Loans Held for Investment

Loans held for investment consisted of the following:



	March 31, 2013			June 30, 2012
Mortgage loans:
Single-family	$	415,616		$	439,024
Multi-family	256,640			278,057
Commercial real estate	94,779			95,302
Other	—			755
Commercial business loans	1,859			2,580
Consumer loans	448			506
Total loans held for investment, gross	769,342			816,224

Deferred loan costs, net	1,925			2,095
Allowance for loan losses	(16,826		)	(21,483		)
Total loans held for investment, net	$	754,441		$	796,836

As of March 31, 2013, the Corporation had $34.9 million in mortgage loans that are subject to negative amortization, consisting of $25.4 million in multi-family loans, $5.6 million in single-family loans and $3.9 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 third quarter of fiscal 2013 and 2012, no loan interest income was added to the negative amortization loan balance. For the first nine 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 March 31, 2013 and June 30, 2012, the interest-only ARM loans were $198.8 million and $214.2 million, or 25.8% and 26.2% of loans held for investment, respectively.

The following table sets forth information at March 31, 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 March 31, 2013, 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
(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	$	376,586	$	15,980	$	7,665	$	1,828	$	13,557	$	415,616
Multi-family	153,313		11,460		73,486		6,811		11,570		256,640
Commercial real estate	47,063		2,445		29,937		781		14,553		94,779
Commercial business loans	884		—		—		—		975		1,859
Consumer loans	430		—		—		—		18		448
Total loans held for investment, gross	$	578,276	$	29,885	$	111,088	$	9,420	$	40,673	$	769,342

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 March 31, 2013 and June 30, 2012:



(In Thousands)	March 31, 2013		June 30, 2012
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	11,319	$	15,189
Multi-family	3,834		3,524
Commercial real estate	1,325		1,810
Other	—		7
Commercial business loans	96		169
Consumer loans	12		13
Total collectively evaluated allowance	16,586		20,712

Individually evaluated for impairment:
Mortgage loans:
Single-family	233		744
Multi-family	—		27
Commercial business loans	7		—
Total individually evaluated allowance	240		771
Total loan loss allowance	$	16,826	$	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 March 31,						For the Nine Months Ended March 31,
(Dollars in Thousands)	2013			2012			2013			2012

Allowance at beginning of period	$	18,530		$	26,901		$	21,483		$	30,482

(Recovery) provision for loan losses	(517		)	1,622			39			3,726

Recoveries:
Mortgage loans:
Single-family	374			33			537			337
Construction	—			28			—			28
Consumer loans	—			—			2			—
Total recoveries	374			61			539			365

Charge-offs:
Mortgage loans:
Single-family	(1,139		)	(3,081		)	(4,810		)	(9,043		)
Multi-family	—			(534		)	—			(534		)
Commercial real estate	(260		)	(49		)	(260		)	(49		)
Other	(159		)	(400		)	(159		)	(400		)
Commercial business loans	—			(256		)	—			(256		)
Consumer loans	(3		)	(4		)	(6		)	(31		)
Total charge-offs	(1,561		)	(4,324		)	(5,235		)	(10,313		)

Net charge-offs	(1,187		)	(4,263		)	(4,696		)	(9,948		)
Balance at end of period	$	16,826		$	24,260		$	16,826		$	24,260

Allowance for loan losses as a percentage of gross loans held for investment	2.18		%	2.86		%	2.18		%	2.86		%
Net charge-offs as a percentage of average loans outstanding during the period (annualized)	0.49		%	1.64		%	0.62		%	1.23		%
Allowance for loan losses as a percentage of gross non- performing loans at the end of the period	73.01		%	57.34		%	73.01		%	57.34		%

The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of allowance for loan losses at March 31, 2013 and June 30, 2012:



(In Thousands)	March 31, 2013
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	8,770	$	(2,044	)	$	6,726
Without a related allowance ⁽²⁾	8,428		—			8,428
Total single-family loans	17,198		(2,044		)	15,154

Multi-family:
With a related allowance	2,211		(552		)	1,659
Total multi-family loans	2,211		(552		)	1,659

Commercial real estate:
With a related allowance	1,424		(214		)	1,210
Without a related allowance ⁽²⁾	1,975		—			1,975
Total commercial real estate loans	3,399		(214		)	3,185

Commercial business loans:
With a related allowance	237		(40		)	197
Total commercial business loans	237		(40		)	197

Total non-performing loans	$	23,045	$	(2,850	)	$	20,195


⁽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 loan balance.



(In Thousands)	June 30, 2012
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
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 or the fair value of the collateral is higher than the loan balance.

