Note 9 - Loans

3 Months Ended

Jun. 30, 2013

Receivables [Abstract]

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 re-price 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, 2013 and March 31, 2013 are summarized as follows (dollars in thousands):

	June 30, 2013			March 31, 2013
Residential (one-to four-family) real estate		65,278			66,598
Multi-family and commercial real estate		11,512			12,402
Commercial		1,120			1,166
Home equity		8,338			8,361
Consumer		922			960
Construction		50			83
Total loans		87,220			89,570
Net deferred loan origination fees		(113	)		(118	)
Allowance for loan losses		(1,023	)		(1,033	)
Loans, net		86,084			88,419

The Bank is subject to a loans-to-one-borrower limitation of 15% of capital funds. At June 30, 2013, the loans-to-one-borrower limitation was $1.7 million; this excluded an additional 10% of adjusted capital funds or approximately $1.1 million, which may be loaned if collateralized by readily marketable securities. At June 30, 2013, 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, 2013 (dollars in thousands):

	Pass		Special Mention Loans		Classified Loans		Non- Performing Loans		Total
Residential real estate	$	62,635	$	304	$	145	$	2,194	$	65,278
Multi-family and commercial real estate		7,558		172		464		3,318		11,512
Commercial		649		251		34		186		1,120
Home equity		8,289		─		─		49		8,338
Consumer		922		─		─		─		922
Construction		─		─		─		50		50
	$	80,053	$	727	$	643	$	5,797	$	87,220

The following table represents past-due loans as of June 30, 2013 (dollars in thousands):

	30-59 Days Past Due			60- 89 Days Past Due			Greater than 90 Days Past Due			Total Past Due			Current			Total Loan Balances
Residential real estate	$	1,223		$	800		$	1,443		$	3,466		$	61,812		$	65,278
Multi-family and commercial real estate		525			609			2,183			3,317			8,195			11,512
Commercial		─			─			186			186			934			1,120
Home Equity		128			─			49			177			8,161			8,338
Consumer		17			6			─			23			899			922
Construction		─			─			─			─			50			50
Total Loans	$	1,893		$	1,415		$	3,861		$	7,169		$	80,051		$	87,220
Percentage of Total Loans		2.17	%		1.62	%		4.43	%		8.22	%		91.78	%		100.00	%

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, 2013, the Bank had 21 loan relationships totaling $3.9 million in non-accrual loans as compared to 25 relationships totaling $4.4 million at March 31, 2013. The average balance of impaired loans totaled $6.0 million for the three months ended June 30, 2013 as compared to $7.2 million for the year ended March 31, 2013, and interest income recorded on impaired loans for the three months ended June 30, 2013 totaled $42 thousand as compared to $168 thousand for the year ended March 31, 2013.

The following table represents data on impaired loans at June 30, 2013 and March 31, 2013 (dollars in thousands):

	June 30, 2013		March 31, 2013
Impaired loans for which a valuation allowance has been provided	$	─	$	─
Impaired loans for which no valuation allowance has been provided		5,797		6,346
Total loans determined to be impaired	$	5,797	$	6,346
Allowance for loans losses related to impaired loans	$	─	$	─
Average recorded investment in impaired loans	$	6,087	$	7,245
Cash basis interest income recognized on impaired Loans	$	42	$	168

The following table presents impaired loans by portfolio class at June 30, 2013 (dollars in thousands):

	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	$	2,233	$	2,194	$	─	$	2,372	$	25
Multi-family and commercial real estate		3,317		3,318		─		3,319		16
Commercial		186		186		─		219		─
Home equity		49		49		─		127		─
Consumer				─		─				─
Construction		50		50		─		50		1
Subtotal	$	5,835	$	5,797	$	─	$	6,087	$	42

The following table presents impaired loans by portfolio class at March 31, 2013) (dollars in thousands):

	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	$	2,255	$	2,223	$	─	$	2,774	$	83
Multi-family and commercial real estate		3,550		3,550		─		4,106		62
Commercial		235		235		─		172		8
Home equity		287		287		─		138		11
Consumer		─		─		─		3		─
Construction		51		51		─		52		4
Subtotal	$	6,378	$	6,346	$	─	$	7,245	$	168

The following table represents nonaccrual loans as of June 30, 2013 and March 31, 2013 (dollars in thousands):

	June 30, 2013			March 31, 2013
Non-accrual loans:
Residential real estate	$	894		$	992
Multi-family and commercial real estate		1,187			1,302
Commercial		186			235
Consumer	─			─
Home Equity		49			287
Construction	─			─
Total non-accrual loans	$	2,316		$	2,816
Troubled Debt Restructurings:
In non-accrual status:
Residential real estate	$	549		$	550
Multi-family and commercial real estate		996			1,001
Commercial	─			─
Consumer	─			─
Home Equity	─			─
Construction	─			─
Total troubled debt restructurings in non-accrual status	$	1,545		$	1,551
Performing under modified terms:
Residential real estate		751			788
Multi-family and commercial real estate		1,135			1,139
Commercial	─			─
Consumer	─			─
Home Equity	─			─
Construction		50			51
Total troubled debt restructurings performing under modified terms:		1,936			1,978
Total troubled debt restructurings		3,481			3,529
Total non-performing loans		5,797			6,345
Real estate owned		2,156			2,470
Total non-performing assets	$	7,953		$	8,815
Non-performing loans as a percentage of loans		6.65	%		7.08	%
Non-performing assets as a percentage of loans and real estate owned		8.91	%		9.58	%
Non-performing assets as percentage of total assets		6.11	%		6.81	%

