PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INC	ex31193011.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INC	ex31293011.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INC	ex32193011.htm
EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INC	ex32293011.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 September 30, 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 ü . 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 [ü ]
	Non-accelerated filer [ ]	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes . No ü .

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 November 4, 2011

Common stock, $ 0.01 par value, per share		11,409,264 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 September 30, 2011 and June 30, 2011	1
	Condensed Consolidated Statements of Operations
		for the Quarters Ended September 30, 2011 and 2010	2
	Condensed Consolidated Statements of Stockholders’ Equity
		for the Quarters Ended September 30, 2011 and 2010	3
	Condensed Consolidated Statements of Cash Flows
		for the Three Months Ended September 30, 2011 and 2010	4
	Notes to Unaudited Interim Condensed Consolidated Financial Statements		5

ITEM 2 -	Management’s Discussion and Analysis of Financial Condition and Results of
		Operations:

	General		25
	Safe-Harbor Statement		26
	Critical Accounting Policies		27
	Executive Summary and Operating Strategy		29
	Off-Balance Sheet Financing Arrangements and Contractual Obligations		30
	Comparison of Financial Condition at September 30, 2011 and June 30, 2011		30
	Comparison of Operating Results
		for the Quarters Ended September 30, 2011 and 2010	32
	Asset Quality		37
	Loan Volume Activities		45
	Liquidity and Capital Resources		45
	Commitments and Derivative Financial Instruments		47
	Supplemental Information		48

ITEM 3 -	Quantitative and Qualitative Disclosures about Market Risk		48

ITEM 4 -	Controls and Procedures		50

PART II -	OTHER INFORMATION

ITEM 1 -	Legal Proceedings		50
ITEM 1A -	Risk Factors		50
ITEM 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		51
ITEM 3 -	Defaults Upon Senior Securiti		51
ITEM 4 -	(Removed and Reserved)		51
ITEM 5 -	Other Information		51
ITEM 6 -	Exhibits		51

SIGNATURES			53

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Financial Condition

(Unaudited)

In Thousands, Except Share Information

	September 30,			June 30,
	2011			2011
Assets
Cash and cash equivalents	$	80,156		$	142,550
Investment securities – available for sale, at fair value		25,253			26,193
Loans held for investment, net of allowance for loan losses of
$28,704 and $30,482, respectively		859,649			881,610
Loans held for sale, at fair value		278,212			191,678
Accrued interest receivable		3,480			3,778
Real estate owned, net		7,300			8,329
Federal Home Loan Bank (“FHLB”) – San Francisco stock		25,777			26,976
Premises and equipment, net		4,941			4,805
Prepaid expenses and other assets		35,100			28,630

Total assets	$	1,319,868		$	1,314,549

Liabilities and Stockholders’ Equity

Commitments and Contingencies

Liabilities:
Non interest-bearing deposits	$	46,044		$	45,437
Interest-bearing deposits		915,832			900,330
Total deposits		961,876			945,767

Borrowings		186,586			206,598
Accounts payable, accrued interest and other liabilities		27,810			20,441
Total liabilities		1,176,272			1,172,806

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; 11,439,264 and 11,418,654 shares outstanding, respectively)

		176			176
Additional paid-in capital		86,021			85,432
Retained earnings		150,120			148,147
Treasury stock at cost (6,171,601 and 6,192,211 shares, respectively)
		(93,316	)		(92,650	)
Accumulated other comprehensive income, net of tax		595			638

Total stockholders’ equity		143,596			141,743

Total liabilities and stockholders’ equity	$	1,319,868		$	1,314,549

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
	September 30,	September 30,
	2011	2010
Interest income:
Loans receivable, net	$ 12,749	$ 15,561
Investment securities	147	241
FHLB – San Francisco stock	18	36
Interest-earning deposits	97	65
Total interest income	13,011	15,903

Interest expense:
Checking and money market deposits	200	305
Savings deposits	225	340
Time deposits	1,906	2,184
Borrowings	1,882	3,262
Total interest expense	4,213	6,091

Net interest income, before provision for loan losses	8,798	9,812
Provision for loan losses	972	877
Net interest income, after provision for loan losses	7,826	8,935

Non-interest income:
Loan servicing and other fees	132	124
Gain on sale of loans, net	7,276	9,447
Deposit account fees	603	629
Gain (loss) on sale and operations of real estate owned acquired in the settlement of loans, net	32	(368	)
Card and processing fees	331	316
Other	174	187
Total non-interest income	8,548	10,335

Non-interest expense:
Salaries and employee benefits	8,854	7,377
Premises and occupancy	872	820
Equipment	314	325
Professional expenses	433	383
Sales and marketing expenses	199	134
Deposit insurance premiums and regulatory assessments	171	681
Other	1,460	1,490
Total non-interest expense	12,303	11,210

