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Loans Held for Investment

12 Months Ended

Jun. 30, 2023

Note 3: Loans Held for Investment

Loans held for investment consisted of the following at June 30, 2023 and 2022:


(In Thousands)	June 30, 2023		June 30, 2022
Mortgage loans:
Single-family	$	518,821	$	378,234
Multi-family		461,113		464,676
Commercial real estate		90,558		90,429
Construction		1,936		3,216
Other		106		123
Commercial business loans		1,565		1,206
Consumer loans		65		86
Total loans held for investment, gross		1,074,164		937,970

Advance payments of escrows		148		47
Deferred loan costs, net		9,263		7,539
Allowance for loan losses		(5,946)		(5,564)
Total loans held for investment, net	$	1,077,629	$	939,992

The following table sets forth information at June 30, 2023 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 11% of loans held for investment at both June 30, 2023 and June 30, 2022. Adjustable rate loans having no stated repricing date that reprice when the index to which they are tied to reprices (e.g. prime rate index) and checking account overdrafts are reported as repricing within one year, subject to periodic and maximum rate cap. 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
		Within	One Year		3 Years		5 Years
(In Thousands)	One Year		Through 3 Years		Through 5 Years		Through 10 Years		Fixed Rate		Total
Mortgage loans:
Single-family	$	56,859	$	22,936	$	68,980	$	258,085	$	111,961	$	518,821
Multi-family		152,929		147,344		118,761		41,950		129		461,113
Commercial real estate		39,071		15,069		35,135		—		1,283		90,558
Construction		1,440		—		—		—		496		1,936
Other		—		—		—		—		106		106
Commercial business loans		1,565		—		—		—		—		1,565
Consumer loans		65		—		—		—		—		65
Total loans held for investment, gross	$	251,929	$	185,349	$	222,876	$	300,035	$	113,975	$	1,074,164

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, as well as peer group data, reflecting the

effect of events that have occurred but are not yet evidenced in the historical data. 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 borrowers 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, 2023
					Commercial				Other		Commercial
(In Thousands)	Single-family		Multi-family		Real Estate		Construction		Mortgage		Business		Consumer		Total

Pass	$	517,399	$	460,603	$	90,011	$	1,936	$	106	$	1,565	$	65	$	1,071,685
Special Mention		—		510		—		—		—		—		—		510
Substandard		1,422		—		547		—		—		—		—		1,969
Total loans held for investment, gross	$	518,821	$	461,113	$	90,558	$	1,936	$	106	$	1,565	$	65	$	1,074,164


	June 30, 2022
					Commercial					Other	Commercial
(In Thousands)	Single-family		Multi-family		Real Estate		Construction			Mortgage	Business		Consumer		Total

Pass	$	376,502	$	464,676	$	90,429	$	3,216	$	123	$	1,206	$	86	$	936,238
Special Mention		224		—		—		—		—		—		—		224
Substandard		1,508		—		—		—		—		—		—		1,508
Total loans held for investment, gross	$	378,234	$	464,676	$	90,429	$	3,216	$	123	$	1,206	$	86	$	937,970

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. 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 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 is 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 years indicated.


	Year Ended June 30, 2023
							Commercial									Commercial
(In Thousands)	Single-family			Multi-family			Real Estate			Construction			Other Mortgage			Business			Consumer			Total

Allowance at beginning of period	$	1,383		$	3,282		$	816		$	23		$	3		$	52		$	5		$	5,564
Provision (recovery) for loan losses		329			(12)			52			(8)			(1)			15			(1)			374
Recoveries		8			—			—			—			—			—			—			8
Charge-offs		—			—			—			—			—			—			—			—
Allowance for loan losses, end of period	$	1,720		$	3,270		$	868		$	15		$	2		$	67		$	4		$	5,946

Allowance:
Individually evaluated for allowances	$	37		$	—		$	—		$	—		$	—		$	—		$	—		$	37
Collectively evaluated for allowances		1,683			3,270			868			15			2			67			4			5,909
Allowance for loan losses, end of period	$	1,720		$	3,270		$	868		$	15		$	2		$	67		$	4		$	5,946

