Note 5: Loans Held for Investment

Loans held for investment, net of fair value adjustments, consisted of the following:


	September 30,		June 30,
(In Thousands)	2019		2019
Mortgage loans:
Single-family	$	328,332	$	324,952
Multi-family		479,597		439,041
Commercial real estate		110,652		111,928
Construction (1)		5,912		4,638
Other		—		167
Commercial business loans (2)		368		478
Consumer loans (3)		144		134
Total loans held for investment, gross		925,005		881,338

Advance payments of escrows		34		53
Deferred loan costs, net		6,204		5,610
Allowance for loan losses		(6,929)		(7,076)
Total loans held for investment, net	$	924,314	$	879,925

⁽¹⁾

Net of $6.2 million and $6.6 million of undisbursed loan funds as of September 30, 2019 and June 30, 2019, respectively

⁽²⁾

Net of $1.1 million and $1.0 million of undisbursed lines of credit as of September 30, 2019 and June 30, 2019, respectively.

⁽³⁾

Net of $0.5 million and $0.5 million of undisbursed lines of credit as of September 30, 2019 and June 30, 2019, respectively.

The following table sets forth information at September 30, 2019 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 one percent and two percent of loans held for investment at September 30, 2019 and June 30, 2019, respectively. 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 One		Through 3		Through 5		Through 10
(In Thousands)	Year		Years		Years		Years		Fixed Rate		Total
Mortgage loans:
Single-family	$	91,793	$	41,361	$	119,810	$	64,197	$	11,171	$	328,332
Multi-family		125,583		179,261		157,529		17,044		180		479,597
Commercial real estate		43,813		31,233		34,408		775		423		110,652
Construction		5,085		—		—		—		827		5,912
Commercial business loans		20		—		—		—		348		368
Consumer loans		144		—		—		—		—		144
Total loans held for investment, gross	$	266,438	$	251,855	$	311,747	$	82,016	$	12,949	$	925,005

The Corporation has developed an internal loan grading system to evaluate and quantify the Bank’s loans held for investment portfolio with respect to quality and risk. Management continually evaluates the credit quality of the Corporation’s loan portfolio and conducts a quarterly review of the adequacy of the allowance for loan losses using quantitative and qualitative methods. The Corporation has adopted an internal risk rating policy in which each loan is rated for credit quality with a rating of pass, special mention, substandard, doubtful or loss. The two primary components that are used during the loan review process to determine the proper allowance levels are individually evaluated allowances and collectively evaluated allowances. Quantitative loan loss factors are developed by determining the historical loss experience, expected future cash flows, discount rates and collateral fair values, among others. Qualitative loan loss factors are developed by assessing general economic indicators such as gross domestic product, retail sales, unemployment rates, employment growth, California home sales and median California home prices. The Corporation assigns individual factors for the quantitative and qualitative methods for each loan category and each internal risk rating.

The Corporation categorizes all of the loans held for investment into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:

Pass - These loans range from minimal credit risk to average, but still acceptable, credit risk. The likelihood of loss is considered remote.

Special Mention - A special mention loan has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the bank is currently protected and loss is considered unlikely and not imminent.

Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful - A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

Loss - A loss loan is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.

The following tables summarize gross loans held for investment, net of fair value adjustments, by loan types and risk category at the dates indicated:


	September 30, 2019
	Single-		Multi-		Commercial				Commercial
(In Thousands)	family		family		Real Estate		Construction		Business		Consumer		Total
Pass	$	321,107	$	475,755	$	109,726	$	4,773	$	323	$	144	$	911,828
Special Mention		3,039		3,842		—		—		—		—		6,881
Substandard		4,186		—		926		1,139		45		—		6,296
Total loans held for investment, gross	$	328,332	$	479,597	$	110,652	$	5,912	$	368	$	144	$	925,005


	June 30, 2019
	Single-		Multi-		Commercial				Other		Commercial
(In Thousands)	family		family		Real Estate		Construction		Mortgage		Business		Consumer		Total
Pass	$	314,036	$	435,177	$	111,001	$	3,667	$	167	$	429	$	134	$	864,611
Special Mention		3,795		3,864		927		—		—		—		—		8,586
Substandard		7,121		—		—		971		—		49		—		8,141
Total loans held for investment, gross	$	324,952	$	439,041	$	111,928	$	4,638	$	167	$	478	$	134	$	881,338

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. The 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.