Income before income taxes	4,071	8,060
Provision for income taxes	1,753	3,531
Net income	$ 2,318	$ 4,529

Basic earnings per share	$ 0.20	$ 0.40
Diluted earnings per share	$ 0.20	$ 0.40
Cash dividends per share	$ 0.03	$ 0.01

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

In Thousands, Except Share Information

For the Quarters Ended September 30, 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 July 1, 2011	11,418,654		$ 176	$ 85,432	$ 148,147		$ (92,650	)	$ -	$ 638		$ 141,743

Comprehensive income:
Net income					2,318							2,318
Change in unrealized holding loss on securities available for sale, net of reclassification of $0 of net gain included in net income and net of tax benefit of $(31)										(43	)	(43	)
Total comprehensive income												2,275
												-
Purchase of treasury stock (1)	(79,690	)					(666	)				(666	)
Distribution of restricted stock	100,300											-
Amortization of restricted stock				302								302
Stock options expense				287								287
Cash dividends					(345	)						(345	)

Balance at September 30, 2011	11,439,264		$ 176	$ 86,021	$ 150,120		$ (93,316	)	$ -	$ 595		$ 143,596

(1) Includes the repurchase of 11,523 shares of distributed restricted stock.

	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 July 1, 2010	11,406,654	$ 176	$ 85,663	$ 135,383		$ (93,942	)	$ (203	)	$ 667		$ 127,744

Comprehensive income:
Net income				4,529								4,529
Change in unrealized holding loss on investment securities available for sale, net of reclassification of $0 of net gain included in net income and net of tax benefit of $(9)										(13	)	(13	)
Total comprehensive income												4,516

Distribution of restricted stock	800
Amortization of restricted stock			103									103
Stock options expense			135									135
Allocations of contribution to ESOP (1)			17					68				85
Cash dividends				(114	)							(114	)

Balance at September 30, 2010	11,407,454	$ 176	$ 85,918	$ 139,798		$ (93,942	)	$ (135	)	$ 654		$ 132,469

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

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)

	Three Months Ended September 30,
	Three Months Ended September 30,
	2011		2010
Cash flows from operating activities:
Net income	$ 2,318		$ 4,529
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization	452		360
Provision for loan losses	972		877
Provision for losses on real estate owned	105		230
Gain on sale of loans, net	(7,276	)	(9,447	)
Gain on sale of real estate owned, net	(361	)	(391	)
Stock-based compensation	589		238
ESOP expense	-		84
Decrease in current and deferred income taxes	1,721		3,422
Increase in cash surrender value of the bank owned life insurance	(48	)	(51	)
Increase in accounts payable and other liabilities	1,751		1,454
(Increase) decrease in prepaid expenses and other assets	(2,095	)	780
Loans originated for sale	(568,060	)	(649,471	)
Proceeds from sale of loans	488,657		596,493
Net cash used for operating activities	(81,275	)	(50,893	)

Cash flows from investing activities:
Decrease in loans held for investment, net	17,234		26,185
Principal payments from investment securities available for sale	898		2,022
Redemption of FHLB – San Francisco stock	1,199		1,224
Proceeds from sale of real estate owned	4,793		8,626
Purchase of premises and equipment	(329	)	(125	)
Net cash provided by investing activities	23,795		37,932

Cash flows from financing activities:
Increase (decrease) in deposits, net	16,109		(685	)
Repayments of long-term borrowings	(20,012	)	(15,012	)
ESOP loan payment	-		1
Cash dividends	(345	)	(114	)
Treasury stock purchases	(666	)	-
Net cash used for financing activities	(4,914	)	(15,810	)

Net decrease in cash and cash equivalents	(62,394	)	(28,771	)
Cash and cash equivalents at beginning of period	142,550		96,201
Cash and cash equivalents at end of period	$ 80,156		$ 67,430
Supplemental information:
Cash paid for interest	$ 4,301		$ 6,134
Cash paid for income taxes	$ -		$ 100
Transfer of loans held for sale to held for investment	$ 856		$ -
Real estate acquired in the settlement of loans	$ 5,682		$ 14,975

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

September 30, 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, 2011 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, 2011. The results of operations for the quarter ended September 30, 2011 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2012.

Note 2: Accounting Standard Updates (“ASU”)

ASU 2010-06:

In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements should be presented separately. This ASU was effective for annual and interim reporting periods beginning after December 15, 2009 for most of the disclosures and for periods beginning after December 15, 2010 for the new Level 3 disclosures. Comparative disclosures are not required in the first year the disclosures are required. The Corporation’s adoption of this ASU did not have a material effect on its consolidated financial statements.

