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Loans Held for Investment | 3 Months Ended
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Mar. 31, 2012
Loans Held for Investment [Abstract] |
Loans Held for Investment | Note 6: Loans Held for Investment
Loans held for investment consisted of the following:
| March 31, 2012 |  | June 30, 2011 |
Mortgage loans: |  |  |  |
Single-family | $ 452,936 |  | $ 494,192 |
Multi-family | 291,205 |  | 304,808 |
Commercial real estate | 98,642 |  | 103,637 |
Other | 756 |  | 1,530 |
Commercial business loans | 3,284 |  | 4,526 |
Consumer loans | 590 |  | 750 |
Total loans held for investment, gross | 847,413 |  | 909,443 |
Deferred loan costs, net | 2,172 |  | 2,649 |
Allowance for loan losses | (24,260 | ) | (30,482 | )
Total loans held for investment, net | $ 825,325 |  | $ 881,610 |
As of March 31, 2012, the Bank had $45.2 million in mortgage loans that are subject to negative amortization, consisting of $27.9 million in multi-family loans, $10.8 million in commercial real estate loans and $6.5 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. During the third quarter of fiscal 2012, no loan interest income was added to the negative amortization loan balance, as compared to $11,000 of loan interest income in the comparable period of fiscal 2011. For the first nine months of fiscal 2012, $13,000 of loan interest income was added to the negative amortization loan balance, down from $38,000 of loan interest income in the comparable nine-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 March 31, 2012 and June 30, 2011, the interest-only ARM loans were $223.6 million and $247.8 million, or 26.3% and 27.2% of loans held for investment, respectively. The following table sets forth information at March 31, 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 March 31, 2012, 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.
|  | 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 | $ 424,446 | $ 16,433 | $ 4,377 | $ 1,465 | $ 6,215 | $ 452,936
Multi-family | 209,716 | 13,237 | 42,866 | 12,105 | 13,281 | 291,205
Commercial real estate | 66,938 | 6,601 | 6,171 | 1,846 | 17,086 | 98,642
Other | 522 | - | - | - | 234 | 756
Commercial business loans | 1,647 | - | - | - | 1,637 | 3,284
Consumer loans | 567 | - | - | - | 23 | 590
Total loans held for investment, gross | $ 703,836 | $ 36,271 | $ 53,414 | $ 15,416 | $ 38,476 | $ 847,413
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 Office of the Comptroller of the Currency’s regulatory reporting requirements, the Corporation modified its charge-off policy on impaired loans during the quarter ended March 31, 2012. Historically, the Corporation established a specific valuation allowance for impaired loans at the time of impairment based upon the estimated fair value of the underlying collateral, less disposition costs, in comparison to the loan balance. The actual loan charge-off was not recorded until the foreclosure process was complete. Under the modified policy, losses on loans are charged-off in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 180 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. 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. Both methods are acceptable under GAAP. The modification to the charge-off policy resulted in $990,000 of additional charge-offs in the third quarter of fiscal 2012, however there was no impact on the allowance for loans losses or provision for loan losses because these charge-offs were timely identified in previous periods and were included in the Corporation’s loss experience as part of the evaluation of the allowance for loan losses in those prior periods. The Corporation still records reserves for individually impaired assets under ASC 310-40. The following tables summarize the Corporation’s allowance for loan losses at March 31, 2012 and June 30, 2011:
(In Thousands) | March 31, 2012 |  | June 30, 2011 (1)
Collectively evaluated for impairment: |  |  |
Mortgage loans: |  |  |
Single-family | $ 10,628 |  | $ 11,561
Multi-family | 2,353 |  | 2,810
Commercial real estate | 1,581 |  | 1,796
Other | 7 |  | 5
Commercial business loans | 124 |  | 178
Consumer loans | 14 |  | 16
Total collectively evaluated allowance | 14,707 |  | 16,366
Individually evaluated for impairment: |  |  |
Mortgage loans: |  |  |
Single-family | 8,980 |  | 12,654
Multi-family | 250 |  | 581
Commercial real estate | 214 |  | 231
Other | - |  | 321
Commercial business loans | 109 |  | 329
Total individually evaluated allowance | 9,553 |  | 14,116
Total loan loss allowance | $ 24,260 |  | $ 30,482
(1) | The presentation for the June 30, 2011 data was changed to conform to the current reporting requirement, specifically the collectively evaluated allowance was previously described as general valuation allowance and the individually evaluated allowance was previously described as a specific valuation allowance.
