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EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCex322q123110.htm
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EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCex311q123110.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCex321q123110.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[  Ö ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended …………………….....  December 31, 2010

[     ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from ________________ to _________________

Commission File Number 000-28304

PROVIDENT FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware                                           33-0704889
(State or other jurisdiction of 
incorporation or organization)
(I.R.S.  Employer 
Identification No.)

3756 Central Avenue, Riverside, California 92506
(Address of principal executive offices and zip code)

(951) 686-6060
(Registrant’s telephone number, including area code)

                                                                                                         .
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  X  .No       .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      .No      .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [   ]  Accelerated filer [   ] 
Non-accelerated filer [   ]  Smaller reporting company [X] 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      .     No   X  .

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
            Title of class:
As of February 3, 2011
Common stock, $ 0.01 par value, per share
 
11,407,454 shares
 


 
 

 

PROVIDENT FINANCIAL HOLDINGS, INC.

Table of Contents

PART 1  -
FINANCIAL INFORMATION
 
       
  ITEM 1  -
Financial Statements.  The Unaudited Interim Condensed Consolidated Financial Statements of Provident Financial Holdings, Inc. filed as a part of the report are as follows:
 
     
Page
 
Condensed Consolidated Statements of Financial Condition
 
   
as of December 31, 2010 and June 30, 2010
1
 
Condensed Consolidated Statements of Operations
 
   
for the Quarters and Six Months Ended December 31, 2010 and 2009
2
 
Condensed Consolidated Statements of Stockholders’ Equity
 
   
for the Quarters and Six Months Ended December 31, 2010 and 2009
3
 
Condensed Consolidated Statements of Cash Flows
 
   
for the Six Months Ended December 31, 2010 and 2009
5
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
6
       
  ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of
 
   
Operations:
 
       
 
General
  28
 
Safe-Harbor Statement
   29
 
Critical Accounting Policies
29
 
Executive Summary and Operating Strategy
31
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
33
 
Comparison of Financial Condition at December 31, 2010 and June 30, 2010
33
 
Comparison of Operating Results
 
   
for the Quarters and Six Months Ended December 31, 2010 and 2009
34
 
Asset Quality
44
 
Loan Volume Activities
53
 
Liquidity and Capital Resources
54
 
Commitments and Derivative Financial Instruments
55
 
Supplemental Information
55
       
  ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
56
       
  ITEM 4  -
Controls and Procedures
58
       
PART II  -
OTHER INFORMATION
 
       
  ITEM 1  -
Legal Proceedings
58
  ITEM 1A -
Risk Factors
58
  ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
58
  ITEM 3  -
Defaults Upon Senior Securities
59
  ITEM 4  -
(Removed and Reserved)
59
  ITEM 5  -
Other Information
59
  ITEM 6  -
Exhibits
59
       
SIGNATURES
60
   


 
 

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
Dollars in Thousands

 
December 31,
   
June 30,
 
 
2010
   
2010
 
Assets
         
     Cash and cash equivalents
$   153,691
   
$      96,201
 
     Investment securities – available for sale, at fair value
31,104
   
35,003
 
     Loans held for investment, net of allowance for loan losses of
         
          $36,925 and $43,501, respectively
932,199
   
1,006,260
 
     Loans held for sale, at fair value
152,061
   
170,255
 
     Accrued interest receivable
4,133
   
4,643
 
     Real estate owned, net
13,470
   
14,667
 
     Federal Home Loan Bank (“FHLB”) – San Francisco stock
29,349
   
31,795
 
     Premises and equipment, net
5,830
   
5,841
 
     Prepaid expenses and other assets
36,249
   
34,736
 
           
               Total assets
$ 1,358,086
   
$ 1,399,401
 
 
 
       
Liabilities and Stockholders’ Equity
         
           
Commitments and Contingencies
         
           
Liabilities:
         
     Non interest-bearing deposits
$       45,475
   
$      52,230
 
     Interest-bearing deposits
881,105
   
880,703
 
               Total deposits
926,580
   
932,933
 
           
     Borrowings
271,623
   
309,647
 
     Accounts payable, accrued interest and other liabilities
23,092
   
29,077
 
               Total liabilities
1,221,295
   
1,271,657
 
           
Stockholders’ equity:
         
     Preferred stock, $.01 par value (2,000,000 shares authorized;
          none issued and outstanding)
         
-
   
-
 
     Common stock, $.01 par value (40,000,000 shares authorized;
          17,610,865 shares issued; 11,407,454 and 11,406,654 shares
          outstanding, respectively)
         
         
176
   
176
 
     Additional paid-in capital
86,146
   
85,663
 
     Retained earnings
143,939
   
135,383
 
     Treasury stock at cost (6,203,411 and 6,204,211 shares,
          respectively)
         
(93,942
 
(93,942
)
     Unearned stock compensation
(68
 
(203
)
     Accumulated other comprehensive income, net of tax
540
   
667
 
           
               Total stockholders’ equity
136,791
   
127,744
 
           
               Total liabilities and stockholders’ equity
$ 1,358,086
   
$ 1,399,401
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 


PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
In Thousands, Except Per Share Information
 
