Note 3: Loans Held for Investment

Loans held for investment consisted of the following at June 30, 2020 and 2019 :


(In Thousands)	June 30, 2020		June 30, 2019
Mortgage loans:
Single-family	$	298,810	$	324,952
Multi-family		491,903		439,041
Commercial real estate		105,235		111,928
Construction		7,801		4,638
Other		143		167
Commercial business loans		480		478
Consumer loans		94		134
Total loans held for investment, gross		904,466		881,338

Advance payments of escrows		68		53
Deferred loan costs, net		6,527		5,610
Allowance for loan losses		(8,265)		(7,076)
Total loans held for investment, net	$	902,796	$	879,925

The following table sets forth information at June 30, 2020 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 1% and 2% of loans held for investment at June 30, 2020 and June 30, 2019, respectively. Adjustable rate loans having no stated repricing date 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
(In Thousands)	Within One Year		Through 3 Years		Through 5 Years		Through 10 Years		Fixed Rate		Total
Mortgage loans:
Single-family	$	80,167	$	54,690	$	89,820	$	65,902	$	8,231	$	298,810
Multi-family		161,881		156,014		157,783		16,069		156		491,903
Commercial real estate		48,343		27,542		29,010		—		340		105,235
Construction		6,041		—		—		—		1,760		7,801
Other		—		—		—		—		143		143
Commercial business loans		85		—		—		—		395		480
Consumer loans		94		—		—		—		—		94
Total loans held for investment, gross	$	296,611	$	238,246	$	276,613	$	81,971	$	11,025	$	904,466

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, among others. 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 however still acceptable credit risk. The likelihood of loss is considered remote.

Special Mention - A special mention asset 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 sound 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 Bank is not warranted.

The following tables summarize gross loans held for investment by loan types and risk category at the dates indicated:


	June 30, 2020
					Commercial						Commercial
(In Thousands)	Single-family		Multi-family		Real Estate		Construction		Other Mortgage		Business		Consumer		Total

Pass	$	289,942	$	488,126	$	105,235	$	6,098	$	143	$	445	$	94	$	890,083
Special Mention		3,120		3,777		—		1,703		—		—		—		8,600
Substandard		5,748		—		—		—		—		35		—		5,783
Total loans held for investment, gross	$	298,810	$	491,903	$	105,235	$	7,801	$	143	$	480	$	94	$	904,466


	June 30, 2019
					Commercial					Other	Commercial
(In Thousands)	Single-family		Multi-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. Provisions (recoveries) for loan losses are 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 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.

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 and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated.


	Year Ended June 30, 2020
							Commercial									Commercial
(In Thousands)	Single-family			Multi-family			Real Estate			Construction			Other Mortgage			Business			Consumer			Total

Allowance at beginning of period	$	2,709		$	3,219		$	1,050		$	61		$	3		$	26		$	8		$	7,076
Provision (recovery) for loan losses		(156)			1,110			60			110			—			(2)			(3)			1,119
Recoveries		70			—			—			—			—			—			2			72
Charge-offs		(1)			—			—			—			—			—			(1)			(2)
Allowance for loan losses, end of period	$	2,622		$	4,329		$	1,110		$	171		$	3		$	24		$	6		$	8,265

Allowance:
Individually evaluated for impairment	$	96		$	—		$	—		$	—		$	—		$	4		$	—		$	100
Collectively evaluated for impairment		2,526			4,329			1,110			171			3			20			6			8,165
Allowance for loan losses, end of period	$	2,622		$	4,329		$	1,110		$	171		$	3		$	24		$	6		$	8,265

Gross Loans:
Individually evaluated for impairment	$	3,371		$	—		$	—		$	—		$	—		$	35		$	—		$	3,406
Collectively evaluated for impairment		295,439			491,903			105,235			7,801			143			445			94			901,060
Total loans held for investment, gross	$	298,810		$	491,903		$	105,235		$	7,801		$	143		$	480		$	94		$	904,466
Allowance for loan losses as a percentage of gross loans held for investment		0.88	%		0.88	%		1.05	%		2.19	%		2.10	%		5.00	%		6.38	%		0.91	%


	Year Ended June 30, 2019
							Commercial									Commercial
(In Thousands)	Single-family			Multi-family			Real Estate			Construction			Other Mortgage			Business			Consumer			Total

Allowance at beginning of period	$	2,783		$	3,492		$	1,030		$	47		$	3		$	24		$	6		$	7,385
Provision (recovery)for loan losses		(241)			(273)			20			14			—			—			5			(475)
Recoveries		198			—			—			—			—			2			—			200
Charge-offs		(31)			—			—			—			—			—			(3)			(34)
Allowance for loan losses, end of period	$	2,709		$	3,219		$	1,050		$	61		$	3		$	26		$	8		$	7,076

