PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INC	ex321.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INC	ex311.htm
EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INC	ex322.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INC	ex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ]

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

For the quarterly period ended ……………………………………..... March 31, 2011

[ ]	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		(I.R.S. Employer
incorporation or organization)		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 X . 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 May 3, 2011

Common stock, $ 0.01 par value, per share 11,418,654 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 March 31, 2011 and June 30, 2010	1
	Condensed Consolidated Statements of Operations
		for the Quarters and Nine Months Ended March 31, 2011 and 2010	2
	Condensed Consolidated Statements of Stockholders’ Equity
		for the Quarters and Nine Months Ended March 31, 2011 and 2010	3
	Condensed Consolidated Statements of Cash Flows
		for the Nine Months Ended March 31, 2011 and 2010	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		30
	Executive Summary and Operating Strategy		32
	Off-Balance Sheet Financing Arrangements and Contractual Obligations		33
	Comparison of Financial Condition at March 31, 2011 and June 30, 2010		33
	Comparison of Operating Results
		for the Quarters and Nine Months Ended March 31, 2011 and 2010	35
	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			61

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Financial Condition

(Unaudited)

Dollars in Thousands

	March 31,			June 30,
	2011			2010
Assets
Cash and cash equivalents	$	175,357		$	96,201
Investment securities – available for sale, at fair value		27,132			35,003
Loans held for investment, net of allowance for loan losses of
$34,478 and $43,501, respectively		913,396			1,006,260
Loans held for sale, at fair value		146,559			170,255
Accrued interest receivable		3,778			4,643
Real estate owned, net		10,659			14,667
Federal Home Loan Bank (“FHLB”) – San Francisco stock		28,185			31,795
Premises and equipment, net		4,616			5,841
Prepaid expenses and other assets		29,349			34,736

Total assets	$	1,339,031		$	1,399,401

Liabilities and Stockholders’ Equity

Commitments and Contingencies

Liabilities:
Non interest-bearing deposits	$	42,433		$	52,230
Interest-bearing deposits		904,502			880,703
Total deposits		946,935			932,933

Borrowings		231,611			309,647
Accounts payable, accrued interest and other liabilities		20,908			29,077
Total liabilities		1,199,454			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; 11,418,654 and 11,406,654 shares outstanding, respectively)		176			176
Additional paid-in capital		86,520			85,663
Retained earnings		146,159			135,383
Treasury stock at cost (6,192,211 and 6,204,211 shares, respectively)
		(93,942	)		(93,942	)
Unearned stock compensation		-			(203	)
Accumulated other comprehensive income, net of tax		664			667

Total stockholders’ equity		139,577			127,744

Total liabilities and stockholders’ equity	$	1,339,031		$	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 March 31,			Nine Months Ended March 31,
	Quarter Ended March 31,			Nine Months Ended March 31,
	2011		2010	2011		2010
Interest income:
Loans receivable, net	$ 13,715		$ 16,101	$ 44,164		$ 51,375
Investment securities	185		311	643		1,869
FHLB – San Francisco stock	22		22	88		91
Interest-earning deposits	104		71	234		191
Total interest income	14,026		16,505	45,129		53,526

Interest expense:
Checking and money market deposits	225		376	801		1,066
Savings deposits	257		468	884		1,492
Time deposits	1,930		2,738	6,165		9,838
Borrowings	2,442		3,330	8,587		11,854
Total interest expense	4,854		6,912	16,437		24,250

Net interest income, before provision for loan losses	9,172		9,593	28,692		29,276
Provision for loan losses	2,693		2,322	4,618		21,843
Net interest income, after provision for loan losses	6,479		7,271	24,074		7,433

Non-interest income:
Loan servicing and other fees	298		219	697		637
Gain on sale of loans, net	6,680		1,431	25,459		9,804
Deposit account fees	633		667	1,933		2,135
Gain on sale of investment securities, net	-		-	-		2,290
(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net	(550	)	58	(1,608	)	247
Other	1,603		502	2,615		1,458
Total non-interest income	8,664		2,877	29,096		16,571

Non-interest expense:
Salaries and employee benefits	7,170		6,065	22,112		16,848
Premises and occupancy	786		740	2,410		2,282
Equipment	394		334	1,097		1,025
Professional expenses	356		424	1,157		1,177
Sales and marketing expenses	202		174	496		434
Deposit insurance premiums and regulatory assessments	695		636	2,040		2,309
Other	1,409		1,175	4,252		3,595
Total non-interest expense	11,012		9,548	33,564		27,670