 
Quarter Ended
December 31,
 
Six Months Ended
December 31,
   
 
2010
 
2009
 
2010
 
2009
Interest income:
                     
     Loans receivable, net
$ 14,888
   
$ 17,126
   
$ 30,449
   
$ 35,274
 
     Investment securities
217
   
463
   
458
   
1,558
 
     FHLB – San Francisco stock
30
   
-
   
66
   
69
 
     Interest-earning deposits
65
   
66
   
130
   
120
 
     Total interest income
15,200
   
17,655
   
31,103
   
37,021
 
                       
Interest expense:
                     
     Checking and money market deposits
271
   
364
   
576
   
690
 
     Savings deposits
287
   
503
   
627
   
1,024
 
     Time deposits
2,051
   
3,196
   
4,235
   
7,100
 
     Borrowings
2,883
   
4,015
   
6,145
   
8,524
 
     Total interest expense
5,492
   
8,078
   
11,583
   
17,338
 
                       
Net interest income, before provision for loan losses
9,708
   
9,577
   
19,520
   
19,683
 
Provision for loan losses
1,048
   
2,315
   
1,925
   
19,521
 
Net interest income, after provision for loan losses
8,660
   
7,262
   
17,595
   
162
 
                       
Non-interest income:
                     
     Loan servicing and other fees
275
   
183
   
399
   
418
 
     Gain on sale of loans, net
9,332
   
5,230
   
18,779
   
8,373
 
     Deposit account fees
671
   
705
   
1,300
   
1,468
 
     Gain on sale of investment securities, net
-
   
341
   
-
   
2,290
 
     (Loss) gain on sale and operations of real estate
       owned acquired in the settlement of loans, net
 
(690
 
)
 
 
(249
 
)
 
 
(1,058
 
)
 
 
189
 
     Other
509
   
478
   
1,012
   
956
 
     Total non-interest income
10,097
   
6,688
   
20,432
   
13,694
 
                       
Non-interest expense:
                     
     Salaries and employee benefits
7,565
   
5,853
   
14,942
   
10,783
 
     Premises and occupancy
804
   
754
   
1,624
   
1,542
 
     Equipment
378
   
334
   
703
   
691
 
     Professional expenses
418
   
366
   
801
   
753
 
     Sales and marketing expenses
160
   
148
   
294
   
260
 
     Deposit insurance premiums and regulatory
       assessments
 
664
   
 
957
   
 
1,345
   
 
1,673
 
     Other
1,353
   
1,159
   
2,843
   
2,420
 
     Total non-interest expense
11,342
   
9,571
   
22,552
   
18,122
 
                       
Income (loss) before income taxes
7,415
   
4,379
   
15,475
   
(4,266
)
Provision (benefit) for income taxes
3,160
   
1,821
   
6,691
   
(1,808
)
     Net income (loss)
$   4,255
   
$   2,558
   
$  8,784
   
$  (2,458
)
                       
Basic earnings (loss) per share
$ 0.37
   
$ 0.37
   
$ 0.77
   
$ (0.38
)
Diluted earnings (loss) per share
$ 0.37
   
$ 0.37
   
$ 0.77
   
$ (0.38
)
Cash dividends per share
$ 0.01
   
$ 0.01
   
$ 0.02
   
$  0.02
 


The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Dollars in Thousands
For the Quarters Ended December 31, 2010 and 2009


 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
Balance at October 1, 2010
11,407,454
 
$ 176
$ 85,918
 
$ 139,798
 
$ (93,942
)
$ (135
)
$   654
 
$ 132,469
 
                               
Comprehensive income:
                             
   Net income
         
4,255
             
4,255
 
   Change in unrealized holding loss on
      securities available for sale, net of
      reclassification of $0 of  net gain
      included in net income
                     
 
 
 
(114
 
 
 
)
 
 
 
(114
 
 
 
)
Total comprehensive income
                         
4,141
 
                               
Amortization of restricted stock
     
99
                 
99
 
Stock options expense
     
96
                 
96
 
Allocations of contribution to ESOP (1)
     
33
         
67
     
100
 
Cash dividends
         
(114
)
           
(114
)
                               
Balance at December 31, 2010
11,407,454
 
$ 176
$ 86,146
 
$ 143,939
 
$ (93,942
)
$   (68
)
$   540
 
$ 136,791
 

(1)  
Employee Stock Ownership Plan (“ESOP”).


 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
Balance at October 1, 2009
6,220,454
 
$ 124
$ 72,978
 
$ 129,542
 
$ (93,942
)
$ (406
)
$     607
 
$ 108,903
 
                               
Comprehensive income:
                             
   Net income
         
2,558
             
2,558
 
   Change in unrealized holding loss on
      investment securities available for
      sale, net of reclassification of
      $198 of net gain included in net
      income
                     
 
 
 
 
(20
 
 
 
 
)
 
 
 
 
(20
 
 
 
 
)
Total comprehensive income
                         
2,538
 
                               
Common stock issuance, net of expenses
5,175,000
 
52
11,907
                 
11,959
 
Amortization of restricted stock
     
105
                 
105
 
Stock options expense
     
110
                 
110
 
Allocations of contribution to ESOP
     
11
         
68
     
79
 
Cash dividends
         
(62
)
           
(62
)
                               
Balance at December 31, 2009
11,395,454
 
$ 176
$ 85,111
 
$ 132,038
 
$ (93,942
)
$ (338
)
$     587
 
$ 123,632
 


                The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Dollars in Thousands
For the Six Months Ended December 31, 2010 and 2009