ASU 2011-02:

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU provides additional guidance for creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The provisions of this standard are effective for the first interim or annual period beginning on or after June 15, 2011. The Corporation’s adoption of this ASU did not have a material effect on its consolidated financial statements.

ASU 2011-03:

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” The update amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and, as well, the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 is effective for the Corporation’s reporting period beginning on or after December 15, 2011. The guidance applies prospectively to transactions or modification of existing transactions that occur on or after the effective date and early adoption is not permitted. The Corporation has not determined the impact of this ASU on the Corporation’s consolidated financial statements.

ASU 2011-04:

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 developed common requirements between U.S. GAAP and IFRSs for measuring fair value and for disclosing

information about fair value measurements. The effective date of ASU 2011-04 will be during interim or annual period beginning after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Corporation has not determined the impact of this ASU on the Corporation’s consolidated financial statements.

ASU 2011-05:

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” ASU 2011-05 attempts to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The effective date of ASU 2011-05 will be the first interim or fiscal period beginning after December 15, 2011 and should be applied retrospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is permitted. The Corporation has not determined the impact of this ASU on the Corporation’s consolidated financial statements.

Note 3: Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income 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 September 30, 2011 and 2010, there were outstanding options to purchase 1,249,700 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.

The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2011 and 2010, respectively.


(In Thousands, Except Share Information)	For the Quarter Ended September 30,
	2011		2010
Numerator:
Net income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders	$	2,318	$	4,529

Denominator:
Denominator for basic earnings per share: Weighted-average shares
		11,468		11,362

Effect of dilutive securities:
Restricted stock dilution		47		-

Denominator for diluted earnings per share:
Adjusted weighted-average shares and assumed conversions		11,515		11,362

Basic earnings per share	$	0.20	$	0.40
Diluted earnings per share	$	0.20	$	0.40

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 September 30, 2011 and 2010, respectively (in thousands).

	For the Quarter Ended September 30, 2011
			Provident
	Provident		Bank	Consolidated
	Bank		Mortgage	Totals
Net interest income, before provision for loan losses	$ 7,558		$ 1,240	$ 8,798
Provision for loan losses	709		263	972
Net interest income, after provision for loan losses	6,849		977	7,826

Non-interest income:
Loan servicing and other fees	119		13	132
Gain on sale of loans, net	7		7,269	7,276
Deposit account fees	603		-	603
(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net	(32	)	64	32
Card and processing fees	331		-	331
Other	174		-	174
Total non-interest income	1,202		7,346	8,548

Non-interest expense:
Salaries and employee benefits	4,189		4,665	8,854
Premises and occupancy	597		275	872
Operating and administrative expenses	940		1,637	2,577
Total non-interest expense	5,726		6,577	12,303
Income before income taxes	2,325		1,746	4,071
Provision for income taxes	1,019		734	1,753
Net income	$ 1,306		$ 1,012	$ 2,318
Total assets, end of period	$ 1,049,345		$ 270,523	$ 1,319,868

	For the Quarter Ended September 30, 2010
			Provident
	Provident		Bank	Consolidated
	Bank		Mortgage	Totals
Net interest income, before provision for loan losses	$ 8,705		$ 1,107	$ 9,812
Provision for loan losses	516		361	877
Net interest income, after provision for loan losses	8,189		746	8,935

Non-interest income:
Loan servicing and other fees	111		13	124
(Loss) gain on sale of loans, net	(131	)	9,578	9,447
Deposit account fees	629		-	629
(Loss) gain on sale and operations of real estate Owned acquired in the settlement of loans, net	(377	)	9	(368	)
Card and processing fess	316		-	316
Other	186		1	187
Total non-interest income	734		9,601	10,335

Non-interest expense:
Salaries and employee benefits	3,199		4,178	7,377
Premises and occupancy	610		210	820
Operating and administrative expenses	1,626		1,387	3,013
Total non-interest expense	5,435		5,775	11,210
Income before income taxes	3,488		4,572	8,060
Provision for income taxes	1,609		1,922	3,531
Net income	$ 1,879		$ 2,650	$ 4,529
Total assets, end of period	$ 1,163,125		$ 226,042	$ 1,389,167

Note 5: Investment Securities

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

September 30, 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)	$ 13,405	$ 480	$ -		$ 13,885	$ 13,885
	U.S. government sponsored enterprise MBS	9,626	454	-		10,080	10,080
	Private issue CMO (2)	1,359	-	(71	)	1,288	1,288
Total investment securities		$ 24,390	$ 934	$ (71	)	$ 25,253	$ 25,253

