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Allowance For Loan Losses | 12 Months Ended
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Mar. 31, 2012
Allowance For Loan Losses: |
Allowance For Loan Losses |
6. | ALLOWANCE FOR LOAN LOSSES
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 or observable market price, 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. An unallocated component is maintained to cover uncertainties that the Company believes have resulted in losses that have not yet been allocated to specific elements of the general component. 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. Commercial business, commercial real estate, construction and land acquisition and development loans are considered to have a higher degree of credit risk than one-to-four family residential loans, and tend to be more vulnerable to adverse conditions in the real estate market and deteriorating economic conditions. While the Company believes the estimates and assumptions used in its determination of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, that the actual amount of future provisions will not exceed the amount of past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, bank regulators periodically review the Company’s allowance and may require the Company to increase its provision for loan losses or recognize additional loan charge-offs. An increase in the Company’s allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on its financial condition and results of operations. 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 internal credit examiners in its quarterly evaluation of the allowance for loan losses. Management’s recent analysis of the allowance has placed greater emphasis on the Company’s construction and land development loan portfolios and the effect of various factors such as geographic and loan type concentrations. The Company has focused on managing these portfolios in an attempt to minimize the effects of declining home values and slower home sales in its market areas. The following tables present a reconciliation of the allowance for loan losses at the dates indicated (in thousands):
March 31, 2012 |  | Commercial Business |  |  | Commercial Real Estate |  |  | Land |  |  | Multi-Family |  |  | Real Estate Construction |  |  | Consumer |  |  | Unallocated |  |  | Total |
Beginning balance | $ | 1,822 |  | $ | 4,744 |  | $ | 2,003 |  | $ | 2,172 |  | $ | 820 |  | $ | 1,339 |  | $ | 2,068 |  | $ | 14,968 |
Provision for loan losses |  | 3,638 |  |  | 3,681 |  |  | 13,692 |  |  | 2,126 |  |  | 1,690 |  |  | 4,670 |  |  | (147 | ) |  | 29,350 |
Charge-offs |  | (2,801 | ) |  | (2,826 | ) |  | (10,892 | ) |  | (3,177 | ) |  | (2,101 | ) |  | (2,750 | ) |  | - |  |  | (24,547 | )
Recoveries |  | 29 |  |  | - |  |  | 103 |  |  | - |  |  | 3 |  |  | 15 |  |  | - |  |  | 150 |
Ending balance | $ | 2,688 |  | $ | 5,599 |  | $ | 4,906 |  | $ | 1,121 |  | $ | 412 |  | $ | 3,274 |  | $ | 1,921 |  | $ | 19,921 |
March 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 3,181 |  | $ | 4,592 |  | $ | 5,013 |  | $ | 423 |  | $ | 5,137 |  | $ | 1,574 |  | $ | 1,722 |  | $ | 21,642 |
Provision for loan losses |  | 1,005 |  |  | 414 |  |  | 1,101 |  |  | 1,749 |  |  | 5 |  |  | 455 |  |  | 346 |  |  | 5,075 |
Charge-offs |  | (2,371 | ) |  | (263 | ) |  | (4,141 | ) |  | - |  |  | (4,329 | ) |  | (703 | ) |  | - |  |  | (11,807 | )
Recoveries |  | 7 |  |  | 1 |  |  | 30 |  |  | - |  |  | 7 |  |  | 13 |  |  | - |  |  | 58 |
Ending balance | $ | 1,822 |  | $ | 4,744 |  | $ | 2,003 |  | $ | 2,172 |  | $ | 820 |  | $ | 1,339 |  | $ | 2,068 |  | $ | 14,968 |
March 31, 2010 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance | $ | 2,668 |  | $ | 3,529 |  | $ | 2,594 |  | $ | 352 |  | $ | 4,592 |  | $ | 1,209 |  | $ | 2,030 |  | $ | 16,974 |
Provision for loan losses |  | 2,973 |  |  | 1,099 |  |  | 6,219 |  |  | 71 |  |  | 4,206 |  |  | 1,640 |  |  | (308 | ) |  | 15,900 |
Charge-offs |  | (2,466 | ) |  | (36 | ) |  | (3,800 | ) |  | - |  |  | (3,737 | ) |  | (1,282 | ) |  | - |  |  | (11,321 | )
