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Note 6: Loans Held For Investment | 3 Months Ended
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Dec. 31, 2012
Notes |
Note 6: Loans Held For Investment | Note 6: Loans Held for Investment Loans held for investment consisted of the following:
| December 31, 2012 |  | June 30, 2012 |
Mortgage loans: |  |  |  |
Single-family | $422,457 |  | $439,024 |
Multi-family | 261,580 |  | 278,057 |
Commercial real estate | 101,621 |  | 95,302 |
Other | 390 |  | 755 |
Commercial business loans | 2,199 |  | 2,580 |
Consumer loans | 383 |  | 506 |
Total loans held for investment, gross | 788,630 |  | 816,224 |
Deferred loan costs, net | 1,957 |  | 2,095 |
Allowance for loan losses | (18,530) |  | (21,483) |
Total loans held for investment, net | $772,057 |  | $796,836 |
As of December 31, 2012, the Corporation had $36.4 million in mortgage loans that are subject to negative amortization, consisting of $25.6 million in multi-family loans, $5.8 million in single-family loans and $5.0 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 the second quarter of fiscal 2013 and 2012, no loan interest income was added to the negative amortization loan balance. For the first six months of 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 December 31, 2012 and June 30, 2012, the interest-only ARM loans were $201.9 million and $214.2 million, or 25.6% and 26.2% of loans held for investment, respectively. The following table sets forth information at December 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 December 31, 2012, 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 |  |
|  | After | After | After |  |
|  | One Year | 3 Years | 5 Years |  |
| Within | Through | Through | Through | Fixed |
| One Year | 3 Years | 5 Years | 10 Years | Rate | Total
(In Thousands) |  |  |  |  |  |
Mortgage loans: |  |  |  |  |  |
Single-family | $382,617 | $17,907 | $8,605 | $1,834 | $11,494 | $422,457
Multi-family | 162,736 | 14,039 | 67,035 | 6,118 | 11,652 | 261,580
Commercial real estate | 57,821 | 2,461 | 17,991 | 8,311 | 15,037 | 101,621
Other | 159 | - | - | - | 231 | 390
Commercial business loans | 988 | - | - | - | 1,211 | 2,199
Consumer loans | 363 | - | - | - | 20 | 383
Total loans held for investment, gross | $604,684 | $34,407 | $93,631 | $16,263 | $39,645 | $788,630
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. The following tables summarize the Corporation’s allowance for loan losses at December 31, 2012 and June 30, 2012:
| December 31, |  | June 30,
| 2012 |  | 2012
(In Thousands) |  |  |
Collectively evaluated for impairment: |  |  |
Mortgage loans: |  |  |
Single-family | $12,201 |  | $15,189
Multi-family | 3,660 |  | 3,524
Commercial real estate | 1,852 |  | 1,810
Other | 7 |  | 7
Commercial business loans | 101 |  | 169
Consumer loans | 13 |  | 13
Total collectively evaluated allowance | 17,834 |  | 20,712
Individually evaluated for impairment: |  |  |
Mortgage loans: |  |  |
Single-family | 503 |  | 744
Multi-family | 27 |  | 27
Other | 159 |  | -
Commercial business loans | 7 |  | -
Total individually evaluated allowance | 696 |  | 771
Total loan loss allowance | $18,530 |  | $ 21,483
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 Six Months Ended |
| December 31, |  | December 31, |
| 2012 |  | 2011 |  | 2012 |  | 2011 |
(Dollars in Thousands) |  |  |  |  |  |  |  |
Allowance at beginning of period | $20,118 |  | $28,704 |  | $21,483 |  | $30,482 |
Provision for loan losses | 23 |  | 1,132 |  | 556 |  | 2,104 |
Recoveries: |  |  |  |  |  |  |  |
Mortgage loans: |  |  |  |  |  |  |  |
Single-family | 93 |  | 191 |  | 163 |  | 304 |
Consumer loans | 1 |  | - |  | 2 |  | - |
Total recoveries | 94 |  | 191 |  | 165 |  | 304 |
Charge-offs: |  |  |  |  |  |  |  |
Mortgage loans: |  |  |  |  |  |  |  |
Single-family | (1,704) |  | (3,101) |  | (3,671) |  | (5,962) |
Multi-family | - |  | - |  | - |  | - |
Consumer loans | (1) |  | (25) |  | (3) |  | (27) |
Total charge-offs | (1,705) |  | (3,126) |  | (3,674) |  | (5,989) |
Net charge-offs | (1,611) |  | (2,935) |  | (3,509) |  | (5,685) |
Balance at end of period | $18,530 |  | $26,901 |  | $18,530 |  | $26,901 |
Allowance for loan losses as a percentage of gross loans held for |  |  |  |  |  |  |  |