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

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

June 30, 2011		Amortized Cost	Gross Unrealized Gains	Gross Unrealized (Losses)		Estimated Fair Value	Carrying Value
(In Thousands)
Available for sale
	U.S. government agency MBS	$ 13,935	$ 474	$ -		$ 14,409	$ 14,409
	U.S. government sponsored enterprise MBS	9,960	457	-		10,417	10,417
	Private issue CMO	1,396	-	(29	)	1,367	1,367
Total investment securities		$ 25,291	$ 931	$ (29	)	$ 26,193	$ 26,193

In the first quarter of fiscal 2012 and 2011, the Bank received MBS principal payments of $898,000 and $2.0 million, respectively, and did not purchase or sell investment securities. 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 September 30, 2011 or June 30, 2011; therefore, no impairment losses have been recorded for the quarter ended September 30, 2011.

Contractual maturities of investment securities as of September 30, 2011 and June 30, 2011 were as follows:

	September 30, 2011				June 30, 2011
			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		-		-		-		-
Due after five through ten years		-		-		-		-
Due after ten years		24,390		25,253		25,291		26,193
Total investment securities	$	24,390	$	25,253	$	25,291	$	26,193

Note 6: Loans Held for Investment

Loans held for investment consisted of the following:

(In Thousands)	September 30, 2011			June 30, 2011

Mortgage loans:
Single-family	$	480,530		$	494,192
Multi-family		298,072			304,808
Commercial real estate		100,863			103,637
Other		1,528			1,530
Commercial business loans		4,267			4,526
Consumer loans		748			750
Total loans held for investment, gross		886,008			909,443

Deferred loan costs, net		2,345			2,649
Allowance for loan losses		(28,704	)		(30,482	)
Total loans held for investment, net	$	859,649		$	881,610

As of September 30, 2011, the Bank had $48.4 million in mortgage loans that are subject to negative amortization, consisting of $29.6 million in multi-family loans, $11.3 million in commercial real estate loans and $7.5 million in single-family loans. This compares to $50.4 million of negative amortization mortgage loans at June 30, 2011, consisting of $31.3 million in multi-family loans, $11.5 million in commercial real estate loans and $7.6 million in single-family loans. The amount of negative amortization included in loan balances decreased to $339,000 at September 30, 2011 from $353,000 at June 30, 2011. During the first quarter of fiscal 2012, approximately $13,000,

or 0.10%, of loan interest income was added to the negative amortization loan balance, down from $17,000, or 0.11% in the comparable quarter of fiscal 2010. 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 September 30, 2011 and June 30, 2011, the interest-only ARM loans were $238.2 million and $247.8 million, or 26.8% and 27.2% of loans held for investment, respectively.

The following table sets forth information at September 30, 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 September 30, 2011, unchanged from June 30, 2011. 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	$ 421,929	$ 46,365	$ 5,678	$ 746	$ 5,812	$ 480,530
	Multi-family	207,440	38,072	14,090	23,838	14,632	298,072
	Commercial real estate	64,976	10,655	2,695	4,721	17,816	100,863
	Other	1,292	-	-	-	236	1,528
Commercial business loans		2,118	-	-	-	2,149	4,267
Consumer loans		703	-	-	-	45	748
	Total loans held for investment, gross	$ 698,458	$ 95,092	$ 22,463	$ 29,305	$ 40,690	$ 886,008

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 Bank’s control.

The following tables summarize the Corporation’s allowance for loan losses at September 30, 2011 and June 30, 2011:

(In Thousands)			September 30, 2011	June 30, 2011

General loan loss allowance:
	Mortgage loans:
		Single-family	$ 11,157	$ 11,561
		Multi-family	2,823	2,810
		Commercial real estate	1,754	1,796
		Other	5	5
	Commercial business loans		177	178
	Consumer loans		15	16
		Total general loan loss allowance	15,931	16,366

Specific loan loss allowance:
	Mortgage loans:
		Single-family	11,267	12,654
		Multi-family	607	581
		Commercial real estate	236	231
		Other	320	321
	Commercial business loans		325	329
	Consumer loans		18	-
		Total specific loan loss allowance	12,773	14,116
Total loan loss allowance			$ 28,704	$ 30,482

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

	Three Months Ended
	September 30,
(Dollars in Thousands)	2011			2010

Allowance at beginning of period	$	30,482		$	43,501

Provision for loan losses		972			877

Recoveries:
Mortgage loans:
Single-family		113			1
Total recoveries		113			1

Charge-offs:
Mortgage loans:
Single-family		(2,861	)		(5,291	)
Consumer loans		(2	)		(2	)
Total charge-offs		(2,863	)		(5,293	)