 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
Balance at July 1, 2010
11,406,654
 
$ 176
$ 85,663
 
$ 135,383
 
$ (93,942
)
$ ( 203
)
$  667
 
$ 127,744
 
                               
Comprehensive income:
                             
   Net income
         
8,784
             
8,784
 
   Change in unrealized holding loss on
      investment securities available for
      sale, net of reclassification of $0
      of net gain included in net income
                     
 
 
 
(127
 
 
 
)
 
 
 
(127
 
 
 
)
Total comprehensive income
                         
8,657
 
                               
Distribution of restricted stock
800
                           
Amortization of restricted stock
     
202
                 
202
 
Stock options expense
     
231
                 
231
 
Allocations of contribution to ESOP
     
50
         
135
     
185
 
Cash dividends
         
(228
)
           
(228
)
                               
Balance at December 31, 2010
11,407,454
 
$ 176
$ 86,146
 
$ 143,939
 
$ (93,942
)
$ (68
)
$  540
 
$ 136,791
 



 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
Balance at July 1, 2009
6,219,654
 
$ 124
$ 72,709
 
$ 134,620
 
$ (93,942
)
$ ( 473
)
$ 1,872
 
$ 114,910
 
                               
Comprehensive loss:
                             
   Net loss
         
(2,458
)
           
(2,458
)
   Change in unrealized holding loss on
      investment securities available for
      sale, net of reclassification of $1.3
      million of net gain included in net
      loss
                     
 
 
 
 
(1,285
 
 
 
 
)
 
 
 
 
(1,285
 
 
 
 
)
Total comprehensive loss
                         
(3,743
)
                               
Common stock issuance, net of expenses
5,175,000
 
52
11,907
                 
11,959
 
Distribution of restricted stock
800
                           
Amortization of restricted stock
     
211
                 
211
 
Stock options expense
     
227
                 
227
 
Allocations of contribution to ESOP
     
57
         
135
     
192
 
Cash dividends
         
(124
)
           
(124
)
                               
Balance at December 31, 2009
11,395,454
 
$ 176
$ 85,111
 
$ 132,038
 
$ (93,942
)
$ (338
)
$     587
 
$ 123,632
 


                The accompanying notes are an integral part of these condensed consolidated financial statements.


 

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Six Months Ended
December 31,
 
 
 
2010
   
2009
 
Cash flows from operating activities:
         
   Net income (loss)
$        8,784
   
$     (2,458
)
   Adjustments to reconcile net income (loss) to net cash provided by
         
    operating activities:
         
       Depreciation and amortization
732
   
832
 
       Provision for loan losses
1,925
   
19,521
 
       Provision for losses on real estate owned
446
   
411
 
       Gain on sale of loans, net
(18,779
)
 
(8,373
)
       Gain on sale of investment securities, net
-
   
(2,290
)
       Gain on sale of real estate owned, net
(488
)
 
(1,572
)
       Stock-based compensation
433
   
438
 
       ESOP expense
184
   
189
 
       Decrease (increase) in current and deferred income taxes
1,682
   
(3,042
)
       Increase in cash surrender value of the bank owned life insurance
(101
)
 
(100
)
   Increase (decrease) in accounts payable and other liabilities
580
   
(3,029
)
   Decrease (increase) in prepaid expenses and other assets
2,692
   
(8,624
)
   Loans originated for sale
(1,270,013
)
 
(956,550
)
   Proceeds from sale of loans
1,295,963
   
976,065
 
Net cash provided by operating activities
24,040
   
11,418
 
           
Cash flows from investing activities:
         
   Decrease in loans held for investment, net
52,588
   
58,088
 
   Principal payments from investment securities available for sale
3,725
   
17,260
 
   Proceeds from sale of investment securities available for sale
-
   
67,778
 
   Redemption of FHLB – San Francisco stock
2,446
   
-
 
   Purchase of bank owned life insurance
-
   
(2,000
)
   Proceeds from sale of real estate owned
19,685
   
25,018
 
   Purchase of premises and equipment
(390
)
 
(121
)
Net cash provided by investing activities
78,054
   
166,023
 
           
Cash flows from financing activities:
         
   Decrease in deposits, net
(6,353
)
 
(52,592
)
   Proceeds from long-term borrowings
10,000
   
-
 
   Repayments of long-term borrowings
(48,024
)
 
(122,022
)
   ESOP loan payment
1
   
3
 
   Cash dividends
(228
)
 
(124
)
   Proceeds from issuance of common stock
-
   
11,959
 
Net cash used for financing activities
(44,604
)
 
(162,776
)
           
Net increase in cash and cash equivalents
57,490
   
14,665
 
Cash and cash equivalents at beginning of period
96,201
   
56,903
 
Cash and cash equivalents at end of period
$    153,691
   
$     71,568
 
Supplemental information:
         
  Cash paid for interest
$ 11,885
   
$ 17,629
 
  Cash paid for income taxes
$   5,005
   
$      125
 
  Real estate acquired in the settlement of loans
$ 25,533
   
$ 26,001
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 


PROVIDENT FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010


Note 1: Basis of Presentation

The unaudited interim condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim periods presented.  All such adjustments are of a normal, recurring nature.  The condensed consolidated statements of financial condition at June 30, 2010 are derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. and its wholly-owned subsidiary, Provident Savings Bank, F.S.B. (the “Bank”) (collectively, the “Corporation”).  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting.  It is recommended that these unaudited interim condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2010.  The results of operations for the quarter and six months ended December 31, 2010 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2011.


