Loans Held for Investment

Loans held for investment consisted of the following at June 30, 2014 and 2013:



(In Thousands)	June 30, 2014			June 30, 2013
Mortgage loans:
Single-family	$	377,997		$	404,341
Multi-family	301,211			262,316
Commercial real estate	96,803			92,488
Construction	2,869			292
Commercial business loans	1,237			1,687
Consumer loans	306			437
Total loans held for investment, gross	780,423			761,561

Undisbursed loan funds	(1,090		)	(292		)
Deferred loan costs, net	2,552			2,063
Allowance for loan losses	(9,744		)	(14,935		)
Total loans held for investment, net	$	772,141		$	748,397

As of June 30, 2014, the Corporation had $23.3 million in mortgage loans that were subject to negative amortization, consisting of $18.7 million in multi-family loans, $3.7 million in single-family loans and $856,000 in commercial real estate loans. This compares to $33.3 million of negative amortization mortgage loans at June 30, 2013, consisting of $24.4 million in multi-family loans, $5.1 million in single-family loans and $3.8 million in commercial real estate loans. During fiscal 2014 and 2013, no loan interest income was added to the negative amortization loan balance. 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 June 30, 2014 and 2013, the interest-only ARM loans totaled $170.7 million and $188.5 million, or 21.8% and 24.7% of gross loans held for investment, respectively.

The following table sets forth information at June 30, 2014 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 4% of loans held for investment at June 30, 2014, down from 5% at June 30, 2013. 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	$	331,852	$	10,509	$	12,216	$	7,925	$	15,495	$	377,997
Multi-family	94,646		39,494		152,610		8,264		6,197		301,211
Commercial real estate	35,613		6,163		44,935		—		10,092		96,803
Construction	2,869		—		—		—		—		2,869
Commercial business loans	328		—		125		—		784		1,237
Consumer loans	294		—		—		—		12		306
Total loans held for investment, gross	$	465,602	$	56,166	$	209,886	$	16,189	$	32,580	$	780,423

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 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 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 still in their restructuring period, classified lower than pass, and containing an embedded loss component 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. For non-performing commercial real estate loans, individually evaluated allowances are calculated based on their fair values and if their fair values are higher than their loan balances, no allowances are required.

The following tables summarize the Corporation’s allowance for loan losses at June 30, 2014 and 2013:



(In Thousands)	June 30, 2014		June 30, 2013
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	5,476	$	8,949
Multi-family	3,142		4,689
Commercial real estate	989		1,053
Construction	35		—
Commercial business loans	51		78
Consumer loans	10		12
Total collectively evaluated allowance	9,703		14,781

Individually evaluated for impairment:
Mortgage loans:
Single-family	—		113
Commercial business loans	41		41
Total individually evaluated allowance	41		154
Total loan loss allowance	$	9,744	$	14,935

The following summarizes the components of the net change in the allowance for loan losses for the periods indicated:



(In Thousands)	Year Ended June 30,
(In Thousands)	2014			2013			2012

Balance, beginning of year	$	14,935		$	21,483		$	30,482
(Recovery) provision for loan losses	(3,380		)	(1,499		)	5,777
Recoveries	929			762			375
Charge-offs	(2,740		)	(5,811		)	(15,151		)
Balance, end of year	$	9,744		$	14,935		$	21,483

The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of allowance for loan losses or charge-offs at June 30, 2014 and 2013:



(In Thousands)	June 30, 2014
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	5,480	$	(1,148	)	$	4,332
Without a related allowance ⁽²⁾	6,067		—			6,067
Total single-family loans	11,547		(1,148		)	10,399

Multi-family:
With a related allowance	956		(354		)	602
Without a related allowance ⁽²⁾	2,491		—			2,491
Total multi-family loans	3,447		(354		)	3,093

Commercial real estate:
Without a related allowance ⁽²⁾	2,352		—			2,352
Total commercial real estate loans	2,352		—			2,352

Commercial business loans:
With a related allowance	138		(46		)	92
Total commercial business loans	138		(46		)	92

Total non-performing loans	$	17,484	$	(1,548	)	$	15,936


⁽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, 2013
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	9,908	$	(2,350	)	$	7,558
Without a related allowance ⁽²⁾	5,665		—			5,665
Total single-family loans	15,573		(2,350		)	13,223

Multi-family:
With a related allowance	4,519		(1,320		)	3,199
Without a related allowance ⁽²⁾	558		—			558
Total multi-family loans	5,077		(1,320		)	3,757

Commercial real estate:
Without a related allowance ⁽²⁾	4,572		—			4,572
Total commercial real estate loans	4,572		—			4,572

Commercial business loans:
With a related allowance	189		(59		)	130
Total commercial business loans	189		(59		)	130

Total non-performing loans	$	25,411	$	(3,729	)	$	21,682


⁽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 June 30, 2014 and 2013, 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 June 30, 2014 and 2013:



As of June 30, 2014 (In Thousands)	3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 Months		Total
Mortgage loans:
Single-family	$	1,433	$	—	$	2,655	$	6,311	$	10,399
Multi-family	413		—		165		2,515		3,093
Commercial real estate	—		455		576		1,321		2,352
Commercial business loans	—		—		—		92		92
Total	$	1,846	$	455	$	3,396	$	10,239	$	15,936