Net charge-offs		(2,750	)		(5,292	)
Allowance at end of period	$	28,704		$	39,086

Allowance for loan losses as a percentage of gross loans held for investment
		3.23	%		3.88	%

Net charge-offs as a percentage of average loans receivable, net, during the period
		1.04	%		1.82	%

Allowance for loan losses as a percentage of gross non-performing loans at the end of the period
		57.61	%		55.28	%

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

(In Thousands)				September 30, 2011
(In Thousands)				Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
			With a related allowance	$ 41,508	$ (11,267	)	$ 30,241
			Without a related allowance	1,313	-		1,313
	Total single-family loans			42,821	(11,267	)	31,554
	Multi-family:
			With a related allowance	2,534	(607	)	1,927
	Total multi-family loans			2,534	(607	)	1,927

	Commercial real estate:
			With a related allowance	2,447	(236	)	2,211
		Without a related allowance		388	-		388
	Total commercial real estate loans			2,835	(236	)	2,599

	Other:
		With a related allowance		1,292	(320	)	972
	Total other loans			1,292	(320	)	972

Commercial business loans:
		With a related allowance		328	(325	)	3
	Total commercial business loans			328	(325	)	3

Consumer loans:
		With a related allowance		18	(18	)	-
	Total consumer loans			18	(18	)	-
Total non-performing loans				$ 49,828	$ (12,773	)	$ 37,055

(In Thousands)				June 30, 2011
(In Thousands)				Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
			With a related allowance	$ 42,958	$ (12,655	)	$ 30,303
			Without a related allowance	1,535	-		1,535
	Total single-family loans			44,493	(12,655	)	31,838
	Multi-family:
			With a related allowance	2,534	(581	)	1,953
	Total multi-family loans			2,534	(581	)	1,953

	Commercial real estate:
			With a related allowance	2,451	(231	)	2,220
	Total commercial real estate loans			2,451	(231	)	2,220

	Other:
		With a related allowance		1,292	(320	)	972
	Total other loans			1,292	(320	)	972

Commercial business loans:
		With a related allowance		331	(329	)	2
		Without a related allowance		141	-		141
	Total commercial business loans			472	(329	)	143
Total non-performing loans				$ 51,242	$ (14,116	)	$ 37,126

At September 30, 2011 and June 30, 2011, 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 specific allowance for loan losses, as of September 30, 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	$ 9,969	$ 7,605	$ 3,996	$ 9,984	$ 31,554
	Multi-family	-	-	-	1,927	1,927
	Commercial real estate	388	918	1,293	-	2,599
	Other	-	-	972	-	972
Commercial business loans		-	-	3	-	3
	Total	$ 10,357	$ 8,523	$ 6,264	$ 11,911	$ 37,055

During the quarters ended September 30, 2011 and 2010, the Corporation’s average investment in non-performing loans was $36.6 million and $58.4 million, respectively. Interest income of $1.5 million and $1.7 million was recognized, based on cash receipts, on non-performing loans during the quarters ended September 30, 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 $313,000 and $363,000 for the quarters ended September 30, 2011 and 2010, respectively, and was not included in the results of operations.

For the quarter ended September 30, 2011, twelve loans for $4.8 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans. This

compares to 21 loans for $9.4 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the quarter ended September 30, 2010. During the quarter ended September 30, 2011, two restructured loans with a total loan balance of $771,000 were in default within a 12-month period subsequent to their original restructuring and required a $200,000 additional provision for loan losses. This compares to one restructured loan with a total loan balance of $285,000 that was in default within a 12-month period subsequent to its original restructuring and required an additional provision for loan losses of $133,000 in the quarter ended September 30, 2010. As of September 30, 2011, the net outstanding balance of the 87 restructured loans was $36.1 million: 26 were classified as pass and remain on accrual status ($11.6 million); eight were classified as special mention and remain on accrual status ($5.7 million); 52 were classified as substandard ($18.8 million total, with 47 of the 52 loans or $17.1 million on non-accrual status); and one loan was classified as a complete loss and is 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, 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 summarizes at the dates indicated the restructured loans by loan types and non-accrual versus accrual status:

(In Thousands)			September 30, 2011	June 30, 2011
Restructured loans on non-accrual status:
	Mortgage loans:
		Single-family	$ 13,940	$ 15,133
		Multi-family	490	490
		Commercial real estate	1,660	1,660
		Other	972	972
	Commercial business loans		3	143
		Total	17,065	18,398

