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Loans Held for Investment

3 Months Ended

Dec. 31, 2011

Note 6: Loans Held for Investment

Loans held for investment consisted of the following:

		December 31, 2011		June 30, 2011

Mortgage loans:
	Single-family	$ 465,606		$ 494,192
	Multi-family	298,285		304,808
	Commercial real estate	99,718		103,637
	Other	1,528		1,530
Commercial business loans		4,332		4,526
Consumer loans		604		750
	Total loans held for investment, gross	870,073		909,443

Deferred loan costs, net		2,304		2,649
Allowance for loan losses		(26,901	)	(30,482	)
	Total loans held for investment, net	$ 845,476		$ 881,610

As of December 31, 2011, the Bank had $46.5 million in mortgage loans that are subject to negative amortization, consisting of $29.7 million in multi-family loans, $10.7 million in commercial real estate loans and $6.1 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. During the second quarter of fiscal 2012, no loan interest income was added to the negative amortization loan balance, as compared to $10,000 of loan interest income in the comparable period of fiscal 2011. For the first six months of fiscal 2012, approximately $13,000 of loan interest income was added to the negative amortization loan balance, down from $27,000 of loan interest income in the comparable six-month period of 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 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 December 31, 2011 and June 30, 2011, the interest-only ARM loans were $229.6 million and $247.8 million, or 26.3% and 27.2% of loans held for investment, respectively.

The following table sets forth information at December 31, 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 December 31, 2011, unchanged from June 30, 2011. 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 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	$ 419,631	$ 32,140	$ 6,502	$ 1,474	$ 5,859	$ 465,606
	Multi-family	216,788	22,631	27,737	17,404	13,725	298,285
	Commercial real estate	65,755	7,701	5,515	2,670	18,077	99,718
	Other	1,292	-	-	-	236	1,528
Commercial business loans		2,020	-	-	-	2,312	4,332
Consumer loans		580	-	-	-	24	604
	Total loans held for investment, gross	$ 706,066	$ 62,472	$ 39,754	$ 21,548	$ 40,233	$ 870,073

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.

The following tables summarize the Corporation’s allowance for loan losses at December 31, 2011 and June 30, 2011:

(In Thousands)			December 31, 2011	June 30, 2011

General loan loss allowance:
	Mortgage loans:
		Single-family	$ 11,385	$ 11,561
		Multi-family	2,171	2,810
		Commercial real estate	1,694	1,796
		Other	5	5
	Commercial business loans		197	178
	Consumer loans		15	16
		Total general loan loss allowance	15,467	16,366

Specific loan loss allowance:
	Mortgage loans:
		Single-family	9,946	12,654
		Multi-family	607	581
		Commercial real estate	225	231
		Other	320	321
	Commercial business loans		336	329
		Total specific loan loss allowance	11,434	14,116
Total loan loss allowance			$ 26,901	$ 30,482

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

	For the Quarter Ended						For the Six Months Ended
	December 31,						December 31,
(Dollars in Thousands)	2011			2010			2011			2010

Allowance at beginning of period	$	28,704		$	39,086		$	30,482		$	43,501

Provision for loan losses		1,132			1,048			2,104			1,925

Recoveries:
Mortgage loans:
Single-family		191			-			304			1
Total recoveries		191			-			304			1

Charge-offs:
Mortgage loans:
Single-family		(3,101	)		(3,199	)		(5,962	)		(8,490	)
Multi-family		-			(3	)		-			(3	)
Consumer loans		(25	)		(7	)		(27	)		(9	)
Total charge-offs		(3,126	)		(3,209	)		(5,989	)		(8,502	)

Net charge-offs		(2,935	)		(3,209	)		(5,685	)		(8,501	)
Balance at end of period	$	26,901		$	36,925		$	26,901		$	36,925

Allowance for loan losses as a percentage of gross loans held for investment
		3.08	%		3.81	%		3.08	%		3.81	%

Net charge-offs as a percentage of average loans outstanding during the period (annualized)
		1.02	%		1.12	%		1.03	%		1.47	%

Allowance for loan losses as a percentage of gross non-performing loans at the end of the period
		62.71	%		56.18	%		62.71	%		56.18	%

The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of specific allowances for loan losses, at December 31, 2011 and June 30, 2011:

(In Thousands)				December 31, 2011
(In Thousands)				Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
			With a related allowance	$ 36,246	$ (9,946	)	$ 26,300
			Without a related allowance	607	-		607
	Total single-family loans			36,853	(9,946	)	26,907

	Multi-family:
			With a related allowance	2,534	(607	)	1,927
			Without a related allowance	352	-		352
	Total multi-family loans			2,886	(607	)	2,279