investment | 2.34% |  | 3.08% |  | 2.34% |  | 3.08% |
Net charge-offs as a percentage of average loans outstanding |  |  |  |  |  |  |  |
during the period (annualized) | 0.62% |  | 1.02% |  | 0.67% |  | 1.03% |
Allowance for loan losses as a percentage of gross non-performing |  |  |  |  |  |  |  |
loans at the end of the period | 64.40% |  | 62.71% |  | 64.40% |  | 62.71% |
The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of allowance for loan losses at December 31, 2012 and June 30, 2012:
| December 31, 2012
|  |  | Allowance |  |
| Recorded |  | for Loan |  | Net
| Investment |  | Losses (1) |  | Investment
(In Thousands) |  |  |  |  |
Mortgage loans: |  |  |  |  |
Single-family: |  |  |  |  |
With a related allowance | $12,513 |  | $(3,078) |  | $9,435
Without a related allowance (2) | 8,950 |  | - |  | 8,950
Total single-family loans | 21,463 |  | (3,078) |  | 18,385
Multi-family: |  |  |  |  |
With a related allowance | 1,988 |  | (397) |  | 1,591
Total multi-family loans | 1,988 |  | (397) |  | 1,591
Commercial real estate: |  |  |  |  |
With a related allowance | 4,958 |  | (744) |  | 4,214
Total commercial real estate loans | 4,958 |  | (744) |  | 4,214
Other: |  |  |  |  |
With a related allowance | 159 |  | (159) |  | -
Total other loans | 159 |  | (159) |  | -
Commercial business loans: |  |  |  |  |
With a related allowance | 204 |  | (29) |  | 175
Total commercial business loans | 204 |  | (29) |  | 175
Total non-performing loans | $28,772 |  | $(4,407) |  | $24,365
| June 30, 2012
|  |  | Allowance |  |
| Recorded |  | for Loan |  | Net
| Investment |  | Losses (1) |  | Investment
(In Thousands) |  |  |  |  |
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 and/or the fair value of the collateral is higher than the loan balance. At December 31, 2012 and June 30, 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, as of December 31, 2012:
| 3 Months or | Over 3 to | Over 6 to | Over 12 |
| Less | 6 Months | 12 Months | Months | Total
(In Thousands) |  |  |  |  |
Mortgage loans: |  |  |  |  |
Single-family | $5,406 | $1,694 | $3,517 | $7,768 | $18,385
Multi-family | 194 | - | 917 | 480 | 1,591
Commercial real estate | 214 | 1,271 | 2,729 | - | 4,214
Commercial business loans | - | - | 150 | 25 | 175
Total | $5,814 | $2,965 | $7,313 | $8,273 | $24,365
For the quarters ended December 31, 2012 and 2011, the Corporation’s average investment in non-performing loans was $26.2 million and $35.3 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 December 31, 2012 and 2011, interest income of $1.5 million and $1.5 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 $145,000 and $261,000 for the quarters ended December 31, 2012 and 2011, respectively, and was not included in the results of operations. For the six months ended December 31, 2012 and 2011, the Corporation’s average investment in non-performing loans was $27.7 million and $36.0 million, respectively. For the six months ended December 31, 2012 and 2011, interest income of $3.0 million and $3.1 million, respectively, was recognized, based on cash receipts from loan payments on non-performing loans. Foregone interest income amounted to $246,000 and $574,000 for the six months ended December 31, 2012 and 2011, respectively, and was not included in the results of operations. For the quarter ended December 31, 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. For the quarter ended December 31, 2011, four loans for $1.0 million were re-underwritten and identified as restructured loans during the quarter ended December 31, 2011. During the quarter ended December 31, 2012 and 2011, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the quarter ended December 31, 2012, there was one loan for $131,000 whose modification was extended beyond the initial maturity of the modification. For the quarter ended December 31, 2011, four loans for $3.0 million had their modification extended beyond the initial maturity of the modification. For the six months ended December 31, 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. This compares to 16 loans for $5.8 million that were re-underwritten and identified as restructured loans during the six months ended December 31, 