Attached files
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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
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For the transition period from ________________ to _________________
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Commission File Number 000-28304
PROVIDENT FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
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33-0704889
|
|
(State or other jurisdiction of
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(I.R.S. Employer
|
|
incorporation or organization)
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Identification No.)
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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 -
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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
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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
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||
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
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ITEM 4 -
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Controls and Procedures
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50
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|
PART II -
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OTHER INFORMATION
|
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ITEM 1 -
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Legal Proceedings
|
50
|
|
ITEM 1A -
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Risk Factors
|
50
|
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ITEM 2 -
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Unregistered Sales of Equity Securities and Use of Proceeds
|
51
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ITEM 3 -
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Defaults Upon Senior Securiti
|
51
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ITEM 4 -
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(Removed and Reserved)
|
51
|
|
ITEM 5 -
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Other Information
|
51
|
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ITEM 6 -
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Exhibits
|
51
|
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SIGNATURES
|
53
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||
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.
1
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.
2
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.
3
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
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.
4
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
5
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 |
6
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
|
7
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”).
|
8
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,
9
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.
10
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
|
11
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 | % |
12
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
|
|||||||
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
|
13
(In Thousands)
|
June 30, 2011
|
|||||||
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
14
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
|
15
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
|
|||||||
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
|
16
(In Thousands)
|
June 30, 2011
|
||||||
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.
17
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.
|
18
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
|
19
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
20
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
|
21
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
|