5. ALLOWANCE FOR LOAN LOSSES

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


	Commercial		Commercial				Multi-		Real Estate
March 31, 2020	Business		Real Estate		Land		Family		Construction		Consumer		Unallocated		Total

Beginning balance	$	1,808	$	5,053	$	254	$	728	$	1,457	$	1,447	$	710	$	11,457
Provision for (recapture of) loan losses		264		1,368		(24)		126		(308)		(65)		(111)		1,250
Charge-offs		(64)		—		—		—		—		(82)		—		(146)
Recoveries		—		—		—		—		—		63		—		63
Ending balance	$	2,008	$	6,421	$	230	$	854	$	1,149	$	1,363	$	599	$	12,624

March 31, 2019

Beginning balance	$	1,668	$	4,914	$	220	$	822	$	618	$	1,809	$	715	$	10,766
Provision for (recapture of) loan losses		139		(685)		34		(94)		839		(178)		(5)		50
Charge-offs		—		—		—		—		—		(291)		—		(291)
Recoveries		1		824		—		—		—		107		—		932
Ending balance	$	1,808	$	5,053	$	254	$	728	$	1,457	$	1,447	$	710	$	11,457

March 31, 2018

Beginning balance	$	1,418	$	5,084	$	228	$	297	$	714	$	2,099	$	688	$	10,528
Provision for (recapture of) loan losses		10		(156)		(301)		525		(96)		(9)		27		—
Charge-offs		—		(68)		—		—		—		(340)		—		(408)
Recoveries		240		54		293		—		—		59		—		646
Ending balance	$	1,668	$	4,914	$	220	$	822	$	618	$	1,809	$	715	$	10,766

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
March 31, 2020	Impairment		Impairment		Total		Impairment		Impairment		Total

Commercial business	$	—	$	2,008	$	2,008	$	139	$	178,890	$	179,029
Commercial real estate		—		6,421		6,421		2,378		505,493		507,871
Land		—		230		230		714		13,312		14,026
Multi-family		—		854		854		1,549		56,825		58,374
Real estate construction		—		1,149		1,149		—		64,843		64,843
Consumer		12		1,351		1,363		432		86,934		87,366
Unallocated		—		599		599		—		—		—
Total	$	12	$	12,612	$	12,624	$	5,212	$	906,297	$	911,509

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

Changes in the allowance for unfunded loan commitments were as follows for the years indicated (in thousands):


	Year Ended March 31,
	2020		2019		2018
Beginning balance	$	469	$	480	$	388
Net change in allowance for unfunded loan commitments		5		(11)		92
Ending balance	$	474	$	469	$	480

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


			90 Days				Total Past
			and				Due and
	30-89 Days		Greater				Non-				Total Loans
March 31, 2020	Past Due		Past Due		Non-accrual		accrual		Current		Receivable

Commercial business	$	—	$	—	$	201	$	201	$	178,828	$	179,029
Commercial real estate		—		—		1,014		1,014		506,857		507,871
Land		—		—		—		—		14,026		14,026
Multi-family		—		—		—		—		58,374		58,374
Real estate construction		—		—		—		—		64,843		64,843
Consumer		271		—		180		451		86,915		87,366
Total	$	271	$	—	$	1,395	$	1,666	$	909,843	$	911,509

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

Interest income foregone on non-accrual loans was $75,000, $94,000 and $102,000 for the years ended March 31, 2020, 2019 and 2018, respectively.

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
March 31, 2020	Pass		Mention		Substandard		Doubtful		Loss		Receivable

Commercial business	$	177,399	$	1,282	$	348	$	—	$	—	$	179,029
Commercial real estate		506,794		63		1,014		—		—		507,871
Land		14,026		—		—		—		—		14,026
Multi-family		58,295		45		34		—		—		58,374
Real estate construction		64,843		—		—		—		—		64,843
Consumer		87,186		—		180		—		—		87,366
Total	$	908,543	$	1,390	$	1,576	$	—	$	—	$	911,509

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 – The following tables present information regarding impaired loans at the dates and for the years indicated (in thousands):


	Recorded		Recorded
	Investment with		Investment						Related
	No Specific		with Specific		Total		Unpaid		Specific
	Valuation		Valuation		Recorded		Principal		Valuation
March 31, 2020	Allowance		Allowance		Investment		Balance		Allowance

Commercial business	$	139	$	—	$	139	$	170	$	—
Commercial real estate		2,378		—		2,378		3,405		—
Land		714		—		714		748		—
Multi-family		1,549		—		1,549		1,662		—
Consumer		295		137		432		543		12
Total	$	5,075	$	137	$	5,212	$	6,528	$	12
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


	Year ended				Year ended				Year ended
	March 31, 2020				March 31, 2019				March 31, 2018
			Interest				Interest				Interest
	Average		Recognized		Average		Recognized		Average		Recognized
	Recorded		on Impaired		Recorded		on Impaired		Recorded		on Impaired
	Investment		Loans		Investment		Loans		Investment		Loans

Commercial business	$	150	$	62	$	334	$	—	$	930	$	41
Commercial real estate		2,420		40		2,607		64		4,185		101
Land		720		90		742		7		781		—
Multi-family		1,573		—		1,620		88		1,668		90
Consumer		494		29		992		45		1,452		62
Total	$	5,357	$	221	$	6,295	$	204	$	9,016	$	294

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 and other loan modifications – 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 in Note 1 – Summary of Significant Accounting Policies – Allowance for Loan Losses.

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


	March 31, 2020						March 31, 2019
	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total

Commercial business	$	—	$	139	$	139	$	—	$	160	$	160
Commercial real estate		1,364		1,014		2,378		1,401		1,081		2,482
Land		714		—		714		728		—		728
Multi-family		1,549		—		1,549		1,598		—		1,598
Consumer		432		—		432		697		—		697
Total	$	4,059	$	1,153	$	5,212	$	4,424	$	1,241	$	5,665

At March 31, 2020, the Company had no commitments to lend additional funds on these loans. At March 31, 2020, all of the Company’s TDRs were paying as agreed except for one commercial real estate loan with a recorded investment of $851,000 which is classified as nonaccrual.

There was one new TDR for the year ended March 31, 2020. The new TDR is a consumer real estate loan secured by a 1-4 family property located in Southwest Washington, for which the Company granted a rate reduction and extended the maturity date by 10 years. The recorded investment in the loan prior to modification and at March 31, 2020 was $27,000 and $25,000, respectively. There were no new TDRs for the year ended March 31, 2019 and 2018.

In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act along with a joint agency statement issued by banking regulatory agencies provides that a short-term modification made in response to COVID-19 and which meets certain criteria does not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note

1 - Summary of Significant Accounting Policies for more information.