Note 2: Accounting Standard Updates (“ASU”)

Financial Accounting Standards Board (“FASB”) ASU 2010-20:
In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  This ASU requires additional disclosures that facilitate financial statement users’ evaluation of the nature of the credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses and the changes and reasons for those changes in the allowance for credit losses. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, and the nature and extent of troubled debt restructurings (“TDR”) that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. These disclosures as of the end of a reporting period are originally scheduled to be effective for interim and annual reporting periods ending on or after December 15, 2010; however, it is currently deferred until the FASB finalizes its project on determining what constitutes a TDR for a creditor.  The Corporation does not expect ASU 2010-20 to have a material effect on its consolidated financial statements.


Note 3: Earnings (Loss) Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income or loss available to common shareholders by the weighted-average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the entity.

As of December 31, 2010 and 2009, there were outstanding options to purchase 837,700 shares and 905,200 shares of the Corporation’s common stock, respectively, of which 656,700 shares and 905,200 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive.  As of December 31, 2010 and 2009, there were outstanding unvested restricted stock of 123,500 shares and 135,500 shares, respectively, of which 24,000 shares and 135,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive.


 

 

The following table provides the basic and diluted EPS computations for the quarters and six months ended December 31, 2010 and 2009, respectively.

 
For the Quarter
Ended
December 31,
 
For the Six Months
Ended
December 31,
 
(In Thousands, Except Earnings (Loss) Per Share)
 
 
2010
 
2009
 
2010
 
2009
 
Numerator:
               
     Net income (loss) – numerator for basic earnings
        (loss) per share and diluted earnings (loss)
        per share - available to common stockholders
 
 
$ 4,255
 
 
 
$ 2,558
 
 
 
$ 8,784
 
 
 
$ (2,458
 
 
)
                 
Denominator:
               
     Denominator for basic earnings (loss) per share:
         Weighted-average shares
               
11,377
6,976
 
11,369
 
6,545
 
                 
     Effect of dilutive securities
10
 
-
 
5
 
-
 
                 
     Denominator for diluted earnings (loss) per share:
               
         Adjusted weighted-average shares
         and assumed conversions
 
11,387
 
 
6,976
 
 
11,374
 
 
6,545
 
                 
Basic earnings (loss) per share
$ 0.37
 
$ 0.37
 
$ 0.77
 
$ (0.38
)
Diluted earnings (loss) per share
$ 0.37
 
$ 0.37
 
$ 0.77
 
$ (0.38
)



 

 

Note 4: Operating Segment Reports

The Corporation operates in two business segments: community banking through the Bank and mortgage banking through Provident Bank Mortgage (“PBM”), a division of the Bank.

The following tables set forth condensed consolidated statements of operations and total assets for the Corporation’s operating segments for the quarters ended December 31, 2010 and 2009, respectively (in thousands).


 
For the Quarter Ended December 31, 2010
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
Net interest income, before provision for loan losses
$        8,619
 
$     1,089
 
$        9,708
 
Provision for loan losses
677
 
371
 
1,048
 
Net interest income, after provision for loan losses
7,942
 
718
 
8,660
 
             
Non-interest income:
           
     Loan servicing and other fees  
263
 
12
 
275
 
     Gain on sale of loans, net
10
 
9,322
 
9,332
 
     Deposit account fees
671
 
-
 
671
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
(644
 
)
 
(46
 
)
 
(690
 
)
     Other
508
 
1
 
509
 
          Total non-interest income
808
 
9,289
 
10,097
 
             
Non-interest expense:
           
     Salaries and employee benefits
3,277
 
4,288
 
7,565
 
     Premises and occupancy
546
 
258
 
804
 
     Operating and administrative expenses
1,584
 
1,389
 
2,973
 
          Total non-interest expense
5,407
 
5,935
 
11,342
 
Income before income taxes
3,343
 
4,072
 
7,415
 
Provision for income taxes
1,448
 
1,712
 
3,160
 
Net income
$         1,895
 
$      2,360
 
$         4,255
 
Total assets, end of period
$ 1,203,862
 
$ 154,224
 
$ 1,358,086
 


 

 



 
For the Quarter Ended December 31, 2009
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
Net interest income, before provision for loan
   losses
 
$        8,787
 
 
$        790
 
 
$        9,577
 
Provision (recovery) for loan losses
2,489
 
(174
)
2,315
 
Net interest income, after provision for loan losses
6,298
 
964
 
7,262
 
             
Non-interest income:
           
     Loan servicing and other fees
165
 
18
 
183
 
     Gain on sale of loans, net
6
 
5,224
 
5,230
 
     Deposit account fees
705
 
-
 
705
 
     Gain on sale of investment securities
341
 
-
 
341
 
     (Loss) gain on sale and operations of real estate
        owned acquired in the settlement of loans, net
 
(285
 
)
 
36
 
 
(249
 
)
     Other
478
 
-
 
478
 
          Total non-interest income
1,410
 
5,278
 
6,688
 
             
Non-interest expense:
           
     Salaries and employee benefits
3,279
 
2,574
 
5,853
 
     Premises and occupancy
579
 
175
 
754
 
     Operating and administrative expenses
1,890
 
1,074
 
2,964
 
          Total non-interest expense
5,748
 
3,823
 
9,571
 
Income before income taxes
1,960
 
2,419
 
4,379
 
Provision for income taxes
804
 
1,017
 
1,821
 
Net income
$         1,156
 
$      1,402
 
$         2,558
 
Total assets, end of period
$ 1,275,402
 
$ 139,236
 
$ 1,414,638
 


 

 

The following tables set forth condensed consolidated statements of operations and total assets for the Corporation’s operating segments for the six months ended December 31, 2010 and 2009, respectively (in thousands).