The following table is provided to disclose additional details on the Corporation’s allowance for loan losses (dollars in thousands):
| For the Quarter Ended |  | For the Nine Months Ended
| March 31, |  | March 31,
| 2012 |  | 2011 |  | 2012 |  | 2011
Allowance at beginning of period | $ 26,901 |  |  | $ 36,925 |  |  | $ 30,482 |  |  | $ 43,501 |
Provision for loan losses | 1,622 |  |  | 2,693 |  |  | 3,726 |  |  | 4,618 |
Recoveries: |  |  |  |  |  |  |  |  |  |  |
Mortgage loans: |  |  |  |  |  |  |  |  |  |  |
| Single-family | 33 |  |  | - |  |  | 337 |  |  | 1 |
| Construction | 28 |  |  | - |  |  | 28 |  |  | - |
Consumer loans | - |  |  | 1 |  |  | - |  |  | 1 |
Total recoveries | 61 |  |  | 1 |  |  | 365 |  |  | 2 |
Charge-offs: |  |  |  |  |  |  |  |  |  |  |
Mortgage loans: |  |  |  |  |  |  |  |  |  |  |
| Single-family | (3,081 | ) |  | (4,937 | ) |  | (9,043 | ) |  | (13,427 | )
| Multi-family | (534 | ) |  | (201 | ) |  | (534 | ) |  | (204 | )
| Commercial real estate | (49 | ) |  | - |  |  | (49 | ) |  | - |
| Other | (400 | ) |  | - |  |  | (400 | ) |  | - |
Commercial business loans | (256 | ) |  | - |  |  | (256 | ) |  | - |
Consumer loans | (4 | ) |  | (3 | ) |  | (31 | ) |  | (12 | )
Total charge-offs | (4,324 | ) |  | (5,141 | ) |  | (10,313 | ) |  | (13,643 | )
Net charge-offs | (4,263 | ) |  | (5,140 | ) |  | (9,948 | ) |  | (13,641 | )
Balance at end of period | $ 24,260 |  |  | $ 34,478 |  |  | $ 24,260 |  |  | $ 34,478 |
Allowance for loan losses as a percentage of gross loans held for investment |  |  |  |  |  |  |  |  |  |  |
2.86% | 3.64% |  |  | 2.86% |  |  | 3.64% |
Net charge-offs as a percentage of average loans outstanding during the period (annualized) |  |  |  |  |  |  |  |  |  |  |
1.64% | 1.94% |  |  | 1.23% |  |  | 1.62% |
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period |  |  |  |  |  |  |  |  |  |  |
57.34% | 54.19% |  |  | 57.34% |  |  | 54.19% |
The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of individually evaluated allowances at March 31, 2012 and June 30, 2011:
(In Thousands) | March 31, 2012
Recorded Investment | Individually Evaluated Allowance | Net Investment
Mortgage loans: |  |  |  |  |
| Single-family: |  |  |  |  |
| With a related allowance | $ 35,145 |  | $ (8,980 | ) | $ 26,165
| Without a related allowance | 656 |  | - |  | 656
| Total single-family loans | 35,801 |  | (8,980 | ) | 26,821
| Multi-family: |  |  |  |  |
| With a related allowance | 516 |  | (250 | ) | 266
| Without a related allowance | 1,022 |  | - |  | 1,022
| Total multi-family loans | 1,538 |  | (250 | ) | 1,288
| Commercial real estate: |  |  |  |  |
| With a related allowance | 1,133 |  | (214 | ) | 919
| Without a related allowance | 2,373 |  | - |  | 2,373
| Total commercial real estate loans | 3,506 |  | (214 | ) | 3,292
| Other: |  |  |  |  |
| Without a related allowance | 522 |  | - |  | 522
| Total other loans | 522 |  | - |  | 522
Commercial business loans: |  |  |  |  |
| With a related allowance | 224 |  | (109 | ) | 115
| Without a related allowance | 103 |  | - |  | 103
| Total commercial business loans | 327 |  | (109 | ) | 218
Total non-performing loans | $ 41,694 |  | $ (9,553 | ) | $ 32,141
(In Thousands) | June 30, 2011
Recorded Investment | Individually Evaluated Allowance (1) | 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
(1) | The presentation for the June 30, 2011 data was changed to conform to the current reporting requirement, specifically the individually evaluated allowance was previously described as a specific valuation allowance.
