Loans Held for Investment

Loans held for investment consisted of the following:



(In Thousands)	June 30, 2013			June 30, 2012
Mortgage loans:
Single-family	$	404,341		$	439,024
Multi-family	262,316			278,057
Commercial real estate	92,488			95,302
Construction	292			—
Other	—			755
Commercial business loans	1,687			2,580
Consumer loans	437			506
Total loans held for investment, gross	761,561			816,224

Undisbursed loan funds	(292		)	—
Deferred loan costs, net	2,063			2,095
Allowance for loan losses	(14,935		)	(21,483		)
Total loans held for investment, net	$	748,397		$	796,836

As of June 30, 2013, the Corporation had $33.3 million in mortgage loans that were subject to negative amortization, consisting of $24.4 million in multi-family loans, $5.1 million in single-family loans and $3.8 million in commercial real estate 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, $6.5 million in single-family loans and $7.0 million in commercial real estate loans. During 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 Corporation 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 Corporation 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, 2013 and 2012, the interest-only ARM loans were $188.5 million and $214.2 million, or 24.7% and 26.2% of gross loans held for investment, respectively.

The following table sets forth information at June 30, 2013 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 June 30, 2013, 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 Corporation’s actual repricing experience to differ materially from that shown.



	Adjustable Rate
(In Thousands)	Within One Year		After One Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		Fixed Rate		Total
Mortgage loans:
Single-family	$	371,167	$	11,749	$	4,838	$	2,237	$	14,350	$	404,341
Multi-family	141,664		8,249		91,265		10,378		10,760		262,316
Commercial real estate	44,573		2,313		30,967		688		13,947		92,488
Construction	292		—		—		—		—		292
Commercial business loans	793		—		—		—		894		1,687
Consumer loans	420		—		—		—		17		437
Total loans held for investment, gross	$	558,909	$	22,311	$	127,070	$	13,303	$	39,968	$	761,561

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 quarterly 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 Corporation’s loans held for investment, will not request the Corporation 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 Corporation’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 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. Subsequent recoveries, if any, are credited to the allowance. Recoveries may include payments from the cost recovery method, mortgage insurance payments or other cash receipts. The allowance for loan losses for non-performing loans is determined by applying ASC 310, “Receivables,”. 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. For non-performing commercial real estate loans, individually evaluated allowances are calculated based on their fair values and if their fair values are higher than their loan balances, no allowances are required.

The following tables summarize the Corporation’s allowance for loan losses at June 30, 2013 and 2012:



(In Thousands)	June 30, 2013		June 30, 2012
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	8,949	$	15,189
Multi-family	4,689		3,524
Commercial real estate	1,053		1,810
Other	—		7
Commercial business loans	78		169
Consumer loans	12		13
Total collectively evaluated allowance	14,781		20,712

Individually evaluated for impairment:
Mortgage loans:
Single-family	113		744
Multi-family	—		27
Commercial business loans	41		—
Total individually evaluated allowance	154		771
Total loan loss allowance	$	14,935	$	21,483

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,
(In Thousands)	2013			2012			2011

Balance, beginning of year	$	21,483		$	30,482		$	43,501
(Recovery) provision for loan losses	(1,499		)	5,777			5,465
Recoveries	762			375			27
Charge-offs	(5,811		)	(15,151		)	(18,511		)
Balance, end of year	$	14,935		$	21,483		$	30,482

The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of allowance for loan losses or charge-offs at June 30, 2013 and 2012:



(In Thousands)	June 30, 2013
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	9,908	$	(2,350	)	$	7,558
Without a related allowance ⁽²⁾	5,665		—			5,665
Total single-family loans	15,573		(2,350		)	13,223

Multi-family:
With a related allowance	4,519		(1,320		)	3,199
Without a related allowance ⁽²⁾	558		—			558
Total multi-family loans	5,077		(1,320		)	3,757

Commercial real estate:
Without a related allowance ⁽²⁾	4,572		—			4,572
Total commercial real estate loans	4,572		—			4,572

Commercial business loans:
With a related allowance	189		(59		)	130
Total commercial business loans	189		(59		)	130

Total non-performing loans	$	25,411	$	(3,729	)	$	21,682


⁽¹⁾	Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.


