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EXCEL - IDEA: XBRL DOCUMENT - PROVIDENT FINANCIAL HOLDINGS INCFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20140930xex321.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20140930xex311.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20140930xex312.htm
EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20140930xex322.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[  ü ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
September 30, 2014
[     ]
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 ü     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 3, 2014
Common stock, $ 0.01 par value, per share
 
9,152,065 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, 2014 and June 30, 2014
 
Condensed Consolidated Statements of Operations
 
 
 
for the Quarters Ended September 30, 2014 and 2013
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
for the Quarters Ended September 30, 2014 and 2013
 
Condensed Consolidated Statements of Stockholders’ Equity
 
 
 
for the Quarters Ended September 30, 2014 and 2013
 
Condensed Consolidated Statements of Cash Flows
 
 
 
for the Three Months Ended September 30, 2014 and 2013
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
 
 
 
 
ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
 
 
 
 
General
 
Safe-Harbor Statement
 
Critical Accounting Policies
 
Executive Summary and Operating Strategy
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
 
Comparison of Financial Condition at September 30, 2014 and June 30, 2014
 
Comparison of Operating Results
 
 
 
for the Quarters Ended September 30, 2014 and 2013
 
Asset Quality
 
Loan Volume Activities
 
Liquidity and Capital Resources
 
Supplemental Information
 
 
 
 
ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
ITEM 4  -
Controls and Procedures
 
 
 
 
PART II  -
OTHER INFORMATION
 
 
 
 
 
ITEM 1  -
Legal Proceedings
ITEM 1A -
Risk Factors
ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3  -
Defaults Upon Senior Securities
ITEM 4  -
Mine Safety Disclosures
ITEM 5  -
Other Information
ITEM 6  -
Exhibits
 
 
 
 
SIGNATURES






PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
In Thousands, Except Share Information
 
(Unaudited)
 
 
September 30,
2014
June 30,
2014
Assets
 
 
Cash and cash equivalents
$
85,138

$
118,937

Investment securities – held to maturity (fair value $800 and $800, respectively)
800

800

Investment securities – available for sale, at fair value
15,793

16,347

Loans held for investment, net of allowance for loan losses of
$8,888 and $9,744, respectively
788,958

772,141

Loans held for sale, at fair value
180,558

158,883

Accrued interest receivable
2,667

2,483

Real estate owned, net
2,707

2,467

Federal Home Loan Bank (“FHLB”) – San Francisco stock
7,056

7,056

Premises and equipment, net
5,979

6,369

Prepaid expenses and other assets
17,198

20,146

 
 

 

Total assets
$
1,106,854

$
1,105,629

 
 

 

Liabilities and Stockholders’ Equity
 

 

 
 

 

Liabilities:
 

 

Non interest-bearing deposits
$
57,412

$
58,654

Interest-bearing deposits
845,020

839,216

Total deposits
902,432

897,870

 
 

 

Borrowings
41,416

41,431

Accounts payable, accrued interest and other liabilities
18,043

20,466

Total liabilities
961,891

959,767

 
 

 

Commitments and Contingencies




 
 

 

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;
17,716,365 and 17,714,365 shares issued; 9,152,065 and
9,312,269 shares outstanding, respectively)
177

177

Additional paid-in capital
86,759

88,259

Retained earnings
183,825

182,458

Treasury stock at cost (8,564,300 and 8,402,096 shares, respectively)
(126,175
)
(125,418
)
Accumulated other comprehensive income, net of tax
377

386

 
 

 

Total stockholders’ equity
144,963

145,862

 
 

 

Total liabilities and stockholders’ equity
$
1,106,854

$
1,105,629



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,
 
2014
2013
Interest income:
 
 
Loans receivable, net
$
9,195

$
9,706

Investment securities
76

92

FHLB – San Francisco stock
144

208

Interest-earning deposits
94

110

Total interest income
9,509

10,116

 
 
 
Interest expense:
 
 
Checking and money market deposits
104

102

Savings deposits
157

147

Time deposits
976

1,263

Borrowings
335

643

Total interest expense
1,572

2,155

 
 
 
Net interest income
7,937

7,961

Recovery from the allowance for loan losses
(818
)
(942
)
Net interest income, after recovery from the allowance for loan losses
8,755

8,903

 
 
 
Non-interest income:
 
 
Loan servicing and other fees
268

195

Gain on sale of loans, net
7,652

6,754

Deposit account fees
626

621

(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net
(19
)
52

Card and processing fees
356

344

Other
227

217

Total non-interest income
9,110

8,183

 
 
 
Non-interest expense:
 
 
Salaries and employee benefits
9,581

10,452

Premises and occupancy
1,348

1,159

Equipment
472

480

Professional expenses
464

424

Sales and marketing expenses
331

415

     Deposit insurance premiums and regulatory assessments
273

214

Other
1,270

1,386

Total non-interest expense
13,739

14,530

 
 
 
Income before income taxes
4,126

2,556

Provision for income taxes
1,736

1,043

Net income
$
2,390

$
1,513

 
 