Restructured loans on accrual status:
	Mortgage loans:
		Single-family	12,940	15,589
		Multi-family	4,172	3,665
		Commercial real estate	1,473	1,142
	Other		236	237
	Commercial business loans		189	125
		Total	19,010	20,758
		Total restructured loans	$ 36,075	$ 39,156

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

(In Thousands)			September 30, 2011
(In Thousands)			Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
		With a related allowance	$ 16,943	$ (3,003	)	$ 13,940
		Without a related allowance	12,940	-		12,940
	Total single-family loans		29,883	(3,003	)	26,880

	Multi-family:
		With a related allowance	517	(27	)	490
		Without a related allowance	4,172	-		4,172
	Total multi-family loans		4,689	(27	)	4,662

	Commercial real estate:
		With a related allowance	1,837	(177	)	1,660
		Without a related allowance	1,473	-		1,473
	Total commercial real estate loans		3,310	(177	)	3,133

	Other:
		With a related allowance	1,292	(320	)	972
		Without a related allowance	236	-		236
	Total other loans		1,528	(320	)	1,208

Commercial business loans:
		With a related allowance	328	(325	)	3
		Without a related allowance	189	-		189
	Total commercial business loans		517	(325	)	192
Total restructured loans			$ 39,927	$ (3,852	)	$ 36,075

(In Thousands)			June 30, 2011
(In Thousands)			Recorded Investment	Specific Allowance For Loan Losses		Net Investment

Mortgage loans:
	Single-family:
		With a related allowance	$ 19,092	$ (3,959	)	$ 15,133
		Without a related allowance	15,589	-		15,589
	Total single-family loans		34,681	(3,959	)	30,722

	Multi-family:
		With a related allowance	517	(27	)	490
		Without a related allowance	3,665	-		3,665
	Total multi-family loans		4,182	(27	)	4,155

	Commercial real estate:
		With a related allowance	1,837	(177	)	1,660
		Without a related allowance	1,142	-		1,142
	Total commercial real estate loans		2,979	(177	)	2,802

	Other:
		With a related allowance	1,293	(321	)	972
		Without a related allowance	237	-		237
	Total other loans		1,530	(321	)	1,209

Commercial business loans:
		With a related allowance	53	(51	)	2
		Without a related allowance	266	-		266
	Total commercial business loans		319	(51	)	268
Total restructured loans			$ 43,691	$ (4,535	)	$ 39,156

During the quarter ended September 30, 2011, sixteen properties were acquired in the settlement of loans, while 18 previously foreclosed upon properties were sold. As of September 30, 2011, real estate owned was comprised of 52 properties with a net fair value of $7.3 million, primarily located in Southern California. This compares to 54 real estate owned properties, primarily located in Southern California, with a net fair value of $8.3 million at June 30, 2011. 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 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 September 30, 2011 and June 30, 2011, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $188.6 million and $107.7 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.

	September 30,	June 30,
Commitments	2011	2011
(In Thousands)

Undisbursed lines of credit – Mortgage loans	$ 1,002	$ 1,028
Undisbursed lines of credit – Commercial business loans	2,466	2,867
Undisbursed lines of credit – Consumer loans	913	956
Commitments to extend credit on loans to be held for investment	1,604	200
Total	$ 5,985	$ 5,051

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 MBS, put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition. At September 30, 2011, $3.6 million was included in other assets and $1.9 million was included in other liabilities; at June 30, 2011, $1.3 million is included in other assets and $0 was included in other liabilities. 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 ended September 30, 2011 and 2010 was as follows:

	For the Quarters Ended September 30,
Derivative Financial Instruments	2011		2010
(In Thousands)

Commitments to extend credit on loans to be held for sale	$ 2,824		$ (528	)
Mandatory loan sale commitments	(533	)	554
TBA(1) MBS trades	(1,939	)	2,641
Option contracts	(154	)	(25	)
Total	$ 198		$ 2,642

(1) To be announced (“TBA”).

The outstanding derivative financial instruments at the dates indicated were as follows:

	September 30, 2011				June 30, 2011
			Fair				Fair
Derivative Financial Instruments	Amount		Value		Amount		Value
(In Thousands)

Commitments to extend credit on loans
to be held for sale (1)	$ 186,953		$ 3,462		$ 107,458		$ 638
Best efforts loan sale commitments	(14,558	)	-		(8,159	)	-
Mandatory loan sale commitments	(168,952	)	(130	)	(96,356	)	403
TBA MBS trades	(279,500	)	(1,763	)	(183,500	)	176
Put option contracts	(10,000	)	48		(13,000	)	99
Call option contracts	10,000		94		-		-
Total	$ (276,057	)	$ 1,711		$ (193,557	)	$ 1,316

(1)	Net of 38.6 percent at September 30, 2011 and 31.0 percent at June 30, 2011 of commitments, which management has estimated may not fund.

