PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INC	prov-2015930x10qxex312.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INC	prov-2015930x10qxex321.htm
EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INC	prov-2015930x10qxex322.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INC	prov-2015930x10qxex311.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, 2015



[ ]	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 2, 2015
Common stock, $ 0.01 par value, per share		8,432,678 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, 2015 and June 30, 2015	1
	Condensed Consolidated Statements of Operations
		for the Quarters Ended September 30, 2015 and 2014	2
	Condensed Consolidated Statements of Comprehensive Income
		for the Quarters Ended September 30, 2015 and 2014	3
	Condensed Consolidated Statements of Stockholders’ Equity
		for the Quarters Ended September 30, 2015 and 2014	4
	Condensed Consolidated Statements of Cash Flows
		for the Three Months Ended September 30, 2015 and 2014	5
	Notes to Unaudited Interim Condensed Consolidated Financial Statements		6

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

	General		42
	Safe-Harbor Statement		43
	Critical Accounting Policies		44
	Executive Summary and Operating Strategy		46
	Off-Balance Sheet Financing Arrangements and Contractual Obligations		47
	Comparison of Financial Condition at September 30, 2015 and June 30, 2015		47
	Comparison of Operating Results
		for the Quarters Ended September 30, 2015 and 2014	49
	Asset Quality		54
	Loan Volume Activities		63
	Liquidity and Capital Resources		64
	Supplemental Information		66

ITEM 3 -	Quantitative and Qualitative Disclosures about Market Risk		67

ITEM 4 -	Controls and Procedures		68

PART II -	OTHER INFORMATION

ITEM 1 -	Legal Proceedings		69
ITEM 1A -	Risk Factors		69
ITEM 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		69
ITEM 3 -	Defaults Upon Senior Securities		70
ITEM 4 -	Mine Safety Disclosures		70
ITEM 5 -	Other Information		70
ITEM 6 -	Exhibits		70

SIGNATURES			73

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Financial Condition

In Thousands, Except Share Information



	(Unaudited)
	September 30, 2015			June 30, 2015
Assets
Cash and cash equivalents	$	156,146		$	81,403
Investment securities – held to maturity, at cost	800			800
Investment securities – available for sale, at fair value	13,461			14,161
Loans held for investment, net of allowance for loan losses of $9,034 and $8,724, respectively; includes $4,036 and $4,518 at fair value, respectively	805,686			814,234
Loans held for sale, at fair value	163,644			224,715
Accrued interest receivable	2,640			2,839
Real estate owned, net	3,674			2,398
Federal Home Loan Bank (“FHLB”) – San Francisco stock	8,094			8,094
Premises and equipment, net	5,259			5,417
Prepaid expenses and other assets	17,833			20,494

Total assets	$	1,177,237		$	1,174,555

Liabilities and Stockholders’ Equity

Liabilities:
Non interest-bearing deposits	$	68,101		$	67,538
Interest-bearing deposits	856,765			856,548
Total deposits	924,866			924,086

Borrowings	91,351			91,367
Accounts payable, accrued interest and other liabilities	21,766			17,965
Total liabilities	1,037,983			1,033,418

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; 17,779,865 and 17,766,865 shares issued; 8,429,678 and 8,634,607 shares outstanding, respectively)	178			177
Additional paid-in capital	89,278			88,893
Retained earnings	189,617			188,206
Treasury stock at cost (9,350,187 and 9,132,258 shares, respectively)	(140,119		)	(136,470		)
Accumulated other comprehensive income, net of tax	300			331

Total stockholders’ equity	139,254			141,137

Total liabilities and stockholders’ equity	$	1,177,237		$	1,174,555

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

In Thousands, Except Per Share Information



	Quarter Ended September 30,
	2015			2014
Interest income:
Loans receivable, net	$	9,490		$	9,195
Investment securities	67			76
FHLB – San Francisco stock	200			144
Interest-earning deposits	100			94
Total interest income	9,857			9,509

Interest expense:
Checking and money market deposits	117			104
Savings deposits	168			157
Time deposits	858			976
Borrowings	648			335
Total interest expense	1,791			1,572

Net interest income	8,066			7,937
Recovery from the allowance for loan losses	(38		)	(818		)
Net interest income, after recovery from the allowance for loan losses	8,104			8,755

Non-interest income:
Loan servicing and other fees	111			268
Gain on sale of loans, net	8,924			7,652
Deposit account fees	610			626
Gain (loss) on sale and operations of real estate owned acquired in the settlement of loans, net	229			(19		)
Card and processing fees	362			356
Other	213			227
Total non-interest income	10,449			9,110