 
For the Six Months Ended December 31, 2010
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
Net interest income, before provision for loan losses
$      17,324
 
$      2,196
 
$      19,520
 
Provision for loan losses
1,193
 
732
 
1,925
 
Net interest income, after provision for loan losses
16,131
 
1,464
 
17,595
 
             
Non-interest income:
           
     Loan servicing and other fees
374
 
25
 
399
 
     (Loss) gain on sale of loans, net
(121
)
18,900
 
18,779
 
     Deposit account fees
1,300
 
-
 
1,300
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
(1,021
 
)
 
(37
 
)
 
(1,058
 
)
     Other
1,010
 
2
 
1,012
 
          Total non-interest income
1,542
 
18,890
 
20,432
 
             
Non-interest expense:
           
     Salaries and employee benefits
6,476
 
8,466
 
14,942
 
     Premises and occupancy
1,156
 
468
 
1,624
 
     Operating and administrative expenses
3,210
 
2,776
 
5,986
 
          Total non-interest expense
10,842
 
11,710
 
22,552
 
Income before taxes
6,831
 
8,644
 
15,475
 
Provision for income taxes
3,057
 
3,634
 
6,691
 
Net income
$         3,774
 
$      5,010
 
$         8,784
 
Total assets, end of period
$ 1,203,862
 
$ 154,224
 
$ 1,358,086
 


 
10 

 


 
For the Six Months Ended December 31, 2009
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
Net interest income, before provision for loan losses
$      18,077
 
$     1,606
 
$      19,683
 
Provision for loan losses
19,202
 
319
 
19,521
 
Net interest (expense) income, after provision for
  loan losses
 
(1,125
 
)
 
1,287
 
 
162
 
             
Non-interest income:
           
     Loan servicing and other fees
389
 
29
 
418
 
     Gain on sale of loans, net
10
 
8,363
 
8,373
 
     Deposit account fees
1,468
 
-
 
1,468
 
     Gain on sale of investment securities, net
2,290
 
-
 
2,290
 
     Gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
183
 
 
6
 
 
189
 
     Other
956
 
-
 
956
 
          Total non-interest income
5,296
 
8,398
 
13,694
 
             
Non-interest expense:
           
     Salaries and employee benefits
5,978
 
4,805
 
10,783
 
     Premises and occupancy
1,198
 
344
 
1,542
 
     Operating and administrative expenses
3,630
 
2,167
 
5,797
 
          Total non-interest expense
10,806
 
7,316
 
18,122
 
(Loss) income before taxes
(6,635
)
2,369
 
(4,266
)
(Benefit) provision for income taxes
(2,804
)
996
 
(1,808
)
Net (loss) income
$       (3,831
)
$     1,373
 
$       (2,458
)
Total assets, end of period
$ 1,275,402
 
$ 139,236
 
$ 1,414,638
 


Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of December 31, 2010 and June 30, 2010 were as follows:

 
 
December 31, 2010
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
                 
Available for sale
                 
 
U.S. government sponsored
  enterprise debt securities
 
$   3,250
 
 
$     9
 
 
$     -
 
 
$   3,259
 
 
$   3,259
 
U.S. government agency MBS (1)
15,034
 
387
 
-
 
15,421
 
15,421
 
U.S. government sponsored
  enterprise MBS
 
10,601
 
 
423
 
 
-
 
 
11,024
 
 
11,024
 
Private issue CMO (2)
1,469
 
-
 
(69
)
1,400
 
1,400
Total investment securities
$ 30,354
 
$ 819
 
$ (69
)
$ 31,104
 
$ 31,104

(1)  
Mortgage-backed securities (“MBS”).
(2)  
Collateralized Mortgage Obligations (“CMO”).


 
11 

 


 
 
June 30, 2010
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
                 
Available for sale
                 
 
U.S. government sponsored
  enterprise debt securities
 
$   3,250
 
 
$   67
 
 
$     -
 
 
$   3,317
 
 
$   3,317
 
U.S. government agency MBS
17,291
 
424
 
-
 
17,715
 
17,715
 
U.S. government sponsored
  enterprise MBS
 
11,957
 
 
499
 
 
-
 
 
12,456
 
 
12,456
 
Private issue CMO
1,599
 
-
 
(84
)
1,515
 
1,515
Total investment securities
$ 34,097
 
$ 990
 
$ (84
)
$ 35,003
 
$ 35,003

Contractual maturities of investment securities as of December 31, 2010 and June 30, 2010 were as follows:

 
 
