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LOANS AND ALLOWANCE FOR CREDIT LOSSES FOR LOANS

6 Months Ended

Sep. 30, 2024

LOANS AND ALLOWANCE FOR CREDIT LOSSES FOR LOANS

LOANS AND ALLOWANCE FOR CREDIT LOSSES FOR LOANS

6. LOANS AND ALLOWANCE FOR CREDIT LOSSES FOR LOANS

Loans receivable are reported net of deferred loan fees and discounts, and inclusive of premiums. Deferred loan fees totaled $4.5 million and $4.7 million at September 30, 2024 and March 31, 2024, respectively. Loans receivable discounts and premiums totaled $1.2 million and $1.8 million, respectively, at September 30, 2024, compared to $1.3 million and $1.9 million, respectively, at March 31, 2024. Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated (in thousands):


	September 30,		March 31,
	2024		2024
Commercial and construction
Commercial business	$	236,895	$	229,404
Commercial real estate		573,455		583,501
Land		7,274		5,693
Multi-family		78,710		70,771
Real estate construction		51,498		36,538
Total commercial and construction		947,832		925,907

Consumer
Real estate one-to-four family		96,911		96,366
Other installment		16,234		1,740
Total consumer		113,145		98,106

Total loans		1,060,977		1,024,013

Less: ACL for loans		15,466		15,364
Loans receivable, net	$	1,045,511	$	1,008,649

The Company considers its loan portfolio to have very little exposure to sub-prime mortgage loans since the Company has not historically engaged in this type of lending. At September 30, 2024, loans carried at $768.2 million were pledged as collateral to the FHLB of Des Moines and FRB pursuant to borrowing agreements.

Substantially all the Company’s business activity is with customers located in the states of Washington and Oregon. Loans and extensions of credit outstanding at one time to one borrower are generally limited by federal regulation to 15% of the Bank’s shareholders’ equity, excluding accumulated other comprehensive income (loss). As of September 30, 2024 and March 31, 2024, the Bank had no loans to any one borrower in excess of the regulatory limit.

Troubled Loan Modifications (“TLM”) – Occasionally, the Company offers modifications of loans to borrowers experiencing financial difficulty by providing principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or any combination of these. When principal forgiveness is provided, the amount of the forgiveness is charged-off against the ACL for loans. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is charged off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL for loans is adjusted by the same amount. The ACL on modified loans is measured using the same credit loss estimation methods used to determine the ACL for all other loans held for investment. These methods incorporate the post-modification loan terms, as well as defaults and charge-offs associated with historical modified loans.

There were no loans modified related to borrowers experiencing financial difficulty during the three months ended September 30, 2024. There were no loans past due at September 30, 2024 that had been modified in the previous 12 months.

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 credit 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. 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 table sets forth the Company’s loan portfolio at September 30, 2024 by risk attribute and year of origination as well as current period gross charge-offs (in thousands). Revolving loans that are converted to term loans are treated as new originations in the table below and are presented by year of origination. Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of the most recent renewal or extension.


	September 30, 2024
	Term Loans Amortized Cost Basis by Origination Fiscal Year
															Total
													Revolving		Loans
	2025		2024		2023		2022		2021		Prior		Loans		Receivable

Commercial business
Risk rating
Pass	$	7,139	$	19,349	$	61,559	$	82,037	$	24,663	$	26,164	$	10,248	$	231,159
Special Mention		—		—		2,250		653		612		936		1,237		5,688
Substandard		—		—		—		—		—		48		—		48
Total commercial business	$	7,139	$	19,349	$	63,809	$	82,690	$	25,275	$	27,148	$	11,485	$	236,895
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate
Risk rating
Pass	$	8,820	$	36,374	$	61,894	$	144,923	$	88,164	$	189,444	$	—	$	529,619
Special Mention		4,497		3,137		3,697		885		—		31,442		—		43,658
Substandard		—		110		—		—		—		68		—		178
Total commercial real estate	$	13,317	$	39,621	$	65,591	$	145,808	$	88,164	$	220,954	$	—	$	573,455
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Land
Risk rating
Pass	$	622	$	3,463	$	2,297	$	89	$	—	$	500	$	(22)	$	6,949
Special Mention		—		—		325		—		—		—		—		325
Total land	$	622	$	3,463	$	2,622	$	89	$	—	$	500	$	(22)	$	7,274
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Multi-family
Risk rating
Pass	$	84	$	959	$	26,095	$	36,088	$	4,400	$	10,647	$	—	$	78,273
Special Mention		—		—		185		—		18		167		—		370
Substandard		—		—		—		—		—		67		—		67
Total multi-family	$	84	$	959	$	26,280	$	36,088	$	4,418	$	10,881	$	—	$	78,710
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	September 30, 2024
	Term Loans Amortized Cost Basis by Origination Fiscal Year
															Total
													Revolving		Loans
	2025		2024		2023		2022		2021		Prior		Loans		Receivable