 
Basic earnings per share
$
0.26

$
0.15

Diluted earnings per share
$
0.25

$
0.14

Cash dividends per share
$
0.11

$
0.10


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

2



PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
In Thousands
 
For the Quarters Ended  
 September 30,
 
2014
2013
Net income
$
2,390

$
1,513

 
 
 
Change in unrealized holding loss on securities available for sale
(16
)
(121
)
Reclassification of (gains) losses to net income


Other comprehensive loss, before income tax benefit
(16
)
(121
)
 
 
 
Income tax benefit
7

51

Other comprehensive loss
(9
)
(70
)
 
 
 
Total comprehensive income
$
2,381

$
1,443



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

3



PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
In Thousands, Except Share Information

For the Quarters Ended September 30, 2014 and 2013:

 
Common
Stock
Additional
Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at June 30, 2014
9,312,269

$
177

$
88,259

$
182,458

$
(125,418
)
$
386

$
145,862

 
 
 
 
 
 
 
 
Net income
 
 
 
2,390

 
 
2,390

Other comprehensive loss
 
 
 
 
 
(9
)
(9
)
Purchase of treasury stock
(162,204
)
 
 
 
(2,398
)
 
(2,398
)
Exercise of stock options
2,000


14

 
 
 
14

Amortization of restricted stock
 
 
59

 
 
 
59

Awards of restricted stock
 
 
(1,641
)
 
1,641

 

Stock options expense
 
 
84

 
 
 
84

Tax effect from stock based compensation
 
 
(16
)
 
 
 
(16
)
Cash dividends
 
 
 
(1,023
)
 
 
(1,023
)
 
 
 
 
 
 
 
 
Balance at September 30, 2014
9,152,065

$
177

$
86,759

$
183,825

$
(126,175
)
$
377

$
144,963

 
 
 
Common
Stock
Additional
Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at June 30, 2013
10,386,399

$
177

$
87,742

$
179,816

$
(108,315
)
$
554

$
159,974

 
 
 
 
 
 
 
 
Net income
 
 
 
1,513

 
 
1,513

Other comprehensive loss
 
 
 
 
 
(70
)
(70
)
Purchase of treasury stock
(190,051
)
 
 
 
(3,404
)
 
(3,404
)
Exercise of stock options
5,000


37

 
 
 
37

Amortization of restricted stock
 
 
51

 
 
 
51

Stock options expense
 
 
80

 
 
 
80

Tax effect from stock based compensation
 
 
7

 
 
 
7

Cash dividends
 
 
 
(1,030
)
 
 
(1,030
)
 
 
 
 
 
 
 
 
Balance at September 30, 2013
10,201,348

$
177

$
87,917

$
180,299

$
(111,719
)
$
484

$
157,158


 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 


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

4



PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Three Months Ended 
 September 30,
 
2014
2013
Cash flows from operating activities:
 
 
Net income
$
2,390

$
1,513

Adjustments to reconcile net income to net cash (used for) provided by operating activities:
 
 
Depreciation and amortization
611

496

Recovery from the allowance for loan losses
(818
)
(942
)
(Recovery) provision for losses on real estate owned
(17
)
26

Gain on sale of loans, net
(7,652
)
(6,754
)
Loss (gain) on sale of real estate owned, net
9

(170
)
Stock-based compensation
143

131

Decrease in current and deferred income taxes
1,748

1,036

Tax effect from stock based compensation
16

(7
)
Decrease in accounts payable and other liabilities
(366
)
(3,916
)
Decrease (increase) in prepaid expenses and other assets
280

(191
)
Loans originated for sale
(513,770
)
(683,703
)
Proceeds from sale of loans
498,413

712,010

Net cash (used for) provided by operating activities
(19,013
)
19,529

 
 
 
Cash flows from investing activities:
 
 
Increase in loans held for investment, net
(16,774
)
(2,175
)
Principal payments from investment securities available for sale
780

820

Purchase of investment securities available for sale
(250
)

Redemption of FHLB – San Francisco stock

1,965

Proceeds from sale of real estate owned
502

1,626

Purchase of premises and equipment
(168
)
(292
)
Net cash (used for) provided by investing activities
(15,910
)
1,944

 
 
 
Cash flows from financing activities:
 
 
Increase (decrease) in deposits, net
4,562

(3,915
)
Repayments of long-term borrowings
(15
)
(50,015
)
Exercise of stock options
14

37

Tax effect from stock based compensation
(16
)
7

Cash dividends
(1,023
)
(1,030
)
Treasury stock purchases
(2,398
)
(3,404
)
Net cash provided by (used for) financing activities
1,124

(58,320
)
 
 
 
Net decrease in cash and cash equivalents
(33,799
)
(36,847
)
Cash and cash equivalents at beginning of period
118,937

193,839

Cash and cash equivalents at end of period
$
85,138

$
156,992

Supplemental information:
 
 
Cash paid for interest
$
1,562

$
2,457

Transfer of loans held for sale to held for investment
$
678

$
1,883

Real estate acquired in the settlement of loans
$
927

$
2,759



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

5



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

September 30, 2014

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, 2014 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 United States 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, 2014.  The results of operations for the quarter ended September 30, 2014 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2015.