Income (loss) before income taxes	4,131		600	19,606		(3,666	)
Provision (benefit) for income taxes	1,796		229	8,487		(1,579	)
Net income (loss)	$ 2,335		$ 371	$ 11,119		$ (2,087	)

Basic earnings (loss) per share	$ 0.20		$ 0.03	$ 0.98		$ (0.26	)
Diluted earnings (loss) per share	$ 0.20		$ 0.03	$ 0.98		$ (0.26	)
Cash dividends per share	$ 0.01		$ 0.01	$ 0.03		$ 0.03

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 March 31, 2011 and 2010

	Common Stock		Additional Paid-In	Retained		Treasury		Unearned Stock		Accumulated Other Comprehensive Income,
	Shares	Amount	Capital	Earnings		Stock		Compensation		Net of Tax	Total
Balance at January 1, 2011	11,407,454	$ 176	$ 86,146	$ 143,939		$ (93,942	)	$ (68	)	$ 540	$ 136,791

Comprehensive income:
Net income				2,335							2,335
Change in unrealized holding gain on securities available for sale, net of reclassification of $0 of net gain included in net income										124	124
Total comprehensive income											2,459

Distribution of restricted stock	11,200
Amortization of restricted stock			172								172
Stock options expense			149								149
Allocations of contribution to ESOP (1)			53					68			121
Cash dividends				(115	)						(115	)

Balance at March 31, 2011	11,418,654	$ 176	$ 86,520	$ 146,159		$ (93,942	)	$ -		$ 664	$ 139,577

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

	Common Stock		Additional Paid-In		Retained		Treasury		Unearned Stock		Accumulated Other Comprehensive Income,
	Shares	Amount	Capital		Earnings		Stock		Compensation		Net of Tax	Total
Balance at January 1, 2010	11,395,454	$ 176	$ 85,111		$ 132,038		$ (93,942	)	$ (338	)	$ 587	$ 123,632

Comprehensive income:
Net income					371							371
Change in unrealized holding gain on investment securities available for sale, net of reclassification of $0 of net gain included in net income											37	37
Total comprehensive income												408

Common stock issuance, net of expenses			(26	)								(26	)
Distribution of restricted stock	11,200
Amortization of restricted stock			235									235
Stock options expense			186									186
Allocations of contribution to ESOP			(18	)					67			49
Cash dividends					(114	)						(114	)

Balance at March 31, 2010	11,406,654	$ 176	$ 85,488		$ 132,295		$ (93,942	)	$ (271	)	$ 624	$ 124,370

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 Nine Months Ended March 31, 2011 and 2010

	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				11,119								11,119
Change in unrealized holding loss on investment securities available for sale, net of reclassification of $0 of net gain included in net income										(3	)	(3	)
Total comprehensive income												11,116

Distribution of restricted stock	12,000
Amortization of restricted stock			374									374
Stock options expense			380									380
Allocations of contribution to ESOP			103					203				306
Cash dividends				(343	)							(343	)

Balance at March 31, 2011	11,418,654	$ 176	$ 86,520	$ 146,159		$ (93,942	)	$ -		$ 664		$ 139,577

	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				(2,087	)							(2,087	)
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										(1,248	)	(1,248	)
Total comprehensive loss												(3,335	)

Common stock issuance, net of expenses	5,175,000	52	11,881									11,933
Distribution of restricted stock	12,000
Amortization of restricted stock			446									446
Stock options expense			413									413
Allocations of contribution to ESOP			39					202				241
Cash dividends				(238	)							(238	)

Balance at March 31, 2010	11,406,654	$ 176	$ 85,488	$ 132,295		$ (93,942	)	$ (271	)	$ 624		$ 124,370

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)


	Nine Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	11,119		$	(2,087	)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization		1,027			1,214
Provision for loan losses		4,618			21,843
(Recovery) provision for losses on real estate owned		(28	)		419
Gain on sale of loans, net		(25,459	)		(9,804	)
Gain on sale of investment securities, net		-			(2,290	)
Loss (gain) on sale of real estate owned, net		187			(2,042	)
Gain on sale of premises and equipment, net		(1,080	)		-
Stock-based compensation		754			859
ESOP expense		304			238
Decrease in current and deferred income taxes		2,203			1,249
Increase in cash surrender value of the bank owned life insurance		(150	)		(149	)
Decrease in accounts payable and other liabilities		(1,197	)		(1,371	)
Decrease (increase) in prepaid expenses and other assets		2,906			(7,722	)
Loans originated for sale		(1,693,902	)		(1,315,799	)
Proceeds from sale of loans		1,738,148			1,323,764
Net cash provided by operating activities		39,450			8,322

