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6. Allowance For Loan Losses

12 Months Ended

Mar. 31, 2013

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, 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.

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, 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 at the dates indicated (in thousands):

March 31, 2013		Commercial Business		Commercial Real Estate			Land			Multi-Family		Real Estate Construction		Consumer			Unallocated				Total

Beginning balance	$	2,688	$	5,599	$		4,906	$		1,121	$	412	$	3,274	$		1,921		$		19,921
Provision for loan losses		928		1,865			(2,149)			(197)		(278)		846			(115)				900
Charge-offs		(1,606)		(1,494)			(1,753)			(622)		(141)		(1,310)			-				(6,926)
Recoveries		118		9			1,015			239		228		139			-				1,748
Ending balance	$	2,128	$	5,979	$		2,019	$		541	$	221	$	2,949	$		1,806		$		15,643

March 31, 2012

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

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, 2013		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total

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

March 31, 2012
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

Changes in the allowance for unfunded loan commitments were as follows (in thousands):

	Year Ended March 31,
	2013		2012		2011
Beginning balance	$	217	$	166	$	185
Net change in allowance for unfunded loan commitments		12		51		(19)
Ending balance	$	229	$	217	$	166

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

March 31, 2013		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	$	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	$	-

March 31, 2012

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	$	-

Interest income foregone on non-accrual loans was $1.4 million, $2.3 million and $1.9 million for the years ended March 31, 2013, 2012 and 2011, 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, 2013				March 31, 2012
		Weighted-Average Risk Grade		Classified Loans ⁽²⁾		Weighted-Average Risk Grade		Classified Loans ⁽²⁾

Commercial Business		3.64	$	3,816		3.97	$	13,456
Commercial Real Estate		4.02		37,643		3.88		35,077
Land		4.57		4,306		5.60		17,560
Multi-Family		3.68		3,846		4.06		8,265
Real estate Construction		3.26		175		4.51		7,756
Consumer ⁽¹⁾		7.00		3,059		7.00		3,915
Total		3.96	$	52,845		4.08	$	86,029

Total loans risk rated	$	439,587			$	550,174

⁽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, 2013		Recorded Investment with No Specific Valuation Allowance		Recorded Investment with Specific Valuation Allowance		Total Recorded Investment		Unpaid Principal Balance		Related Specific Valuation Allowance		Year-to-Date Average Recorded Investment

Commercial business	$	679	$	-	$	679	$	944	$	-	$	3,986
Commercial real estate		12,011		7,455		19,466		21,291		536		20,705
Land		3,469		-		3,469		4,359		-		6,818
Multi-family		3,846		-		3,846		4,802		-		7,822
Real estate construction		175		-		175		811		-		2,365
Consumer		3,090		1,843		4,933		5,799		183		4,961
Total	$	23,270	$	9,298	$	32,568	$	38,006	$	719	$	46,657

March 31, 2012
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

The related amount of interest income recognized on loans that were impaired was $796,000, $2.2 million and $907,000 during the years ended March 31, 2013, 2012 and 2011, respectively.

Trouble debt restructurings (“TDR”) 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.

The following table presents troubled debt restructurings (“TDR”) at the date indicated (dollars in thousands):

	March 31, 2013						March 31, 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	$	408	10	$	5,864	$	5,018
Commercial real estate ⁽¹⁾		5		9,022		8,603	3		4,158		2,966
Land ⁽¹⁾		2		1,193		918	1		2,191		1,136
Multi-family ⁽¹⁾		1		3,277		2,967	2		6,372		5,277
Consumer		2		1,971		1,671	4		1,739		1,683
Total		12	$	15,912	$	14,567	20	$	20,324	$	16,080

⁽¹⁾Included within these amounts at March 31, 2013, is 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 was one TDR loan secured by a one-to-four family home that was recorded in the twelve months prior to March 31, 2013 that defaulted in the twelve months ended March 31, 2013. The loan had a pre-modification outstanding recorded investment of $442,000 and the amount of the defaulted loan totaled $441,000. There were no TDRs that were recorded in the twelve months prior to March 31, 2012 that subsequently defaulted in the twelve months ended March 31, 2012.