Recoveries |  | 6 |  |  | - |  |  | - |  |  | - |  |  | 76 |  |  | 7 |  |  | - |  |  | 89 |
Ending balance | $ | 3,181 |  | $ | 4,592 |  | $ | 5,013 |  | $ | 423 |  | $ | 5,137 |  | $ | 1,574 |  | $ | 1,722 |  | $ | 21,642 |
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 |
March 31, 2012 |  | Individually Evaluated for Impairment |  |  | Collectively Evaluated for Impairment |  |  | Total |  |  | Individually Evaluated for Impairment |  |  | Collectively Evaluated for Impairment |  |  | Total |
Commercial business | $ | 73 |  | $ | 2,615 |  | $ | 2,688 |  | $ | 7,818 |  | $ | 79,420 |  | $ | 87,238 |
Commercial real estate |  | 686 |  |  | 4,913 |  |  | 5,599 |  |  | 22,824 |  |  | 330,256 |  |  | 353,080 |
Land |  | 624 |  |  | 4,282 |  |  | 4,906 |  |  | 14,226 |  |  | 24,662 |  |  | 38,888 |
Multi-family |  | 4 |  |  | 1,117 |  |  | 1,121 |  |  | 8,265 |  |  | 34,530 |  |  | 42,795 |
Real estate construction |  | 18 |  |  | 394 |  |  | 412 |  |  | 7,613 |  |  | 18,178 |  |  | 25,791 |
Consumer |  | 197 |  |  | 3,077 |  |  | 3,274 |  |  | 4,967 |  |  | 132,050 |  |  | 137,017 |
Unallocated |  | - |  |  | 1,921 |  |  | 1,921 |  |  | - |  |  | - |  |  | - |
Total | $ | 1,602 |  | $ | 18,319 |  | $ | 19,921 |  | $ | 65,713 |  | $ | 619,096 |  | $ | 684,809 |
March 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial business | $ | 207 |  | $ | 1,615 |  | $ | 1,822 |  | $ | 3,382 |  | $ | 82,129 |  | $ | 85,511 |
Commercial real estate |  | 59 |  |  | 4,685 |  |  | 4,744 |  |  | 8,976 |  |  | 355,712 |  |  | 364,688 |
Land |  | - |  |  | 2,003 |  |  | 2,003 |  |  | 2,695 |  |  | 52,563 |  |  | 55,258 |
Multi-family |  | 1,779 |  |  | 393 |  |  | 2,172 |  |  | 8,000 |  |  | 34,009 |  |  | 42,009 |
Real estate construction |  | - |  |  | 820 |  |  | 820 |  |  | 4,206 |  |  | 23,179 |  |  | 27,385 |
Consumer |  | - |  |  | 1,339 |  |  | 1,339 |  |  | - |  |  | 112,726 |  |  | 112,726 |
Unallocated |  | - |  |  | 2,068 |  |  | 2,068 |  |  | - |  |  | - |  |  | - |
Total | $ | 2,045 |  | $ | 12,923 |  | $ | 14,968 |  | $ | 27,259 |  | $ | 660,318 |  | $ | 687,577 |
Changes in the allowance for unfunded loan commitments were as follows (in thousands):
| Year Ended March 31, |
| 2012 |  | 2011 |  | 2010 |
Beginning balance | $ | 166 |  | $ | 185 |  | $ | 296 |
Net change in allowance for unfunded loan commitments |  | 51 |  |  | (19 | ) |  | (111 | )
Ending balance | $ | 217 |  | $ | 166 |  | $ | 185 |
Non-accrual loans: The following tables present an analysis of past due loans at the dates indicated (in thousands):
March 31, 2012 |  | 30-89 Days Past Due |  |  | Greater Than 90 Days (Non-Accrual) |  |  | Total Past Due |  |  | Current |  |  | Total Loans Receivable |  |  | Recorded Investment > 90 Days and Accruing
Commercial business | $ | 535 |  | $ | 3,930 |  | $ | 4,465 |  | $ | 82,773 |  | $ | 87,238 |  | $ | -
Commercial real estate |  | 5,733 |  |  | 13,950 |  |  | 19,683 |  |  | 333,397 |  |  | 353,080 |  |  | -
Land |  | 128 |  |  | 12,985 |  |  | 13,113 |  |  | 25,775 |  |  | 38,888 |  |  | -
Multi-family |  | - |  |  | 1,627 |  |  | 1,627 |  |  | 41,168 |  |  | 42,795 |  |  | -
Real estate construction |  | - |  |  | 7,756 |  |  | 7,756 |  |  | 18,035 |  |  | 25,791 |  |  | -
Consumer |  | 2,453 |  |  | 3,915 |  |  | 6,368 |  |  | 130,649 |  |  | 137,017 |  |  | -
Total | $ | 8,849 |  | $ | 44,163 |  | $ | 53,012 |  | $ | 631,797 |  | $ | 684,809 |  | $ | -
March 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial business | $ | 1,415 |  | $ | 2,871 |  | $ | 4,286 |  | $ | 81,225 |  | $ | 85,511 |  | $ | -
Commercial real estate |  | 2,112 |  |  | 1,385 |  |  | 3,497 |  |  | 361,191 |  |  | 364,688 |  |  | -
Land |  | - |  |  | 2,904 |  |  | 2,904 |  |  | 52,354 |  |  | 55,258 |  |  | -
Multi-family |  | - |  |  | - |  |  | - |  |  | 42,009 |  |  | 42,009 |  |  | -
Real estate construction |  | - |  |  | 4,206 |  |  | 4,206 |  |  | 23,179 |  |  | 27,385 |  |  | -
Consumer |  | 4,271 |  |  | 957 |  |  | 5,228 |  |  | 107,498 |  |  | 112,726 |  |  | -