	Commercial real estate:
			With a related allowance	1,140	(225	)	915
		Without a related allowance		388	-		388
	Total commercial real estate loans			1,528	(225	)	1,303

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

Commercial business loans:
		With a related allowance		336	(336	)	-
	Total commercial business loans			336	(336	)	-

Total non-performing loans				$ 42,895	$ (11,434	)	$ 31,461

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

Mortgage loans:
	Single-family:
			With a related allowance	$ 42,957	$ (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

At December 31, 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 December 31, 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	$ 5,798	$ 6,282	$ 5,491	$ 9,336	$ 26,907
	Multi-family	352	-	-	1,927	2,279
	Commercial real estate	-	388	915	-	1,303
	Other	-	-	972	-	972
	Total	$ 6,150	$ 6,670	$ 7,378	$ 11,263	$ 31,461

During the quarters ended December 31, 2011 and 2010, the Corporation’s average investment in non-performing loans was $35.3 million and $52.1 million, respectively. Interest income of $1.5 million and $1.8 million was recognized, based on cash receipts, on non-performing loans during the quarters ended December 31, 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 $261,000 and $278,000 for the quarters ended December 31, 2011 and 2010, respectively, and was not included in the results of operations.

For the six months ended December 31, 2011 and 2010, the Corporation’s average investment in non-performing loans was $36.0 million and $55.2 million, respectively. Interest income of $3.1 million and $3.5 million was recognized, based on cash receipts, on non-performing loans during the six months ended December 31, 2011 and 2010, respectively. The foregone interest income amounted to $574,000 and $641,000 and was not included in the results of operations for the six months ended December 31, 2011 and 2010, respectively.

For the quarter ended December 31, 2011, four loans for $1.0 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 15 loans for $7.2 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the quarter ended December 31, 2010. During the quarter ended December 31, 2011 and 2010, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, for the quarter ended December 31, 2011 and 2010, four loans for $3.0 million and six loans for $2.8 million, respectively, had their modification terms extended beyond the initial maturity of the modification.

For the six months ended December 31, 2011, sixteen loans for $5.8 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 29 loans for $14.2 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the six months ended December 31, 2010. For the first six months ended December 31, 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 first six months ended December 31, 2010. Additionally, for the six months ended December 31, 2011 and 2010, five loans for $3.2 million and 13 loans for $5.0 million, respectively, had their modification terms extended beyond the initial maturity of the modification.

As of December 31, 2011, the net outstanding balance of the 72 restructured loans was $30.5 million: 18 were classified as pass and remain on accrual status ($7.5 million); nine were classified as special mention and remain on accrual status ($6.3 million); and 45 were classified as substandard ($16.7 million total, with 38 of the 45 loans or $13.3 million 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 type and non-accrual versus accrual status:

(In Thousands)			December 31, 2011	June 30, 2011
Restructured loans on non-accrual status:
	Mortgage loans:
		Single-family	$ 11,424	$ 15,133
		Multi-family	490	490
		Commercial real estate	365	1,660
		Other	972	972
	Commercial business loans		-	143
		Total	13,251	18,398

Restructured loans on accrual status:
	Mortgage loans:
		Single-family	10,092	15,589
		Multi-family	4,168	3,665
		Commercial real estate	2,772	1,142
	Other		-	237
	Commercial business loans		219	125
		Total	17,251	20,758
		Total restructured loans	$ 30,502	$ 39,156

The following table shows the restructured loans by type, net of specific valuation allowances for loan losses, at December 31, 2011 and June 30, 2011:

(In Thousands)			December 31, 2011
(In Thousands)			Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
		With a related allowance	$ 13,895	$ (2,471	)	$ 11,424
		Without a related allowance	10,092	-		10,092
	Total single-family loans		23,987	(2,471	)	21,516

	Multi-family:
		With a related allowance	517	(27	)	490
		Without a related allowance	4,168	-		4,168
	Total multi-family loans		4,685	(27	)	4,658

	Commercial real estate:
		With a related allowance	533	(168	)	365
		Without a related allowance	2,772	-		2,772
	Total commercial real estate loans		3,305	(168	)	3,137

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

Commercial business loans:
		With a related allowance	336	(336	)	-
		Without a related allowance	219	-		219
	Total commercial business loans		555	(336	)	219

Total restructured loans			$ 33,824	$ (3,322	)	$ 30,502

(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 December 31, 2011, twenty properties were acquired in the settlement of loans, while 40 previously foreclosed upon properties were sold. For the six months ended December 31, 2011, thirty-six properties were acquired in the settlement of loans, while 58 previously foreclosed upon properties were sold. As of December 31, 2011, real estate owned was comprised of 32 properties with a net fair value of $7.8 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 records costs to carry real estate owned as real estate operating expenses as incurred.