Non-interest expense:
Salaries and employee benefits	10,792			9,581
Premises and occupancy	1,108			1,348
Equipment	379			472
Professional expenses	500			464
Sales and marketing expenses	262			331
Deposit insurance premiums and regulatory assessments	262			273
Other	1,057			1,270
Total non-interest expense	14,360			13,739

Income before income taxes	4,193			4,126
Provision for income taxes	1,750			1,736
Net income	$	2,443		$	2,390

Basic earnings per share	$	0.29		$	0.26
Diluted earnings per share	$	0.28		$	0.25
Cash dividends per share	$	0.12		$	0.11

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

In Thousands



	For the Quarters Ended September 30,
	2015			2014
Net income	$	2,443		$	2,390

Change in unrealized holding loss on securities available for sale	(53		)	(16		)
Reclassification of (gains) losses to net income	—			—
Other comprehensive loss, before income taxes	(53		)	(16		)

Income tax benefit	(22		)	(7		)
Other comprehensive loss	(31		)	(9		)

Total comprehensive income	$	2,412		$	2,381

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

In Thousands, Except Share Information

For the Quarters Ended September 30, 2015 and 2014:



	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, 2015	8,634,607		$	177	$	88,893	$	188,206		$	(136,470	)	$	331		$	141,137

Net income							2,443									2,443
Other comprehensive loss													(31		)	(31		)
Purchase of treasury stock⁽¹⁾	(220,429	)								(3,649		)				(3,649		)
Exercise of stock options	13,000		1		95											96
Distribution of restricted stock	2,500															—
Amortization of restricted stock					161											161
Stock options expense					128											128
Tax effect from stock based compensation					1											1
Cash dividends⁽²⁾							(1,032		)							(1,032		)

Balance at September 30, 2015	8,429,678		$	178	$	89,278	$	189,617		$	(140,119	)	$	300		$	139,254

⁽¹⁾Includes the repurchase of 4,500 shares from a cashless stock option exercise.

⁽²⁾Cash dividends of $0.12 per share were paid in the quarter ended September 30, 2015.



	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⁾								(1,023		)							(1,023		)

Balance at September 30, 2014	9,152,065		$	177	$	86,759		$	183,825		$	(126,175	)	$	377		$	144,963

⁽¹⁾Cash dividends of $0.11 per share were paid in the quarter ended September 30, 2014.

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In Thousands)



	Three Months Ended September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	2,443		$	2,390
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization	307			611
Recovery from the allowance for loan losses	(38		)	(818		)
Unrealized gain on real estate owned	(161		)	(17		)
Gain on sale of loans, net	(8,924		)	(7,652		)
(Gain) loss on sale of real estate owned, net	(30		)	9
Stock-based compensation	289			143
(Benefit) provision for deferred income taxes	(632		)	176
Tax effect from stock based compensation	(1		)	16
Increase (decrease) in accounts payable and other liabilities	1,617			(366		)
Decrease in prepaid expenses and other assets	1,711			1,852
Loans originated for sale	(540,289		)	(513,770		)
Proceeds from sale of loans	613,940			498,413
Net cash provided by (used for) operating activities	70,232			(19,013		)

Cash flows from investing activities:
Decrease (increase) in loans held for investment, net	7,289			(16,774		)
Principal payments from investment securities available for sale	650			780
Purchase of investment securities available for sale	—			(250		)
Proceeds from sale of real estate owned	463			502
Purchase of premises and equipment	(71		)	(168		)
Net cash provided by (used for) investing activities	8,331			(15,910		)

Cash flows from financing activities:
Increase in deposits, net	780			4,562
Repayments of long-term borrowings	(16		)	(15		)
Exercise of stock options	96			14
Tax effect from stock based compensation	1			(16		)
Cash dividends	(1,032		)	(1,023		)
Treasury stock purchases	(3,649		)	(2,398		)
Net cash (used for) provided by financing activities	(3,820		)	1,124

Net increase (decrease) in cash and cash equivalents	74,743			(33,799		)
Cash and cash equivalents at beginning of period	81,403			118,937
Cash and cash equivalents at end of period	$	156,146		$	85,138
Supplemental information:
Cash paid for interest	$	1,788		$	1,562
Cash paid for income taxes	$	—		$	—
Transfer of loans held for sale to held for investment	$	1,552		$	678
Real estate acquired in the settlement of loans	$	1,006		$	927

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

PROVIDENT FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

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 statement of financial condition at June 30, 2015 is 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, 2015. The results of operations for the quarter ended September 30, 2015 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2016.