Real estate construction
Risk rating
Pass	$	6,736	$	21,551	$	14,466	$	8,120	$	—	$	—	$	—	$	50,873
Special Mention		625		—		—		—		—		—		—		625
Total real estate construction	$	7,361	$	21,551	$	14,466	$	8,120	$	—	$	—	$	—	$	51,498
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Real estate one-to-four family
Risk rating
Pass	$	11	$	—	$	—	$	59,710	$	4,101	$	17,948	$	15,108	$	96,878
Substandard		—		—		—		—		—		33		—		33
Total real estate one-to-four family	$	11	$	—	$	—	$	59,710	$	4,101	$	17,981	$	15,108	$	96,911
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Other installment
Risk rating
Pass	$	14,517	$	610	$	442	$	154	$	58	$	15	$	438	$	16,234
Total other installment	$	14,517	$	610	$	442	$	154	$	58	$	15	$	438	$	16,234
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	1	$	1

Total loans receivable, gross
Risk rating
Pass	$	37,929	$	82,306	$	166,753	$	331,121	$	121,386	$	244,718	$	25,772	$	1,009,985
Special Mention		5,122		3,137		6,457		1,538		630		32,545		1,237		50,666
Substandard		—		110		—		—		—		216		—		326
Total loans receivable, gross	$	43,051	$	85,553	$	173,210	$	332,659	$	122,016	$	277,479	$	27,009	$	1,060,977
Total current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	1	$	1


	March 31, 2024
	Term Loans Amortized Cost Basis by Origination Fiscal Year
															Total
													Revolving		Loans
	2024		2023		2022		2021		2020		Prior		Loans		Receivable

Commercial business
Risk rating
Pass	$	14,126	$	63,838	$	85,131	$	28,119	$	16,945	$	12,411	$	4,827	$	225,397
Special Mention		—		—		733		—		486		232		2,498		3,949
Substandard		—		—		—		—		—		58		—		58
Total commercial business	$	14,126	$	63,838	$	85,864	$	28,119	$	17,431	$	12,701	$	7,325	$	229,404
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate
Risk rating
Pass	$	36,116	$	66,847	$	147,015	$	89,662	$	53,424	$	158,311	$	—	$	551,375
Special Mention		—		3,752		897		—		—		26,878		—		31,527
Substandard		520		—		—		—		—		79		—		599
Total commercial real estate	$	36,636	$	70,599	$	147,912	$	89,662	$	53,424	$	185,268	$	—	$	583,501
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Land
Risk rating
Pass	$	2,361	$	2,340	$	94	$	—	$	106	$	437	$	—	$	5,338
Special Mention		—		355		—		—		—		—		—		355
Total land	$	2,361	$	2,695	$	94	$	—	$	106	$	437	$	—	$	5,693
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Multi-family
Risk rating
Pass	$	970	$	21,643	$	32,003	$	4,841	$	8,788	$	2,429	$	—	$	70,674
Special Mention		—		—		—		—		35		32		—		67
Substandard		—		—		—		—		—		30		—		30
Total multi-family	$	970	$	21,643	$	32,003	$	4,841	$	8,823	$	2,491	$	—	$	70,771
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	March 31, 2024
	Term Loans Amortized Cost Basis by Origination Fiscal Year
															Total
													Revolving		Loans
	2024		2023		2022		2021		2020		Prior		Loans		Receivable

Real estate construction
Risk rating
Pass	$	13,320	$	10,078	$	12,346	$	—	$	—	$	—	$	—	$	35,744
Special Mention		794		—		—		—		—		—		—		794
Total real estate construction	$	14,114	$	10,078	$	12,346	$	—	$	—	$	—	$	—	$	36,538
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Real estate one-to-four family
Risk rating
Pass	$	—	$	—	$	60,447	$	4,164	$	4,364	$	14,756	$	12,599	$	96,330
Substandard		—		—		—		—		—		36		—		36
Total real estate one-to-four family	$	—	$	—	$	60,447	$	4,164	$	4,364	$	14,792	$	12,599	$	96,366
Current YTD gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Other installment
Risk rating
Pass	$	418	$	555	$	198	$	75	$	27	$	8	$	459	$	1,740
Total other installment	$	418	$	555	$	198	$	75	$	27	$	8	$	459	$	1,740
Current YTD gross write-offs	$	—	$	11	$	—	$	—	$	—	$	2	$	—	$	13

Total loans receivable, gross
Risk rating
Pass	$	67,311	$	165,301	$	337,234	$	126,861	$	83,654	$	188,352	$	17,885	$	986,598
Special Mention		794		4,107		1,630		—		521		27,142		2,498		36,692
Substandard		520		—		—		—		—		203		—		723
Total loans receivable, gross	$	68,625	$	169,408	$	338,864	$	126,861	$	84,175	$	215,697	$	20,383	$	1,024,013
Total current YTD gross write-offs	$	—	$	11	$	—	$	—	$	—	$	2	$	—	$	13

ACL on Loans - The ACL for loans is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL for loans is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. The Company estimates the expected credit losses over the loans’ contractual terms, adjusted for expected prepayments. The ACL for loans is calculated for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. In addition, the Company incorporates a reasonable and supportable forecast. For loans that are individually evaluated, an allowance is established when the discounted cash flows or collateral value (less estimated selling costs, if applicable) of the loan is lower than its carrying value.