Note 2: Accounting Standard Updates (“ASU”)

ASU 2013-11:
In July 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Corporation's adoption of this ASU did not have a material impact on its consolidated financial statements.

ASU 2014-04:
In January 2014, the FASB issued ASU 2014-04, "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The amendments in this ASU are intended to reduce diversity in practice by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. Holding foreclosed real estate property presents different operational and economic risk to creditors compared with holding an impaired loan. Therefore, consistency in the timing of loan derecognition and presentation of foreclosed real estate properties is of qualitative significance to users of the creditor’s financial statements. Additionally, the disclosure of the amount of foreclosed residential real estate properties and of the recorded investment in consumer mortgage loans secured by residential real estate properties that are in the process of foreclosure is expected to provide decision-useful information to many users of the creditor’s financial statements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Corporation's adoption of this ASU is not expected to have a material impact on its consolidated financial statements.
 

6



ASU 2014-14:
In August 2014, the FASB issued ASU 2014-14," Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure." Current GAAP provides classification and measurement guidance for situations in which a creditor obtains a debtor’s assets in satisfaction of a receivable, including receipt of assets through foreclosure, but does not provide specific guidance on how to classify and measure foreclosed loans that are government guaranteed. Current GAAP also does not provide guidance on how to determine the unit of account; that is, whether a single asset should be recognized or whether two separate assets should be recognized (real estate and a guarantee receivable). In practice, most creditors derecognize the loan and recognize a single asset. Some creditors recognize a nonfinancial asset (other real estate owned), while others recognize a financial asset (typically, a guarantee receivable). Regardless of the classification of the asset (or assets), measurement of the asset (or total measurement of the assets) in practice generally represents the amount recoverable under the guarantee. The amendments in this ASU should reduce variations in practice by providing guidance on how to classify and measure certain government-guaranteed mortgage loans upon foreclosure. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Corporation's adoption of this ASU is not expected to have a material impact on its 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, 2014 and 2013, there were outstanding options to purchase 1.1 million shares and 1.0 million shares of the Corporation’s common stock, respectively, of which 271,500 shares and 511,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of September 30, 2014 and 2013, there were outstanding restricted stock awards of 266,500 shares and 72,250 shares, respectively, all of which have dilutive effects.

The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2014 and 2013, respectively.
 
(In Thousands, Except Earnings Per Share)
For the Quarters Ended
September 30,
 
2014
2013
Numerator:
 
 
Net income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders
$
2,390

$
1,513

 
 
 
Denominator:
 

 

Denominator for basic earnings per share:
 

 

 Weighted-average shares
9,253

10,305

 
 
 
   Effect of dilutive shares:
 
 
Stock options
173

194

Restricted stock
42

26

 
 
 
Denominator for diluted earnings per share:
 

 

Adjusted weighted-average shares and assumed conversions
9,468

10,525

 
 
 
Basic earnings per share
$
0.26

$
0.15

Diluted earnings per share
$
0.25

$
0.14


7



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, 2014 and 2013, respectively.

 
For the Quarter Ended September 30, 2014
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
6,895

$
1,042

$
7,937

(Recovery) provision for loan losses
(890
)
72

(818
)
Net interest income, after (recovery) provision for loan losses
7,785

970

8,755

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
8

260

268

     Gain on sale of loans, net (2)
71

7,581

7,652

Deposit account fees
626


626

     Loss on sale and operations of real estate
        owned acquired in the settlement of loans, net
(19
)

(19
)
Card and processing fees
356


356

Other
227


227

Total non-interest income
1,269

7,841

9,110

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,267

5,314

9,581

Premises and occupancy
872

476

1,348

Operating and administrative expenses
1,156

1,654

2,810

Total non-interest expense
6,295

7,444

13,739

Income before income taxes
2,759

1,367

4,126

Provision for income taxes
1,167

569

1,736

Net income
$
1,592

$
798

$
2,390

Total assets, end of period
$
925,881

$
180,973

$
1,106,854


(1) 
Includes an inter-company charge of $158 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
(2) 
Includes an inter-company charge of $14 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.

8



 
For the Quarter Ended September 30, 2013
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
6,567

$
1,394

$
7,961

(Recovery) provision for loan losses
(983
)
41

(942
)
Net interest income after (recovery) provision for loan losses
7,550

1,353

8,903

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
134

61

195

     Gain on sale of loans, net (2)
237

6,517

6,754

Deposit account fees
621


621

     Gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
51

1

52

Card and processing fees
344


344

Other
217


217

Total non-interest income
1,604

6,579

8,183

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
3,955

6,497

10,452

Premises and occupancy
683

476

1,159

Operating and administrative expenses
1,014

1,905

2,919

Total non-interest expense
5,652

8,878

14,530

Income (loss) before income taxes (benefit)
3,502

(946
)
2,556

Provision (benefit) for income taxes
1,441

(398
)
1,043

Net income (loss)
$
2,061

$
(548
)
$
1,513

Total assets, end of period
$
973,862

$
179,165

$
1,153,027


(1) 
Includes an inter-company charge of $8 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
(2) 
Includes an inter-company charge of $7 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
 