Cash flows from investing activities:
Decrease in loans held for investment, net		61,950			78,743
Maturity and call of investment securities available for sale		3,250			2,000
Principal payments from investment securities available for sale		4,610			19,106
Proceeds from sale of investment securities available for sale		-			67,778
Redemption of FHLB – San Francisco stock		3,610			-
Purchase of bank owned life insurance		-			(2,000	)
Proceeds from sale of real estate owned		28,963			32,118
Proceeds from sale of premises and equipment		2,189			-
Purchase of premises and equipment		(491	)		(288	)
Net cash provided by investing activities		104,081			197,457

Cash flows from financing activities:
Increase (decrease) in deposits, net		14,002			(41,328	)
Proceeds from long-term borrowings		30,000			-
Repayments of long-term borrowings		(108,036	)		(147,034	)
ESOP loan payment		2			3
Cash dividends		(343	)		(238	)
Proceeds from issuance of common stock		-			11,933
Net cash used for financing activities		(64,375	)		(176,664	)

Net increase in cash and cash equivalents		79,156			29,115
Cash and cash equivalents at beginning of period		96,201			56,903
Cash and cash equivalents at end of period	$	175,357		$	86,018
Supplemental information:
Cash paid for interest	$	17,007		$	24,723
Cash paid for income taxes	$	6,280		$	2,040
Transfer of loans held for sale to held for investment	$	163		$	-
Real estate acquired in the settlement of loans	$	36,146		$	45,051

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

March 31, 2011

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 nine months ended March 31, 2011 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 first interim or annual period beginning on after June 15, 2011 (per ASU 2011-02, dated April 2011). The Corporation does not expect ASU 2010-20 to have a material effect on its condensed 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 March 31, 2011 and 2010, 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 March 31, 2011 and 2010, there were outstanding unvested restricted stock of 112,300 shares and 124,300 shares, respectively, of which 12,800 shares and 124,300 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 nine months ended March 31, 2011 and 2010, respectively.

	For the Quarter Ended March 31,				For the Nine Months Ended March 31,
(In Thousands, Except Earnings (Loss) Per Share)	2011		2010		2011		2010
Numerator:
Net income (loss) – numerator for basic earnings (loss) per share and diluted earnings (loss) per share - available to common stockholders	$	2,335	$	371	$	11,119	$	(2,087	)

Denominator:
Denominator for basic earnings (loss) per share:
Weighted-average shares		11,399		11,326		11,379		8,115

Effect of dilutive securities		36		-		15		-

Denominator for diluted earnings (loss) per share:
Adjusted weighted-average shares and assumed conversions		11,435		11,326		11,394		8,115

Basic earnings (loss) per share	$	0.20	$	0.03	$	0.98	$	(0.26	)
Diluted earnings (loss) per share	$	0.20	$	0.03	$	0.98	$	(0.26	)

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 March 31, 2011 and 2010, respectively (in thousands).

	For the Quarter Ended March 31, 2011
			Provident
	Provident		Bank		Consolidated
	Bank		Mortgage		Totals
Net interest income, before provision for loan losses	$ 8,266		$ 906		$ 9,172
Provision for loan losses	1,080		1,613		2,693
Net interest income (expense), after provision for loan losses	7,186		(707	)	6,479

Non-interest income:
Loan servicing and other fees (1)	283		15		298
Gain on sale of loans, net	4		6,676		6,680
Deposit account fees	633		-		633
Loss on sale and operations of real estate owned acquired in the settlement of loans, net	(501	)	(49	)	(550	)
Other	1,603		-		1,603
Total non-interest income	2,022		6,642		8,664

Non-interest expense:
Salaries and employee benefits	3,636		3,534		7,170
Premises and occupancy	546		240		786
Operating and administrative expenses	1,586		1,470		3,056
Total non-interest expense	5,768		5,244		11,012
Income before income taxes	3,440		691		4,131
Provision for income taxes	1,505		291		1,796
Net income	$ 1,935		$ 400		$ 2,335
Total assets, end of period	$ 1,194,594		$ 144,437		$ 1,339,031

(1)	Includes an inter-company charge of $4 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.

