Note 9 - Loans

3 Months Ended

Jun. 30, 2011

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

(9) Loans

The Bank monitors and assesses the credit risk of its loan portfolio using the classes set forth below.  These classes also represent the segments by which the Bank monitors the performance of its loan portfolio and estimates its allowance for loan losses.

Residential real estate loans consist of loans secured by one to four family residences located in the Bank’s market area.  The Bank has originated one to four family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property without requiring mortgage insurance.  A mortgage loan originated by the Bank, for owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 30 years.  Non-owner occupied property, whether fixed rate or adjustable rate, can have a term of up to 30 years.  Adjustable rate loan terms limit the periodic interest rate adjustment and the minimum and maximum rates that may be charged over the term of the loan based on the type of loan.

Commercial real estate loans are generally originated in amounts up to the lower of 80% of the appraised value or cost of the property and are secured by improved property such as multi-family dwelling units, office buildings, retail stores, warehouses, church buildings and other non-residential buildings, most of which are located in the Bank’s market area.  Commercial real estate loans are generally made with fixed interest rates which mature or reprice in 5 to 7 years with principal amortization of up to 25 years.

Commercial loans include short and long-term business loans and commercial lines of credit for the purposes of providing working capital, supporting accounts receivable, purchasing inventory and acquiring fixed assets.  The loans generally are secured by these types of assets as collateral and /or by personal guarantees provided by principals of the borrowers.

Construction loans will be made only if there is a permanent mortgage commitment in place.  Interest rates on commercial construction loans are typically in line with normal commercial mortgage loan rates, while interest rates on residential construction loans are slightly higher than normal residential mortgage loan rates.  These loans usually are adjustable rate loans and generally have terms of up to one year.

Consumer loans include installment loans and home equity loans, secured by first or second mortgages on homes owned or being purchased by the loan applicant.  Home equity term loans and credit lines are credit accommodations secured by either a first or second mortgage on the borrower’s residential property.  Interest rates charged on home equity term loans are generally fixed; interest on credit lines is usually a floating rate related to the prime rate.  The Bank generally requires a loan to value ratio of less than or equal to 80% of the appraised value, including any outstanding prior mortgage balance.

Loans at June 30, 2011 and March 31, 2011 are summarized as follows (dollars in thousands):

	June 30,			March 31,
	2011			2011
Residential (one-to four-family) real estate	$	64,870		$	62,875
Multi-family and commercial real estate		21,763			21,866
Commercial		1,535			1,736
Home equity		17,441			17,347
Consumer		958			1,026
Construction		376			374
Total loans		106,943			105,224
Net deferred loan origination fees		(66	)		(71	)
Allowance for loan losses		(1,366	)		(1,286	)
		(1,432	)		(1,357	)
Loans, net	$	105,511		$	103,867

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds.  At June 30, 2011, the loans-to-one-borrower limitation was $1.81 million; this excluded an additional 10% of adjusted capital funds or approximately $1.2 million, which may be loaned if collateralized by readily marketable securities.  At June 30, 2011, there were no loans outstanding or committed to any one borrower, which individually or in the aggregate exceeded the Bank’s loans to-one-borrower limitations of 15% of capital funds.

A summary of the Bank’s credit quality indicators is as follows:

Pass – A credit which is assigned a rating of Pass shall exhibit some or all of the following characteristics:

a. Loans that present an acceptable degree of risk associated with the financing being considered as measured against earnings and balance sheet trends, industry averages, etc.  Actual and projected indicators and market conditions provide satisfactory evidence that the credit will perform as agreed.

b. Loans to borrowers that display acceptable financial conditions and operating results.  Debt service capacity is demonstrated and future prospects are considered good.

c. Loans to borrowers where a comfort level is achieved by the strength of the cash flows from the business or project and the strength and quantity of the collateral or security position (i.e.; receivables, inventory and other readily marketable securities) as supported by a current valuation and/or the strong capabilities of a guarantor.

Special Mention – Loans on which the credit risk requires more than ordinary attention by the Loan Officer.  This may be the result of some erosion in the borrower’s financial condition, the economics of the industry, the capability of management, or changes in the original transaction.  Loans which are currently sound yet exhibit potentially unacceptable credit risk or deteriorating long term prospects, will receive this classification.  Loans which deviate from loan policy or regulations will not generally be classified in this category, but will be separately reported as an area of concern.

Classified – Classified loans include those considered by the Bank to be substandard, doubtful or loss.

An asset is considered “substandard” if it involves more than an acceptable level of risk due to a deteriorating financial condition, unfavorable history of the borrower, inadequate payment capacity, insufficient security or other negative factors within the industry, market or management.  Substandard loans have clearly defined weaknesses which can jeopardize the timely payment of the loan.