2011. During the six months ended December 31, 2012, one restructured loan with a balance of $437,000 was in default within a 12-month period subsequent to its original restructuring and required an additional provision of $226,000. This compares to two restructured loans with a total balance of $771,000 during the six months ended December 31, 2011 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 six months ended December 31, 2012, there was one loan for $131,000 whose modification was extended beyond the initial maturity of the modification. For the six months ended December 31, 2011, five loans for $3.2 million had their modification extended beyond the initial maturity of the modification. As of December 31, 2012, the net outstanding balance of the 42 restructured loans was $18.1 million: six were classified in accordance with the Corporation’s risk rating system as pass and remain on accrual status ($2.7 million); four were classified as special mention and remain on accrual status ($1.7 million); and 32 were classified as substandard ($13.6 million total, with 31 of the 32 loans or $10.8 million 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 December 31, 2012, $9.8 million, or 54 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 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: 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:
| December 31, 2012 |  | June 30, 2012 |
(In Thousands) |  |  |  |
Restructured loans on non-accrual status: |  |  |  |
Mortgage loans: |  |  |  |
Single-family | $7,708 |  | $11,995 |
Multi-family | 480 |  | 490 |
Commercial real estate | 2,477 |  | 2,483 |
Other | - |  | 522 |
Commercial business loans | 168 |  | 165 |
Total | 10,833 |  | 15,655 |
Restructured loans on accrual status: |  |  |  |
Mortgage loans: |  |  |  |
Single-family | 4,252 |  | 6,148 |
Multi-family | 2,755 |  | 3,266 |
Other | 232 |  | - |
Commercial business loans | - |  | 33 |
Total | 7,239 |  | 9,447 |
Total restructured loans | $18,072 |  | $25,102 |
The following table shows the restructured loans by type, net of allowance for loan losses, at December 31, 2012 and June 30, 2012:
| December 31, 2012
|  |  | Allowance |  |
| Recorded |  | for Loan |  | Net
| Investment |  | Losses (1) |  | Investment
(In Thousands) |  |  |  |  |
Mortgage loans: |  |  |  |  |
Single-family: |  |  |  |  |
With a related allowance | $3,466 |  | $(372) |  | $3,094
Without a related allowance (2) | 8,866 |  | - |  | 8,866
Total single-family loans | 12,332 |  | (372) |  | 11,960
Multi-family: |  |  |  |  |
With a related allowance | 506 |  | (26) |  | 480
Without a related allowance (2) | 2,755 |  | - |  | 2,755
Total multi-family loans | 3,261 |  | (26) |  | 3,235
Commercial real estate: |  |  |  |  |
With a related allowance | 2,914 |  | (437) |  | 2,477
Total commercial real estate loans | 2,914 |  | (437) |  | 2,477
Other: |  |  |  |  |
With a related allowance | 159 |  | (159) |  | -
Without a related allowance (2) | 232 |  | - |  | 232
Total other loans | 391 |  | (159) |  | 232
Commercial business loans: |  |  |  |  |
With a related allowance | 195 |  | (27) |  | 168
Total commercial business loans | 195 |  | (27) |  | 168
Total restructured loans | $19,093 |  | $(1,021) |  | $18,072
| June 30, 2012
|  |  | Allowance |  |
| Recorded |  | for Loan |  | Net
| Investment |  | Losses (1) |  | Investment
(In Thousands) |  |  |  |  |
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 and/or the fair value of the collateral is higher than the loan balance. During the quarter ended December 31, 2012, five properties were acquired in the settlement of loans, while 11 previously foreclosed upon properties were sold. For the six months ended December 31, 2012, sixteen properties were acquired in the settlement of loans, while 28 previously foreclosed upon properties were sold. As of December 31, 2012, real estate owned was comprised of 12 properties with a net fair value of $2.4 million, primarily located in Southern California. This compares to 24 real estate owned properties, primarily located in Southern California, with a net fair value of $5.5 million at June 30, 2012. 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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