 
 
 

 
 
 
 




9



Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 2014 and June 30, 2014 were as follows:

September 30, 2014
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
 
 
 
 
 
Held to maturity:
 
 
 
 
 
Certificates of deposit
$
800

$

$

$
800

$
800

Total investment securities - held to maturity
$
800

$

$

$
800

$
800

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
U.S. government agency MBS (1)
$
8,387

$
327

$

$
8,714

$
8,714

U.S. government sponsored enterprise MBS
5,757

244


6,001

6,001

Private issue CMO (2)
817

11


828

828

Common stock - community development financial institution
250



250

250

Total investment securities - available for sale
$
15,211

$
582

$

$
15,793

$
15,793

Total investment securities
$
16,011

$
582

$

$
16,593

$
16,593


(1) 
Mortgage-Backed Securities (“MBS”).
(2) 
Collateralized Mortgage Obligations (“CMO”).

June 30, 2014
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
 
 
 
 
 
Held to maturity:
 
 
 
 
 
Certificates of deposit
$
800

$

$

$
800

$
800

Total investment securities - held to maturity
$
800

$

$

$
800

$
800

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
U.S. government agency MBS
$
8,772

$
337

$

$
9,109

$
9,109

U.S. government sponsored enterprise MBS
6,128

257


6,385

6,385

Private issue CMO
841

12


853

853

Total investment securities - available for sale
$
15,741

$
606

$

$
16,347

$
16,347

Total investment securities
$
16,541

$
606

$

$
17,147

$
17,147


In the first quarters of fiscal 2015 and 2014, the Corporation received MBS principal payments of $780,000 and $820,000, respectively, and did not purchase or sell investment securities, except the fiscal 2015 purchase of $250,000 in the common stock of a community development financial institution to help fulfill the Corporation's Community Reinvestment Act obligation.
  
The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value.  As of September 30, 2014, no investment securities were in an unrealized loss position. This compares to September 30, 2013 when the gross unrealized holding losses relate to two adjustable rate private issue CMOs, where one has been in an unrealized loss position for more than 12 months and the other has been in an unrealized loss position for less than 12 months.  Based on the nature of the investments, management concluded that such unrealized losses were not other than temporary as of September 30, 2013.  The Corporation does not believe that there are any other-than-temporary impairments at September 30, 2014 and 2013;

10



therefore, no impairment losses have been recorded for the quarters ended September 30, 2014 and 2013.  The Corporation intends and has the ability to hold these CMOs until maturity and will not likely be required to sell the CMOs before realizing a full recovery.

Contractual maturities of investment securities as of September 30, 2014 and June 30, 2014 were as follows:

 
September 30, 2014
 
June 30, 2014
(In Thousands)
Amortized
Cost
Estimated
Fair
Value
 
Amortized
Cost
Estimated
Fair
Value
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
Due in one year or less
$
800

$
800

 
$
800

$
800

Due after one through five years


 


Due after five through ten years


 


Due after ten years


 


Total investment securities - held to maturity
$
800

$
800

 
$
800

$
800

 
 
 
 
 
 
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
14,961

15,543

 
15,741

16,347

No stated maturity (common stock)
250

250

 


Total investment securities - available for sale
$
15,211

$
15,793

 
$
15,741

$
16,347

Total investment securities
$
16,011

$
16,593

 
$
16,541

$
17,147



Note 6: Loans Held for Investment
 
Loans held for investment consisted of the following:

(In Thousands)
September 30,
2014
June 30,
2014
Mortgage loans:
 
 
Single-family
$
377,371

$
377,997

Multi-family
314,880

301,211

Commercial real estate
100,743

96,803

Construction
4,378

2,869

Commercial business loans
1,109

1,237

Consumer loans
271

306

Total loans held for investment, gross
798,752

780,423

 
 
 
Undisbursed loan funds
(3,604
)
(1,090
)
Deferred loan costs, net
2,698

2,552

Allowance for loan losses
(8,888
)
(9,744
)
Total loans held for investment, net
$
788,958

$
772,141


As of September 30, 2014, the Corporation had $23.0 million in mortgage loans that are subject to negative amortization, consisting of $18.6 million in multi-family loans, $3.6 million in single-family loans and $819,000 in commercial real estate loans.  This compares to $23.3 million of negative amortization mortgage loans at June 30, 2014, consisting of $18.7 million in multi-family

11



loans, $3.7 million in single-family loans and $856,000 in commercial real estate loans.  During the first quarters of fiscal 2015 and 2014, no loan interest income was added to the negative amortization loan balance.  Negative amortization involves a greater risk to the Corporation 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 Corporation 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, 2014 and June 30, 2014, the interest-only ARM loans were $166.3 million and $170.7 million, or 21% and 22% of loans held for investment, respectively.

The following table sets forth information at September 30, 2014 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 4% of loans held for investment at September 30, 2014, unchanged from June 30, 2014.  Adjustable rate loans having no stated repricing dates that 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 Corporation’s actual repricing experience to differ materially from that shown.

