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Note 6: Loans Held For Investment

12 Months Ended

Sep. 30, 2012

Note 6: Loans Held for Investment

Loans held for investment consisted of the following:

	September 30, 2012	June 30, 2012

Mortgage loans:
Single-family	$ 431,373	$ 439,024
Multi-family	266,398	278,057
Commercial real estate	94,172	95,302
Other	391	755
Commercial business loans	2,310	2,580
Consumer loans	378	506
Total loans held for investment, gross	795,022	816,224

Deferred loan costs, net	1,940	2,095
Allowance for loan losses	(20,118)	(21.483)
Total loans held for investment, net	$776,844	$796,836

As of September 30, 2012, the Bank had $36.9 million in mortgage loans that are subject to negative amortization, consisting of $25.8 million in multi-family loans, $5.3 million in commercial real estate loans and $5.8 million in single-family loans. This compares to $40.2 million of negative amortization mortgage loans at June 30, 2012, 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. During the first quarter of fiscal 2013, no loan interest income was added to the negative amortization loan balance, as compared to $13,000 of loan interest income in the comparable period of fiscal 2012. 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 during the period of negative amortization 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 September 30, 2012 and June 30, 2012, the interest-only ARM loans were $206.5 million and $214.2 million, or 25.9% and 26.2% of loans held for investment, respectively.

The following table sets forth information at September 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. Fixed-rate loans comprised 5% of loans held for investment at September 30, 2012, unchanged from June 30, 2012. Adjustable rate loans having no stated repricing dates that 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.

	Adjustable Rate
		After	After	After
		One Year	3 Years	5 Years
	Within	Through	Through	Through	Fixed
	One Year	3 Years	5 Years	10 Years	Rate	Total
(In Thousands)
Mortgage loans:
Single-family	$ 395,265	$ 15,303	$ 8,106	$ 3,024	$ 9,675	$ 431,373
Multi-family	174,678	12,534	50,127	16,534	12,525	266,398
Commercial real estate	61,122	2,552	14,497	760	15,241	94,172
Other	159	-	-	-	232	391
Commercial business loans	1,060	-	-	-	1,250	2,310
Consumer loans	357	-	-	-	21	378
Total loans held for investment, gross	$ 632,641	$ 30,389	$ 72,730	$ 20,318	$ 38,944	$ 795,022

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management’s continuing analysis of the factors underlying the quality of the loans held for investment. These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans. Provisions for loan losses are charged against operations on a monthly basis, as necessary, to maintain the allowance at appropriate levels. Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Bank’s loans held for investment, will not request the Bank to significantly increase its allowance for loan losses. Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the Bank’s control.

In compliance with the regulatory reporting requirements of the Office of the Comptroller of the Currency (“OCC”), the Bank’s primary federal regulator, 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 loans that were modified from their original terms, were re-underwritten and identified in the Corporation’s asset quality reports as troubled debt restructurings (“restructured loans”), the charge-off occurs when the loan 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. The allowance for loan losses for non-performing loans is determined by applying ASC 310. 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 September 30, 2012 and June 30, 2012:

	September 30,	June 30,
	2012	2012
(In Thousands)
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$ 14,399	$ 15,189
Multi-family	3,209	3,524
Commercial real estate	1,892	1,810
Other	7	7
Commercial business loans	155	169
Consumer loans	13	13
Total collectively evaluated allowance	19,675	20,712

Individually evaluated for impairment:
Mortgage loans:
Single-family	416	744
Multi-family	27	27
Total individually evaluated allowance	443	771
Total loan loss allowance	$ 20,118	$ 21,483

The following table is provided to disclose additional details on the Corporation’s allowance for loan losses (dollars in thousands):

	Three Months Ended
	September 30,
	2012	2011
(Dollars in Thousands)
Allowance at beginning of period	$ 21,483	$ 30,482

Provision for loan losses	533	972

Recoveries:
Mortgage loans:
Single-family	70	113
Consumer loans	1	-
Total recoveries	71	113

Charge-offs:
Mortgage loans:
Single-family	(1,967)	(2,861)
Consumer loans	(2)	(2)
Total charge-offs	(1,969)	(2,863)

