Loans Held for Investment

12 Months Ended

Jun. 30, 2012

Loans Held for Investment:

Loans Held for Investment

3.   Loans Held for Investment:

Loans held for investment as of June 30, 2012 and 2011 consisted of the following:

(In Thousands)		June 30,
		2012		2011
Mortgage loans:
	Single-family	$ 439,024		$ 494,192
	Multi-family	278,057		304,808
	Commercial real estate	95,302		103,637
	Other	755		1,530
Commercial business loans		2,580		4,526
Consumer loans		506		750
	Total loans held for investment, gross	816,224		909,443
Deferred loan costs, net		2,095		2,649
Allowance for loan losses		(21,483	)	(30,482	)
	Total loans held for investment, net	$ 796,836		$ 881,610

Fixed-rate loans comprised 5% of loans held for investment at June 30, 2012 and 2011.  As of June 30, 2012, the Bank had $40.2 million in mortgage loans that are subject to negative amortization, consisting of $26.7 million in multi-family loans, $7.0 million in commercial real estate loans and $6.5 million in single-family loans.  This compares to $50.4 million of negative amortization mortgage loans at June 30, 2011, consisting of $31.3 million in multi-family loans, $11.5 million in commercial real estate loans and $7.6 million in single-family loans.  The amount of negative amortization included in loan balances decreased to $137,000 at June 30, 2012 from $353,000 at June 30, 2011.  During fiscal 2012, approximately $13,000, or 0.03%, of loan interest income was added to the negative amortization loan balance, down from $43,000, or 0.07% in fiscal 2011.  Negative amortization involves a greater risk to the Bank because the loan principal balance may increase by a range of 110% to 115% of the original loan amount and because the loan payment may increase beyond the means of the borrower when loan principal amortization is required.  Also, the Bank has originated interest-only ARM loans, which typically have a fixed interest rate for the first two to five years coupled with an interest only payment, followed by a periodic adjustable rate and a fully amortizing loan payment.  As of June 30, 2012 and 2011, the interest-only ARM loans were $214.2 million and $247.8 million, or 26.2% and 27.2% of loans held for investment, respectively.

In compliance with the OCC’s regulatory reporting requirements which do not recognize specific valuation allowances, the Bank modified its charge-off policy on non-performing loans during the quarter ended March 31, 2012 and, subsequent to the OCC’s review, the Bank further revised its charge-off policy in the quarter ended June 30, 2012.  Historically, the Bank established a specific valuation allowance for non-performing loans under ASC 310 based upon the estimated fair value of the underlying collateral, less disposition costs, in comparison to the loan balance or used a discounted cash flow method for non-performing restructured loans.  The specific valuation allowance was not charged-off until the foreclosure process was complete.  Under the modified policy, non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans.  For restructured loans, the charge-off occurs when the loans becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent.  The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses.  Both methods are acceptable under GAAP.  The modification to the charge-off policy resulted in $3.01 million of additional charge-offs in the fourth quarter of fiscal 2012 and a total of $4.00 million of additional charge-offs for fiscal 2012, but had no impact to the allowance for loans losses or the provision for loan losses because these charge-offs were timely identified in previous periods as specific valuation allowances and were included in the Corporation’s loss experience as part of the evaluation of the allowance for loan losses in those prior periods.  The allowance for loan losses for non-performing loans is determined by applying ASC 310.  The change in method did not have a material impact to the allowance for loan losses.  For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations or (b) collectively evaluated allowances based on the aggregated pooling method.  For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method.

The following tables summarize the Corporation’s allowance for loan losses at June 30, 2012 and 2011:

			As of June 30,
			2012	2011
Collectively evaluated allowance:
	Mortgage loans:
		Single-family	$ 15,189	$ 11,561
		Multi-family	3,524	2,810
		Commercial real estate	1,810	1,796
		Other	7	5
	Commercial business loans		169	178
	Consumer loans		13	16
		Total collectively evaluated allowance	20,712	16,366
Individually evaluated allowance:
	Mortgage loans:
		Single-family	744	12,654
		Multi-family	27	581
		Commercial real estate	-	231
		Other	-	321
	Commercial business loans		-	329
		Total individually evaluated allowance	771	14,116
Total loan loss allowance			$ 21,483	$ 30,482

The following table sets forth information at June 30, 2012 regarding the dollar amount of loans held for investment that are contractually repricing during the periods indicated, segregated between adjustable rate loans and fixed rate loans.  Adjustable rate loans having no stated repricing dates but reprice when the index they are tied to reprices (e.g. prime rate index) and checking account overdrafts are reported as repricing within one year.  The table does not include any estimate of prepayments which may cause the Bank’s actual repricing experience to differ materially from that shown below.

