Loans Held for Investment

Loans held for investment consisted of the following:



(In Thousands)	September 30, 2014			June 30, 2014
Mortgage loans:
Single-family	$	377,371		$	377,997
Multi-family	314,880			301,211
Commercial real estate	100,743			96,803
Construction	4,378			2,869
Commercial business loans	1,109			1,237
Consumer loans	271			306
Total loans held for investment, gross	798,752			780,423

Undisbursed loan funds	(3,604		)	(1,090		)
Deferred loan costs, net	2,698			2,552
Allowance for loan losses	(8,888		)	(9,744		)
Total loans held for investment, net	$	788,958		$	772,141

As of September 30, 2014, the Corporation had $23.0 million in mortgage loans that are subject to negative amortization, consisting of $18.6 million in multi-family loans, $3.6 million in single-family loans and $819,000 in commercial real estate loans. This compares to $23.3 million of negative amortization mortgage loans at June 30, 2014, consisting of $18.7 million in multi-family loans, $3.7 million in single-family loans and $856,000 in commercial real estate loans. During the first quarters of fiscal 2015 and 2014, 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 September 30, 2014 and June 30, 2014, the interest-only ARM loans were $166.3 million and $170.7 million, or 21% and 22% of loans held for investment, respectively.

The following table sets forth information at September 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 September 30, 2014, unchanged from June 30, 2014. 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	$	317,328	$	13,939	$	25,818	$	5,093	$	15,193	$	377,371
Multi-family	96,584		44,980		157,434		10,402		5,480		314,880
Commercial real estate	36,310		8,641		45,238		600		9,954		100,743
Construction	2,569		—		—		—		1,809		4,378
Commercial business loans	350		—		123		—		636		1,109
Consumer loans	260		—		—		—		11		271
Total loans held for investment, gross	$	453,401	$	67,560	$	228,613	$	16,095	$	33,083	$	798,752

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. Provision (recovery) for (from) the allowance for loan losses is charged (credited) 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 a significant increase in 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 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, an individually evaluated allowance is calculated based on the loan's fair value and if the fair value is higher than the loan balance, no allowance is required.

The following table summarizes the Corporation’s allowance for loan losses at September 30, 2014 and June 30, 2014:



(In Thousands)	September 30, 2014		June 30, 2014
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	4,652	$	5,476
Multi-family	3,122		3,142
Commercial real estate	1,014		989
Construction	5		35
Commercial business loans	44		51
Consumer loans	10		10
Total collectively evaluated allowance	8,847		9,703

Individually evaluated for impairment:
Mortgage loans:
Commercial business loans	41		41
Total individually evaluated allowance	41		41
Total loan loss allowance	$	8,888	$	9,744

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



	For the Quarters Ended September 30,
(Dollars in Thousands)	2014			2013

Allowance at beginning of period	$	9,744		$	14,935

Recovery from the allowance for loan losses	(818		)	(942		)

Recoveries:
Mortgage loans:
Single-family	109			168
Multi-family	71			11
Consumer loans	1			1
Total recoveries	181			180

Charge-offs:
Mortgage loans:
Single-family	(219		)	(690		)
Multi-family	—			(1,378		)
Total charge-offs	(219		)	(2,068		)

Net charge-offs	(38		)	(1,888		)
Balance at end of period	$	8,888		$	12,105

Allowance for loan losses as a percentage of gross loans held for investment	1.11		%	1.59		%
Net charge-offs as a percentage of average loans receivable, net, during the period (annualized)	0.02		%	0.82		%
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period	66.62		%	58.57		%

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



(In Thousands)	September 30, 2014
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	1,915	$	(406	)	$	1,509
Without a related allowance ⁽²⁾	6,515		—			6,515
Total single-family loans	8,430		(406		)	8,024

Multi-family:
With a related allowance	271		(100		)	171
Without a related allowance ⁽²⁾	2,194		—			2,194
Total multi-family loans	2,465		(100		)	2,365

Commercial real estate:
Without a related allowance ⁽²⁾	2,317		—			2,317
Total commercial real estate loans	2,317		—			2,317

Commercial business loans:
With a related allowance	129		(44		)	85
Total commercial business loans	129		(44		)	85

Total non-performing loans	$	13,341	$	(550	)	$	12,791


⁽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 individual loan balance.



