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Allowance for Loan Losses

9 Months Ended

Dec. 31, 2015

7. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level sufficient to provide for estimated 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 a 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 (less estimated selling costs, if applicable) 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 24-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 as of the date of the filing of the consolidated financial statements.

When available information confirms that specific loans or portions of these loans are uncollectible, identified amounts are charged against the allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; and/or the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.

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 the 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 December 31, 2015		Commercial Business		Commercial Real Estate			Land			Multi-Family		Real Estate Construction		Consumer			Unallocated			Total

Beginning balance	$	1,360	$	4,293		$	490		$	494	$	286	$	2,329		$	861		$	10,113
Provision for (recapture of) loan losses		160		(141	)		(134	)		9		84		175			(153	)		-
Charge-offs		-		-			-			-		-		(87	)		-			(87	)
Recoveries		6		-			107			-		-		34			-			147
Ending balance	$	1,526	$	4,152		$	463		$	503	$	370	$	2,451		$	708		$	10,173

Nine months ended December 31, 2015

Beginning balance	$	1,263	$	4,268		$	539		$	348	$	769		$	2,548		$	1,027		$	10,762
Provision for (recapture of) loan losses		239		(116	)		(306	)		155		(405	)		(48	)		(319	)		(800	)
Charge-offs		-		-			-			-		-			(161	)		-			(161	)
Recoveries		24		-			230			-		6			112			-			372
Ending balance	$	1,526	$	4,152		$	463		$	503	$	370		$	2,451		$	708		$	10,173

Three months ended December 31, 2014

Beginning balance	$	1,579		$	5,187		$	265	$	360		$	319	$	2,822		$	1,469		$	12,001
Provision for (recapture of) loan losses		117			(868	)		192		(1	)		461		60			(361	)		(400	)
Charge-offs		(16	)		-			-		-			-		(27	)		-			(43	)
Recoveries		24			-			102		-			-		17			-			143
Ending balance	$	1,704		$	4,319		$	559	$	359		$	780	$	2,872		$	1,108		$	11,701

Nine months ended December 31, 2014

Beginning balance	$	2,409		$	5,269		$	340		$	203	$	387	$	2,653		$	1,290		$	12,551
Provision for (recapture of) loan losses		(644	)		(922	)		(1	)		156		393		150			(182	)		(1,050	)
Charge-offs		(89	)		(28	)		-			-		-		(85	)		-			(202	)
Recoveries		28			-			220			-		-		154			-			402
Ending balance	$	1,704		$	4,319		$	559		$	359	$	780	$	2,872		$	1,108		$	11,701

The following tables present an analysis of loans receivable and the 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
December 31, 2015		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total

Commercial business	$	-	$	1,526	$	1,526	$	193	$	71,920	$	72,113
Commercial real estate		-		4,152		4,152		10,946		324,579		335,525
Land		-		463		463		801		12,260		13,061
Multi-family		-		503		503		1,742		32,859		34,601
Real estate construction		-		370		370		-		23,749		23,749
Consumer		119		2,332		2,451		1,691		129,973		131,664
Unallocated		-		708		708		-		-		-
Total	$	119	$	10,054	$	10,173	$	15,373	$	595,340	$	610,713

March 31, 2015

Commercial business	$	-	$	1,263	$	1,263	$	1,091	$	76,095	$	77,186
Commercial real estate		-		4,268		4,268		15,939		283,752		299,691
Land		-		539		539		801		14,557		15,358
Multi-family		-		348		348		1,922		28,535		30,457
Real estate construction		-		769		769		-		30,498		30,498
Consumer		147		2,401		2,548		2,622		123,960		126,582
Unallocated		-		1,027		1,027		-		-		-
Total	$	147	$	10,615	$	10,762	$	22,375	$	557,397	$	579,772

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. As a general practice, payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cost recovery method. Also 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. A history of repayment performance generally would be a minimum of six months. Interest income foregone on non-accrual loans was $92,000 and $351,000 during the nine months ended December 31, 2015 and 2014, respectively.

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

December 31, 2015	30-89 Days Past Due	90 Days and Greater Past Due	Non-accrual	Total Past Due and Non-accrual	Current	Total Loans Receivable

Commercial business	$ -	$ -	$ -	$ -	$ 72,113	$ 72,113
Commercial real estate	-	-	2,475	2,475	333,050	335,525
Land	-	-	801	801	12,260	13,061
Multi-family	-	-	-	-	34,601	34,601
Real estate construction	-	-	-	-	23,749	23,749
Consumer	696	-	665	1,361	130,303	131,664
Total	$ 696	$ -	$ 3,941	$ 4,637	$ 606,076	$ 610,713

March 31, 2015

Commercial business	$ 359	$ -	$ -	$ 359	$ 76,827	$ 77,186
Commercial real estate	225	-	3,291	3,516	296,175	299,691
Land	-	-	801	801	14,557	15,358
Multi-family	-	-	-	-	30,457	30,457
Real estate construction	-	-	-	-	30,498	30,498
Consumer	902	-	1,226	2,128	124,454	126,582
Total	$ 1,486	$ -	$ 5,318	$ 6,804	$ 572,968	$ 579,772

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 future financial characteristics. The Company assigns a risk rating to each commercial loan at origination and subsequently updates these ratings, as necessary, so that the risk rating continues to reflect the appropriate risk characteristics of the loan. Application of appropriate risk ratings is key to management of loan portfolio risk. In determining the appropriate risk rating, the Company considers the following factors: delinquency, payment history, quality of management, liquidity, leverage, earnings 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 losses.