		Adjustable Rate
			After	After	After
			One Year	3 Years	5 Years
		Within	Through	Through	Through	Fixed
(In Thousands)		One Year	3 Years	5 Years	10 Years	Rate	Total
Mortgage loans:
	Single-family	$ 408,777	$ 12,896	$ 7,796	$   2,627	$   6,928	$ 439,024
	Multi-family	186,144	17,563	49,026	10,980	14,344	278,057
	Commercial real estate	62,483	3,993	10,048	1,836	16,942	95,302
	Other	522	-	-	-	233	755
Commercial business loans		1,170	-	-	-	1,410	2,580
Consumer loans		484	-	-	-	22	506
	Total loans held for investment, gross	$ 659,580	$ 34,452	$ 66,870	$ 15,443	$ 39,879	$ 816,224

Non-performing loans, which includes non-performing restructured loans, were $34.5 million and $37.1 million at June 30, 2012 and 2011, respectively.  The effect of the non-performing loans on interest income for the years ended June 30, 2012, 2011 and 2010 is presented below:

(In Thousands)	Year Ended June 30,
	2012		2011		2010
Contractual interest due	$  2,432		$  3,605		$  8,907
Interest recognized	(1,556	)	(2,313	)	(5,103	)
Net foregone interest	$     876		$  1,292		$  3,804

The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of allowances for loan losses at June 30, 2012 and 2011:

(In Thousands)				June 30, 2012
				Recorded Investment	Allowance for Loan Losses (1)		Net Investment
Mortgage loans:
	Single-family:
			With a related allowance	$ 26,214	$ (5,476	)	$ 20,738
			Without a related allowance	8,352	-		8,352
	Total single-family loans			34,566	(5,476	)	29,090
	Multi-family:
			With a related allowance	1,806	(349	)	1,457
	Total multi-family loans			1,806	(349	)	1,457
	Commercial real estate:
			With a related allowance	3,820	(573	)	3,247
	Total commercial real estate loans			3,820	(573	)	3,247
	Other:
		Without a related allowance		522	-		522
	Total other loans			522	-		522
Commercial business loans:
		With a related allowance		246	(74	)	172
	Total commercial business loans			246	(74	)	172
Total non-performing loans				$ 40,960	$ (6,472	)	$ 34,488

(1)   Consists of collectively and individually evaluated allowances.

(In Thousands)				June 30, 2011
				Recorded Investment	Allowance for Loan Losses (1)		Net Investment
Mortgage loans:
	Single-family:
			With a related allowance	$ 42,957	$ (12,654	)	$ 30,303
			Without a related allowance	1,535	-		1,535
	Total single-family loans			44,492	(12,654	)	31,838
	Multi-family:
			With a related allowance	2,534	(581	)	1,953
	Total multi-family loans			2,534	(581	)	1,953
	Commercial real estate:
			With a related allowance	2,451	(231	)	2,220
	Total commercial real estate loans			2,451	(231	)	2,220
	Other:
		With a related allowance		1,293	(321	)	972
	Total other loans			1,293	(321	)	972
Commercial business loans:
		With a related allowance		331	(329	)	2
		Without a related allowance		141	-		141
	Total commercial business loans			472	(329	)	143
Total non-performing loans				$ 51,242	$ (14,116	)	$ 37,126

(1)   Consists of specific valuation allowances.

At June 30, 2012 and 2011, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

The following table describes the aging analysis (length of time on non-performing status) of non-performing loans, net of allowance for loan losses, as of June 30, 2012 and 2011:

As of June 30, 2012:

(In Thousands)		3 Months or Less	Over 3 to 6 Months	Over 6 to 12 Months	Over 12 Months	Total
Mortgage loans:
	Single-family	$   8,291	$ 6,877	$ 3,141	$ 10,781	$ 29,090
	Multi-family	967	-	-	490	1,457
	Commercial real estate	1,002	1,735	-	510	3,247
	Other	-	-	-	522	522
Commercial business loans		-	131	-	41	172
	Total	$ 10,260	$ 8,743	$ 3,141	$ 12,344	$ 34,488

As of June 30, 2011:

(In Thousands)		3 Months or Less	Over 3 to 6 Months	Over 6 to 12 Months	Over 12 Months	Total
Mortgage loans:
	Single-family	$   9,655	$   8,156	$ 4,016	$ 10,011	$ 31,838
	Multi-family	-	-	-	1,953	1,953
	Commercial real estate	927	1,293	-	-	2,220
	Other	-	972	-	-	972
Commercial business loans		-	-	2	141	143
	Total	$ 10,582	$ 10,421	$ 4,018	$ 12,105	$ 37,126

During the years ended June 30, 2012, 2011 and 2010, the Corporation’s average investment in non-performing loans was $34.4 million, $50.2 million and $78.0 million, respectively.  Interest income of $1.5 million, $2.3 million and $5.1 million was recognized, based on cash receipts, on non-performing loans during the years ended June 30, 2012, 2011 and 2010, respectively.  The Corporation records interest on non-performing loans utilizing the cash basis method of accounting during the periods when the loans are on non-performing status.