Gross Loans:
Individually evaluated for allowances	$	996		$	—		$	—		$	—		$	—		$	—		$	—		$	996
Collectively evaluated for allowances		517,825			461,113			90,558			1,936			106			1,565			65			1,073,168
Total loans held for investment, gross	$	518,821		$	461,113		$	90,558		$	1,936		$	106		$	1,565		$	65		$	1,074,164
Allowance for loan losses as a percentage of gross loans held for investment		0.33	%		0.71	%		0.96	%		0.77	%		1.89	%		4.28	%		6.15	%		0.55	%
Net (recoveries) charge-offs to average loans receivable, net during the period		—	%		—	%		—	%		—	%		—	%		—	%		—	%		—	%


	Year Ended June 30, 2022
							Commercial									Commercial
(In Thousands)	Single-family			Multi-family			Real Estate			Construction			Other Mortgage			Business			Consumer			Total

Allowance at beginning of period	$	2,000		$	4,485		$	1,006		$	51		$	3		$	36		$	6		$	7,587
(Recovery) provision for loan losses		(1,056)			(1,203)			(190)			(28)			—			16			(1)			(2,462)
Recoveries		439			—			—			—			—			—			—			439
Charge-offs		—			—			—			—			—			—			—			—
Allowance for loan losses, end of period	$	1,383		$	3,282		$	816		$	23		$	3		$	52		$	5		$	5,564

Allowance:
Individually evaluated for allowances	$	38		$	—		$	—		$	—		$	—		$	—		$	—		$	38
Collectively evaluated for allowances		1,345			3,282			816			23			3			52			5			5,526
Allowance for loan losses, end of period	$	1,383		$	3,282		$	816		$	23		$	3		$	52		$	5		$	5,564

Gross Loans:
Individually evaluated for allowances	$	1,275		$	—		$	—		$	—		$	—		$	—		$	—		$	1,275
Collectively evaluated for allowances		376,959			464,676			90,429			3,216			123			1,206			86			936,695
Total loans held for investment, gross	$	378,234		$	464,676		$	90,429		$	3,216		$	123		$	1,206		$	86		$	937,970
Allowance for loan losses as a percentage of gross loans held for investment		0.37	%		0.71	%		0.90	%		0.72	%		2.44	%		4.31	%		5.81	%		0.59	%
Net (recoveries) charge-offs to average loans receivable, net during the period		(0.15)	%		—	%		—	%		—	%		—	%		—	%		—	%		(0.05)	%

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


	Year Ended June 30,
(In Thousands)	2023		2022

Balance, beginning of year	$	5,564	$	7,587
Provision (recovery) for loan losses		374		(2,462)
Recoveries		8		439
Charge-offs		—		—
Balance, end of year	$	5,946	$	5,564

The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the years 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, 2023
	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	$	1,171	$	—	$	1,171	$	(122)	$	1,049	$	996	$	42
Without a related allowance⁽²⁾		276		(25)		251		—		251		112		—
Total single-family loans		1,447		(25)		1,422		(122)		1,300		1,108		42


Total non-performing loans	$	1,447	$	(25)	$	1,422	$	(122)	$	1,300	$	1,108	$	42

(1)	Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.

(2)	There was no related allowance for loan losses because these 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, 2022
	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	$	993	$	—	$	993	$	(85)	$	908	$	2,594	$	98
Without a related allowance⁽²⁾		548		(33)		515		—		515		635		232
Total single-family loans		1,541		(33)		1,508		(85)		1,423		3,229		330

Multi-family:
With a related allowance		—		—		—		—		—		957		46
Total multi-family loans		—		—		—		—		—		957		46

Total non-performing loans	$	1,541	$	(33)	$	1,508	$	(85)	$	1,423	$	4,186	$	376

(1)	Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.

(2)	There was no related allowance for loan losses because these 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, 2023 and 2022, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

During the fiscal years ended June 30, 2023 and 2022, the Corporation’s average investment in non-performing loans was $1.1 million and $4.2 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, 2023, the Bank received $49,000 in interest payments from non-performing loans, of which $42,000 was recognized as interest income. The remaining $7,000 was applied to reduce the loan balances under the cost recovery method. In comparison, for the fiscal year ended June 30, 2022, the Bank received $405,000 in interest payments from non-performing loans, of which $376,000 was recognized as interest income. The remaining $29,000 was applied to reduce the loan balances under the cost recovery method.

