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Loans Held for Investment

3 Months Ended

Sep. 30, 2011

Note 6: Loans Held for Investment

Loans held for investment consisted of the following:

(In Thousands)	September 30, 2011			June 30, 2011

Mortgage loans:
Single-family	$	480,530		$	494,192
Multi-family		298,072			304,808
Commercial real estate		100,863			103,637
Other		1,528			1,530
Commercial business loans		4,267			4,526
Consumer loans		748			750
Total loans held for investment, gross		886,008			909,443

Deferred loan costs, net		2,345			2,649
Allowance for loan losses		(28,704	)		(30,482	)
Total loans held for investment, net	$	859,649		$	881,610

As of September 30, 2011, the Bank had $48.4 million in mortgage loans that are subject to negative amortization, consisting of $29.6 million in multi-family loans, $11.3 million in commercial real estate loans and $7.5 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 $339,000 at September 30, 2011 from $353,000 at June 30, 2011. During the first quarter of fiscal 2012, approximately $13,000, or 0.10%, of loan interest income was added to the negative amortization loan balance, down from $17,000, or 0.11% in the comparable quarter of fiscal 2010. 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, 2011 and June 30, 2011, the interest-only ARM loans were $238.2 million and $247.8 million, or 26.8% and 27.2% of loans held for investment, respectively.

The following table sets forth information at September 30, 2011 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, 2011, unchanged from June 30, 2011. 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	$ 421,929	$ 46,365	$ 5,678	$ 746	$ 5,812	$ 480,530
	Multi-family	207,440	38,072	14,090	23,838	14,632	298,072
	Commercial real estate	64,976	10,655	2,695	4,721	17,816	100,863
	Other	1,292	-	-	-	236	1,528
Commercial business loans		2,118	-	-	-	2,149	4,267
Consumer loans		703	-	-	-	45	748
	Total loans held for investment, gross	$ 698,458	$ 95,092	$ 22,463	$ 29,305	$ 40,690	$ 886,008

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 that the Bank 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.

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

(In Thousands)			September 30, 2011	June 30, 2011

General loan loss allowance:
	Mortgage loans:
		Single-family	$ 11,157	$ 11,561
		Multi-family	2,823	2,810
		Commercial real estate	1,754	1,796
		Other	5	5
	Commercial business loans		177	178
	Consumer loans		15	16
		Total general loan loss allowance	15,931	16,366

Specific loan loss allowance:
	Mortgage loans:
		Single-family	11,267	12,654
		Multi-family	607	581
		Commercial real estate	236	231
		Other	320	321
	Commercial business loans		325	329
	Consumer loans		18	-
		Total specific loan loss allowance	12,773	14,116
Total loan loss allowance			$ 28,704	$ 30,482

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

	Three Months Ended
	September 30,
(Dollars in Thousands)	2011			2010

Allowance at beginning of period	$	30,482		$	43,501

Provision for loan losses		972			877

Recoveries:
Mortgage loans:
Single-family		113			1
Total recoveries		113			1

Charge-offs:
Mortgage loans:
Single-family		(2,861	)		(5,291	)
Consumer loans		(2	)		(2	)
Total charge-offs		(2,863	)		(5,293	)

Net charge-offs		(2,750	)		(5,292	)
Allowance at end of period	$	28,704		$	39,086

Allowance for loan losses as a percentage of gross loans held for investment
		3.23	%		3.88	%

Net charge-offs as a percentage of average loans receivable, net, during the period
		1.04	%		1.82	%

Allowance for loan losses as a percentage of gross non-performing loans at the end of the period
		57.61	%		55.28	%

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

(In Thousands)				September 30, 2011
(In Thousands)				Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
			With a related allowance	$ 41,508	$ (11,267	)	$ 30,241
			Without a related allowance	1,313	-		1,313
	Total single-family loans			42,821	(11,267	)	31,554
	Multi-family:
			With a related allowance	2,534	(607	)	1,927
	Total multi-family loans			2,534	(607	)	1,927

	Commercial real estate:
			With a related allowance	2,447	(236	)	2,211
		Without a related allowance		388	-		388
	Total commercial real estate loans			2,835	(236	)	2,599

	Other:
		With a related allowance		1,292	(320	)	972
	Total other loans			1,292	(320	)	972

Commercial business loans:
		With a related allowance		328	(325	)	3
	Total commercial business loans			328	(325	)	3

Consumer loans:
		With a related allowance		18	(18	)	-
	Total consumer loans			18	(18	)	-
Total non-performing loans				$ 49,828	$ (12,773	)	$ 37,055

(In Thousands)				June 30, 2011
(In Thousands)				Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
			With a related allowance	$ 42,958	$ (12,655	)	$ 30,303
			Without a related allowance	1,535	-		1,535
	Total single-family loans			44,493	(12,655	)	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		1,292	(320	)	972
	Total other loans			1,292	(320	)	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

At September 30, 2011 and June 30, 2011, there were no commitments to lend additional funds to those borrowers whose loans were classified as impaired.