(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 individual loan balance.

At September 30, 2014 and June 30, 2014, 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 September 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	$	24	$	1,551	$	480	$	5,969	$	8,024
Multi-family	—		409		—		1,956		2,365
Commercial real estate	—		—		452		1,865		2,317
Commercial business loans	—		—		—		85		85
Total	$	24	$	1,960	$	932	$	9,875	$	12,791

For the quarters ended September 30, 2014 and 2013, the Corporation’s average investment in non-performing loans was $15.0 million and $18.4 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 quarters ended September 30, 2014 and 2013, interest income of $93,000 and $187,000, respectively, was recognized, based on cash receipts from loan payments on non-performing loans; and $147,000 and $104,000, respectively, was collected and applied to the net loan balances under the cost recovery method. Foregone interest income, which would have been recorded had the non-performing loans been current in accordance with their original terms, amounted to $57,000 and $120,000 for the quarters ended September 30, 2014 and 2013, respectively, and was not included in the results of operations.

For the quarters ended September 30, 2014 and 2013, there were no loans that were newly modified from their original terms, re-underwritten or identified in the Corporation’s asset quality reports as restructured loans. During the quarters ended September 30, 2014 and 2013, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the quarters ended September 30, 2014 and 2013, there were no loans whose modifications were extended beyond the initial maturity of the modification.

As of September 30, 2014, the net outstanding balance of the 16 restructured loans was $6.0 million: one was classified as special mention and remains on accrual status ($687,000); and 15 were classified as substandard ($5.4 million, all of which were on non-accrual status). As of June 30, 2014, the net outstanding balance of the 17 restructured loans was $6.0 million: one was classified as special mention on accrual status ($343,000); and 16 were classified as substandard ($5.6 million, all of which were 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 September 30, 2014 and June 30, 2014, $3.6 million or 60 percent, and $3.7 million or 62 percent, respectively, of the restructured loans were current with respect to their modified 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. 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)	September 30, 2014		June 30, 2014
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	2,861	$	2,957
Multi-family	1,620		1,760
Commercial real estate	796		800
Commercial business loans	85		92
Total	5,362		5,609

Restructured loans on accrual status:
Mortgage loans:
Single-family	687		343
Total	687		343

Total restructured loans	$	6,049	$	5,952

The following tables show the restructured loans by type, net of allowance for loan losses, at September 30, 2014 and June 30, 2014:



(In Thousands)	September 30, 2014
	Recorded Investment		Allowance for Loan Losses ⁽¹⁾			Net Investment
Mortgage loans:
Single-family:
With a related allowance	$	413	$	(103	)	$	310
Without a related allowance ⁽²⁾	3,238		—			3,238
Total single-family loans	3,651		(103		)	3,548

Multi-family:
Without a related allowance ⁽²⁾	1,620		—			1,620
Total multi-family loans	1,620		—			1,620

Commercial real estate:
Without a related allowance ⁽²⁾	796		—			796
Total commercial real estate loans	796		—			796

Commercial business loans:
With a related allowance	129		(44		)	85
Total commercial business loans	129		(44		)	85

Total restructured loans	$	6,196	$	(147	)	$	6,049


⁽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 individual loan balance.



(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 individual loan balance.

During the quarter ended September 30, 2014, three properties were acquired in the settlement of loans, while two previously foreclosed upon properties were sold and one real estate owned property was written off. For the quarter ended September 30, 2013, three properties were acquired in the settlement of loans, while five previously foreclosed upon properties were sold. As of September 30, 2014, real estate owned was comprised of four properties with a net fair value of $2.7 million, primarily located in Southern California. This compares to four real estate owned properties, primarily located in Southern California, with a net fair value of $2.5 million at June 30, 2014. 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.