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Allowance for Loan Losses

6 Months Ended

Sep. 30, 2013

8. ALLOWANCE FOR LOAN LOSSES

Allowance for loan loss: The allowance for loan losses is maintained at a level sufficient to provide for probable loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon the Company’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 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 18-month periods. The Company calculates and applies its historical loss rates by individual loan types in its 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 and 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 at the time the consolidated financial statements are prepared.

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 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. The Company also considers bank regulatory examination results and findings of credit examiners in its quarterly evaluation of the allowance for loan losses.

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

Three months ended September 30, 2013		Commercial Business			Commercial Real Estate			Land			Multi-Family			Real Estate Construction			Consumer			Unallocated			Total

Beginning balance	$	1,694		$	5,568		$	1,294		$	332		$	239		$	2,633		$	1,937		$	13,697
Provision for (recapture of) loan losses		230			1,317			(479	)		(63	)		(4	)		(896	)		(105	)		-
Charge-offs		(44	)		(98	)		(37	)		-			-			(18	)		-			(197	)
Recoveries		33			-			37			-			-			126			-			196
Ending balance	$	1,913		$	6,787		$	815		$	269		$	235		$	1,845		$	1,832		$	13,696

Six months ended September 30, 2013		Commercial Business			Commercial Real Estate			Land			Multi- Family			Real Estate Construction			Consumer			Unallocated		Total

Beginning balance	$	2,128		$	5,979		$	2,019		$	541		$	221		$	2,949		$	1,806	$	15,643
Provision for (recapture of) loan losses		(333	)		965			(1,678	)		(272	)		17			(1,225	)		26		(2,500	)
Charge-offs		(99	)		(172	)		(45	)		-			(7	)		(156	)		-		(479	)
Recoveries		217			15			519			-			4			277			-		1,032
Ending balance	$	1,913		$	6,787		$	815		$	269		$	235		$	1,845		$	1,832	$	13,696

Three months ended September 30, 2012

Beginning balance	$	2,576		$	7,622		$	3,958		$	945	$	480		$	3,353		$	2,038		$	20,972
Provision for loan losses		20			(99	)		(103	)		4		64			617			(3	)		500
Charge-offs		(367	)		(147	)		(180	)		-		(41	)		(679	)		-			(1,414	)
Recoveries		54			-			-			1		3			24			-			82
Ending balance	$	2,283		$	7,376		$	3,675		$	950	$	506		$	3,315		$	2,035		$	20,140

Six months ended September 30, 2012

Beginning balance	$	2,688		$	5,599		$	4,906		$	1,121		$	412		$	3,274		$	1,921	$	19,921
Provision for loan losses		500			2,859			(208	)		212			206			817			114		4,500
Charge-offs		(991	)		(1,082	)		(1,054	)		(384	)		(116	)		(834	)		-		(4,461	)
Recoveries		86			-			31			1			4			58			-		180
Ending balance	$	2,283		$	7,376		$	3,675		$	950		$	506		$	3,315		$	2,035	$	20,140

The following tables present an analysis of loans receivable and allowance for loan losses, which were evaluated individually and collectively for impairment at the dates indicated (in thousands):

	Allowance for loan losses						Recorded investment in loans
September 30, 2013		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total

Commercial business	$	-	$	1,913	$	1,913	$	1,623	$	68,887	$	70,510
Commercial real estate		532		6,255		6,787		18,121		275,814		293,935
Land		-		815		815		2,001		15,521		17,522
Multi-family		-		269		269		2,532		34,268		36,800
Real estate construction		-		235		235		-		11,850		11,850
Consumer		117		1,728		1,845		3,390		89,136		92,526
Unallocated		-		1,832		1,832		-		-		-
Total	$	649	$	13,047	$	13,696	$	27,667	$	495,476	$	523,143

March 31, 2013

Commercial business	$	-	$	2,128	$	2,128	$	679	$	71,256	$	71,935
Commercial real estate		536		5,443		5,979		19,466		278,225		297,691
Land		-		2,019		2,019		3,469		19,935		23,404
Multi-family		-		541		541		3,846		30,456		34,302
Real estate construction		-		221		221		175		9,500		9,675
Consumer		183		2,766		2,949		4,933		94,072		99,005
Unallocated		-		1,806		1,806		-		-		-
Total	$	719	$	14,924	$	15,643	$	32,568	$	503,444	$	536,012

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 days 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. Payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cash-basis method. 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. Interest income foregone on non-accrual loans was $612,000 and $840,000 during the six months ended September 30, 2013 and 2012, respectively.