 
(In Thousands)
December 31, 2010
June 30, 2010
   
Estimated
     
Estimated
Amortized
 
Fair
 
Amortized
 
Fair
Cost
 
Value
 
Cost
 
Value
Available for sale
             
               
Due in one year or less
$          -
 
$          -
 
$          -
 
$          -
Due after one through five years
3,250
 
3,259
 
3,250
 
3,317
Due after five through ten years
-
 
-
 
-
 
-
Due after ten years
27,104
 
27,845
 
30,847
 
31,686
Total investment securities
 $ 30,354
 
 $ 31,104
 
 $ 34,097
 
 $ 35,003


Note 6: Loans Held for Investment

Loans held for investment consisted of the following:

 
December 31,
2010
 
June 30,
2010
 
         
Mortgage loans:
       
 
Single-family
$ 531,686
 
$    583,126
 
 
Multi-family
     320,279
 
343,551
 
 
Commercial real estate
105,720
 
110,310
 
 
Construction
400
 
400
 
 
Other
       1,531
 
1,532
 
Commercial business loans
5,723
 
6,620
 
Consumer loans
792
 
857
 
 
Total loans held for investment, gross
966,131
 
1,046,396
 
         
Deferred loan costs, net
2,993
 
3,365
 
Allowance for loan losses
(36,925
)
(43,501
)
 
Total loans held for investment, net
$ 932,199
 
$ 1,006,260
 

Fixed-rate loans comprised 5% of loans held for investment at December 31, 2010, as compared to 4% at June 30, 2010.  As of December 31, 2010, the Bank had $55.1 million in mortgage loans that are subject to negative amortization, consisting of $34.7 million in multi-family loans, $11.8 million in commercial real estate loans and $8.6 million in single-family loans.  This compares to $60.9 million of negative amortization mortgage loans at June 30, 2010, consisting of $38.4 million in multi-family loans, $12.9 million in commercial real estate loans and $9.6 million in single-family loans.  Negative amortization involves a greater risk to the Bank because the loan principal balance may increase by a range of 110% to 115% of the original loan amount and because the loan payment may increase beyond the means of the borrower when loan principal amortization is required.  Also, the Bank has originated interest-only ARM loans, which typically have a fixed interest rate for the first two to five years coupled
 
 
 
12

 
 
with an interest only payment, followed by a periodic adjustable rate and a fully amortizing loan payment.  As of December 31, 2010 and June 30, 2010, the interest-only ARM loans were $276.1 million and $317.6 million, or 28.5% and 30.3% of loans held for investment, respectively.

The following table sets forth information at December 31, 2010 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.  Adjustable rate loans having no stated repricing dates but 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 Bank’s actual repricing experience to differ materially from that shown below.

   
Adjustable Rate
   
     
After
After
After
   
     
One Year
3 Years
5 Years
   
   
Within
Through
Through
Through
Fixed
 
(In Thousands)
One Year
3 Years
5 Years
10 Years
Rate
Total
             
Mortgage loans:
           
 
Single-family
 $ 417,381
 $ 107,215
 $ 2,866
 $        50
$   4,174
 $ 531,686
 
Multi-family
181,236
93,032
 3,315
 27,223
15,473
320,279
 
Commercial real estate
56,360
23,172
1,836
 2,295
22,057
105,720
 
Construction
400
-
-
 -
-
400
 
Other
1,292
 -
 -
 -
239
1,531
Commercial business loans
2,923
 -
 -
 -
2,800
5,723
Consumer loans
725
 -
 -
 -
67
792
 
Total loans held for investment, gross
 $ 660,317
 $ 223,419
 $ 8,017
 $ 29,568
$ 44,810
$ 966,131

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management’s continuing analysis of the factors underlying the quality of the loans held for investment.  These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans.  Provisions for loan losses are charged against operations on a monthly 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 Bank’s loans held for investment, will not request that the Bank 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 control of the Bank.


 
13 

 

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

 
For the Quarter Ended
 
For the Six Months Ended
 
December 31,
 
December 31,
(Dollars in Thousands)
2010
 
2009
 
2010
 
2009
                       
Allowance at beginning of period
$ 39,086
   
$ 58,013
   
$ 43,501
   
$ 45,445
 
                       
Provision for loan losses
1,048
   
2,315
   
1,925
   
19,521
 
                       
Recoveries:
                     
Mortgage loans:
                     
 
Single-family
-
   
265
   
1
   
293
 
 
Construction
-
   
12
   
-
   
47
 
          Total recoveries
-
   
277
   
1
   
340
 
                       
Charge-offs:
                     
Mortgage loans:
                     
 
Single-family
(3,199
)
 
(5,126
)
 
(8,490
)
 
(9,693
)
 
Multi-family
(3
)
 
(113
)
 
(3
)
 
(245
)
Consumer loans
(7
)
 
(2
)
 
(9
)
 
(4
)
         Total charge-offs
(3,209
)
 
(5,241
)
 
(8,502
)
 
(9,942
)
                       
         Net charge-offs
(3,209
)
 
(4,964
)
 
(8,501
)
 
(9,602
)
             Balance at end of period
$ 36,925
   
$ 55,364
   
$ 36,925
   
$ 55,364
 
                       
Allowance for loan losses as a
     percentage of gross loans held for
     investment
                     