When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for credit 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 ACL for loans 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 individually evaluated 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 ACL for loans and may require the Company to make additions to the ACL for loans based on their judgment about information available to them at the time of their examinations.

The following tables detail activity in the ACL for loans at or for the three and six months ended September 30, 2024 and September 30, 2023, by loan category (in thousands):


Three months ended	Commercial		Commercial				Multi-		Real Estate
September 30, 2024	Business		Real Estate		Land		Family		Construction		Consumer		Unallocated		Total

Beginning balance	$	5,141	$	7,303	$	120	$	402	$	723	$	1,675	$	—	$	15,364
(Recapture of) provision for credit losses		(23)		(166)		19		(48)		202		116		—		100
Charge-offs		—		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		2		—		2
Ending balance	$	5,118	$	7,137	$	139	$	354	$	925	$	1,793	$	—	$	15,466

Six months ended
September 30, 2024

Beginning balance	$	5,280	$	7,391	$	106	$	367	$	636	$	1,584	$	—	$	15,364
Provision for (recapture of) credit losses		(162)		(254)		33		(13)		289		207		—		100
Charge-offs		—		—		—		—		—		(1)		—		(1)
Recoveries		—		—		—		—		—		3		—		3
Ending balance	$	5,118	$	7,137	$	139	$	354	$	925	$	1,793	$	—	$	15,466

Three months ended
September 30, 2023

Beginning balance	$	5,215	$	7,205	$	123	$	293	$	830	$	1,677	$	—	$	15,343
Provision for (recapture of) credit losses		124		(67)		(11)		—		30		(76)		—		—
Charge-offs		—		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		3		—		3
Ending balance	$	5,339	$	7,138	$	112	$	293	$	860	$	1,604	$	—	$	15,346

Six months ended
September 30, 2023

Beginning balance	$	3,123	$	8,894	$	93	$	798	$	764	$	1,127	$	510	$	15,309
Impact of adopting CECL (ASU 2016-13)		1,884		(1,494)		40		(492)		131		483		(510)		42
Provision for (recapture of) loan losses		332		(262)		(21)		(13)		(35)		(1)		—		—
Charge-offs		—		—		—		—		—		(11)		—		(11)
Recoveries		—		—		—		—		—		6		—		6
Ending balance	$	5,339	$	7,138	$	112	$	293	$	860	$	1,604	$	—	$	15,346

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 six months. Interest income foregone on non-accrual loans was $4,000 and $5,000 for the six months ended September 30, 2024 and 2023, respectively.

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


							Total
			90 Days				Past
			and				Due and				Total
	30-89 Days		Greater				Non-				Loans
September 30, 2024	Past Due		Past Due		Non-accrual		accrual		Current		Receivable

Commercial business	$	3,063	$	301	$	48	$	3,412	$	233,483	$	236,895
Commercial real estate		3,745		—		68		3,813		569,642		573,455
Land		—		—		—		—		7,274		7,274
Multi-family		—		—		—		—		78,710		78,710
Real estate construction		—		—		—		—		51,498		51,498
Consumer		36		—		33		69		113,076		113,145
Total	$	6,844	$	301	$	149	$	7,294	$	1,053,683	$	1,060,977

March 31, 2024

Commercial business	$	1,778	$	5	$	58	$	1,841	$	227,563	$	229,404
Commercial real estate		—		—		79		79		583,422		583,501
Land		—		—		—		—		5,693		5,693
Multi-family		—		—		—		—		70,771		70,771
Real estate construction		—		—		—		—		36,538		36,538
Consumer		1		—		36		37		98,069		98,106
Total	$	1,779	$	5	$	173	$	1,957	$	1,022,056	$	1,024,013

The increase in the 30-89 days past due loans was primarily related to one loan that is in the probate process. There is a plan in place to bring the loan current after the probate process has been finalized and no losses are expected. Included in the 30-89 days past due loans at September 30, 2024 and March 31, 2024 are $2.1 million and $1.8 million, respectively, of fully guaranteed SBA or United States Department of Agriculture (“USDA”) loans. These government guaranteed loans are classified as pass rated loans and are not considered to be either nonaccrual or classified loans because based on the guarantee, the Company expects to receive all principal and interest according to the contractual terms of the loan agreement and there are no well-defined weaknesses or risk of loss. As a result, these loans were omitted from the required calculation of the ACL for loans. Interest income foregone on non-accrual loans was $4,000 and $10,000 for the six months ended September 30, 2024 and the year ended March 31, 2024, respectively. For additional information, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Comparison of Financial Condition at September 30, 2024 and March 31, 2024 – Asset Quality, discussed below.

At September 30, 2024, the Company had $116,000 of non-accrual loans with no ACL and $33,000 of non-accrual loans with an ACL of $1,000. The amortized cost of collateral dependent loans as of September 30, 2024, were $48,000 and $68,000 for commercial business and commercial real estate, respectively.