 
Adjustable Rate
 
 
(In Thousands)
Within One Year
After
One Year
Through 3 Years
After
3 Years
Through 5 Years
After
5 Years
Through 10 Years
Fixed Rate
Total
Mortgage loans:
 
 
 
 
 
 
Single-family
$
317,328

$
13,939

$
25,818

$
5,093

$
15,193

$
377,371

Multi-family
96,584

44,980

157,434

10,402

5,480

314,880

Commercial real estate
36,310

8,641

45,238

600

9,954

100,743

Construction
2,569




1,809

4,378

Commercial business loans
350


123


636

1,109

Consumer loans
260




11

271

Total loans held for investment, gross
$
453,401

$
67,560

$
228,613

$
16,095

$
33,083

$
798,752


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.  Provision (recovery) for (from) the allowance for loan losses is charged (credited) against operations on a quarterly 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 Corporation’s loans held for investment, will not request a significant increase in 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 Corporation’s control.

In compliance with the regulatory reporting requirements of the Office of the Comptroller of the Currency (“OCC”), the Bank’s primary federal regulator, non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans.  For loans that were modified from their original terms, were re-underwritten and identified in the Corporation’s asset quality reports as troubled debt restructurings (“restructured loans”), the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent.  The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses.  The allowance for loan losses for non-performing loans is determined by applying Accounting Standards Codification (“ASC”) 310, “Receivables.”  For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method.  For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances

12



are assigned based on the aggregated pooling method. For non-performing commercial real estate loans, an individually evaluated allowance is calculated based on the loan's fair value and if the fair value is higher than the loan balance, no allowance is required.

The following table summarizes the Corporation’s allowance for loan losses at September 30, 2014 and June 30, 2014:

(In Thousands)
September 30,
2014
June 30,
2014
Collectively evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family
$
4,652

$
5,476

Multi-family
3,122

3,142

Commercial real estate
1,014

989

Construction
5

35

Commercial business loans
44

51

Consumer loans
10

10

Total collectively evaluated allowance
8,847

9,703

 
 
 
Individually evaluated for impairment:
 
 
Mortgage loans:
 
 
Commercial business loans
41

41

Total individually evaluated allowance
41

41

Total loan loss allowance
$
8,888

$
9,744



13



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

 
For the Quarters Ended
September 30,
(Dollars in Thousands)
2014
2013
 
 
 
Allowance at beginning of period
$
9,744

$
14,935

 
 
 
Recovery from the allowance for loan losses
(818
)
(942
)
 
 
 
Recoveries:
 

 

Mortgage loans:
 

 

Single-family
109

168

Multi-family
71

11

Consumer loans
1

1

Total recoveries
181

180

 
 
 
Charge-offs:
 

 

Mortgage loans:
 

 

Single-family
(219
)
(690
)
Multi-family

(1,378
)
Total charge-offs
(219
)
(2,068
)
 
 
 
Net charge-offs
(38
)
(1,888
)
Balance at end of period
$
8,888

$
12,105

 
 

 

Allowance for loan losses as a percentage of gross loans held for investment
1.11
%
1.59
%
Net charge-offs as a percentage of average loans receivable, net, during the period (annualized)
0.02
%
0.82
%
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period
66.62
%
58.57
%


14



The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of allowance for loan losses at September 30, 2014 and June 30, 2014:

 
 
 
(In Thousands)
September 30, 2014
 
Recorded
Investment
Allowance
for Loan
Losses
(1)
 
Net
Investment
Mortgage loans:
 
 
 
Single-family:
 
 
 
With a related allowance
$
1,915

$
(406
)
$
1,509

Without a related allowance (2)
6,515


6,515

Total single-family loans
8,430

(406
)
8,024

 
 
 
 
Multi-family:
 
 
 
With a related allowance
271

(100
)
171

Without a related allowance (2)
2,194


2,194

Total multi-family loans
2,465

(100
)
2,365

 
 
 
 
Commercial real estate:
 
 
 
Without a related allowance (2)
2,317


2,317

Total commercial real estate loans
2,317


2,317

 
 
 
 
Commercial business loans:
 
 
 
With a related allowance
129

(44
)
85

Total commercial business loans
129

(44
)
85

 
 
 
 
Total non-performing loans
$
13,341

$
(550
)
$
12,791


(1) 
Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2) 
There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the individual loan balance.

15



 
 
 
(In Thousands)
June 30, 2014
 
Recorded
Investment
Allowance
for Loan
Losses
(1)
 
Net
Investment
Mortgage loans:
 
 
 
Single-family:
 
 
 
With a related allowance
$
5,480

$
(1,148
)
$
4,332

Without a related allowance (2)
6,067


6,067

Total single-family loans
11,547

(1,148
)
10,399

 
 
 
 
Multi-family:
 
 
 
With a related allowance
956

(354
)
602

Without a related allowance (2)
2,491


2,491

Total multi-family loans
3,447

(354
)
3,093

 
 
 
 
Commercial real estate:
 
 
 
Without a related allowance (2)
2,352


2,352

Total commercial real estate loans
2,352


2,352

 
 
 
 
Commercial business loans:
 
 
 
With a related allowance
138

(46
)
92

Total commercial business loans
138

(46
)
92

 
 
 
 
Total non-performing loans
$
17,484

$
(1,548
)
$
15,936


(1) 
Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2) 
There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the individual loan balance.