Assets classified as “doubtful” exhibit all of the weaknesses defined under the substandard category but with enough risk to present a high probability of some principal loss on the loan, although not yet fully ascertainable in amount.

Assets classified as “loss” are those considered uncollectible or of little value, even though a collection effort may continue after the classification and potential charge-off.

Non-Performing Loans

Non-performing loans consist of non-accrual loans (loans on which the accrual of interest has ceased), loans over ninety days delinquent and still accruing interest, renegotiated loans and impaired loans.  Loans are generally placed on non-accrual status if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more, unless the collateral is considered sufficient to cover principal and interest and the loan is in the process of collection.

The following table represents loans by credit quality indicator at June 30, 2011 (dollars in thousands):

	Pass		Special Mention Loans		Classified Loans		Non- Performing Loans		Total
Residential real estate	$	62,587	$	-	$	-	$	2,283	$	64,870
Multi-family and commercial real estate		14,129		2,023		3,012		2,599		21,763
Commercial		1,197		258		34		46		1,535
Home equity		16,013		-		-		1,428		17,441
Consumer		958		-		-		-		958
Construction		376		-		-		-		376
	$	95,260	$	2,281	$	3,046	$	6,356	$	106,943

The following table represents past-due loans as of June 30, 2011 (dollars in thousands):

	30-89 Days Past Due and Still Accruing			90 Days or More Past Due and Still Accruing			Total Past Due and Still Accruing			Accruing Current Balances			Non-Accrual Balances			Total Loan Balances
Residential real estate	$	916		$	-		$	916		$	61,732		$	2,222		$	64,870
Multi-family and commercial real estate		1,765			-			1,765			17,327			2,598			21,690
Commercial		299			-			299			1,263			46			1,608
Home Equity		175			-			175			15,838			1,428			17,441
Consumer		11			-			11			947			-			958
Construction		-			-			-			376			-			376
Total Loans	$	3,166		$	-		$	3,166		$	97,483		$	6,294		$	106,943
Percentage of Total Loans		2.96	%		N/A	%		2.96	%		91.15	%		5.89	%		100.0	%

Impaired loans are measured based on the present value of expected future discounted cash flows, the fair value of the loan or the fair value of the underlying collateral if the loan is collateral dependent.  The recognition of interest income on impaired loans is the same for non-accrual loans discussed above.  At June 30, 2011, the Bank had 26 loan relationships totaling $6.3 million in non-accrual loans as compared to 23 relationships totaling $5.5 million at March 31, 2011.  At June 30, 2011, the Bank had 26 impaired loan relationships totaling $6.2 million (included within the non-accrual loans discussed above) in which $2.9 million in impaired loans had a related allowance for credit losses of $579 thousand and $3.2 million in impaired loans in which there is no related allowance for credit losses.  The average balance of impaired loans totaled $6.4 million for the three months ended June 30, 2011 as compared to $5.4 million for the year ended March 31, 2011, and interest income recorded on impaired loans for the three months ended June 30, 2011 totaled $19 thousand as compared to $154 thousand for the year ended March 31, 2011.

The following table represents data on impaired loans at June 30, 2011 and March 31, 2011 (dollars in thousands):

	June 30, 2011		March 31, 2011
Impaired loans for which a valuation allowance has been provided	$	2,948	$	2,882
Impaired loans for which no valuation allowance has been provided		3,408		2,576
Total loans determined to be impaired	$	6,356	$	5,458
Allowance for loans losses related to impaired loans	$	579	$	502
Average recorded investment in impaired loans	$	6,355	$	5,445
Cash basis interest income recognized on impaired Loans	$	19	$	154

The following table presents impaired loans by portfolio class at June 30, 2011 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Recorded Investment		Interest Income Recognized While On Impaired Status
Impaired loans with a valuation allowance:
Residential real estate	$	1,060	$	1,060	$	211	$	1,058	$	-
Multi-family and commercial real estate		1,439		1,439		294		1,439		-
Commercial		46		46		46		46		-
Home equity		403		403		28		403		-
Consumer		-		-		-		-		-
Construction		-		-		-		-		-
Subtotal	$	2,948	$	2,948	$	579	$	2,946	$	-

	Recorded Investment		Unpaid Principal Balance		Related Valuation Allowance		Average Recorded Investment		Interest Income Recognized While On Impaired Statues
Impaired loans with no valuation allowance:
Residential real estate	$	1,223	$	1,223	$	-	$	1,223	$	5
Multi-family and commercial real estate		1,160		1,160		-		1,160		9
Commercial		-		-		-		-		-
Home equity		1,025		1,025		-		1,025		5
Consumer		-		-		-		-		-
Construction		-		-		-		-		-
Subtotal	$	3,408	$	3,408	$	-	$	3,408	$	19