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 derived based on the loan’s discounted cash flow fair value (for restructured loans) or collateral fair value less estimated selling costs and if the fair value is higher than the loan balance, no allowance is required.

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


	For the Quarters Ended
	September 30,
(Dollars in Thousands)	2019			2018
Allowance at beginning of period	$	7,076		$	7,385

Provision (recovery) for loan losses		(181)			(237)

Recoveries:
Mortgage loans:
Single-family		36			32
Consumer loans		—			1
Total recoveries		36			33

Charge-offs:
Mortgage loans:
Single-family		(1)			(25)
Consumer loans		(1)			(1)
Total charge-offs		(2)			(26)

Net (charge-offs) recoveries		34			7
Balance at end of period	$	6,929		$	7,155

Allowance for loan losses as a percentage of gross loans held for investment at the end of the period		0.74	%		0.81	%
Net charge-offs (recoveries) as a percentage of average loans receivable, net, during the period (annualized)		(0.02)	%		0.00	%

The following tables denote the past due status of the Corporation’s gross loans held for investment, net of fair value adjustments, at the dates indicated.


	September 30, 2019
			30‑89 Days				Total Loans Held for
(In Thousands)	Current		Past Due		Non-Accrual (1)		Investment, Gross
Mortgage loans:
Single-family	$	323,159	$	987	$	4,186	$	328,332
Multi-family		479,597		—		—		479,597
Commercial real estate		110,652		—		—		110,652
Construction		4,773		—		1,139		5,912
Commercial business loans		323		—		45		368
Consumer loans		141		3		—		144
Total loans held for investment, gross	$	918,645	$	990	$	5,370	$	925,005

⁽¹⁾

All loans 90 days or greater past due are placed on non-accrual status.


	June 30, 2019
			30‑89 Days				Total Loans Held for
(In Thousands)	Current		Past Due		Non-Accrual (1)		Investment, Gross
Mortgage loans:
Single-family	$	318,671	$	660	$	5,621	$	324,952
Multi-family		439,041		—		—		439,041
Commercial real estate		111,928		—		—		111,928
Construction		3,667		—		971		4,638
Other		167		—		—		167
Commercial business loans		429		—		49		478
Consumer loans		129		5		—		134
Total loans held for investment, gross	$	874,032	$	665	$	6,641	$	881,338

⁽¹⁾

All loans 90 days or greater past due are placed on non-accrual status.

The following tables summarize the Corporation’s allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated.


	Quarter Ended September 30, 2019
	Single-			Multi-			Commercial									Commercial
(In Thousands)	family			family			Real Estate			Construction			Other			Business			Consumer			Total
Allowance for loan losses:
Allowance at beginning of period	$	2,709		$	3,219		$	1,050		$	61		$	3		$	26		$	8		$	7,076
Provision (recovery) for loan losses		(510)			288			35			13			(3)			(6)			2			(181)
Recoveries		36			—			—			—			—			—			—			36
Charge-offs		(1)			—			—			—			—			—			(1)			(2)
Allowance for loan losses, end of period	$	2,234		$	3,507		$	1,085		$	74		$	—		$	20		$	9		$	6,929

Allowance for loan losses:
Individually evaluated for impairment	$	47		$	—		$	—		$	—		$	—		$	7		$	—		$	54
Collectively evaluated for impairment		2,187			3,507			1,085			74			—			13			9			6,875
Allowance for loan losses, end of period	$	2,234		$	3,507		$	1,085		$	74		$	—		$	20		$	9		$	6,929

Loans held for investment:
Individually evaluated for impairment	$	3,766		$	—		$	—		$	1,139		$	—		$	45		$	—		$	4,950
Collectively evaluated for impairment		324,566			479,597			110,652			4,773			—			323			144			920,055
Total loans held for investment, gross	$	328,332		$	479,597		$	110,652		$	5,912		$	—		$	368		$	144		$	925,005
Allowance for loan losses as a percentage of gross loans held for investment		0.68	%		0.73	%		0.98	%		1.25	%		—	%		5.43	%		6.25	%		0.74	%