Note 8: Income Taxes

FASB ASC 740, “Income Taxes,” requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Management has determined that there are no unrecognized tax benefits to be reported in the Corporation’s financial statements, and none are anticipated during the fiscal year ending June 30, 2012.

ASC 740 requires that when determining the need for a valuation allowance against a deferred tax asset, management must assess both positive and negative evidence with regard to the realizability of the tax losses represented by that asset. To the extent available sources of taxable income are insufficient to absorb tax losses, a valuation allowance is necessary. Sources of taxable income for this analysis include prior years’ tax returns, the expected reversals of taxable temporary differences between book and tax income, prudent and feasible tax-planning strategies, and future taxable income. The deferred tax asset related to the allowance will be realized when actual charge-offs are made against the allowance. Based on the availability of loss carry-backs and projected taxable income during the periods for which loss carry-forwards are available, management believes it is more likely than not the Corporation will realize the deferred tax asset. The Corporation continues to monitor the deferred tax asset on a quarterly basis for a valuation allowance. The future realization of these tax benefits primarily hinges on adequate future earnings to utilize the tax benefit. Prospective earnings or losses, tax law changes or capital changes could prompt the Corporation to reevaluate the assumptions which may be used to establish a valuation allowance. As of September 30, 2011, the estimated deferred tax asset was $9.5 million, a $459,000 or five percent decrease, from $9.9 million at June 30, 2011. The Corporation did not have any liabilities for uncertain tax positions or any known unrecognized tax benefit at September 30, 2011 or June 30, 2011.

The Corporation files income tax returns for the United States and state of California jurisdictions. The Internal Revenue Service has audited the Bank’s income tax returns through 1996 and the California Franchise Tax Board has audited the Bank through 1990. The Internal Revenue Service also completed a review of the Corporation’s income tax returns for fiscal 2006 and 2007. Tax years subsequent to 2007 remain subject to federal examination, while the California state tax returns for years subsequent to 2004 are subject to examination by state taxing authorities. The California Franchise Tax Board completed a review of the Corporation’s income tax returns for fiscal 2007 and 2008. It is the Corporation’s policy to record any penalties or interest charges arising from federal or state taxes as a component of income tax expense. For the quarter ended September 30, 2011, there was a $14,000 interest charge (related to the State of California tax return for fiscal 2007) and no tax penalties; and for the quarter ended September 30, 2010, there was a $13,000 interest charge (related to the State of California tax returns for fiscal 2007 and 2008) and no tax penalties.

Note 9: Fair Value of Financial Instruments

The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” on July 1, 2008 and elected the fair value option (ASC 825, “Financial Instruments”) on May 28, 2009 on loans originated for sale by PBM. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the Fair Value Option) at specified election dates. At each subsequent reporting date, an entity is required to report unrealized gains and losses on items in earnings for which the fair value option has been elected. The objective of the Fair Value Option is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

The following table describes the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale at fair value.

(In Thousands)	Aggregate Fair Value	Aggregate Unpaid Principal Balance	Net Unrealized Gain
As of September 30, 2011:
Single-family loans measured at fair value	$ 278,212	$ 265,804	$ 12,408

On April 9, 2009, the FASB issued ASC 820-10-65-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This ASC provides additional guidance for estimating fair value in accordance with ASC 820, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased.

ASC 820 establishes a three-level valuation hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:

Level 1	-	Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2	-	Observable inputs other than Level 1 such as: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated to observable market data for substantially the full term of the asset or liability.
Level 3	-	Unobservable inputs for the asset or liability that use significant assumptions, including assumptions of risks. These unobservable assumptions reflect the Corporation’s estimate of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.

ASC 820 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

The Corporation’s financial assets and liabilities measured at fair value on a recurring basis consist of investment securities, loans held for sale at fair value, interest-only strips and derivative financial instruments; while non-performing loans, mortgage servicing assets and real estate owned are measured at fair value on a nonrecurring basis.

Investment securities are primarily comprised of U.S. government agency mortgage-backed securities, U.S. government sponsored enterprise mortgage-backed securities and private issue collateralized mortgage obligations. The Corporation utilizes unadjusted quoted prices in active markets for identical securities for its fair value measurement of debt securities, quoted prices in active and less than active markets for similar securities for its fair value measurement of mortgage-backed securities and debt securities, and broker price indications for similar securities in non-active markets for its fair value measurement of collateralized mortgage obligations.

Derivative financial instruments are comprised of commitments to extend credit on loans to be held for sale, loan sale commitments and option contracts. The fair value is determined, when possible, using quoted secondary-market prices. If no such quoted price exists, the fair value of a commitment is determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment.