Note 2: Accounting Standard Updates (“ASU”)

ASU 2014-04:

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("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 did not have a material impact on its consolidated financial statements.

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 did not have a material impact on its consolidated financial statements.

ASU 2015-05:

In April 2015, the FASB issued ASU 2015-05, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40).” The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP

for a customer’s accounting for service contracts. In addition, the guidance in this ASU supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. For public entities, the FASB decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 and early adoption is permitted. The Corporation's adoption of this ASU is not expected have a material impact on its consolidated financial statements.

ASU 2015-10:

In June 2015, the FASB issued ASU 2015-10, "Technical Corrections and Improvements." The amendments in this ASU cover a wide range of topics in the Codification. The reason for each amendment is provided before each amendment for clarity and ease of understanding. The amendments generally related to: (1) amendments related to differences between original guidance and the codification, (2) guidance clarification and reference corrections, (3) simplification and (4) minor improvements. These amendments improve the guidance and are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this ASU. The amendments in this ASU that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this ASU. The Corporation's adoption of this ASU is not expected have a material impact on its consolidated financial statements.

ASU 2015-12:

In July 2015, the FASB issued ASU 2015-12, "Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force)." The amendments of this ASU (i) require fully benefit-responsive investment contracts to be measured, presented and disclosed only at contract value, not fair value; (ii) simplify the investment disclosure requirements; and (iii) provide a measurement date practical expedient for employee benefit plans. This ASU is effective for fiscal years beginning after December 15, 2015, earlier adoption is permitted. The Corporation's adoption of this ASU is not expected 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, 2015 and 2014, there were outstanding options to purchase 1.0 million shares and 1.1 million shares of the Corporation’s common stock, respectively, of which 236,500 shares and 271,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of September 30, 2015 and 2014, there were outstanding restricted stock awards of 197,500 shares and 266,500 shares, respectively, all of which have dilutive effects.

The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2015 and 2014, respectively.



(In Thousands, Except Earnings Per Share)	For the Quarters Ended September 30,
	2015		2014
Numerator:
Net income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders	$	2,443	$	2,390

Denominator:
Denominator for basic earnings per share:
Weighted-average shares	8,566		9,253

Effect of dilutive shares:
Stock options	111		173
Restricted stock	67		42

Denominator for diluted earnings per share:
Adjusted weighted-average shares and assumed conversions	8,744		9,468

Basic earnings per share	$	0.29	$	0.26
Diluted earnings per share	$	0.28	$	0.25

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, 2015 and 2014, respectively.



	For the Quarter Ended September 30, 2015
(In Thousands)	Provident Bank		Provident Bank Mortgage			Consolidated Totals
Net interest income	$	6,903	$	1,163		$	8,066
Provision (recovery) for loan losses	12		(50		)	(38		)
Net interest income, after provision (recovery) for loan losses	6,891		1,213			8,104

Non-interest income:
Loan servicing and other fees ⁽¹⁾	144		(33		)	111
Gain on sale of loans, net ⁽²⁾	1		8,923			8,924
Deposit account fees	610		—			610
Gain on sale and operations of real estate owned acquired in the settlement of loans, net	224		5			229
Card and processing fees	362		—			362
Other	213		—			213
Total non-interest income	1,554		8,895			10,449

Non-interest expense:
Salaries and employee benefits	4,553		6,239			10,792
Premises and occupancy	696		412			1,108
Operating and administrative expenses	989		1,471			2,460
Total non-interest expense	6,238		8,122			14,360
Income before income taxes	2,207		1,986			4,193
Provision for income taxes	915		835			1,750
Net income	$	1,292	$	1,151		$	2,443
Total assets, end of period	$	1,013,345	$	163,892		$	1,177,237


⁽¹⁾	Includes an inter-company charge of $65 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 $108 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.



	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.

Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 2015 and June 30, 2015 were as follows:



September 30, 2015	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⁾	$	7,305	$	268	$	—		$	7,573	$	7,573
U.S. government sponsored enterprise MBS	4,765		281		—			5,046		5,046
Private issue CMO ⁽²⁾	683		8		—			691		691
Common stock - community development financial institution	250		—		(99		)	151		151
Total investment securities - available for sale	$	13,003	$	557	$	(99	)	$	13,461	$	13,461
Total investment securities	$	13,803	$	557	$	(99	)	$	14,261	$	14,261


⁽¹⁾	Mortgage-Backed Securities (“MBS”).