Net charge-offs	(1,898)	(2,750)
Allowance at end of period	$ 20,118	$ 28,704

Allowance for loan losses as a percentage of gross loans held for
investment	2.52%	3.23%

Net charge-offs as a percentage of average loans receivable, net,
during the period	0.72%	1.04%

Allowance for loan losses as a percentage of gross non-performing
loans at the end of the period	58.64%	57.61%

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

	September 30, 2012
		Allowance
	Recorded	for Loan	Net
	Investment	Losses ⁽¹⁾	Investment
(In Thousands)
Mortgage loans:
Single-family:
With a related allowance	$19,753	$(4,176)	$15,577
Without a related allowance ⁽²⁾	6,917	-	6,917
Total single-family loans	26,670	(4,176 )	22,494

Multi-family:
With a related allowance	1,793	(347)	1,446
Total multi-family loans	1,793	(347)	1,446

Commercial real estate:
With a related allowance	5,445	(817)	4,628
Total commercial real estate loans	5,445	(817)	4,628

Other:
Without a related allowance ⁽²⁾	159	-	159
Total other loans	159	-	159

Commercial business loans:
With a related allowance	238	(71)	167
Total commercial business loans	238	(71)	167

Total non-performing loans	$34,305	$(5,411)	$28,894

	June 30, 2012
		Allowance
	Recorded	for Loan	Net
	Investment	Losses ⁽¹⁾	Investment
(In Thousands)
Mortgage loans:
Single-family:
With a related allowance	$26,214	$(5,476)	$20,738
Without a related allowance ⁽²⁾	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 ⁽²⁾	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, specifically assigned to the individual loan.

(2) There is no related allowance for loan losses because the loans have been charged-off to their fair value and/or the fair value of the collateral is higher than the loan balance.

At September 30, 2012 and June 30, 2012, 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 September 30, 2012:

	3 Months or	Over 3 to	Over 6 to	Over 12
	Less	6 Months	12 Months	Months	Total
(In Thousands)
Mortgage loans:
Single-family	$2,912	$7,036	$3,402	$9,144	$22,494
Multi-family	-	961	-	485	1,446
Commercial real estate	1,392	1,001	1,729	506	4,628
Other	-	-	-	159	159
Commercial business loans	-	-	128	39	167
Total	$4,304	$8,998	$5,259	$10,333	$28,894

For the quarters ended September 30, 2012 and 2011, the Corporation’s average investment in non-performing loans was $29.1 million and $36.6 million, respectively. The Corporation records payments on non-performing loans utilizing the cash basis or cost recovery method of accounting during the periods when the loans are on non-performing status. For the quarters ended September 30, 2012 and 2011, interest income of $1.6 million and $1.5 million, respectively, was recognized, based on cash receipts from loan payments on non-performing loans. Foregone interest income, which would have been recorded had the non-performing loans been current in accordance with their original terms, amounted to $101,000 and $313,000 for the quarters ended September 30, 2012 and 2011, respectively, and was not included in the results of operations.

For the quarter ended September 30, 2012, there were no loans that were modified from their original terms, were re-underwritten and were identified as restructured loans. This compares to 12 loans for $4.8 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the quarter ended September 30, 2011. During the quarter ended September 30, 2012, one restructured loan with a balance of $437,000 was in default within a 12-month period subsequent to their original restructuring and required an additional provision of $243,000. This compares to two restructured loans with a total balance of $771,000 during the quarter ended September 30, 2011 that were in default within a 12-month period subsequent to their original restructuring and required an additional provision of $200,000. Additionally, for the quarter ended September 30, 2012, there were no loans where their modification terms extended beyond the initial maturity of the modification. For the quarter ended September 30, 2011, one loan for $260,000 had their modification terms extended beyond the initial maturity of the modification.

As of September 30, 2012, the net outstanding balance of the 49 restructured loans was $20.9 million: 6 were classified in accordance with the Bank’s risk rating system as pass and remain on accrual status ($2.3 million); four were classified as special mention and remain on accrual status ($1.9 million); and 39 were classified as substandard ($16.7 million total, with 38 of the 39 loans or $13.9 million on non-accrual status). Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets that do not currently expose the Bank to sufficient risk to warrant adverse classification but possess weaknesses are designated as special mention and are closely monitored by the Bank. As of September 30, 2012, $13.0 million, or 62 percent, of the restructured loans are current with respect to their payment status.