At September 30, 2014 and June 30, 2014, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

The following table describes the aging analysis (length of time on non-performing status) of non-performing loans, net of allowance for loan losses or charge offs, as of September 30, 2014:

 
(In Thousands)
3 Months or
Less
Over 3 to
6 Months
Over 6 to
12 Months
Over 12
Months
 
Total
Mortgage loans:
 
 
 
 
 
Single-family
$
24

$
1,551

$
480

$
5,969

$
8,024

Multi-family

409


1,956

2,365

Commercial real estate


452

1,865

2,317

Commercial business loans



85

85

Total
$
24

$
1,960

$
932

$
9,875

$
12,791


For the quarters ended September 30, 2014 and 2013, the Corporation’s average investment in non-performing loans was $15.0 million and $18.4 million, respectively.  The Corporation records payments on non-performing loans utilizing the cash basis or cost recovery method of accounting during the periods when the loans are on non-performing status.  For the quarters ended September 30, 2014 and 2013, interest income of $93,000 and $187,000, respectively, was recognized, based on cash receipts from loan payments on non-performing loans; and $147,000 and $104,000, respectively, was collected and applied to the net loan balances under the cost recovery method. Foregone interest income, which would have been recorded had the non-performing

16



loans been current in accordance with their original terms, amounted to $57,000 and $120,000 for the quarters ended September 30, 2014 and 2013, respectively, and was not included in the results of operations.

For the quarters ended September 30, 2014 and 2013, there were no loans that were newly modified from their original terms, re-underwritten or identified in the Corporation’s asset quality reports as restructured loans. During the quarters ended September 30, 2014 and 2013, no restructured loans were in default within a 12-month period subsequent to their original restructuring.  Additionally, during the quarters ended September 30, 2014 and 2013, there were no loans whose modifications were extended beyond the initial maturity of the modification.

As of September 30, 2014, the net outstanding balance of the 16 restructured loans was $6.0 million:  one was classified as special mention and remains on accrual status ($687,000); and 15 were classified as substandard ($5.4 million, all of which were on non-accrual status).  As of June 30, 2014, the net outstanding balance of the 17 restructured loans was $6.0 million:  one was classified as special mention on accrual status ($343,000); and 16 were classified as substandard ($5.6 million, all of which were on non-accrual status). Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.  Assets that do not currently expose the Corporation to sufficient risk to warrant adverse classification but possess weaknesses are designated as special mention and are closely monitored by the Corporation.  As of September 30, 2014 and June 30, 2014, $3.6 million or 60 percent, and $3.7 million or 62 percent, respectively, of the restructured loans were current with respect to their modified payment 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; 12 months for those loans that were restructured more than once; 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: 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 Corporation.  The Corporation 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 loan balances, net of allowance for loan losses, by loan type and non-accrual versus accrual status:

(In Thousands)
September 30, 2014
June 30, 2014
Restructured loans on non-accrual status:
 
 
Mortgage loans:
 
 
Single-family
$
2,861

$
2,957

Multi-family
1,620

1,760

Commercial real estate
796

800

Commercial business loans
85

92

Total
5,362

5,609

 
 
 
Restructured loans on accrual status:
 

 

Mortgage loans:
 

 

Single-family
687

343

Total
687

343

 
 
 
Total restructured loans
$
6,049

$
5,952



17



The following tables show the restructured loans by type, net of allowance for loan losses, at September 30, 2014 and June 30, 2014:

 
 
 
(In Thousands)
September 30, 2014
 
Recorded
Investment
Allowance
for Loan
Losses
(1)
 
Net
Investment
Mortgage loans:
 
 
 
Single-family:
 
 
 
With a related allowance
$
413

$
(103
)
$
310

Without a related allowance (2)
3,238


3,238

Total single-family loans
3,651

(103
)
3,548

 
 
 
 
Multi-family:
 
 
 
Without a related allowance (2)
1,620


1,620

Total multi-family loans
1,620


1,620

 
 
 
 
Commercial real estate:
 
 
 
Without a related allowance (2)
796


796

Total commercial real estate loans
796


796

 
 
 
 
Commercial business loans:
 
 
 
With a related allowance
129

(44
)
85

Total commercial business loans
129

(44
)
85

 
 
 
 
Total restructured loans
$
6,196

$
(147
)
$
6,049


(1) 
Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2) 
There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the individual loan balance.