Loans held for sale at fair value are primarily single-family loans. The fair value is determined, when possible, using quoted secondary-market prices such as mandatory loan sale commitments. If no such quoted price exists, the fair value of a loan is determined by quoted prices for a similar loan or loans, adjusted for the specific attributes of each loan.

Non-performing loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or of the collateral pledged and the accrual of interest income has been discontinued. The non-performing loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The Corporation assesses loans individually and identifies impairment when the loan is classified as non-performing, been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans may currently be performing. The fair value of a non-performing loan is determined based on an observable market price or current appraised value of the underlying collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the borrower. For non-performing loans which are also restructured loans, the fair value is derived from discounted cash flow analysis, except those

which are in the process of foreclosure, for which the fair value is derived from the appraised value of its collateral. Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. This loss is not recorded directly as an adjustment to current earnings or other comprehensive income (loss), but rather as a component in determining the overall adequacy of the allowance for loan losses. These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings.

The Corporation uses the amortization method for its mortgage servicing assets, which amortizes servicing assets in proportion to and over the period of estimated net servicing income and assesses servicing assets for impairment based on fair value at each reporting date. The fair value of mortgage servicing assets is calculated using the present value method; which includes a third party’s prepayment projections of similar instruments, weighted-average coupon rates and the estimated average life.

The rights to future income from serviced loans that exceed contractually specified servicing fees are recorded as interest-only strips. The fair value of interest-only strips is calculated using the same assumptions that are used to value the related servicing assets.

The fair value of real estate owned is derived from the lower of the appraised value at the time of foreclosure or the listing price, net of disposition costs.

The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following fair value hierarchy table presents information about the Corporation’s assets measured at fair value on a recurring basis:

				Fair Value Measurement at September 30, 2011 Using:
(In Thousands)				Level 1	Level 2	Level 3	Total
Assets:
	Investment securities:
		U.S. government agency MBS		$ -	$ 13,885	$ -	$ 13,885
		U.S. government sponsored enterprise MBS		-	10,080	-	10,080
		Private issue CMO		-	-	1,288	1,288
			Investment securities	-	23,965	1,288	25,253

	Loans held for sale, at fair value			-	278,212	-	278,212
	Interest-only strips			-	-	167	167

	Derivative assets:
		Commitments to extend credit on loans to be held for sale		-	-	3,469	3,469
		Mandatory loan sale commitments		-	-	105	105
		Option contracts		-	-	142	142
			Derivative assets	-	-	3,716	3,716
Total assets				$ -	$ 302,177	$ 5,171	$ 307,348

Liabilities:
	Derivative liabilities:
		Commitments to extend credit on loans to be held for sale		$ -	$ -	$ 7	$ 7
		Mandatory loan sale		-	-	235	235
		TBA MBS trades		-	1,763	-	1,763
			Derivative liabilities		1,763	242	2,005
Total liabilities				$ -	$ 1,763	$ 242	$ 2,005

				Fair Value Measurement at June 30, 2011 Using:
(In Thousands)				Level 1	Level 2	Level 3	Total
Assets:
	Investment securities:
		U.S. government agency MBS		$ -	$ 14,409	$ -	$ 14,409
		U.S. government sponsored enterprise MBS		-	10,417	-	10,417
		Private issue CMO		-	-	1,367	1,367
			Investment securities	-	24,826	1,367	26,193

	Loans held for sale, at fair value			-	191,678	-	191,678
	Interest-only strips			-	-	200	200

	Derivative assets:
		Commitments to extend credit on loans to be held for sale		-	-	797	797
		Mandatory loan sale commitments		-	-	403	403
		TBA MBS trades		-	252	-	252
		Option contracts		-	-	99	99
			Derivative assets	-	252	1,299	1,551
Total assets				$ -	$ 216,756	$ 2,866	$ 219,622

Liabilities:
	Derivative liabilities:
		Commitments to extend credit on loans to be held for sale		$ -	$ -	$ 159	$ 159
		TBA MBS trades		-	76	-	76
			Derivative liabilities	-	76	159	235
Total liabilities				$ -	$ 76	$ 159	$ 235

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the Condensed Consolidated Statements of Financial Condition using Level 3 inputs:

Fair Value Measurement

Using Significant Other Unobservable Inputs

(Level 3)

(In Thousands)

Private

Issue

CMO

Interest-

Only

Strips

Loan

Commit-ments to originate

(1)

Manda-

tory

Commit-

ments

(2)

Option

Contracts

Total

Beginning balance at July 1, 2011

$ 1,367

$ 200

$ 638

PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q - November 9, 2011

Attached files