	For the Quarter Ended March 31, 2010
			Provident
	Provident		Bank		Consolidated
	Bank		Mortgage		Totals
Net interest income, before provision for loan losses	$ 8,909		$ 684		$ 9,593
Provision for loan losses	2,059		263		2,322
Net interest income, after provision for loan losses	6,850		421		7,271

Non-interest income:
Loan servicing and other fees	207		12		219
(Loss) gain on sale of loans, net	(15	)	1,446		1,431
Deposit account fees	667		-		667
Gain on sale and operations of real estate owned acquired in the settlement of loans, net	25		33		58
Other	502		-		502
Total non-interest income	1,386		1,491		2,877

Non-interest expense:
Salaries and employee benefits	3,581		2,484		6,065
Premises and occupancy	569		171		740
Operating and administrative expenses	1,574		1,169		2,743
Total non-interest expense	5,724		3,824		9,548
Income (loss) before income taxes	2,512		(1,912	)	600
Provision (benefit) for income taxes	1,033		(804	)	229
Net income (loss)	$ 1,479		$ (1,108	)	$ 371
Total assets, end of period	$ 1,250,341		$ 154,979		$ 1,405,320

The following tables set forth condensed consolidated statements of operations and total assets for the Corporation’s operating segments for the nine months ended March 31, 2011 and 2010, respectively (in thousands).

	For the Nine Months Ended March 31, 2011
			Provident
	Provident		Bank		Consolidated
	Bank		Mortgage		Totals
Net interest income, before provision for loan losses	$ 25,590		$ 3,102		$ 28,692
Provision for loan losses	2,273		2,345		4,618
Net interest income, after provision for loan losses	23,317		757		24,074

Non-interest income:
Loan servicing and other fees (1)	657		40		697
(Loss) gain on sale of loans, net	(117	)	25,576		25,459
Deposit account fees	1,933		-		1,933
Loss on sale and operations of real estate owned acquired in the settlement of loans, net	(1,522	)	(86	)	(1,608	)
Other	2,613		2		2,615
Total non-interest income	3,564		25,532		29,096

Non-interest expense:
Salaries and employee benefits	10,112		12,000		22,112
Premises and occupancy	1,702		708		2,410
Operating and administrative expenses	4,796		4,246		9,042
Total non-interest expense	16,610		16,954		33,564
Income before taxes	10,271		9,335		19,606
Provision for income taxes	4,562		3,925		8,487
Net income	$ 5,709		$ 5,410		$ 11,119
Total assets, end of period	$ 1,194,594		$ 144,437		$ 1,339,031

(1)	Includes an inter-company charge of $4 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.

	For the Nine Months Ended March 31, 2010
			Provident
	Provident		Bank	Consolidated
	Bank		Mortgage	Totals
Net interest income, before provision for loan losses	$ 26,986		$ 2,290	$ 29,276
Provision for loan losses	21,261		582	21,843
Net interest income, after provision for loan losses	5,725		1,708	7,433

Non-interest income:
Loan servicing and other fees (1)	596		41	637
(Loss) gain on sale of loans, net	(5	)	9,809	9,804
Deposit account fees	2,135		-	2,135
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	208		39	247
Other	1,458		-	1,458
Total non-interest income	6,682		9,889	16,571

Non-interest expense:
Salaries and employee benefits	9,559		7,289	16,848
Premises and occupancy	1,767		515	2,282
Operating and administrative expenses	5,204		3,336	8,540
Total non-interest expense	16,530		11,140	27,670
(Loss) income before taxes	(4,123	)	457	(3,666	)
(Benefit) provision for income taxes	(1,771	)	192	(1,579	)
Net (loss) income	$ (2,352	)	$ 265	$ (2,087	)
Total assets, end of period	$ 1,250,341		$ 154,979	$ 1,405,320

(1)	Includes an inter-company charge of $1 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.

Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of March 31, 2011 and June 30, 2010 were as follows:

March 31, 2011		Amortized Cost	Gross Unrealized Gains	Gross Unrealized (Losses)		Estimated Fair Value	Carrying Value
(In Thousands)
Available for sale
	U.S. government agency MBS (1)	$ 14,522	$ 528	$ -		$ 15,050	$ 15,050
	U.S. government sponsored enterprise MBS	10,266	450	-		10,716	10,716
	Private issue CMO (2)	1,433	-	(67	)	1,366	1,366
Total investment securities		$ 26,221	$ 978	$ (67	)	$ 27,132	$ 27,132

(1)	Mortgage-backed securities (“MBS”).

(2)	Collateralized Mortgage Obligations (“CMO”).

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

The Bank evaluates individual investment securities quarterly for other-than-temporary declines in market value. The Bank does not believe that there are any other-than-temporary impairments at March 31, 2011 and June 30, 2010; therefore, no impairment losses have been recorded for the quarter and nine months ended March 31, 2011.

Contractual maturities of investment securities as of March 31, 2011 and June 30, 2010 were as follows:

	March 31, 2011				June 30, 2010
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
(In Thousands)	Cost		Value		Cost		Value
Available for sale
Due in one year or less	$	-	$	-	$	-	$	-
Due after one through five years		-		-		3,250		3,317
Due after five through ten years		-		-		-		-
Due after ten years		26,221		27,132		30,847		31,686
Total investment securities	$	26,221	$	27,132	$	34,097	$	35,003

Note 6: Loans Held for Investment

Loans held for investment consisted of the following:

		March 31, 2011		June 30, 2010
Mortgage loans:
	Single-family	$ 513,263		$ 583,126
	Multi-family	319,229		343,551
	Commercial real estate	104,354		110,310
	Construction	400		400
	Other	1,531		1,532
Commercial business loans		5,515		6,620
Consumer loans		735		857
	Total loans held for investment, gross	945,027		1,046,396

Deferred loan costs, net		2,847		3,365
Allowance for loan losses		(34,478	)	(43,501	)
	Total loans held for investment, net	$ 913,396		$ 1,006,260

As of March 31, 2011, the Bank had $53.4 million in mortgage loans that are subject to negative amortization, consisting of $34.2 million in multi-family loans, $11.6 million in commercial real estate loans and $7.6 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 during the period of negative amortization and because the loan payment may increase beyond the means of the borrower when loan principal amortization is required. Also, the Bank has originated interest-only ARM loans, which typically have a fixed interest rate for the first two to five years coupled with an interest only payment, followed by a periodic adjustable rate and a fully amortizing loan payment. As of March 31, 2011 and June 30, 2010, the interest-only ARM loans were $263.3 million and $317.6 million, or 27.8% and 30.3% of loans held for investment, respectively.

The following table sets forth information at March 31, 2011 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 5% of loans held for investment at March 31, 2011, as compared to 4% at June 30, 2010. 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	$ 417,327	$ 87,871	$ 2,889	$ 635	$ 4,541	$ 513,263
	Multi-family	187,885	84,932	8,716	22,305	15,391	319,229
	Commercial real estate	59,623	18,711	1,825	2,277	21,918	104,354
	Construction	400	-	-	-	-	400
	Other	1,292	-	-	-	239	1,531
Commercial business loans		2,459	-	-	-	3,056	5,515
Consumer loans		676	-	-	-	59	735
	Total loans held for investment, gross	$ 669,662	$ 191,514	$ 13,430	$ 25,217	$ 45,204	$ 945,027

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.

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

	For the Quarter Ended						For the Nine Months Ended
	March 31,						March 31,
(Dollars in Thousands)	2011			2010			2011			2010
Allowance at beginning of period	$	36,925		$	55,364		$	43,501		$	45,445

Provision for loan losses		2,693			2,322			4,618			21,843

Recoveries:
Mortgage loans:
Single-family		-			149			1			442
Construction		-			-			-			47
Consumer loans		1			-			1			-
Total recoveries		1			149			2			489

Charge-offs:
Mortgage loans:
Single-family		(4,937	)		(6,522	)		(13,427	)		(16,215	)
Multi-family		(201	)		(205	)		(204	)		(450	)
Commercial real estate		-			(254	)		-			(254	)
Consumer loans		(3	)		(5	)		(12	)		(9	)
Total charge-offs		(5,141	)		(6,986	)		(13,643	)		(16,928	)

Net charge-offs		(5,140	)		(6,837	)		(13,641	)		(16,439	)
Balance at end of period	$	34,478		$	50,849		$	34,478		$	50,849