 
3.81%
 
4.92%
   
 
3.81%
   
 
4.92%
 
                       
Net charge-offs as a percentage of
     average loans outstanding during
     the period (annualized)
                     
 
1.12%
 
1.63%
   
 
1.47%
   
 
1.53%
 
                       
Allowance for loan losses as a
     percentage of non-performing loans
     at the end of the period
                     
 
73.80%
 
61.63%
   
 
73.80%
   
 
61.63%
 


 
14 

 



The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of specific allowances for loan losses, at December 31, 2010 and June 30, 2010:

 
 
 
(In Thousands)
December 31, 2010
 
Recorded
Investment
Allowance
For Loan
Losses
 
Net
Investment
           
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
 $ 54,221
 
 $ (13,498
)
 $ 40,723
   
Without a related allowance
1,872
 
-
 
 1,872
 
Total single-family loans
56,093
 
 (13,498
)
42,595
 
 
Multi-family:
         
   
With a related allowance
5,702
 
 (1,555
)
 4,147
 
Total multi-family loans
5,702
 
(1,555
)
4,147
           
 
Commercial real estate:
         
   
With a related allowance
1,143
 
 (208
)
 935
   
    Without a related allowance
1,693
 
-
 
1,693
 
Total commercial real estate loans
2,836
 
(208
)
2,628
           
 
Construction:
         
   
    With a related allowance
400
 
(150
)
250
 
Total construction loans
400
 
(150
)
250
           
 
Other:
         
   
    With a related allowance
239
 
(7
)
232
 
Total other loans
239
 
(7
)
232
           
Commercial business loans:
         
   
    With a related allowance
310
 
(270
)
40
   
    Without a related allowance
143
 
-
 
143
 
Total commercial business loans
453
 
 (270
)
183
Total non-performing loans
 $ 65,723
 
 $ (15,688
)
 $ 50,035


 
15 

 


 
 
 
(In Thousands)
June 30, 2010
 
Recorded
Investment
Allowance
For Loan
Losses
 
Net
Investment
           
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$ 61,184
 
 $ (15,348
)
$ 45,836
   
Without a related allowance
3,815
 
-
 
3,815
 
Total single-family loans
64,999
 
 (15,348
)
49,651
 
 
Multi-family:
         
   
With a related allowance
7,196
 
 (1,665
)
5,531
   
    Without a related allowance
955
 
-
 
955
 
Total multi-family loans
8,151
 
(1,665
)
6,486
           
 
Commercial real estate:
         
   
With a related allowance
1,501
 
 (436
)
1,065
   
    Without a related allowance
663
 
-
 
663
 
Total commercial real estate loans
2,164
 
(436
)
1,728
           
 
Construction:
         
   
    With a related allowance
400
 
(50
)
350
 
Total construction loans
400
 
(50
)
350
           
Commercial business loans:
         
   
    With a related allowance
750
 
(326
)
424
   
    Without a related allowance
143
 
-
 
143
 
Total commercial business loans
893
 
 (326
)
567
           
Consumer loans:
         
   
    Without a related allowance
1
 
-
 
1
 
Total consumer loans
1
 
-
 
1
Total non-performing loans
 $ 76,608
 
 $ (17,825
)
 $ 58,783

At December 31, 2010 and June 30, 2010, there were no commitments to lend additional funds to those borrowers whose loans were classified as impaired.

The following table describes the aging analysis (length of time on non-performing status) of non-performing loans as of December 31, 2010:

 
(Dollars In Thousands)
3 Months or
Less
Over 3 to
6 Months
Over 6 to
12 Months
Over 12
Months
 
Total
Mortgage loans:
         
 
Single-family
$ 13,205
$ 12,017
$ 6,700
$ 10,673
$ 42,595
 
Multi-family
-
-
-
4,147
4,147
 
Commercial real estate
1,301
-
345
982
2,628
 
Construction
-
-
-
250
250
 
Other
232
-
-
-
232
Commercial business loans
3
37
-
143
183
 
Total
$ 14,741
$ 12,054
$ 7,045
$ 16,195
$ 50,035

During the quarters ended December 31, 2010 and 2009, the Corporation’s average investment in non-performing loans was $52.1 million and $86.5 million, respectively.  Interest income of $1.8 million and $1.8 million was recognized, based on cash receipts, on non-performing loans during the quarters ended December 31, 2010 and 2009, respectively.  The Corporation records interest on non-performing loans utilizing the cash basis method of accounting during the periods when the loans are on non-performing status.  Foregone interest income, which would
 
 
 
16

 
 
have been recorded had the non-performing loans been current in accordance with their original terms, amounted to $278,000 and $1.2 million was not included in the results of operations for the quarters ended December 31, 2010 and 2009, respectively.

For the six months ended December 31, 2010 and 2009, the Corporation’s average investment in non-performing loans was $55.2 million and $82.4 million, respectively.  Interest income of $3.5 million and $2.9 million was recognized, based on cash receipts, on non-performing loans during the six months ended December 31, 2010 and 2009, respectively.  The foregone interest income amounted to $641,000 and $2.6 million was not included in the results of operations for the six months ended December 31, 2010 and 2009, respectively.