The following table describes the aging analysis (length of time on non-performing status) of non-performing loans, net of specific allowance for loan losses, as of September 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	$ 9,969	$ 7,605	$ 3,996	$ 9,984	$ 31,554
	Multi-family	-	-	-	1,927	1,927
	Commercial real estate	388	918	1,293	-	2,599
	Other	-	-	972	-	972
Commercial business loans		-	-	3	-	3
	Total	$ 10,357	$ 8,523	$ 6,264	$ 11,911	$ 37,055

During the quarters ended September 30, 2011 and 2010, the Corporation’s average investment in non-performing loans was $36.6 million and $58.4 million, respectively. Interest income of $1.5 million and $1.7 million was recognized, based on cash receipts, on non-performing loans during the quarters ended September 30, 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. Foregone interest income, which would have been recorded had the non-performing loans been current in accordance with their original terms, amounted to $313,000 and $363,000 for the quarters ended September 30, 2011 and 2010, respectively, and was not included in the results of operations.

For the quarter ended September 30, 2011, twelve loans for $4.8 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans. This compares to 21 loans for $9.4 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the quarter ended September 30, 2010. During the quarter ended September 30, 2011, 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 a $200,000 additional provision for loan losses. This compares to one restructured loan with a total loan balance of $285,000 that was in default within a 12-month period subsequent to its original restructuring and required an additional provision for loan losses of $133,000 in the quarter ended September 30, 2010. As of September 30, 2011, the net outstanding balance of the 87 restructured loans was $36.1 million: 26 were classified as pass and remain on accrual status ($11.6 million); eight were classified as special mention and remain on accrual status ($5.7 million); 52 were classified as substandard ($18.8 million total, with 47 of the 52 loans or $17.1 million on non-accrual status); and one loan was classified as a complete loss and is on non-accrual 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. 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 loans by loan types and non-accrual versus accrual status:

(In Thousands)			September 30, 2011	June 30, 2011
Restructured loans on non-accrual status:
	Mortgage loans:
		Single-family	$ 13,940	$ 15,133
		Multi-family	490	490
		Commercial real estate	1,660	1,660
		Other	972	972
	Commercial business loans		3	143
		Total	17,065	18,398

Restructured loans on accrual status:
	Mortgage loans:
		Single-family	12,940	15,589
		Multi-family	4,172	3,665
		Commercial real estate	1,473	1,142
	Other		236	237
	Commercial business loans		189	125
		Total	19,010	20,758
		Total restructured loans	$ 36,075	$ 39,156

The following table shows the restructured loans by type, net of specific valuation allowances for loan losses, at September 30, 2011 and June 30, 2011:

(In Thousands)			September 30, 2011
(In Thousands)			Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
		With a related allowance	$ 16,943	$ (3,003	)	$ 13,940
		Without a related allowance	12,940	-		12,940
	Total single-family loans		29,883	(3,003	)	26,880

	Multi-family:
		With a related allowance	517	(27	)	490
		Without a related allowance	4,172	-		4,172
	Total multi-family loans		4,689	(27	)	4,662

	Commercial real estate:
		With a related allowance	1,837	(177	)	1,660
		Without a related allowance	1,473	-		1,473
	Total commercial real estate loans		3,310	(177	)	3,133

	Other:
		With a related allowance	1,292	(320	)	972
		Without a related allowance	236	-		236
	Total other loans		1,528	(320	)	1,208

Commercial business loans:
		With a related allowance	328	(325	)	3
		Without a related allowance	189	-		189
	Total commercial business loans		517	(325	)	192
Total restructured loans			$ 39,927	$ (3,852	)	$ 36,075

(In Thousands)			June 30, 2011
(In Thousands)			Recorded Investment	Specific Allowance For Loan Losses		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

During the quarter ended September 30, 2011, sixteen properties were acquired in the settlement of loans, while 18 previously foreclosed upon properties were sold. As of September 30, 2011, real estate owned was comprised of 52 properties with a net fair value of $7.3 million, primarily located in Southern California. This compares to 54 real estate owned properties, primarily located in Southern California, with a net fair value of $8.3 million at June 30, 2011. 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 reflects costs to carry real estate owned as real estate operating expenses as incurred.