	5,327	$	6,306	$	—	$	—	$	876,116

Impaired loans and troubled debt restructurings (“TDRs”): A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Typically, factors used in determining if a loan is impaired include, but are not limited to, whether the loan is 90 days or more delinquent, internally designated as substandard or worse, on non-accrual status or represents a TDR. The majority of the Company’s impaired loans are considered collateral dependent. When a loan is considered collateral dependent, impairment is measured using the estimated value of the underlying collateral, less any prior liens, and when applicable, less estimated selling costs. For impaired loans that are not collateral dependent, impairment is measured using the present value of expected future cash flows, discounted at the loan’s original effective interest rate. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized by adjusting an allocation of the allowance for loan losses. Subsequent to the initial allocation of allowance to the individual loan, the Company may conclude that it is appropriate to record a charge-off of the impaired portion of the loan. When a charge-off is recorded, the loan balance is reduced and the specific allowance is eliminated. Generally, when a collateral dependent loan is initially measured for impairment and has not had an appraisal of the collateral in the last nine months, the Company obtains an updated market valuation. Subsequently, the Company generally obtains an updated market valuation of the collateral on an annual basis. The collateral valuation may occur more frequently if the Company determines that there is an indication that the market value may have declined.

The following tables present the total and average recorded investment in impaired loans at the dates and for the periods indicated (in thousands):


	Recorded
	Investment		Recorded
	with		Investment						Related
	No Specific		with Specific		Total		Unpaid		Specific
	Valuation		Valuation		Recorded		Principal		Valuation
	Allowance		Allowance		Investment		Balance		Allowance
December 31, 2019

Commercial business	$	144	$	—	$	144	$	173	$	—
Commercial real estate		2,392		—		2,392		3,410		—
Land		716		—		716		748		—
Multi-family		1,563		—		1,563		1,676		—
Consumer		298		141		439		552		8
Total	$	5,113	$	141	$	5,254	$	6,559	$	8

March 31, 2019

Commercial business	$	160	$	—	$	160	$	182	$	—
Commercial real estate		2,482		—		2,482		3,424		—
Land		728		—		728		766		—
Multi-family		1,598		—		1,598		1,709		—
Consumer		281		416		697		807		22
Total	$	5,249	$	416	$	5,665	$	6,888	$	22


	Three months ended				Three months ended
	December 31, 2019				December 31, 2018
	Average		Interest		Average		Interest
	Recorded		Recognized on		Recorded		Recognized on
	Investment		Impaired Loans		Investment		Impaired Loans

Commercial business	$	147	$	—	$	166	$	—
Commercial real estate		2,401		16		2,539		16
Land		718		10		735		2
Multi-family		1,567		22		1,613		22
Consumer		443		7		709		9
Total	$	5,276	$	55	$	5,762	$	49


	Nine months ended				Nine months ended
	December 31, 2019				December 31, 2018
	Average		Interest		Average		Interest
	Recorded		Recognized on		Recorded		Recognized on
	Investment		Impaired Loans		Investment		Impaired Loans

Commercial business	$	152	$	—	$	377	$	—
Commercial real estate		2,431		47		2,639		48
Land		722		30		746		2
Multi-family		1,579		68		1,626		66
Consumer		509		21		1,065		35
Total	$	5,393	$	166	$	6,453	$	151

The cash basis interest income on impaired loans was not materially different than the interest recognized on impaired loans as shown in the above tables.

TDRs are loans for which the Company, for economic or legal reasons related to the borrower’s financial condition, has granted a concession to the borrower that it would otherwise not consider. A TDR typically involves a modification of terms such as a reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, and/or an extension of the maturity date(s) at a stated interest rate lower than the current market rate for a new loan with similar risk. TDRs are considered impaired loans and as such, impairment is measured as described for impaired loans above.

The following table presents TDRs by interest accrual status at the dates indicated (in thousands):


	December 31, 2019						March 31, 2019
	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total

Commercial business	$	—	$	144	$	144	$	—	$	160	$	160
Commercial real estate		1,373		1,019		2,392		1,401		1,081		2,482
Land		716		—		716		728		—		728
Multi-family		1,563		—		1,563		1,598		—		1,598
Consumer		414		25		439		697		—		697
Total	$	4,066	$	1,188	$	5,254	$	4,424	$	1,241	$	5,665

At December 31, 2019, the Company had no commitments to lend additional funds on TDR loans. At December 31, 2019, all of the Company’s TDRs were paying as agreed except for one commercial real estate loan of $851,000 which is classified as nonaccrual.

There were no new TDRs for the three months ended December 31, 2019. There was one new TDR for the nine months ended December 31, 2019. The new TDR is a consumer real estate loan secured by a 1-4 family property located in Southwest Washington, whereby the Company granted a rate reduction to market interest rates and extended the maturity date by 10 years. The recorded investment in the loan prior to modification and at December 31, 2019 was $27,000 and $25,000, respectively. There were no new TDRs for the three and nine months ended December 31, 2018.

In accordance with the Company’s policy guidelines, unsecured loans are generally charged-off when no payments have been received for three consecutive months unless an alternative action plan is in effect. Consumer installment loans delinquent six months or more that have not received at least 75% of their required monthly payment in the last 90 days are charged-off. In addition, loans discharged in bankruptcy proceedings are charged-off. Loans under bankruptcy protection with no payments received for four consecutive months are charged-off. The outstanding balance of a secured loan that is in excess of the net realizable value is generally charged-off if no payments are received for four to five consecutive months. However, charge-offs are postponed if alternative proposals to restructure, obtain additional guarantors, obtain additional assets as collateral or a potential sale of the underlying collateral would result in full repayment of the outstanding loan balance. Once any other potential sources of repayment are exhausted, the impaired portion of the loan is charged-off. Regardless of whether a loan is unsecured or collateralized, once an amount is determined to be a confirmed loan loss it is promptly charged off.