18



 
 
 
(In Thousands)
June 30, 2014
 
Recorded
Investment
Allowance
for Loan
Losses
(1)
 
Net
Investment
Mortgage loans:
 
 
 
Single-family:
 
 
 
With a related allowance
$
994

$
(248
)
$
746

Without a related allowance (2)
2,554


2,554

Total single-family loans
3,548

(248
)
3,300

 
 
 
 
Multi-family:
 
 
 
Without a related allowance (2)
1,760


1,760

Total multi-family loans
1,760


1,760

 
 
 
 
Commercial real estate:
 
 
 
Without a related allowance (2)
800


800

Total commercial real estate loans
800


800

 
 
 
 
Commercial business loans:
 
 
 
With a related allowance
138

(46
)
92

Total commercial business loans
138

(46
)
92

 
 
 
 
Total restructured loans
$
6,246

$
(294
)
$
5,952


(1) 
Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2) 
There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the individual loan balance.

During the quarter ended September 30, 2014, three properties were acquired in the settlement of loans, while two previously foreclosed upon properties were sold and one real estate owned property was written off.  For the quarter ended September 30, 2013, three properties were acquired in the settlement of loans, while five previously foreclosed upon properties were sold. As of September 30, 2014, real estate owned was comprised of four properties with a net fair value of $2.7 million, primarily located in Southern California.  This compares to four real estate owned properties, primarily located in Southern California, with a net fair value of $2.5 million at June 30, 2014.  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 records 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, 2014 and June 30, 2014, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $128.2 million and $134.8 million, respectively.


19



The following table provides information at the dates indicated regarding undisbursed funds to borrowers on existing lines of credit with the Corporation as well as commitments to originate loans to be held for investment at the dates indicated below.

Commitments
September 30,
2014
June 30,
2014
(In Thousands)
 
 
 
 
 
Undisbursed loan funds - Construction loans
$
3,604

$
1,090

Undisbursed lines of credit – Mortgage loans
507

616

Undisbursed lines of credit – Commercial business loans
823

1,222

Undisbursed lines of credit – Consumer loans
710

774

Commitments to extend credit on loans to be held for investment
11,472

2,247

Total
$
17,116

$
5,949


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, to be announced (“TBA”) MBS trades, put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition.  At September 30, 2014, $1.8 million was included in other assets and $503,000 was included in other liabilities; at June 30, 2014, $2.6 million was included in other assets and $1.4 million 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 following table provides information regarding the allowance for loan losses for the undisbursed funds and commitments to extend credit on loans to be held for investment for the quarters ended September 30, 2014 and 2013.

 
For the Quarters
Ended
September 30,
(In Thousands)
2014
2013
Balance, beginning of the period
$
61

$
115

Provision (recovery)
47

(26
)
Balance, end of the period
$
108

$
89


The net impact of derivative financial instruments on the gain on sale of loans contained in the Condensed Consolidated Statements of Operations during the quarters ended September 30, 2014 and 2013 was as follows:

 
For the Quarters
Ended
September 30,
Derivative Financial Instruments
2014
2013
(In Thousands)
 
 
Commitments to extend credit on loans to be held for sale
$
(781
)
$
4,397

Mandatory loan sale commitments and TBA MBS trades
937

(11,248
)
Option contracts
(105
)
108

Total net gain (loss)
$
51

$
(6,743
)


20



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

 
September 30, 2014
 
June 30, 2014
Derivative Financial Instruments
Amount
Fair
Value
 
Amount
Fair
Value
(In Thousands)
 
 
 
 
 
Commitments to extend credit on loans to be held for sale (1)
$
116,695

$
1,785

 
$
132,567

$
2,566

Best efforts loan sale commitments
(22,531
)

 
(18,069
)

Mandatory loan sale commitments and TBA MBS trades
(253,286
)
(491
)
 
(258,021
)
(1,428
)
Option contracts
(10,000
)
33

 
(10,000
)

Total
$
(169,122
)
$
1,327

 
$
(153,523
)
$
1,138


(1) 
Net of 27.5 percent at September 30, 2014 and 28.0 percent at June 30, 2014 of commitments which management has estimated may not fund.


Note 8: Income Taxes

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.

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.  The Corporation maintains net deferred income tax assets for deductible temporary tax differences, such as loss reserves, deferred compensation, non-accrued interest and unrealized gains. The Corporation did not have any liabilities for uncertain tax positions or any known unrecognized tax benefit at September 30, 2014 or June 30, 2014.

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.  Also, the Internal Revenue Service completed a review of the Corporation’s income tax returns for fiscal 2006 and 2007; and the California Franchise Tax Board completed a review of the Corporation’s income tax returns for fiscal 2009 and 2010. Tax years subsequent to fiscal 2010 remain subject to federal examination, as well as the California state income tax returns for years subsequent to fiscal 2010 are subject to future examination by state taxing authorities.  The Corporation believes that it has adequately provided or paid income tax on all matters not yet resolved with federal and state taxing authorities.

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 2014, the Corporation paid $4,000 in interest charges to the State of California tax authority for the fiscal 2010 tax obligation. There were no tax penalties or interest charges for the quarter ended September 30, 2013.  



21



Note 9: Fair Value of Financial Instruments

The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” and elected the fair value option pursuant to ASC 825, “Financial Instruments” 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 at the dates indicated 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, 2014:
 
 
 
Loans held for sale, measured at fair value
$
180,558

$
174,564

$
5,994

 
 
 
 
As of June 30, 2014:
 
 
 
Loans held for sale, measured at fair value
$
158,883

$
152,192

$
6,691


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,” 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 ("MSA") and real estate owned are measured at fair value on a nonrecurring basis.