The Corporation upgrades restructured single-family loans to the pass category if the borrower has demonstrated satisfactory contractual payments for at least six consecutive months; and if the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no longer categorized as a restructured loan for the United States Securities and Exchange Commissions (“SEC”) reporting purposes. In addition to the payment history described above, multi-family, commercial real estate, construction and commercial business loans (which are sometimes referred to in this report as “preferred loans”) must also demonstrate a combination of the following characteristics to be upgraded, such as: satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others.

To qualify for restructuring, a borrower must provide evidence of their creditworthiness such as, current financial statements, their most recent income tax returns, current paystubs, current W-2s, and most recent bank statements, among other documents, which are then verified by the Bank. The Bank re-underwrites the loan with the borrower’s updated financial information, new credit report, current loan balance, new interest rate, remaining loan term, updated property value and modified payment schedule, among other considerations, to determine if the borrower qualifies.

The following table summarizes at the dates indicated the restructured loan balances, net of allowance for loan losses, by loan type and non-accrual versus accrual status:


	September 30, 2012	June 30, 2012
(In Thousands)
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$10,662	$11,995
Multi-family	485	490
Commercial real estate	2,477	2,483
Other	159	522
Commercial business loans	160	165
Total	13,943	15,655

Restructured loans on accrual status:
Mortgage loans:
Single-family	4,166	6,148
Multi-family	2,755	3,266
Commercial business loans	-	33
Total	6,921	9,447
Total restructured loans	$20,864	$25,102

The following table shows the restructured loans by type, net of allowance for loan losses, at September 30, 2012 and June 30, 2012:

	September 30, 2012
		Allowance
	Recorded	for Loan	Net
	Investment	Losses ⁽¹⁾	Investment
(In Thousands)
Mortgage loans:
Single-family:
With a related allowance	$8,141	$(724)	$7,417
Without a related allowance ⁽²⁾	7,411	-	7,411
Total single-family loans	15,552	(724)	14,828

Multi-family:
With a related allowance	512	(27)	485
Without a related allowance ⁽²⁾	2,755	-	2,755
Total multi-family loans	3,267	(27)	3,240

Commercial real estate:
With a related allowance	2,914	(437)	2,477
Total commercial real estate loans	2,914	(437)	2,477

Other:
Without a related allowance ⁽²⁾	159	-	159
Total other loans	159	-	159

Commercial business loans:
With a related allowance	229	(69)	160
Total commercial business loans	229	(69)	160

Total restructured loans	$22,121	$(1,257)	$20,864

	June 30, 2012
		Allowance
	Recorded	for Loan	Net
	Investment	Losses ⁽¹⁾	Investment
(In Thousands)
Mortgage loans:
Single-family:
With a related allowance	$9,465	$(486)	$8,979
Without a related allowance ⁽²⁾	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 ⁽²⁾	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 ⁽²⁾	522	-	522
Total other loans	522	-	522

Commercial business loans:
With a related allowance	236	(71)	165
Without a related allowance ⁽²⁾	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, specifically assigned to the individual loan.

(2) There is no related allowance for loan losses because the loans have been charged-off to their fair value and/or the fair value of the collateral is higher than the loan balance.

During the quarter ended September 30, 2012, eleven properties were acquired in the settlement of loans, while 17 previously foreclosed upon properties were sold. As of September 30, 2012, real estate owned was comprised of 18 properties with a net fair value of $5.2 million, primarily located in Southern California. This compares to 24 real estate owned properties, primarily located in Southern California, with a net fair value of $5.5 million at June 30, 2012. A new appraisal was obtained on each of the properties at the time of foreclosure and fair value was calculated by using the lower of the appraised value or the listing price of the property, net of disposition costs. Any initial loss was recorded as a charge to the allowance for loan losses before being transferred to real estate owned. Subsequently, if there is further deterioration in real estate values, specific real estate owned loss reserves are established and charged to the statement of operations. In addition, the Corporation records costs to carry real estate owned as real estate operating expenses as incurred.