Total | $ | 7,798 |  | $ | 12,323 |  | $ | 20,121 |  | $ | 667,456 |  | $ | 687,577 |  | $ | -
Interest income foregone on non-accrual loans was $2.3 million, $1.9 million and $2.8 million for the years ended March 31, 2012, 2011 and 2010, respectively. 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):
| March 31, 2012 |  |  | March 31, 2011
|  | Weighted- Average Risk Grade |  |  | Classified Loans (2) |  |  |  | Weighted- Average Risk Grade |  |  | Classified Loans (2)
Commercial Business |  | 3.97 |  | $ | 13,456 |  |  |  | 4.00 |  | $ | 4,920
Commercial Real Estate |  | 3.88 |  |  | 35,077 |  |  |  | 3.66 |  |  | 8,909
Land |  | 5.60 |  |  | 17,560 |  |  |  | 5.00 |  |  | 8,818
Multi-Family |  | 4.06 |  |  | 8,265 |  |  |  | 4.06 |  |  | 4,679
Real estate Construction |  | 4.51 |  |  | 7,756 |  |  |  | 4.96 |  |  | 8,106
Consumer (1) |  | 7.00 |  |  | 3,915 |  |  |  | 7.00 |  |  | 957
Total |  | 4.08 |  | $ | 86,029 |  |  |  | 3.93 |  | $ | 36,389
Total loans risk rated | $ | 550,174 |  |  |  |  |  | $ | 573,506 |  |  |
(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 includes loans under the credit quality indicator categories of substandard, doubtful and loss
Impaired loans: The following tables present an analysis of impaired loans at the dates indicated (in thousands):
March 31, 2012 |  | Recorded Investment with No Specific Valuation Allowance |  |  | Recorded Investment with Specific Valuation Allowance |  |  | Total Recorded Investment |  |  | Unpaid Principal Balance |  | Related Specific Valuation Allowance |  |  | Average Recorded Investment
Commercial business | $ | 4,790 |  | $ | 3,028 |  | $ | 7,818 |  | $ | 10,477 |  | 73 |  | $ | 6,400
Commercial real estate |  | 12,704 |  |  | 10,120 |  |  | 22,824 |  |  | 25,359 |  | 686 |  |  | 17,102
Land |  | 10,365 |  |  | 3,861 |  |  | 14,226 |  |  | 17,989 |  | 624 |  |  | 13,339
Multi-family |  | 7,825 |  |  | 440 |  |  | 8,265 |  |  | 9,189 |  | 4 |  |  | 8,254
Real estate construction |  | 7,009 |  |  | 604 |  |  | 7,613 |  |  | 13,796 |  | 18 |  |  | 6,700
Consumer |  | 2,842 |  |  | 2,125 |  |  | 4,967 |  |  | 6,880 |  | 197 |  |  | 1,584
Total | $ | 45,535 |  | $ | 20,178 |  | $ | 65,713 |  | $ | 83,690 |  | 1,602 |  | $ | 53,379
March 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial business | $ | 1,024 |  | $ | 2,358 |  | $ | 3,382 |  | $ | 5,562 |  | 207 |  | $ | 5,593
Commercial real estate |  | 750 |  |  | 8,226 |  |  | 8,976 |  |  | 9,221 |  | 59 |  |  | 9,979
Land |  | 2,695 |  |  | - |  |  | 2,695 |  |  | 5,094 |  | - |  |  | 6,695
Multi-family |  | - |  |  | 8,000 |  |  | 8,000 |  |  | 8,036 |  | 1,779 |  |  | 3,864
Real estate construction |  | 4,206 |  |  | - |  |  | 4,206 |  |  | 8,474 |  | - |  |  | 10,950
Consumer |  | - |  |  | - |  |  | - |  |  | - |  | - |  |  | 462
Total | $ | 8,675 |  | $ | 18,584 |  | $ | 27,259 |  | $ | 36,387 |  | 2,045 |  | $ | 37,543
The related amount of interest income recognized on loans that were impaired was $2.2 million, $907,000 and $175,000 during the years ended March 31, 2012, 2011 and 2010, respectively. The following table presents troubled debt restructurings (“TDR”) at the date indicated:
| March 31, 2012
(In Thousands) |  | Number of Contracts |  |  | Pre- Modification Outstanding Recorded Investment |  |  | Post- Modification Outstanding Recorded Investment
Commercial business |  | 10 |  | $ | 5,864 |  | $ | 5,018
Commercial real estate |  | 3 |  |  | 4,158 |  |  | 2,966
Land |  | 1 |  |  | 2,191 |  |  | 1,136
Multi-family |  | 2 |  |  | 6,372 |  |  | 5,277
Consumer |  | 4 |  |  | 1,739 |  |  | 1,683
Total |  | 20 |  | $ | 20,324 |  | $ | 16,080
At March 31, 2011, TDRs totaled $5.9 million. 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 current fair value of the collateral, less selling costs 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. There were no TDRs that were recorded in the twelve months ended March 31, 2011 or March 31, 2012 that subsequently defaulted.

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