The following tables present an analysis of past due loans at the dates indicated (in thousands):

September 30, 2013		30-89 Days Past Due		90 Days and Greater (Non-Accrual)		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing

Commercial business	$	1,071	$	680	$	1,751	$	68,759	$	70,510	$	-
Commercial real estate		2,361		8,212		10,573		283,362		293,935		-
Land		-		1,886		1,886		15,636		17,522		-
Multi-family		103		2,532		2,635		34,165		36,800		-
Real estate construction		-		-		-		11,850		11,850		-
Consumer		761		2,865		3,626		88,900		92,526		-
Total	$	4,296	$	16,175	$	20,471	$	502,672	$	523,143	$	-

March 31, 2013

Commercial business	$	336	$	1,349	$	1,685	$	70,250	$	71,935	$	-
Commercial real estate		6,345		10,315		16,660		281,031		297,691		-
Land		-		3,267		3,267		20,137		23,404		-
Multi-family		-		2,968		2,968		31,334		34,302		-
Real estate construction		-		175		175		9,500		9,675		-
Consumer		2,654		3,059		5,713		93,292		99,005		-
Total	$	9,335	$	21,133	$	30,468	$	505,544	$	536,012	$	-

Credit quality indicators: The Company monitors credit risk in its loan portfolio using a risk rating system 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 financial characteristics. The Company assigns a risk rating to each commercial loan at origination and subsequently updates these ratings, as necessary, so the risk rating continues to reflect the appropriate risk characteristics of the loan. Application of appropriate risk ratings is key to management of the loan portfolio risk. In arriving at the rating, the Company considers the following factors: delinquency, payment history, quality of management, liquidity, leverage, earning 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 loss.

Pass - These loans have 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 strength in other areas. Typically, the operating assets of the company and/or real estate will secure these loans. 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 would typically have many of the attributes of loans in the pass rating. However, there would typically be some reason for additional management oversight, such as recent financial setbacks, deteriorating financial position, industry concerns and failure to perform on other borrowing obligations. Loans with this rating are to be monitored closely in an effort to correct deficiencies.

Special mention – These loans have a risk rating of 6 and are currently protected but have the potential to deteriorate to a “Substandard” rating. The borrower’s financial performance may be inconsistent or below forecast, creating the possibility of liquidity problems and shrinking debt service coverage. The borrower may have a short track record and little depth of management. Other typical characteristics include inadequate current financial information, marginal capitalization, and susceptibility to negative industry trends. The primary source of repayment is still viable but there is increasing reliance on collateral or guarantor support.

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. Such loans are apt 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 may be dependent upon collateral having a 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 to be 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 credit quality indicators at the dates indicated (dollars in thousands):

	September 30, 2013				March 31, 2013
		Weighted-Average Risk Grade		Classified Loans⁽²⁾		Weighted-Average Risk Grade		Classified Loans⁽²⁾

Commercial business		3.64	$	7,235		3.64	$	3,816
Commercial real estate		3.99		31,523		4.02		37,643
Land		4.38		2,065		4.57		4,306
Multi-family		3.49		2,546		3.68		3,846
Real estate construction		3.16		-		3.26		175
Consumer ⁽¹⁾		7.00		2,865		7.00		3,059
Total		3.89	$	46,234		3.96	$	52,845

Total loans risk rated	$	431,238			$	439,587

⁽¹⁾ Consumer loans are primarily evaluated on a homogenous pool level and generally not individually risk rated unless certain factors are met.
⁽²⁾Classified loans consist of substandard, doubtful and loss loans.