	June 30, 2011			March 31, 2011
Non-accrual loans:
Residential real estate		2,283			1,779
Multi-family and commercial real estate		2,599			2,374
Commercial		46			46
Consumer		-			11
Home Equity		1,428			1,194
Construction		-			-
Total non-accrual loans		6,356			5,404
Impaired loans		2,361			2,438
Total non-performing loans		8,717			7,842
Real estate owned		369			771
Total non-performing assets		9,086		$	8,613
Non-performing loans as a percentage of loans		8.12	%		7.24	%
Non-performing assets as a percentage of loans and real estate owned		8.47	%		8.19	%
Non-performing assets as percentage of total assets		6.67	%		6.33	%

During the three months ended June 30, 2011, the Bank experienced an $952 thousand net increase in non-accrual loans.  This change reflects the downgrading of five loan relationships to non-accrual status totaling $900 thousand during the three months ended June 30, 2011.  The downgraded loans consisted of four relationships representing residential mortgage and home equity loans totaling $720 thousand, two commercial relationships representing two loans totaling $225 thousand, partially offset by the return of one loan relationship consisting of one loan totaling $3 thousand to an accruing basis and by total charge offs of one loan relationship representing one loan in the amount of $8 thousand

The following table sets forth with respect to the Bank’s allowance for losses on loans (dollars in thousands):

	June 30, 2011			March 31, 2011
Balance at beginning of period	$	1,286		$	998
Provision:
Commercial		-			21
Commercial real estate		92			(2	)
Residential real estate		(9	)		413
Consumer		(8	)		8
Total Provision	$	75		$	440

	June 30, 2011			March 31, 2011
Charge-Offs:
Commercial		-			143
Residential real estate		-			31
Consumer		8			32
Recoveries		(13	)		(54	)
Total Net Charge-Offs		(5	)		152
Balance at end of period	$	1,366		$	1,286
Period-end loans outstanding	$	106,943		$	105,225
Average loans outstanding	$	105,240		$	105,400
Allowance as a percentage of period-end loans		1.28	%		1.22	%
Net charge-offs as a percentage of average loans		0.0	%		0.15	%

Additional details for changes in the allowance for loan by loan portfolio as of June 30, 2011 are as follows (dollars in thousands):

Allowance for Loan Losses

	Commercial		Commercial Real Estate		Residential Real Estate			Consumer			Total
Balance, beginning of year	$	70	$	596	$	508		$	112		$	1,286
Loan charge-offs									(8	)		(8	)
Recoveries		13										13
Provision for loan losses				92		(9	)		(8	)		75
Balance, end of year	$	83	$	688	$	499		$	96		$	1,366

The Bank prepares an allowance for loan loss model on a quarterly basis to determine the adequacy of the allowance.  Management considers a variety of factors when establishing the allowance, such as the impact of current economic conditions, diversification of the loan portfolio, delinquency statistics, results of independent loan review and related classifications.  The Bank’s historic loss rates and the loss rates of peer financial institutions are also considered.  In evaluating the Bank’s allowance for loan loss, the Bank maintains a loan committee consisting of senior management and the Board of Directors that monitors problem loans and formulates collection efforts and resolution plans for each borrower.  On a monthly basis, the loan committee meets to review each problem loan and determine if there has been any change in collateral value due to changes in market conditions.  Each quarter, when calculating the allowance for loan loss, the loan committee reviews an updated loan impairment analysis on each problem loan to determine if a specific provision for loan loss is warranted.  Management reviews the most recent appraisal on each loan adjusted for holding and selling costs.  In the event there is not a recent appraisal on file, the Bank will use the aged appraisal and apply a discount factor to the appraisal and then adjust the holding and selling costs from the discounted appraisal value.  At June 30, 2011, the Bank maintained an allowance for loan loss ratio of 1.28% to quarter end loans outstanding.  On a linked basis, non-performing assets have increased by $473 thousand over their stated levels at March 31, 2011 representing a non-performing asset to total asset ratio of 6.67% at June 30, 2011 as compared to a non-performing asset to total asset ratio of 6.33% at March 31, 2011.

The Bank’s charge-off policy states that any asset classified loss shall be charged-off within thirty days of such classification unless the asset has already been eliminated from the books by collection or other appropriate entry.  On a quarterly basis, the loan committee will review past due, classified, non-performing and other loans, as it deems appropriate, to determine the collectability of such loans.  If the loan committee determines a loan to be uncollectable, the loan shall be charged to the allowance for loan loss.  In addition, upon reviewing the collectability, the loan committee may determine a portion of the loan to be uncollectable; in which case that portion of the loan deemed uncollectable will be partially charged-off against the allowance for loan loss.

For the quarter ending June 30, 2011, the Bank experienced one charge-off relating to one loan relationship totaling $8 thousand as compared to charge-offs of 11 loans representing 11 relationships totaling $206 thousand for the year ended March 31, 2011.