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



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

At June 30, 2013 and 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 or charge-offs, as of June 30, 2013 and 2012:



As of June 30, 2013 (In Thousands)	3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 Months		Total
Mortgage loans:
Single-family	$	2,089	$	1,650	$	1,801	$	7,683	$	13,223
Multi-family	2,109		383		—		1,265		3,757
Commercial real estate	1,183		—		1,744		1,645		4,572
Commercial business loans	—		—		—		130		130
Total	$	5,381	$	2,033	$	3,545	$	10,723	$	21,682



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

During the fiscal years ended June 30, 2013, 2012 and 2011, the Corporation’s average investment in non-performing loans was $24.2 million, $34.4 million and $50.2 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 fiscal years ended June 30, 2013, 2012 and 2011, interest income of $885,000, $1.5 million and $2.3 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 $878,000 , $876,000 and $1.3 million for the fiscal years ended June 30, 2013, 2012 and 2011, respectively, and was not included in the loan interest income; while $542,000, $0 and $0, respectively, were collected and applied to the net loan balances.

The effect of the non-performing loans on interest income for the years ended June 30, 2013, 2012 and 2011 is presented below:



(In Thousands)	Year Ended June 30,
(In Thousands)	2013			2012			2011

Contractual interest due	$	1,763		$	2,432		$	3,605
Interest recognized	(885		)	(1,556		)	(2,313		)
Net foregone interest	$	878		$	876		$	1,292

For the fiscal year ended June 30, 2013, there were no new restructured loans. This compares to 24 loans with a total balance of $10.1 million that were restructured during the fiscal year ended June 30, 2012. During the fiscal year ended June 30, 2013, no restructured loans were in default within a 12-month period subsequent to their original restructuring. This compares to two restructured loans with a total balance of $771,000 during the fiscal year ended June 30, 2012 that were in default within a 12-month period subsequent to their original restructuring and required an additional provision of $200,000. Additionally, during the fiscal year ended June 30, 2013, there was one restructured loan for $131,000 whose modification was extended beyond the initial maturity of the modification. For the fiscal year ended June 30, 2012, 10 restructured loans with a total balance of $5.5 million had their modification extended beyond the initial maturity of the modification.

As of June 30, 2013, the net outstanding balance of the 26 restructured loans was $9.5 million: one was classified as special mention and remains on accrual status ($434,000); and 25 were classified as substandard ($9.1 million, all of which are on non-accrual status). Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Assets that do not currently expose the Corporation to sufficient risk to warrant adverse classification but possess weaknesses are designated as special mention and are closely monitored by the Corporation. As of June 30, 2013, $6.5 million, or 68 percent, of the restructured loans were current with respect to their payment status. As of June 30, 2012, the net outstanding balance of 56 restructured loans was $25.1 million: 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, $18.5 million, 74 percent, of the restructured loans have a current 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; 12 months for those loans that were restructured more than once; 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 Commission (“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 to the pass category: satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others.

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



(In Thousands)	June 30, 2013		June 30, 2012
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	5,094	$	11,995
Multi-family	2,521		490
Commercial real estate	1,354		2,483
Other	—		522
Commercial business loans	123		165
Total	9,092		15,655

Restructured loans on accrual status:
Mortgage loans:
Single-family	434		6,148
Multi-family	—		3,266
Commercial business loans	—		33
Total	434		9,447
Total restructured loans	$	9,526	$	25,102

The following table shows the restructured loans by type, net of allowance for loan losses or charge-offs, at June 30, 2013 and 2012:



(In Thousands)	June 30, 2013
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	3,774	$	(795	)	$	2,979
Without a related allowance ⁽²⁾	2,549		—			2,549
Total single-family loans	6,323		(795		)	5,528

Multi-family:
With a related allowance	3,266		(1,006		)	2,260
Without a related allowance ⁽²⁾	261		—			261
Total multi-family loans	3,527		(1,006		)	2,521

Commercial real estate:
Without a related allowance ⁽²⁾	1,354		—			1,354
Total commercial real estate loans	1,354		—			1,354

Commercial business loans:
With a related allowance	180		(57		)	123
Total commercial business loans	180		(57		)	123

Total restructured loans	$	11,384	$	(1,858	)	$	9,526


⁽¹⁾	Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.


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



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

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,
(In Thousands)	2013			2012			2011

Balance, beginning of year	$	2,030		$	2,036		$	2,341
Originations	3,581			2,807			2,742
Sales and payments	(3,587		)	(2,813		)	(3,047		)
Balance, end of year	$	2,024		$	2,030		$	2,036

As of June 30, 2013 and 2012, all of the related-party loans were performing in accordance with their original contractual terms.