As of June 30, 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	$	2,089	$	1,650	$	1,801	$	7,683	$	13,223
Multi-family	2,109		383		—		1,265		3,757
Commercial real estate	1,183		—		1,744		1,645		4,572
Commercial business loans	—		—		—		130		130
Total	$	5,381	$	2,033	$	3,545	$	10,723	$	21,682

During the fiscal years ended June 30, 2014, 2013 and 2012, the Corporation’s average investment in non-performing loans was $17.0 million, $24.2 million and $34.4 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 fiscal years ended June 30, 2014, 2013 and 2012, interest income of $546,000, $885,000 and $1.6 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 $800,000 , $878,000 and $876,000 for the fiscal years ended June 30, 2014, 2013 and 2012, respectively, and was not included in the loan interest income; while $498,000, $542,000 and $0, respectively, were collected and applied to the net loan balances.

The effect of the non-performing loans on interest income for the years ended June 30, 2014, 2013 and 2012 is presented below:



(In Thousands)	Year Ended June 30,
(In Thousands)	2014			2013			2012

Contractual interest due	$	1,346		$	1,763		$	2,432
Interest recognized	(546		)	(885		)	(1,556		)
Net foregone interest	$	800		$	878		$	876

For the fiscal year ended June 30, 2014, there was one loan with an outstanding balance of $221,000 that was newly modified from its original terms, re-underwritten and identified as a restructured loan. Subsequent to the modification, this loan was paid off in fiscal 2014. This compares to no loans that were restructured during the fiscal year ended June 30, 2013. During the fiscal year ended June 30, 2014 and 2013, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the fiscal year ended June 30, 2014, there were two restructured loans for $810,000 whose modifications were extended beyond the initial maturity of the modification. For the fiscal year ended June 30, 2013, one restructured loan with a total balance of $131,000 had its modification extended beyond the initial maturity of the modification.

As of June 30, 2014, the net outstanding balance of the Corporation's 17 restructured loans was $6.0 million: one was classified as special mention and remains on accrual status ($343,000); and 16 were classified as substandard ($5.6 million, all of which are 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 June 30, 2014, $3.7 million, or 62 percent, of the restructured loans were current with respect to their payment status. As of June 30, 2013, the net outstanding balance the Corporation's of 26 restructured loans was $9.5 million: one loan was classified as special mention and remains on accrual status ($434,000); and 25 loans were classified as substandard ($9.1 million, all on non-accrual status). As of June 30, 2013, $6.5 million, 68 percent, of the restructured loans had a current 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 or 12 months for those loans that were restructured more than once. Once 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 to the pass category: satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others.

The following table summarizes at the dates indicated the restructured loan balances, net of allowance for loan losses or charge-offs, by loan type and non-accrual versus accrual status at June 30, 2014 and 2013:



(In Thousands)	June 30, 2014		June 30, 2013
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	2,957	$	5,094
Multi-family	1,760		2,521
Commercial real estate	800		1,354
Commercial business loans	92		123
Total	5,609		9,092

Restructured loans on accrual status:
Mortgage loans:
Single-family	343		434
Total	343		434
Total restructured loans	$	5,952	$	9,526

The following table shows the restructured loans by type, net of allowance for loan losses or charge-offs, at June 30, 2014 and 2013:



(In Thousands)	June 30, 2014
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	994	$	(248	)	$	746
Without a related allowance ⁽²⁾	2,554		—			2,554
Total single-family loans	3,548		(248		)	3,300

Multi-family:
Without a related allowance ⁽²⁾	1,760		—			1,760
Total multi-family loans	1,760		—			1,760

Commercial real estate:
Without a related allowance ⁽²⁾	800		—			800
Total commercial real estate loans	800		—			800

Commercial business loans:
With a related allowance	138		(46		)	92
Total commercial business loans	138		(46		)	92

Total restructured loans	$	6,246	$	(294	)	$	5,952


⁽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, 2013
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	3,774	$	(795	)	$	2,979
Without a related allowance ⁽²⁾	2,549		—			2,549
Total single-family loans	6,323		(795		)	5,528

Multi-family:
With a related allowance	3,266		(1,006		)	2,260
Without a related allowance ⁽²⁾	261		—			261
Total multi-family loans	3,527		(1,006		)	2,521

Commercial real estate:
Without a related allowance ⁽²⁾	1,354		—			1,354
Total commercial real estate loans	1,354		—			1,354

Commercial business loans:
With a related allowance	180		(57		)	123
Total commercial business loans	180		(57		)	123
Total restructured loans	$	11,384	$	(1,858	)	$	9,526


⁽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 the ordinary course of business, the Bank makes loans to its directors, officers and employees on substantially the same terms prevailing at the time of origination for comparable transactions with unaffiliated borrowers. The following is a summary of related-party loan activity:



(In Thousands)	Year Ended June 30,
(In Thousands)	2014			2013			2012

Balance, beginning of year	$	2,024		$	2,030		$	2,036
Originations	691			3,581			2,807
Sales and payments	(704		)	(3,587		)	(2,813		)
Balance, end of year	$	2,011		$	2,024		$	2,030

As of June 30, 2014 and 2013, all of the related-party loans were performing in accordance with their original contractual terms.