At March 31, 2012 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 individually evaluated allowances, as of March 31, 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 | $ 9,074 | $ 4,827 | $ 3,712 | $ 9,208 | $ 26,821
| Multi-family | 669 | 353 | - | 266 | 1,288
| Commercial real estate | 2,373 | - | 919 | - | 3,292
| Other | - | - | - | 522 | 522
Commercial business loans | 218 | - | - | - | 218
| Total | $ 12,334 | $ 5,180 | $ 4,631 | $ 9,996 | $ 32,141
During the quarters ended March 31, 2012 and 2011, the Corporation’s average investment in non-performing loans was $33.1 million and $47.8 million, respectively. Interest income of $1.7 million was recognized, based on cash receipts, on non-performing loans during both quarters ended March 31, 2012 and 2011, 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 $132,000 and $354,000 for the quarters ended March 31, 2012 and 2011, respectively, and was not included in the results of operations. For the nine months ended March 31, 2012 and 2011, the Corporation’s average investment in non-performing loans was $35.1 million and $52.8 million, respectively. Interest income of $4.8 million and $5.2 million was recognized, based on cash receipts, on non-performing loans during the nine months ended March 31, 2012 and 2011, respectively. The foregone interest income amounted to $706,000 and $995,000 and was not included in the results of operations for the nine months ended March 31, 2012 and 2011, respectively. For the quarter ended March 31, 2012, six loans for $3.1 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as troubled debt restructurings (“restructured loans”). This compares to eight loans for $3.6 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the quarter ended March 31, 2011. During the quarter ended March 31, 2012, 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 $737,000 during the quarter ended March 31, 2011 that was in default within a 12-month period subsequent to its original restructuring and required an additional provision of $327,000. Additionally, for the quarter ended March 31, 2012 and 2011, three loans for $1.0 million and three loans for $2.0 million, respectively, had their modification terms extended beyond the initial maturity of the modification. For the nine months ended March 31, 2012, twenty-two loans for $8.9 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 37 loans for $17.8 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the nine months ended March 31, 2011. For the first nine months ended March 31, 2012, 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 individually evaluated allowance. This compares to three restructured loans with a total loan balance of $1.0 million that was in default within a 12-month period subsequent to its original restructuring and required an additional individually evaluated allowance of $460,000 in the first nine months ended March 31, 2011. Additionally, for the nine months ended March 31, 2012 and 2011, eight loans for $4.3 million and 16 loans for $7.0 million, respectively, had their modification terms extended beyond the initial maturity of the modification. As of March 31, 2012, the net outstanding balance of the 69 restructured loans was $28.5 million: 20 were classified in accordance with the Bank’s risk rating system as pass and remain on accrual status ($8.3 million); four were classified as special mention and remain on accrual status ($4.9 million); and 45 were classified as substandard ($15.3 million total, with 43 of the 45 loans or $14.5 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 March 31, 2012, $22.9 million, or 80 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. 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 individually evaluated allowances, by loan type and non-accrual versus accrual status:
(In Thousands) | March 31, 2012 |  | June 30, 2011 |
Restructured loans on non-accrual status: |  |  |  |
| Mortgage loans: |  |  |  |
|  | Single-family | $ 10,213 |  | $ 15,133 |
|  | Multi-family | 776 |  | 490 |
|  | Commercial real estate | 2,739 |  | 1,660 |
|  | Other | 522 |  | 972 |
| Commercial business loans | 218 |  | 143 |
|  | Total | 14,468 |  | 18,398 |
Restructured loans on accrual status: |  |  |  |
| Mortgage loans: |  |  |  |
|  | Single-family | 9,505 |  | 15,589 |
|  | Multi-family | 3,653 |  | 3,665 |
|  | Commercial real estate | 880 |  | 1,142 |
| Other | - |  | 237 |
| Commercial business loans | 35 |  | 125 |
|  | Total | 14,073 |  | 20,758 |
|  | Total restructured loans | $ 28,541 |  | $ 39,156 |
The following table shows the restructured loans by type, net of individually evaluated allowances at March 31, 2012 and June 30, 2011:
(In Thousands) | March 31, 2012
Recorded Investment | Individually Evaluated Allowance | Net Investment
Mortgage loans: |  |  |  |  |
| Single-family: |  |  |  |  |
|  | With a related allowance | $ 12,321 |  | $ (2,108 | ) | $ 10,213
|  | Without a related allowance | 9,505 |  | - |  | 9,505
| Total single-family loans | 21,826 |  | (2,108 | ) | 19,718
| Multi-family: |  |  |  |  |
|  | With a related allowance | 516 |  | (250 | ) | 266
|  | Without a related allowance | 4,163 |  | - |  | 4,163
| Total multi-family loans | 4,679 |  | (250 | ) | 4,429
| Commercial real estate: |  |  |  |  |
|  | With a related allowance | 530 |  | (164 | ) | 366
|  | Without a related allowance | 3,253 |  | - |  | 3,253
| Total commercial real estate loans | 3,783 |  | (164 | ) | 3,619
| Other: |  |  |  |  |
|  | Without a related allowance | 522 |  | - |  | 522
| Total other loans | 522 |  | - |  | 522
Commercial business loans: |  |  |  |  |
|  | With a related allowance | 214 |  | (99 | ) | 115
|  | Without a related allowance | 138 |  | - |  | 138
| Total commercial business loans | 352 |  | (99 | ) | 253
Total restructured loans | $ 31,162 |  | $ (2,621 | ) | $ 28,541
(In Thousands) | June 30, 2011
Recorded Investment | Individually Evaluated Allowance (1) | 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
(1) | The presentation for the June 30, 2011 data was changed to conform to the current reporting requirement, specifically the individually evaluated allowance was previously described as a specific valuation allowance.
During the quarter ended March 31, 2012, eighteen properties were acquired in the settlement of loans, while 24 previously foreclosed upon properties were sold. For the nine months ended March 31, 2012, fifty-four properties were acquired in the settlement of loans, while 82 previously foreclosed upon properties were sold. As of March 31, 2012, real estate owned was comprised of 27 properties with a net fair value of $6.1 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.

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