Allowance:
Individually evaluated for impairment	$	122		$	—		$	—		$	—		$	—		$	8		$	—		$	130
Collectively evaluated for impairment		2,587			3,219			1,050			61			3			18			8			6,946
Allowance for loan losses, end of period	$	2,709		$	3,219		$	1,050		$	61		$	3		$	26		$	8		$	7,076

Gross Loans:
Individually evaluated for impairment	$	5,199		$	—		$	—		$	971		$	—		$	49		$	—		$	6,219
Collectively evaluated for impairment		319,753			439,041			111,928			3,667			167			429			134			875,119
Total loans held for investment, gross	$	324,952		$	439,041		$	111,928		$	4,638		$	167		$	478		$	134		$	881,338
Allowance for loan losses as a percentage of gross loans held for investment		0.83	%		0.73	%		0.94	%		1.32	%		1.80	%		5.44	%		5.97	%		0.80	%

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


	Year Ended June 30,
(In Thousands)	2020		2019

Balance, beginning of year	$	7,076	$	7,385
Provision (recovery) for loan losses		1,119		(475)
Recoveries		72		200
Charge-offs		(2)		(34)
Balance, end of year	$	8,265	$	7,076

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 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 evaluation 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 or For the Year Ended June 30, 2020
	Unpaid								Net		Average		Interest
	Principal		Related		Recorded				Recorded		Recorded		Income
(In Thousands)	Balance		Charge-offs		Investment		Allowance (1)		Investment		Investment		Recognized

Mortgage loans:
Single-family:
With a related allowance	$	3,289	$	—	$	3,289	$	(438)	$	2,851	$	1,541	$	60
Without a related allowance(2)		2,509		(467)		2,042		—		2,042		2,572		119
Total single-family loans		5,798		(467)		5,331		(438)		4,893		4,113		179

Construction:
Without a related allowance(2)		—		—		—		—		—		271		20
Total construction loans		—		—		—		—		—		271		20

Commercial business loans:
With a related allowance		35		—		35		(4)		31		42		4
Total commercial business loans		35		—		35		(4)		31		42		4

Total non-performing loans	$	5,833	$	(467)	$	5,366	$	(442)	$	4,924	$	4,426	$	203

⁽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 or For the Year Ended June 30, 2019
	Unpaid		Related						Net		Average		Interest
	Principal		Charge-offs		Recorded				Recorded		Recorded		Income
(In Thousands)	Balance		Related		Investment		Allowance (1)		Investment		Investment		Recognized

Mortgage loans:
Single-family:
With a related allowance	$	2,640	$	—	$	2,640	$	(434)	$	2,206	$	1,583	$	110
Without a related allowance(2)		3,518		(518)		3,000		—		3,000		4,301		293
Total single-family loans		6,158		(518)		5,640		(434)		5,206		5,884		403

Construction:
Without a related allowance(2)		971		—		971		—		971		664		—
Total construction loans		971		—		971		—		971		664		—

Commercial business loans:
With a related allowance		49		—		49		(8)		41		58		5
Total commercial business loans		49		—		49		(8)		41		58		5

Total non-performing loans	$	7,178	$	(518)	$	6,660	$	(442)	$	6,218	$	6,606	$	408

⁽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.

On March 27, 2020, the CARES Act was signed into law and on April 7, 2020, the Board of Governors of the Federal Reserve System, FDIC, National Credit Union Administration, OCC and consumer Financial Protection Bureau issued Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus ("Interagency Statement"). Among other things, the CARES Act and Interagency Statement provided relief to borrowers, including the opportunity to defer loan payments while not negatively affecting their credit standing. For commercial and consumer customers, the Corporation has provided relief options, including payment deferrals and fee waivers.

All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

As of June 30, 2020, loan forbearance related to COVID-19 hardship requests are described below:


	Forbearance Granted			Forbearance Completed			Forbearance Remaining
	Number of			Number of			Number of
(Dollars In Thousands)	Loans	Amount		Loans	Amount		Loans	Amount
Single-family loans	52	$	21,470	4	$	1,579	48	$	19,891
Multi-family loans	3		1,592	—		—	3		1,592
Commercial real estate loans	2		1,071	—		—	2		1,071
Total loan forbearance	57	$	24,133	4	$	1,579	53	$	22,554

As of June 30, 2020, loan forbearance outstanding balances are described below:


									Weighted	Weighted Avg.
				% of				Weighted	Avg. Debt	Forbearance
	Number			Total		Weighted		Avg.	Coverage	Period
(Dollars In Thousands)	of Loans	Amount		Loans		Avg. LTV(1)		FICO(2)	Ratio(3)	Granted(4)
Single-family loans	48	$	19,891	2.20	%	64	%	727	N/A	6.0
Multi-family loans	3		1,592	0.17	%	41	%	719	1.65x	3.3
Commercial real estate loans(5)	2		1,071	0.12	%	31	%	755	1.36x	3.5
Total loans in forbearance	53	$	22,554	2.49	%	61	%	727	1.53x	5.7

⁽¹⁾

Current loan balance in comparison to the original appraised value.