Impaired loans: 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 original loan agreement. Typically, factors used in determining if a loan is impaired include, but are not limited to, loans 90 days or more delinquent, loans internally designated as substandard or worse, on non-accrual status or trouble debt restructures (“TDRs”). 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 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 does not have an appraisal performed in the last three months, the Company generally obtains an updated market valuation. Subsequently, the Company generally obtains an updated market valuation on an annual basis. The 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 an analysis of impaired loans at the dates indicated (in thousands):

September 30, 2013		Recorded Investment with No Specific Valuation Allowance		Recorded Investment with Specific Valuation Allowance		Total Recorded Investment		Unpaid Principal Balance		Related Specific Valuation Allowance

Commercial business	$	1,623	$	-	$	1,623	$	1,711	$	-
Commercial real estate		14,824		3,297		18,121		20,140		532
Land		2,001		-		2,001		2,791		-
Multi-family		2,532		-		2,532		2,564		-
Consumer		2,157		1,233		3,390		4,126		117
Total	$	23,137	$	4,530	$	27,667	$	31,332	$	649

March 31, 2013		Recorded Investment with No Specific Valuation Allowance		Recorded Investment with Specific Valuation Allowance		Total Recorded Investment		Unpaid Principal Balance		Related Specific Valuation Allowance

Commercial business	$	679	$	-	$	679	$	944	$	-
Commercial real estate		12,011		7,455		19,466		21,291		536
Land		3,469		-		3,469		4,359		-
Multi-family		3,846		-		3,846		4,802		-
Real estate construction		175		-		175		811		-
Consumer		3,090		1,843		4,933		5,799		183
Total	$	23,270	$	9,298	$	32,568	$	38,006	$	719

	Three Months ended September 30, 2013				Three Months ended September 30, 2012
		Average Recorded Investment		Interest Recognized on Impaired Loans		Average Recorded Investment		Interest Recognized on Impaired Loans

Commercial business	$	1,264	$	19	$	4,212	$	27
Commercial real estate		21,442		117		21,022		86
Land		1,832		1		5,804		24
Multi-family		2,932		-		9,855		46
Real estate construction		84		-		1,674		-
Consumer		3,321		12		4,981		43
Total	$	30,875	$	149	$	47,548	$	226

	Six Months ended September 30, 2013				Six Months ended September 30, 2012
		Average Recorded Investment		Interest Recognized on Impaired Loans		Average Recorded Investment		Interest Recognized on Impaired Loans

Commercial business	$	1,069	$	23	$	5,414	$	70
Commercial real estate		20,783		250		21,623		191
Land		2,378		4		8,611		59
Multi-family		3,237		16		9,325		89
Real estate construction		114		-		3,653		-
Consumer		3,858		23		4,977		60
Total	$	31,439	$	316	$	53,603	$	469

TDRs are loans where 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, 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, when a loan is deemed to be impaired, the amount of the impairment is measured using discounted cash flows using the original note rate, except when the loan is collateral dependent. In these cases, the estimated fair value of the collateral, less selling costs (when applicable) is used. Impairment is recognized as a specific component within the allowance for loan losses if the value of the impaired loan is less than the recorded investment in the loan. When the amount of the impairment represents a confirmed loss, it is charged off against the allowance for loan losses.

The following table presents new TDRs at the dates indicated:

	Six Months Ended September 30, 2013						Six Months Ended September 30, 2012
(Dollars in Thousands)		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial business		-	$	-	$	-	2	$	449	$	430
Commercial real estate ⁽¹⁾		-		-		-	5		9,022		8,671
Land ⁽¹⁾		-		-		-	3		2,340		1,957
Multi-family ⁽¹⁾		1		2,562		2,532	1		3,277		3,081
Consumer		1		43		42	2		1,971		1,702
Total		2	$	2,605	$	2,574	13	$	17,059	$	15,841

⁽¹⁾For the six months ended September 30, 2012, the original loan was a $5.0 million real estate construction loan restructured into one $3.3 million multi-family, one $875,000 commercial real estate and one $800,000 land loan based upon collateral securing the restructured loans.

There were no TDRs recorded in the twelve months prior to September 30, 2013 that defaulted in the six months ended September 30, 2013. There was one TDR loan for a one-to-four family home that was recorded in the twelve months prior to September 30, 2012 that defaulted in the six months ended September 30, 2012. The pre-modification outstanding recorded investment was $453,000 and the amount of the defaulted loan totaled $450,000 at September 30, 2012.

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 will be 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 would result in full repayment of the outstanding loan balance. Once any of these or other potential sources of repayment are exhausted the impaired portion of the loan is charged-off, unless an updated valuation of the collateral reveals no impairment. 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.