Investment securities are primarily comprised of U.S. government agency MBS, U.S. government sponsored enterprise MBS, private issue CMO and common stock of a community development financial institution.  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 MBS and debt securities (Level 2), broker

22



price indications for similar securities in non-active markets for its fair value measurement of CMO (Level 3) and pricing indications from recent transaction in non-active markets for common stock of a community development financial institution (Level 3).

Derivative financial instruments are comprised of commitments to extend credit on loans to be held for sale, mandatory loan sale commitments, TBA MBS trades and option contracts.  The fair value of TBA MBS trades is determined using quoted secondary-market prices (Level 2).  The fair values of other derivative financial instruments are determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment, including management's estimate of loan commitments which may not fund (Level 3).

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 TBA MBS trades.  If no such quoted price exists, the fair value of a loan is determined by quoted prices for a similar loan or loans (Level 2).

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.  The non-performing loans are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.  The fair value of a non-performing loan is determined based on an observable market price or current appraised value, net of estimated disposition costs, 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 restructured loans, the fair value is derived from discounted cash flow analysis (Level 3), except for those which are in the process of foreclosure or 90 days delinquent for which the fair value is derived from the appraised value of the collateral (Level 2).  For other non-performing loans which are not restructured loans, the fair value is derived from relative value analysis: historical experience and management estimates by loan type for which collectively evaluated allowances are assigned (Level 3); or the appraised value of the collateral for loans which are in the process of foreclosure or where borrowers file bankruptcy (Level 2).  For non-performing commercial real estate loans, the fair value is derived from the appraised value of the collateral (Level 2). Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional allowance 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 MSA, which amortizes the MSA in proportion to and over the period of estimated net servicing income and assesses the MSA for impairment based on fair value at each reporting date.  The fair value of MSA 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 (Level 3).

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 MSA (Level 3).

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 estimated disposition costs (Level 2).

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.


23



The following fair value hierarchy tables present information at the dates indicated about the Corporation’s assets measured at fair value on a recurring basis:
 
 
Fair Value Measurement at September 30, 2014 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
 
 
 
 
Investment securities:
 
 
 
 
U.S. government agency MBS
$

$
8,714

$

$
8,714

U.S. government sponsored enterprise MBS

6,001


6,001

Private issue CMO


828

828

Common stock - community development financial institution


250

250

Investment securities

14,715

1,078

15,793

 
 
 
 
 
Loans held for sale, at fair value

180,558


180,558

Interest-only strips


70

70

 
 
 
 
 
Derivative assets:
 
 
 
 
Commitments to extend credit on loans to be held for sale


1,797

1,797

Option contracts


33

33

Derivative assets


1,830

1,830

Total assets
$

$
195,273

$
2,978

$
198,251

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative liabilities:
 
 
 
 
Commitments to extend credit on loans to be held for sale
$

$

$
12

$
12

Mandatory loan sale commitments


245

245

TBA MBS trades

246


246

Derivative liabilities

246

257

503

Total liabilities
$

$
246

$
257

$
503


24



 
Fair Value Measurement at June 30, 2014 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
 
 
 
 
Investment securities:
 
 
 
 
U.S. government agency MBS
$

$
9,109

$

$
9,109

U.S. government sponsored enterprise MBS

6,385


6,385

Private issue CMO


853

853

Investment securities

15,494

853

16,347

 
 
 
 
 
Loans held for sale, at fair value

158,883


158,883

Interest-only strips


62

62

 
 
 
 
 
Derivative assets:
 
 
 
 
Commitments to extend credit on loans to be held for sale


2,570

2,570

Derivative assets


2,570

2,570

Total assets
$

$
174,377

$
3,485

$
177,862

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative liabilities:
 
 
 
 
Commitments to extend credit on loans to be held for sale
$

$

$
4

$
4

Mandatory loan sale commitments


93

93

TBA MBS trades

1,335


1,335

Derivative liabilities

1,335

97

1,432

Total liabilities
$

$
1,335

$
97

$
1,432



25



The following tables summarize reconciliations of the beginning and ending balances during the periods shown of recurring fair value measurements recognized in the Condensed Consolidated Statements of Financial Condition using Level 3 inputs:

 
For the Quarter Ended September 30, 2014
 
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
 
 
 
(In Thousands)
 
 
Private
Issue
CMO
Common stock (1)
 
 
Interest-
Only
Strips
Loan
Commit-
ments to
Originate (2)
Manda-
tory
Commit-
ments (3)
 
 
 
Option
Contracts
 
 
 
 
Total
Beginning balance at June 30, 2014
$
853

$

$
62

$
2,566

$
(93
)
$

$
3,388

Total gains or losses (realized/
  unrealized):
 
 
 
 
 
 
 
Included in earnings



(781
)
(156
)
(105
)
(1,042
)
Included in other comprehensive
 loss
(1
)

8




7

Purchases

250