⁽²⁾

At time of loan origination, borrowers and/or guarantors.

⁽³⁾

At time of loan origination.

⁽⁴⁾

In months.

⁽⁵⁾

Comprised of $579 thousand in Office and $493 thousand in Mixed Used – Office/Single-Family Residential.

In addition, as of June 30, 2020, the Bank had pending requests for payment relief for an additional seven single-family loans totaling approximately $2.6 million.

After the payment deferral period, normal loan payments will once again become due and payable. The forbearance amount will be due and payable in full as a balloon payment at the end of the loan term or sooner if the loan becomes due and payable in full at an earlier date. The Corporation believes the steps we are taking are necessary to effectively manage its portfolio and assist the borrowers through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

At June 30, 2020 and 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 $1.0 million at June 30, 2019.

During the fiscal years ended June 30, 2020 and 2019, the Corporation’s average investment in non-performing loans was $4.4 million and $6.6 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 year ended June 30, 2020, the Bank received $312,000 in interest payments from non-performing loans, of which $203,000 was recognized as interest income. The remaining $109,000 was applied to reduce the loan balances under the cost recovery method. In comparison, for the fiscal year ended June 30, 2019, the Bank received $574,000 in interest payments from non-performing loans, of which $408,000 was recognized as interest income. The remaining $166,000 was applied to reduce the loan balances under the cost recovery method.

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


	June 30, 2020
			30-89 Days Past				Total Loans Held for
(In Thousands)	Current		Due		Non-Accrual (1)		Investment, Gross

Mortgage loans:
Single-family	$	293,326	$	219	$	5,265	$	298,810
Multi-family		491,903		—		—		491,903
Commercial real estate		105,235		—		—		105,235
Construction		7,801		—		—		7,801
Other		143		—		—		143
Commercial business loans		445		—		35		480
Consumer loans		94		—		—		94
Total loans held for investment, gross	$	898,947	$	219	$	5,300	$	904,466

⁽¹⁾

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


	June 30, 2019
			30-89 Days Past				Total Loans Held for
(In Thousands)	Current		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.

For the fiscal year ended June 30, 2020, there were two loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; one loan (previously modified) was downgraded; one loan was upgraded to the pass category; two loans were paid off; and no loans were converted to real estate owned. For the fiscal year ended June 30, 2019, there were no loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; one loan (previously modified) was downgraded; three loans were upgraded to the pass category; one loan was paid off; and no loans were converted to real estate owned. During the fiscal years ended June 30, 2020 and 2019, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the fiscal year ended June 30, 2020, there were no restructured loans that were extended beyond the initial maturity of the modification; while in fiscal 2019, there was one restructured loan of $56,000 that was extended beyond the initial maturity of the modification.

As of June 30, 2020, the net outstanding balance of the Corporation's eight restructured loans was $2.6 million, all were classified as substandard on non-accrual status. As of June 30, 2020, $1.2 million, or 44 percent, of the restructured loans were current with respect to their payment status, consistent with modified terms. As of June 30, 2019, the net outstanding balance of the Corporation's eight restructured loans was $3.8 million: one was classified as special mention on accrual status ($437,000); one was classified as substandard on accrual status ($1.4 million); and six were classified as substandard on non-accrual status ($1.9 million). As of June 30, 2019, $1.2 million, or 44 percent, of the restructured loans were current with respect to their payment status, consistent with modified terms. At both June 30, 2020 and June 30, 2019, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

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, 2020 and 2019 :


	At June 30,
(In Thousands)	2020		2019
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	2,612	$	1,891
Commercial business loans		31		41
Total		2,643		1,932

Restructured loans on accrual status:
Mortgage loans:
Single-family		—		1,861
Total		—		1,861
Total restructured loans	$	2,643	$	3,793

The following tables show the restructured loans by type, net of allowance for loan losses or charge-offs, at June 30, 2020 and 2019 :


	At June 30, 2020
	Unpaid								Net
	Principal		Related		Recorded				Recorded
(In Thousands)	Balance		Charge-offs		Investment		Allowance (1)		Investment

Mortgage loans:
Single-family:
With a related allowance	$	1,650	$	—	$	1,650	$	(108)	$	1,542
Without a related allowance(2)		1,435		(365)		1,070		—		1,070
Total single-family		3,085		(365)		2,720		(108)		2,612

Commercial business loans:
With a related allowance		35		—		35		(4)		31
Total commercial business loans		35		—		35		(4)		31

Total restructured loans	$	3,120	$	(365)	$	2,755	$	(112)	$	2,643

⁽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.

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:


	Year Ended June 30,
(In Thousands)	2020		2019

Balance, beginning of year	$	2	$	677
Originations		—		—
Sales and payments		(1)		(675)
Balance, end of year	$	1	$	2

As of June 30, 2020 and 2019, all of the related-party loans were performing in accordance with their original contractual terms.