	Quarter Ended September 30, 2018
	Single-			Multi-			Commercial									Commercial
(In Thousands)	family			family			Real Estate			Construction			Other			Business			Consumer			Total
Allowance for loan losses:
Allowance at beginning of period	$	2,783		$	3,492		$	1,030		$	47		$	3		$	24		$	6		$	7,385
Provision (recovery) for loan losses		(49)			(156)			(18)			(9)			—			(5)			—			(237)
Recoveries		32			—			—			—			—			—			1			33
Charge-offs		(25)			—			—			—			—			—			(1)			(26)
Allowance for loan losses, end of period	$	2,741		$	3,336		$	1,012		$	38		$	3		$	19		$	6		$	7,155

Allowance for loan losses:
Individually evaluated for impairment	$	124		$	—		$	—		$	—		$	—		$	5		$	—		$	129
Collectively evaluated for impairment		2,617			3,336			1,012			38			3			14			6			7,026
Allowance for loan losses, end of period	$	2,741		$	3,336		$	1,012		$	38		$	3		$	19		$	6		$	7,155

Loans held for investment:
Individually evaluated for impairment	$	6,370		$	—		$	—		$	745		$	—		$	68		$	—		$	7,183
Collectively evaluated for impairment		301,110			454,821			112,026			3,101			167			348			104			871,677
Total loans held for investment, gross	$	307,480		$	454,821		$	112,026		$	3,846		$	167		$	416		$	104		$	878,860
Allowance for loan losses as a percentage of gross loans held for investment		0.89	%		0.73	%		0.90	%		0.99	%		1.80	%		4.57	%		5.77	%		0.81	%

The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the periods indicated. Generally, a loan is placed on non-accrual status when it becomes 90 days past due as to principal or interest or if the loan is deemed impaired, after considering economic and business conditions and collection efforts, where the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured. A non-performing loan may be restored to accrual status when delinquent principal and interest payments are brought current, the borrower(s) has demonstrated sustained payment performance and future monthly principal and interest payments are expected to be collected on a timely basis. Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell, to establish realizable value. This analysis may identify a specific impairment amount needed or may conclude that no reserve is needed. Loans that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves.


	At September 30, 2019
	Unpaid								Net
	Principal		Related		Recorded				Recorded
(In Thousands)	Balance		Charge-offs		Investment		Allowance (1)		Investment
Mortgage loans:
Single-family:
With a related allowance	$	1,112	$	—	$	1,112	$	(133)	$	979
Without a related allowance (2)		3,576		(502)		3,074		—		3,074
Total single-family		4,688		(502)		4,186		(133)		4,053

Construction:
Without a related allowance (2)		1,139		—		1,139		—		1,139
Total construction		1,139		—		1,139		—		1,139

Commercial business loans:
With a related allowance		45		—		45		(7)		38
Total commercial business loans		45		—		45		(7)		38
Total non-performing loans	$	5,872	$	(502)	$	5,370	$	(140)	$	5,230

⁽¹⁾

Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan, and fair value credit adjustments.

⁽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, 2019
	Unpaid								Net
	Principal		Related		Recorded				Recorded
(In Thousands)	Balance		Charge-offs		Investment		Allowance (1)		Investment
Mortgage loans:
Single-family:
With a related allowance	$	2,640	$	—	$	2,640	$	(434)	$	2,206
Without a related allowance (2)		3,518		(518)		3,000		—		3,000
Total single-family		6,158		(518)		5,640		(434)		5,206

Construction:
Without a related allowance(2)		971		—		971		—		971
Total construction		971		—		971		—		971

Commercial business loans:
With a related allowance		49		—		49		(8)		41
Total commercial business loans		49		—		49		(8)		41
Total non-performing loans	$	7,178	$	(518)	$	6,660	$	(442)	$	6,218

⁽¹⁾

Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan, and fair value credit adjustments.

⁽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 both September 30, 2019 and June 30, 2019, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing, except for one construction loan with undisbursed loan funds of $862,000 and $1.0 million, respectively.

For the quarters ended September 30, 2019 and 2018, the Corporation’s average recorded investment in non-performing loans was $5.4 million and $7.0 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 quarter ended September 30, 2019, the Bank received $153,000 in interest payments from non-performing loans, of which $129,000 were recognized as interest income and the remaining $24,000 were applied to reduce the loan balances under the cost recovery method. In comparison for the quarter ended September 30, 2018, the Bank received $121,000 in interest payments from non-performing loans, of which $65,000 were recognized as interest income and the remaining $56,000 were applied to reduce the loan balances under the cost recovery method.