During the three months ended June 30, 2013, the Bank experienced a $506 thousand net decrease in non-accrual loans. This change reflects the downgrading of two loan relationships to non-accrual status totaling $85 thousand during the three months ended June 30, 2013. The downgraded loans consisted of one residential mortgage totaling $77 thousand and one home equity loan totaling $8 thousand. These additions to the non-accruals were offset by one residential mortgage for $140 thousand and one home equity loan in the amount of $463 that were paid in full, two home equity loans totaling $245 thousand that returned to accruing status, a residential mortgage loan totaling $145 thousand that was paid through a short sale, two commercial real estate loans that were partially charged off by $10 thousand due to valuation updates and one commercial loan totaling $49 thousand that was charged off.

The following table presents troubled debt restructurings that occurred during the periods ended June 30, 2013 and March 31, 2013 and loans modified as troubled debt restructurings within the previous three and 12 month period and for which there was a payment default during the period.

June 30, 2013

March 31, 2013

Outstanding Recorded Investment

Outstanding Recorded Investment

Number of Contracts

Pre- Modification

Post- Modification

Number of Contracts

Pre- Modification

Post- Modification

Troubled debt restructurings:

Residential real estate

─

$

─

$

─

2

$

339

$

486

	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Troubled debt restructurings that subsequently defaulted:
Residential real estate		─	$	─		1	$	75

The following table presents the changes in real estate owned (REO), net of valuation allowance, for the periods ended June 30, 2013 and March 31, 2013:

	June 30, 2013			March 31, 2013
Balance, beginning of period	$	2,470		$	846
Additions from loan foreclosures		─			2,650
Additions from capitalized costs		─			3
Dispositions of REO		(280	)		(820	)
Gain (loss) on sale of REO		(34	)		(152	)
Valuation adjustments in the period		─			(57	)
Balance, end of period	$	2,156		$	2,470

The following table presents the changes in fair value adjustments to REO for the periods ended June 30, 2013 and March 31, 2013:

	June 30, 2013			March 31, 2013
Balance, beginning of period	$	72		$	104
Valuation adjustments added in the period		─			57
Valuation adjustments on disposed properties during the period		(7	)		(89	)
Balance, end of period	$	65		$	72

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

	June 30, 2013			March 31, 2013
Balance at beginning of period	$	1,033		$	1,161
Provision:
Commercial		50			4
Commercial real estate		13			587
Residential real estate		36			20
Home Equity		1			19
Consumer		(9	)		14
Construction		(1	)		(4	)
Total Provision	$	90		$	640
Charge-Offs:
Commercial	$	49		$	─
Commercial Real Estate		10			686
Residential real estate		46			27
Home Equity		─			29
Consumer		─			66
Recoveries		(6	)		(40	)
Total Net Charge-Offs		99			768
Balance at end of period	$	1,024		$	1,033
Period-end loans outstanding	$	87,220		$	89,570
Average loans outstanding	$	89,667		$	95,122
Allowance as a percentage of period-end loans		1.17	%		1.15	%
Net charge-offs as a percentage of average loans		0.11	%		0.81	%

Additional details for changes in the allowance for loan by loan portfolio as of June 30, 2013 are as follows (dollars in thousands):

Allowance for Loan Losses

	Commercial			Commercial Real Estate			Residential Real Estate			Home  Equity		Consumer			Construction			Total
Balance, beginning of year	$	44		$	378		$	485		$	48	$	77		$	1		$	1,033
Loan charge-offs		(49	)		(10	)		(46	)		─		─			─			(105	)
Recoveries		─			1			─			─		5			─			6
Provision for loan losses		50			13			36			1		(9	)		(1	)		90
Balance, end of period	$	45		$	382		$	475		$	49	$	73		$	─		$	1,024
Ending balance for loans individually evaluated for impairment	$	186		$	2,182		$	2,364		$	49	$	─		$	─		$	4,781
Ending balance for loans collectively evaluated for impairment	$	934		$	9,330		$	62,914		$	8,289	$	922		$	50		$	82,439
Loans receivable:
Ending balance	$	1,120		$	11,512		$	65,278		$	8,338	$	922		$	50		$	87,220
Ending balance: loans individually evaluated for impairment	$	186		$	2,182		$	2,364		$	49	$	─		$	─		$	4,781
Ending balance: loans collectively evaluated for impairment	$	934		$	9,330		$	62,914		$	8,289	$	922		$	50		$	82,439

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.

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.

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.

For the three months ending June 30, 2013, the Bank experienced one full charge-off relating to one loan relationship totaling $49 thousand and three partial charge-offs related to two relationships totaling $56 thousand as compared to two charge-offs relating to two loan relationships totaling $66,510 and twelve partial charge-offs relating to twelve loan relationships totaling $741,699 for the year ended March 31, 2013.

At June 30, 2013, the Bank maintained an allowance for loan loss ratio of 1.17% to loans outstanding. Non-performing assets have decreased by $863 thousand over their stated levels at March 31, 2013, representing a non-performing asset to total asset ratio of 6.11% at June 30, 2013 as compared to a non-performing asset to total asset ratio of 6.81% at March 31, 2013.

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.