Allowance for loan losses as a percentage of gross loans held for investment
		3.64	%		4.69	%		3.64	%		4.69	%

Net charge-offs as a percentage of average loans outstanding during the period (annualized)
		1.94	%		2.35	%		1.62	%		1.79	%

Allowance for loan losses as a percentage of non-performing loans at the end of the period
		73.91	%		68.86	%		73.91	%		68.86	%

The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of specific allowances for loan losses, at March 31, 2011 and June 30, 2010:

(In Thousands)				March 31, 2011
(In Thousands)				Recorded Investment	Allowance For Loan Losses		Net Investment
Mortgage loans:
	Single-family:
			With a related allowance	$ 51,380	$ (14,704	)	$ 36,676
			Without a related allowance	669	-		669
	Total single-family loans			52,049	(14,704	)	37,345
	Multi-family:
			With a related allowance	5,290	(1,396	)	3,894
			Without a related allowance	1,032	-		1,032
	Total multi-family loans			6,322	(1,396	)	4,926

	Commercial real estate:
			With a related allowance	2,441	(54	)	2,387
		Without a related allowance		393	-		393
	Total commercial real estate loans			2,834	(54	)	2,780

	Construction:
		With a related allowance		400	(150	)	250
	Total construction loans			400	(150	)	250

	Other:
		With a related allowance		1,530	(327	)	1,203
	Total other loans			1,530	(327	)	1,203

Commercial business loans:
		With a related allowance		350	(347	)	3
		Without a related allowance		142	-		142
	Total commercial business loans			492	(347	)	145
Total non-performing loans				$ 63,627	$ (16,978	)	$ 46,649

(In Thousands)				June 30, 2010
(In Thousands)				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 March 31, 2011 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, net of allowance, as of March 31, 2011:

(In Thousands)		3 Months or Less	Over 3 to 6 Months	Over 6 to 12 Months	Over 12 Months	Total
Mortgage loans:
	Single-family	$ 12,158	$ 9,867	$ 4,803	$ 10,517	$ 37,345
	Multi-family	1,032	-	-	3,894	4,926
	Commercial real estate	1,293	-	375	1,112	2,780
	Construction	-	-	-	250	250
	Other	972	231	-	-	1,203
Commercial business loans		-	3	-	142	145
	Total	$ 15,455	$ 10,101	$ 5,178	$ 15,915	$ 46,649

During the quarters ended March 31, 2011 and 2010, the Corporation’s average investment in non-performing loans was $47.8 million and $81.5 million, respectively. Interest income of $1.7 million and $1.9 million was recognized, based on cash receipts, on non-performing loans during the quarters ended March 31, 2011 and 2010, 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 have been recorded

had the non-performing loans been current in accordance with their original terms, amounted to $381,000 and $708,000 for the quarters ended March 31, 2011 and 2010, respectively, and was not included in the results of operations.

For the nine months ended March 31, 2011 and 2010, the Corporation’s average net investment in non-performing loans was $52.8 million and $82.1 million, respectively. Interest income of $5.2 million and $4.8 million was recognized, based on cash receipts, during the nine months ended March 31, 2011 and 2010, respectively. The foregone interest income amounted to $1.0 million and $3.3 million and was not included in the results of operations for the nine months ended March 31, 2011 and 2010, respectively.

For the quarter ended March 31, 2011, eleven loans for $5.6 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 nine months ended March 31, 2011, 53 loans which totaled $24.7 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as troubled debt restructuring or restructured loans. As of March 31, 2011, the net outstanding balance of the 103 restructured loans was $44.8 million: 38 were classified as pass and remain on accrual status ($18.1 million); eight were classified as special mention and remain on accrual status ($3.4 million); 56 were classified as substandard ($23.3 million, all are 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, higher yielding multi-family, commercial real estate, construction and commercial business loans (which are sometimes referred to in this report as “preferred loans”) must also demonstrate a combination of the following characteristics to be upgraded, 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.

The following table shows the restructured loans by type, net of specific valuation allowances for loan losses, at March 31, 2011 and June 30, 2010:

(In Thousands)			March 31, 2011
(In Thousands)			Recorded Investment	Allowance For Loan Losses	Net Investment
Mortgage loans:
	Single-family:
		With a related allowance	$ 21,251	$ (4,066

PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q - May 10, 2011

Attached files