Loans Held for Investment

Loans held for investment consisted of the following:



(In Thousands)	September 30, 2013			June 30, 2013
Mortgage loans:
Single-family	$	391,888		$	404,341
Multi-family	273,847			262,316
Commercial real estate	91,417			92,488
Construction	292			292
Commercial business loans	1,386			1,687
Consumer loans	423			437
Total loans held for investment, gross	759,253			761,561

Undisbursed loan funds	(271		)	(292		)
Deferred loan costs, net	2,079			2,063
Allowance for loan losses	(12,105		)	(14,935		)
Total loans held for investment, net	$	748,956		$	748,397

As of September 30, 2013, the Corporation had $30.6 million in mortgage loans that are subject to negative amortization, consisting of $23.2 million in multi-family loans, $3.9 million in single-family loans and $3.5 million in commercial real estate loans. This compares to $33.3 million of negative amortization mortgage loans at June 30, 2013, 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. During the first quarter of fiscal 2014 and 2013, no loan interest income was added to the negative amortization loan balance. 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 September 30, 2013 and June 30, 2013, the interest-only ARM loans were $182.1 million and $188.5 million, or 24% and 25% of loans held for investment, respectively.

The following table sets forth information at September 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 September 30, 2013, unchanged from June 30, 2013. 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	$	354,350	$	15,149	$	4,285	$	2,906	$	15,198	$	391,888
Multi-family	130,479		18,898		98,629		16,471		9,370		273,847
Commercial real estate	40,272		2,677		34,374		1,400		12,694		91,417
Construction	292		—		—		—		—		292
Commercial business loans	648		—		—		—		738		1,386
Consumer loans	407		—		—		—		16		423
Total loans held for investment, gross	$	526,448	$	36,724	$	137,288	$	20,777	$	38,016	$	759,253

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 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 Accounting Standards Codification (“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, an individually evaluated allowance is calculated based on the loan's fair value and if the fair values is higher than the loan balance, no allowance is required.

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



(In Thousands)	September 30, 2013		June 30, 2013
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	7,372	$	8,949
Multi-family	3,600		4,689
Commercial real estate	1,014		1,053
Commercial business loans	66		78
Consumer loans	12		12
Total collectively evaluated allowance	12,064		14,781

Individually evaluated for impairment:
Mortgage loans:
Single-family	—		113
Commercial business loans	41		41
Total individually evaluated allowance	41		154
Total loan loss allowance	$	12,105	$	14,935

The following table is provided to disclose additional details on the Corporation’s allowance for loan losses:



	For the Quarters Ended September 30,
(Dollars in Thousands)	2013			2012

Allowance at beginning of period	$	14,935		$	21,483

(Recovery) provision for loan losses	(942		)	533

Recoveries:
Mortgage loans:
Single-family	168			70
Multi-family	11			—
Consumer loans	1			1
Total recoveries	180			71

Charge-offs:
Mortgage loans:
Single-family	(690		)	(1,967		)
Multi-family	(1,378		)	—
Consumer loans	—			(2		)
Total charge-offs	(2,068		)	(1,969		)

Net charge-offs	(1,888		)	(1,898		)
Balance at end of period	$	12,105		$	20,118

Allowance for loan losses as a percentage of gross loans held for investment	1.59		%	2.52		%
Net charge-offs as a percentage of average loans receivable, net, during the period (annualized)	0.82		%	0.72		%
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period	58.57		%	58.64		%

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, 2013 and June 30, 2013:



(In Thousands)	September 30, 2013
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	6,519	$	(1,689	)	$	4,830
Without a related allowance ⁽²⁾	5,681		—			5,681
Total single-family loans	12,200		(1,689		)	10,511

Multi-family:
With a related allowance	1,196		(365		)	831
Without a related allowance ⁽²⁾	2,435		—			2,435
Total multi-family loans	3,631		(365		)	3,266

Commercial real estate:
Without a related allowance ⁽²⁾	4,645		—			4,645
Total commercial real estate loans	4,645		—			4,645

Commercial business loans:
With a related allowance	190		(60		)	130
Total commercial business loans	190		(60		)	130

Total non-performing loans	$	20,666	$	(2,114	)	$	18,552


⁽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 individual loan balance.



(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 individual loan balance.

At September 30, 2013 and June 30, 2013, 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 September 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	$	1,064	$	477	$	2,218	$	6,752	$	10,511
Multi-family	166		1,716		315		1,069		3,266
Commercial real estate	2,049		1,180		247		1,169		4,645
Commercial business loans	9		—		—		121		130
Total	$	3,288	$	3,373	$	2,780	$	9,111	$	18,552

For the quarters ended September 30, 2013 and 2012, the Corporation’s average investment in non-performing loans was $18.4 million and $29.1 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, 2013 and 2012, interest income of $1.4 million and $1.6 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 $148,000 and $101,000 for the quarters ended September 30, 2013 and 2012, respectively, and was not included in the results of operations, of which $104,000 and $99,000, respectively, was collected and applied to the net loan balances.

For the quarters ended September 30, 2013 and 2012, there were no new loans that were modified from their original terms, re-underwritten or identified in the Corporation’s asset quality reports as restructured loans. During the quarter ended September 30, 2013, no restructured loans were in default within a 12-month period subsequent to their original restructuring. This compares to one restructured loan with a total balance of $437,000 that was in default within a 12-month period subsequent to their original restructuring and required an additional provision of $243,000 during the quarter ended September 30, 2012. Additionally, during the quarters ended September 30, 2013 and 2012, there were no loans whose modification were extended beyond the initial maturity of the modification.

As of September 30, 2013, the net outstanding balance of the 23 restructured loans was $7.7 million: two were classified as special mention and remain on accrual status ($815,000); and 21 were classified as substandard ($6.9 million , all of which were 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 September 30, 2013, $5.2 million, or 69 percent, of the restructured loans were 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; 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 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: 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 Corporation. The Corporation 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:



(In Thousands)	September 30, 2013		June 30, 2013
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	3,740	$	5,094
Multi-family	2,109		2,521
Commercial real estate	880		1,354
Commercial business loans	115		123
Total	6,844		9,092

Restructured loans on accrual status:
Mortgage loans:
Single-family	815		434
Total	815		434

Total restructured loans	$	7,659	$	9,526

The following table shows the restructured loans by type, net of allowance for loan losses, at September 30, 2013 and June 30, 2013:



(In Thousands)	September 30, 2013
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	1,456	$	(420	)	$	1,036
Without a related allowance ⁽²⁾	3,519		—			3,519
Total single-family loans	4,975		(420		)	4,555

Multi-family:
With a related allowance	508		(193		)	315
Without a related allowance ⁽²⁾	1,794		—			1,794
Total multi-family loans	2,302		(193		)	2,109

Commercial real estate:
Without a related allowance ⁽²⁾	880		—			880
Total commercial real estate loans	880		—			880

Commercial business loans:
With a related allowance	169		(54		)	115
Total commercial business loans	169		(54		)	115

Total restructured loans	$	8,326	$	(667	)	$	7,659


⁽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 individual loan balance.



(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 individual loan balance.

During the quarter ended September 30, 2013, three properties were acquired in the settlement of loans, while five previously foreclosed upon properties were sold. As of September 30, 2013, real estate owned was comprised of eight properties with a net fair value of $3.2 million, primarily located in Southern California. This compares to 10 real estate owned properties, primarily located in Southern California, with a net fair value of $2.3 million at June 30, 2013. 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.