At March 31, 2013 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 or charge offs, as of March 31, 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	$	1,811	$	3,650	$	3,094	$	6,599	$	15,154
Multi-family	383		—		900		376		1,659
Commercial real estate	—		213		2,493		479		3,185
Commercial business loans	28		—		—		169		197
Total	$	2,222	$	3,863	$	6,487	$	7,623	$	20,195

For the quarters ended March 31, 2013 and 2012, the Corporation’s average investment in non-performing loans was $20.8 million and $33.1 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 March 31, 2013 and 2012, interest income of $1.4 million and $1.7 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 $258,000 and $132,000 for the quarters ended March 31, 2013 and 2012, respectively, and was not included in the results of operations, of which $142,000 and $0, respectively, were collected and applied to the principal balances.

For the nine months ended March 31, 2013 and 2012, the Corporation’s average investment in non-performing loans was $25.4 million and $35.1 million, respectively. For the nine months ended March 31, 2013 and 2012, interest income of $4.4 million and $4.8 million, respectively, was recognized, based on cash receipts from loan payments on non-performing loans. Foregone interest income amounted to $762,000 and $706,000 for the quarters ended March 31, 2013 and 2012, respectively, and was not included in the results of operations, of which $400,000 and $0, respectively, were collected and applied to the principal balances.

For the quarter ended March 31, 2013, 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 March 31, 2012, six loans totaling $3.1 million were re-underwritten and identified as restructured loans. During the quarter ended March 31, 2013 and 2012, one restructured loan with a balance of $739,000 was in default within a 12-month period subsequent to their original restructuring and required an additional provision of $260,000. Additionally, during the quarter ended March 31, 2013, there were no loans whose modification were extended beyond the initial maturity of the modification. For the quarter ended March 31, 2012, three loans totaling $1.0 million had their modification extended beyond the initial maturity of the modification.

For the nine months ended March 31, 2013, 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 22 loans for $8.9 million that were re-underwritten and identified as restructured loans during the nine months ended March 31, 2012. During the nine months ended March 31, 2013, two restructured loans with a total balance of $1.2 million was in default within a 12-month period subsequent to its original restructuring and required an additional provision of $480,000. This compares to two restructured loans with a total balance of $771,000 during the nine months ended March 31, 2012 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 nine months ended March 31, 2013, there was one loan for $131,000 whose modification was extended beyond the initial maturity of the modification. For the nine months ended March 31, 2012, eight loans for $4.3 million had their modification extended beyond the initial maturity of the modification.

As of March 31, 2013, the net outstanding balance of the 31 restructured loans was $13.3 million: three were classified in accordance with the Corporation’s risk rating system as pass and remain on accrual status ($1.5 million); two were classified as special mention and remain on accrual status ($1.0 million); and 26 were classified as substandard ($10.8 million total, with 25 of the 26 loans or $8.0 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 March 31, 2013, $9.4 million, or 71 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:



(In Thousands)	March 31, 2013		June 30, 2012
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	5,850	$	11,995
Multi-family	759		490
Commercial real estate	1,227		2,483
Other	—		522
Commercial business loans	163		165
Total	7,999		15,655

Restructured loans on accrual status:
Mortgage loans:
Single-family	2,575		6,148
Multi-family	2,755		3,266
Commercial business loans	—		33
Total	5,330		9,447
Total restructured loans	$	13,329	$	25,102

The following table shows the restructured loans by type, net of allowance for loan losses, at March 31, 2013 and June 30, 2012:



(In Thousands)	March 31, 2013
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	3,500	$	(526	)	$	2,974
Without a related allowance ⁽²⁾	5,451		—			5,451
Total single-family loans	8,951		(526		)	8,425

Multi-family:
With a related allowance	1,012		(253		)	759
Without a related allowance ⁽²⁾	2,755		—			2,755
Total multi-family loans	3,767		(253		)	3,514

Commercial real estate:
With a related allowance	880		(132		)	748
Without a related allowance ⁽²⁾	479		—			479
Total commercial real estate loans	1,359		(132		)	1,227

Commercial business loans:
With a related allowance	187		(24		)	163
Total commercial business loans	187		(24		)	163

Total restructured loans	$	14,264	$	(935	)	$	13,329


⁽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 loan balance.



(In Thousands)	June 30, 2012
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
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 or the fair value of the collateral is higher than the loan balance.

During the quarter ended March 31, 2013, six properties were acquired in the settlement of loans, while eight previously foreclosed upon properties were sold. For the nine months ended March 31, 2013, twenty-two properties were acquired in the settlement of loans, while 36 previously foreclosed upon properties were sold. As of March 31, 2013, real estate owned was comprised of 10 properties with a net fair value of $2.2 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.