The following table presents the average recorded investment in non-performing loans and the related interest income recognized for the quarters ended September 30, 2019 and 2018:


	Quarter Ended September 30,
	2019				2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(In Thousands)	Investment		Recognized		Investment		Recognized
Without related allowances:
Mortgage loans:
Single-family	$	3,086	$	116	$	4,599	$	40
Construction		1,084		—		248		—
		4,170		116		4,847		40

With related allowances:
Mortgage loans:
Single-family		1,198		12		2,071		24
Commercial business loans		46		1		68		1
		1,244		13		2,139		25

Total	$	5,414	$	129	$	6,986	$	65

For the quarter ended September 30, 2019, no new loans were restructured from their original terms and classified as restructured loans, while two substandard restructured loans were paid off. For the quarter ended September 30, 2018, no new loans were restructured from their original terms and classified as restructured loans, while one restructured loan was upgraded to the pass category. During the quarters ended September 30, 2019 and 2018, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the quarters ended September 30, 2019 and 2018, there was no loan whose modification was extended beyond the initial maturity of the modification. At both September 30, 2019 and June 30, 2019, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

As of September 30, 2019, the Corporation held six restructured loans with a net outstanding balance of $1.8 million: one loan was classified as special mention on accrual status ($431,000) and five loans were classified as substandard on non-accrual status ($1.4 million). As of June 30, 2019, the Corporation held eight restructured loans with a net outstanding balance of $3.8 million: one loan was classified as special mention on accrual status ($437,000); one loan was classified as substandard on accrual status ($1.4 million); and six loans were classified as substandard on non-accrual status ($1.9 million). 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, 2019 and June 30, 2019, $1.4 million or 77%, and $2.4 million or 63%, respectively, of the restructured loans were current with respect to their modified payment terms.

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 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:


	At		At
(In Thousands)	September 30, 2019		June 30, 2019
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	1,316	$	1,891
Commercial business loans		38		41
Total		1,354		1,932

Restructured loans on accrual status:
Mortgage loans:
Single-family		431		1,861
Total		431		1,861

Total restructured loans	$	1,785	$	3,793

The following tables identify the Corporation’s total recorded investment in restructured loans by type at the dates and for the periods indicated.


	At September 30, 2019
	Unpaid								Net
	Principal		Related		Recorded				Recorded
(In Thousands)	Balance		Charge-offs		Investment		Allowance (1)		Investment
Mortgage loans:
Single-family:
With a related allowance	$	693	$	—	$	693	$	(47)	$	646
Without a related allowance (2)		1,466		(365)		1,101		—		1,101
Total single-family		2,159		(365)		1,794		(47)		1,747

Commercial business loans:
With a related allowance		45		—		45		(7)		38
Total commercial business loans		45		—		45		(7)		38
Total restructured loans	$	2,204	$	(365)	$	1,839	$	(54)	$	1,785

⁽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, 2019
	Unpaid								Net
	Principal		Related		Recorded				Recorded
(In Thousands)	Balance		Charge-offs		Investment		Allowance (1)		Investment
Mortgage loans:
Single-family:
With a related allowance	$	2,199	$	—	$	2,199	$	(122)	$	2,077
Without a related allowance (2)		2,040		(365)		1,675		—		1,675
Total single-family		4,239		(365)		3,874		(122)		3,752

Commercial business loans:
With a related allowance		49		—		49		(8)		41
Total commercial business loans		49		—		49		(8)		41
Total restructured loans	$	4,288	$	(365)	$	3,923	$	(130)	$	3,793

⁽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 September 30, 2019, no properties were acquired in the settlement of loans and no previously foreclosed upon properties were sold. This compares to the quarter ended September 30, 2018 when no properties were acquired in the settlement of loans, while one previously foreclosed upon property was sold. As of September 30, 2019 and June 30, 2019, there was no real estate owned property at both dates. A new appraisal is obtained on each of the properties at the time of foreclosure and fair value is derived by using the lower of the appraised value or the listing price of the property, net of selling costs. Any initial loss is recorded as a charge to the allowance for loan losses before being transferred to real estate owned. Subsequent to transfer to real estate owned, if there is further deterioration in real estate values, specific real estate owned loss reserves are established and charged to the condensed consolidated statements of operations. In addition, the Corporation records costs to carry real estate owned as real estate operating expenses as incurred.