For the quarter ended December 31, 2010, twenty-one loans for $9.6 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans.  For the six months ended December 31, 2010, 42 loans for $19.0 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans.  As of December 31, 2010, the outstanding balance of restructured loans was $42.9 million:  29 were classified as pass and remain on accrual status ($13.7 million); nine were classified as special mention and remain on accrual status ($6.2 million); 61 were classified as substandard ($23.0 million, with 60 of the 61 loans or $22.6 million on non-accrual status); and one was classified as loss and fully reserved on non-accrual 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; 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, preferred loans must also demonstrate a combination of the following characteristics to be upgraded, such as: 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 Bank.  The Bank 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.


 
17 

 

The following table shows the restructured loans by type, net of specific valuation allowances for loan losses, at December 31, 2010 and June 30, 2010:

 
 
 
(In Thousands)
December 31, 2010
 
Recorded
Investment
Allowance
For Loan
Losses
 
Net
Investment
           
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
 $ 22,368
 
 $ (3,748
)
$ 18,620
   
Without a related allowance
16,149
 
-
 
 16,149
 
Total single-family loans
38,517
 
 (3,748
)
34,769
           
 
Multi-family:
         
   
With a related allowance
3,677
 
(1,055
)
2,622
   
Without a related allowance
918
 
-
 
 918
 
Total multi-family loans
4,595
 
(1,055
)
3,540
           
 
Commercial real estate:
         
   
With a related allowance
752
 
(162
)
590
   
Without a related allowance
2,223
 
-
 
2,223
 
Total commercial real estate loans
2,975
 
(162
)
2,813
           
 
Other:
         
   
With a related allowance
239
 
(7
)
232
   
Without a related allowance
1,292
 
-
 
1,292
 
Total other loans
1,531
 
(7
)
1,524
           
Commercial business loans:
         
   
With a related allowance
95
 
(92
)
3
   
Without a related allowance
237
 
-
 
237
 
Total commercial business loans
332
 
(92
)
240
Total restructured loans
 $ 47,950
 
 $ (5,064
)
 $ 42,886 


 
18 

 


 
 
 
(In Thousands)
June 30, 2010
 
Recorded
Investment
Allowance
For Loan
Losses
 
Net
Investment
           
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
$ 24,667
 
 $ (5,145
)
 $ 19,522
   
Without a related allowance
33,212
 
-
 
33,212
 
Total single-family loans
57,879
 
 (5,145
)
52,734
           
 
Multi-family:
         
   
With a related allowance
3,678
 
(1,137
)
2,541
 
Total multi-family loans
3,678
 
(1,137
)
2,541
           
 
Commercial real estate:
         
   
With a related allowance
491
 
(151
)
340
   
Without a related allowance
2,495
 
-
 
2,495
 
Total commercial real estate loans
2,986
 
(151
)
2,835
           
 
Other:
         
   
Without a related allowance
1,292
 
-
 
1,292
 
Total other loans
1,292
 
-
 
1,292
           
Commercial business loans:
         
   
With a related allowance
793
 
(369
)
424
   
Without a related allowance
143
 
-
 
143
 
Total commercial business loans
936
 
(369
)
567
Total restructured loans
 $ 66,771
 
 $ (6,802
)
 $ 59,969 

During the quarter ended December 31, 2010, twenty-nine properties were acquired in the settlement of loans, while 35 previously foreclosed upon properties were sold.  During the six months ended December 31, 2010, 63 properties were acquired in the settlement of loans, while 62 previously foreclosed upon properties were sold.  As of December 31, 2010, real estate owned was comprised of 78 properties with a net fair value of $13.5 million, primarily located in Southern California.  This compares to 77 real estate owned properties, primarily located in Southern California, with a net fair value of $14.7 million at June 30, 2010.  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 reflects costs to carry real estate owned as real estate operating expenses as incurred.


Note 7: Derivative and Other Financial Instruments with Off-Balance Sheet Risks

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit, loan sale commitments to third parties and put option contracts.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Condensed Consolidated Statements of Financial Condition.  The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments.  The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.  As of December 31, 2010 and June 30, 2010, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $92.2 million and $146.7 million, respectively.  The following table provides information regarding undisbursed funds to borrowers on existing lines of credit with the Bank as well as commitments to originate loans to be held for investment.
 
 
 
19

 

 
December 31,
 
June 30,
Commitments
2010
 
2010
(In Thousands)
     
       
Undisbursed lines of credit – Mortgage loans
$ 1,196
 
$ 1,504
Undisbursed lines of credit – Commercial business loans
2,661
 
3,603
Undisbursed lines of credit – Consumer loans
1,004
 
1,698
Commitments to extend credit on loans to be held for investment
200
 
350
Total
$ 5,061
 
$ 7,155

In accordance with ASC 815, “Derivatives and Hedging,” and interpretations of the Derivatives Implementation Group of the FASB, the fair value of the commitments to extend credit on loans to be held for sale, loan sale commitments, commitments to sell mortgage-backed securities (“MBS”), put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition, and $2.3 million is included in other assets at December 31, 2010 and $150,000 is included in other liabilities at December 31, 2010; and $3.0 million is included in other assets and $3.4 million in other liabilities at June 30, 2010.  The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings.

The net impact of derivative financial instruments on the Condensed Consolidated Statements of Operations during the quarters and six months ended December 31, 2010 and 2009 was as follows:

 
 For the Quarters
Ended
December 31,
 
 For the Six Months
Ended
December 31,
 
Derivative Financial Instruments
2010