The following summarizes the components of the net change in the allowance for loan losses for the periods indicated:

(In Thousands)	Year Ended June 30,
	2012		2011		2010
Balance, beginning of year	$ 30,482		$ 43,501		$ 45,445
Provision for loan losses	5,777		5,465		21,843
Recoveries	375		27		717
Charge-offs	(15,151	)	(18,511	)	(24,504	)
Balance, end of year	$ 21,483		$ 30,482		$ 43,501

During the fiscal year ended June 30, 2012, 24 loans for $10.1 million were modified from their original terms, were re-underwritten at current market interest rates and were identified in the Corporation’s asset quality reports as restructured loans.  This compares to 43 loans for $20.7 million that were modified in the fiscal year ended June 30, 2011.  During the fiscal year ended June 30, 2012, two restructured loans with a total loan balance of $771,000 were in default within a 12-month period subsequent to their original restructuring and required an additional allowance for loan losses of $200,000.  This compares to three restructured loans with a total loan balance of $1.2 million that were in default within a 12-month period subsequent to their original restructuring and required an additional allowance for loan losses of $316,000 in the fiscal year ended June 30, 2011.  As of June 30, 2012, the outstanding balance of restructured loans was $25.1 million, comprised of 56 loans.  These restructured loans are classified as follows: 12 loans are classified as pass, are not included in the classified asset totals and remain on accrual status ($5.5 million); three loans are classified as special mention and remain on accrual status ($4.0 million); and 41 loans are classified as substandard ($15.6 million, all are on non-accrual status).  As of June 30, 2012, 74 percent, or $18.5 million of the restructured loans have a current payment status.

The following table summarizes the restructured loans by loan type at June 30, 2012 and 2011:

			As of June 30,
(In Thousands)			2012	2011
Restructured loans on non-accrual status:
	Mortgage loans:
		Single-family	$ 11,995	$ 15,133
		Multi-family	490	490
		Commercial real estate	2,483	1,660
		Other	522	972
	Commercial business loans		165	143
		Total	15,655	18,398
Restructured loans on accrual status:
	Mortgage loans:
		Single-family	6,148	15,589
		Multi-family	3,266	3,665
		Commercial real estate	-	1,142
	Other		-	237
	Commercial business loans		33	125
		Total	9,447	20,758
		Total restructured loans	$ 25,102	$ 39,156

The following tables show the restructured loans by type, net of allowance for loan losses, at June 30, 2012 and 2011:

(In Thousands)			June 30, 2012
			Recorded Investment	Allowance for Loan Losses (1)		Net Investment
Mortgage loans:
	Single-family:
		With a related allowance	$   9,465	$    (486	)	$   8,979
		Without a related allowance	9,164	-		9,164
	Total single-family loans		18,629	(486	)	18,143
	Multi-family:
		With a related allowance	517	(27	)	490
		Without a related allowance	3,266	-		3,266
	Total multi-family loans		3,783	(27	)	3,756
	Commercial real estate:
		With a related allowance	2,921	(438	)	2,483
	Total commercial real estate loans		2,921	(438	)	2,483
	Other:
		Without a related allowance	522	-		522
	Total other loans		522	-		522
Commercial business loans:
		With a related allowance	236	(71	)	165
		Without a related allowance	33	-		33
	Total commercial business loans		269	(71	)	198
Total restructured loans			$ 26,124	$ (1,022	)	$ 25,102

(1)   Consists of collectively and individually evaluated allowances.

(In Thousands)			June 30, 2011
			Recorded Investment	Allowance for Loan Losses (1)		Net Investment
Mortgage loans:
	Single-family:
		With a related allowance	$ 19,092	$ (3,959	)	$ 15,133
		Without a related allowance	15,589	-		15,589
	Total single-family loans		34,681	(3,959	)	30,722
	Multi-family:
		With a related allowance	517	(27	)	490
		Without a related allowance	3,665	-		3,665
	Total multi-family loans		4,182	(27	)	4,155
	Commercial real estate:
		With a related allowance	1,837	(177	)	1,660
		Without a related allowance	1,142	-		1,142
	Total commercial real estate loans		2,979	(177	)	2,802
	Other:
		With a related allowance	1,293	(321	)	972
		Without a related allowance	237	-		237
	Total other loans		1,530	(321	)	1,209
Commercial business loans:
		With a related allowance	53	(51	)	2
		Without a related allowance	266	-		266
	Total commercial business loans		319	(51	)	268
Total restructured loans			$ 43,691	$ (4,535	)	$ 39,156

(1)   Consists of specific valuation allowances.

In the ordinary course of business, the Bank makes loans to its directors, officers and employees on substantially the same terms prevailing at the time of origination for comparable transactions with unaffiliated borrowers.  The following is a summary of related-party loan activity:

(In Thousands)	Year Ended June 30,
	2012		2011		2010
Balance, beginning of year	$  2,036		$  2,341		$  2,300
Originations	2,807		2,742		1,307
Sales and payments	(2,813	)	(3,047	)	(1,266	)
Balance, end of year	$  2,030		$  2,036		$  2,341

As of June 30, 2012, all of the related-party loans were performing in accordance with their original contractual terms.