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


	June 30, 2023
			30-89 Days Past				Total Loans Held for
(In Thousands)	Current		Due		Non-Accrual⁽¹⁾		Investment, Gross

Mortgage loans:
Single-family	$	517,399	$	—	$	1,422	$	518,821
Multi-family		461,113		—		—		461,113
Commercial real estate		90,558		—		—		90,558
Construction		1,936		—		—		1,936
Other		106		—		—		106
Commercial business loans		1,565		—		—		1,565
Consumer loans		64		1		—		65
Total loans held for investment, gross	$	1,072,741	$	1	$	1,422	$	1,074,164

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


	June 30, 2022
			30-89 Days Past				Total Loans Held for
(In Thousands)	Current		Due		Non-Accrual⁽¹⁾		Investment, Gross

Mortgage loans:
Single-family	$	376,726	$	—	$	1,508	$	378,234
Multi-family		464,676		—		—		464,676
Commercial real estate		90,429		—		—		90,429
Construction		3,216		—		—		3,216
Other		123		—		—		123
Commercial business loans		1,206		—		—		1,206
Consumer loans		83		3		—		86
Total loans held for investment, gross	$	936,459	$	3	$	1,508	$	937,970

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

For the fiscal year ended June 30, 2023, there were no loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; 11 loans were upgraded to the pass category; one loan was downgraded to the special mention category and subsequently upgraded back to the pass category; one loan was paid off; and no loans were converted to real estate owned. For the fiscal year ended June 30, 2022, there were no loans that were newly modified from their original terms, re-underwritten or identified as a restructured loan; three loans were upgraded to the pass category; seven loans were paid off; and no loans were converted to real estate owned. During the fiscal years ended June 30, 2023 and 2022, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the fiscal years ended June 30, 2023 and 2022, there were no restructured loans that were extended beyond the initial maturity of the modification.

As of June 30, 2023, the net outstanding balance of the Corporation’s restructured loans was $708,000, consisting of one loan classified as substandard on non-accrual status. As of June 30, 2023, the restructured loan was delinquent with respect to its payment status. As of June 30, 2022, the net outstanding balance of the Corporation’s 13 restructured loans was $4.5 million; one loan with an outstanding balance of $722,000 was classified as substandard on non-accrual status and 12 loans totaling $3.7 million were classified in the pass category on accrual status. As of June 30, 2022, all of the restructured loans were current with respect to their payment status, consistent with their modified terms. At both June 30, 2023 and June 30, 2022, 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, 2023 and 2022 :


	At June 30,
(In Thousands)	2023		2022
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	708	$	722
Total		708		722

Restructured loans on accrual status:
Mortgage loans:
Single-family		—		3,748
Total		—		3,748
Total restructured loans	$	708	$	4,470

The following tables show the restructured loans by type, net of allowance for loan losses or charge-offs, at June 30, 2023 and 2022:


	At June 30, 2023
	Unpaid								Net
	Principal		Related		Recorded				Recorded
(In Thousands)	Balance		Charge-offs		Investment		Allowance⁽¹⁾		Investment

Mortgage loans:
Single-family:
With a related allowance	$	745	$	—	$	745	$	(37)	$	708
Total single-family		745		—		745		(37)		708


Total restructured loans	$	745	$	—	$	745	$	(37)	$	708

(1)	Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.


	At June 30, 2022
	Unpaid								Net
	Principal		Related		Recorded				Recorded
(In Thousands)	Balance		Charge-offs		Investment		Allowance⁽¹⁾		Investment

Mortgage loans:
Single-family:
With a related allowance	$	760	$	—	$	760	$	(38)	$	722
Without a related allowance⁽²⁾		3,748		—		3,748		—		3,748
Total single-family		4,508		—		4,508		(38)		4,470


Total restructured loans	$	4,508	$	—	$	4,508	$	(38)	$	4,470

(1)	Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.

(2)	There was no related allowance for loan losses because these 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 may offer loans to its directors, officers and employees on substantially the same terms prevailing at the time of origination for comparable transactions with unaffiliated borrowers. During fiscal

2023 and 2022, there were no related-party loan activities and as of June 30, 2023 and 2022, there were no outstanding related-party loans.