ALLOWANCE FOR LOAN LOSSES | 8. 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 management'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 (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 loan 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, uncertainties 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 thereof 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. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations. The following tables present a reconciliation of the allowance for loan losses for the periods indicated (in thousands): Three months ended June 30, 2018 Commercial Business Commercial Real Estate Land Multi- Family Real Estate Construction Consumer Unallocated Total Beginning balance $ 1,668 $ 4,914 $ 220 $ 822 $ 618 $ 1,809 $ 715 $ 10,766 Provision for (recapture of) loan losses 131 (598 ) 38 (41 ) 237 19 14 (200 ) Charge-offs - - - - - (92 ) - (92 ) Recoveries - 823 - - - 52 - 875 Ending balance $ 1,799 $ 5,139 $ 258 $ 781 $ 855 $ 1,788 $ 729 $ 11,349 Three months ended June 30, 2017 Beginning balance $ 1,418 $ 5,084 $ 228 $ 297 $ 714 $ 2,099 $ 688 $ 10,528 Provision for (recapture of) loan losses (30 ) 92 (146 ) 205 (46 ) (96 ) 21 - Charge-offs - - - - - (82 ) - (82 ) Recoveries 3 - 137 - - 11 - 151 Ending balance $ 1,391 $ 5,176 $ 219 $ 502 $ 668 $ 1,932 $ 709 $ 10,597 The following tables present an analysis of loans receivable and the allowance for loan losses, based on impairment methodology, at the dates indicated (in thousands): Allowance for Loan Losses Recorded Investment in Loans June 30, 2018 Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Commercial business $ - $ 1,799 $ 1,799 $ 173 $ 148,084 $ 148,257 Commercial real estate - 5,139 5,139 2,596 445,423 448,019 Land - 258 258 751 16,553 17,304 Multi-family - 781 781 1,632 57,162 58,794 Real estate construction - 855 855 - 53,156 53,156 Consumer 64 1,724 1,788 1,414 99,642 101,056 Unallocated - 729 729 - - - Total $ 64 $ 11,285 $ 11,349 $ 6,566 $ 820,020 $ 826,586 March 31, 2018 Commercial business $ - $ 1,668 $ 1,668 $ 1,004 $ 136,668 $ 137,672 Commercial real estate - 4,914 4,914 2,883 447,714 450,597 Land - 220 220 763 14,574 15,337 Multi-family - 822 822 1,644 61,436 63,080 Real estate construction - 618 618 - 39,584 39,584 Consumer 69 1,740 1,809 1,428 103,678 105,106 Unallocated - 715 715 - - - Total $ 69 $ 10,697 $ 10,766 $ 7,722 $ 803,654 $ 811,376 Non-accrual loans: The following tables present an analysis of loans by aging category at the dates indicated (in thousands): June 30, 2018 30-89 Days 90 Days and Greater Past Due Non-accrual Total Past Due and Non- accrual Current Total Loans Receivable Commercial business $ - $ - $ 173 $ 173 $ 148,084 $ 148,257 Commercial real estate 370 - 1,167 1,537 446,482 448,019 Land - - 751 751 16,553 17,304 Multi-family - - - - 58,794 58,794 Real estate construction - - - - 53,156 53,156 Consumer 229 - 253 482 100,574 101,056 Total $ 599 $ - $ 2,344 $ 2,943 $ 823,643 $ 826,586 March 31, 2018 Commercial business $ 7 $ - $ 178 $ 185 $ 137,487 $ 137,672 Commercial real estate - - 1,200 1,200 449,397 450,597 Land - - 763 763 14,574 15,337 Multi-family - - - - 63,080 63,080 Real estate construction - - - - 39,584 39,584 Consumer 513 - 277 790 104,316 105,106 Total $ 520 $ - $ 2,418 $ 2,938 $ 808,438 $ 811,376 Credit quality indicators: Pass Watch Special mention Substandard Doubtful Loss The following tables present an analysis of loans by credit quality indicators at the dates indicated (in thousands): June 30, 2018 Pass Special Mention Substandard Doubtful Loss Total Loans Receivable Commercial business $ 143,073 $ 1,971 $ 3,213 $ - $ - $ 148,257 Commercial real estate 437,383 7,699 2,937 - - 448,019 Land 16,553 - 751 - - 17,304 Multi-family 56,609 2,164 21 - - 58,794 Real estate construction 53,156 - - - - 53,156 Consumer 100,803 - 253 - - 101,056 Total $ 807,577 $ 11,834 $ 7,175 $ - $ - $ 826,586 March 31, 2018 Commercial business $ 132,309 $ 1,976 $ 3,387 $ - $ - $ 137,672 Commercial real estate 440,123 7,489 2,985 - - 450,597 Land 14,574 - 763 - - 15,337 Multi-family 60,879 2,190 11 - - 63,080 Real estate construction 39,584 - - - - 39,584 Consumer 104,829 - 277 - - 105,106 Total $ 792,298 $ 11,655 $ 7,423 $ - $ - $ 811,376 Impaired loans and troubled debt restructurings ("TDRs"): The following tables present the total and average recorded investment in impaired loans at the dates and for the periods indicated (in thousands): June 30, 2018 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 $ 173 $ - $ 173 $ 188 $ - Commercial real estate 2,596 - 2,596 3,496 - Land 751 - 751 784 - Multi-family 1,632 - 1,632 1,740 - Consumer 290 1,124 1,414 1,526 64 Total $ 5,442 $ 1,124 $ 6,566 $ 7,734 $ 64 March 31, 2018 Commercial business $ 1,004 $ - $ 1,004 $ 1,062 $ - Commercial real estate 2,883 - 2,883 3,816 - Land 763 - 763 790 - Multi-family 1,644 - 1,644 1,765 - Consumer 294 1,134 1,428 1,544 69 Total $ 6,588 $ 1,134 $ 7,722 $ 8,977 $ 69 Three Months ended June 30, 2018 Three Months ended June 30, 2017 Average Recorded Investment Interest Recognized on Impaired Loans Average Recorded Investment Interest Recognized on Impaired Loans Commercial business $ 588 $ - $ 704 $ 20 Commercial real estate 2,740 16 5,674 30 Land 757 - 796 - Multi-family 1,638 22 1,686 23 Consumer 1,421 16 1,470 15 Total $ 7,144 $ 54 $ 10,330 $ 88 The cash basis interest income on impaired loans was not materially different than the interest recognized on impaired loans as shown in the above tables. TDRs are loans for which 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. The following table presents TDRs by interest accrual status at the dates indicated (in thousands): June 30, 2018 March 31, 2018 Accrual Nonaccrual Total Accrual Nonaccrual Total Commercial business $ - $ 173 $ 173 $ 826 $ 178 $ 1,004 Commercial real estate 1,429 1,167 2,596 1,683 1,200 2,883 Land - 751 751 - 763 763 Multi-family 1,632 - 1,632 1,644 - 1,644 Consumer 1,414 - 1,414 1,428 - 1,428 Total $ 4,475 $ 2,091 $ 6,566 $ 5,581 $ 2,141 $ 7,722 At June 30, 2018, the Company had no commitments to lend additional funds on these loans. At June 30, 2018, all of the Company's TDRs were paying as agreed except for one commercial business TDR loan totaling $173,000 and two commercial real estate TDR loans totaling $1.2 million that defaulted since the loans were modified. There were no new TDRs for the three months ended June 30, 2018 and 2017. There were no loans modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended June 30, 2018. 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 are 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. |