Pass – These loans have a 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, these loans are secured by the operating assets of the borrower and/or real estate. The borrower’s 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 are included in the “pass” rating. However, there would typically be some reason for additional management oversight, such as the borrower’s recent financial setbacks and/or deteriorating financial position, industry concerns and failure to perform on other borrowing obligations. Loans with this rating are monitored closely in an effort to correct deficiencies.

Special mention – These loans have a risk rating of 6 and are rated in accordance with regulatory guidelines. These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the credit position at some future date. These loans pose elevated risk, but their weakness does not yet justify a “Substandard” classification.

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 likely 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 repayment may be dependent upon collateral which has 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 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):

December 31, 2015		Pass		Special Mention		Substandard		Doubtful		Loss		Total Loans Receivable

Commercial business	$	70,791	$	947	$	375	$	-	$	-	$	72,113
Commercial real estate		322,307		10,262		2,956		-		-		335,525
Land		9,604		2,656		801		-		-		13,061
Multi-family		32,847		1,742		12		-		-		34,601
Real estate construction		23,749		-		-		-		-		23,749
Consumer		130,999		-		665		-		-		131,664
Total	$	590,297	$	15,607	$	4,809	$	-	$	-	$	610,713

March 31, 2015

Commercial business	$	75,643	$	977	$	566	$	-	$	-	$	77,186
Commercial real estate		277,156		15,570		6,965		-		-		299,691
Land		11,665		2,892		801		-		-		15,358
Multi-family		28,508		14		1,935		-		-		30,457
Real estate construction		28,670		-		1,828		-		-		30,498
Consumer		125,356		-		1,226		-		-		126,582
Total	$	546,998	$	19,453	$	13,321	$	-	$	-	$	579,772

Impaired loans and troubled debt restructurings (“TDRs”): 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 loan agreement. Typically, factors used in determining if a loan is impaired include, but are not limited to, whether the loan is 90 days or more delinquent, internally designated as substandard or worse, on non-accrual status or represents a TDR. 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 estimated 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 has not had an appraisal of the collateral performed in the last six months, the Company obtains an updated market valuation. Subsequently, the Company generally obtains an updated market valuation of the collateral on an annual basis. The collateral 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 the total and average recorded investment in impaired loans at the dates and for the periods indicated (in thousands):

December 31, 2015		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	$	193	$	-	$	193	$	194	$	-
Commercial real estate		10,946		-		10,946		12,148		-
Land		801		-		801		804		-
Multi-family		1,742		-		1,742		1,887		-
Consumer		481		1,210		1,691		1,862		119
Total	$	14,163	$	1,210	$	15,373	$	16,895	$	119

March 31, 2015
Commercial business	$	1,091	$	-	$	1,091	$	1,125	$	-
Commercial real estate		15,939		-		15,939		17,188		-
Land		801		-		801		804		-
Multi-family		1,922		-		1,922		2,058		-
Consumer		1,276		1,346		2,622		3,211		147
Total	$	21,029	$	1,346	$	22,375	$	24,386	$	147

	Three Months ended December 31, 2015				Three Months ended December 31, 2014
		Average Recorded Investment		Interest Recognized on Impaired Loans		Average Recorded Investment		Interest Recognized on Impaired Loans

Commercial business	$	405	$	2	$	1,203	$	14
Commercial real estate		12,617		98		17,086		121
Land		801		-		800		-
Multi-family		1,821		24		2,299		-
Consumer		1,778		18		2,662		18
Total	$	17,422	$	142	$	24,050	$	153

	Nine Months ended December 31, 2015				Nine Months ended December 31, 2014
		Average Recorded Investment		Interest Recognized on Impaired Loans		Average Recorded Investment		Interest Recognized on Impaired Loans

Commercial business	$	630	$	15	$	1,070	$	36
Commercial real estate		13,962		364		17,436		346
Land		801		-		821		-
Multi-family		1,869		76		2,239		-
Consumer		2,014		54		3,329		56
Total	$	19,276	$	509	$	24,895	$	438

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, and/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, impairment is measured as described for impaired loans above.

At December 31, 2015 and March 31, 2015, the Company had TDRs totaling $15.1 million and $21.4 million, respectively, of which $12.1 million and $17.3 million, respectively, were on accrual status. At December 31, 2015, the Company had no commitments to lend additional funds on these loans. At December 31, 2015, all of the Company’s TDRs are paying as agreed except for one of the Company’s TDRs that defaulted since the loan was modified.

The following table presents new TDRs for the periods indicated (dollars in thousands):

	Nine Months Ended December 31, 2015						Nine Months Ended December 31, 2014
		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 real estate		-	$	-	$	-	1	$	344	$	333

There were no loans modified as a TDR within the previous twelve months that subsequently defaulted in the nine months ended December 31, 2015.

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 of the underlying collateral would result in full repayment of the outstanding loan balance. Once any other potential sources of repayment are exhausted, the impaired portion of the loan is charged-off. 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.