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



June 30, 2015	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	$	7,613	$	293	$	—		$	7,906	$	7,906
U.S. government sponsored enterprise MBS	5,083		304		—			5,387		5,387
Private issue CMO	708		9		—			717		717
Common stock - community development financial institution	250		—		(99		)	151		151
Total investment securities - available for sale	$	13,654	$	606	$	(99	)	$	14,161	$	14,161
Total investment securities	$	14,454	$	606	$	(99	)	$	14,961	$	14,961

In the first quarters of fiscal 2016 and 2015, the Corporation received MBS principal payments of $650,000 and $780,000, respectively, and did not purchase or sell investment securities, except the purchase in the first quarter of fiscal 2015 of $250,000 in the common stock of a community development financial institution to help fulfill the Bank's Community Reinvestment Act obligation.

The Corporation held investments with unrealized loss position at September 30, 2015 and June 2015 of $99,000 at both dates.



As of September 30, 2015	Unrealized Holding Losses				Unrealized Holding Losses				Unrealized Holding Losses
(In Thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses

Common stock⁽¹⁾	$	151	$	99	$	—	$	—	$	151	$	99
Total	$	151	$	99	$	—	$	—	$	151	$	99



As of June 30, 2015	Unrealized Holding Losses				Unrealized Holding Losses				Unrealized Holding Losses
(In Thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses

Common stock⁽¹⁾	$	151	$	99	$	—	$	—	$	151	$	99
Total	$	151	$	99	$	—	$	—	$	151	$	99


⁽¹⁾	Common stock of a community development financial institution.

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. As of September 30, 2015, the unrealized holding loss was less than 12 months on the common stock, primarily the result of the dilutive nature of the institution's recent merger with another community development financial institution. Based on the nature of the investment, management concluded that such unrealized loss was not other than temporary as of September 30, 2015. The Corporation intends and has the ability to hold the common stock and will not likely be required to sell before realizing a full recovery. The Corporation does not believe that there are any other-than-temporary impairments at September 30, 2015 and 2014; therefore, no impairment losses have been recorded for the quarters ended September 30, 2015 and 2014.

Contractual maturities of investment securities as of September 30, 2015 and June 30, 2015 were as follows:



	September 30, 2015				June 30, 2015
(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	12,753		13,310		13,404		14,010
No stated maturity (common stock)	250		151		250		151
Total investment securities - available for sale	$	13,003	$	13,461	$	13,654	$	14,161
Total investment securities	$	13,803	$	14,261	$	14,454	$	14,961

Note 6: Loans Held for Investment

Loans held for investment consisted of the following:



(In Thousands)	September 30, 2015			June 30, 2015
Mortgage loans:
Single-family	$	356,963		$	365,961
Multi-family	355,442			347,020
Commercial real estate	94,580			100,897
Construction	6,185			8,191
Other	72			—
Commercial business loans	399			666
Consumer loans	243			244
Total loans held for investment, gross	813,884			822,979

Undisbursed loan funds	(2,691		)	(3,360		)
Advance payments of escrows	193			199
Deferred loan costs, net	3,334			3,140
Allowance for loan losses	(9,034		)	(8,724		)
Total loans held for investment, net	$	805,686		$	814,234

As of September 30, 2015, the Corporation had $13.6 million in mortgage loans that are subject to negative amortization, consisting of $10.2 million in multi-family loans, $3.2 million in single-family loans and $213,000 in commercial real estate loans. This compares to $14.1 million of negative amortization mortgage loans at June 30, 2015, consisting of $10.7 million in multi-family loans, $3.2 million in single-family loans and $227,000 in commercial real estate loans. During the first quarters of fiscal 2016 and 2015, 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, 2015 and June 30, 2015, the interest-only ARM loans were $131.4 million and $152.6 million, or 16.1% and 18.6% of loans held for investment, respectively. As of September 30, 2015, the Corporation had $4.0 million of single-family loans, 12 loans, held for investment which were originated for sale but were subsequently transferred to held for investment and are carried at fair value. This compares to $4.5 million of single-family loans, 13 loans, held for investment at June 30, 2015 which were originated for sale but were subsequently transferred to held for investment and are carried at fair value.

The following table sets forth information at September 30, 2015 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 3% of loans held for investment at September 30, 2015, as compared to 4% at June 30, 2015. 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	$	287,251	$	5,167	$	48,876	$	1,984	$	13,685	$	356,963
Multi-family	66,947		98,626		178,461		8,332		3,076		355,442
Commercial real estate	13,634		29,099		46,411		—		5,436		94,580
Construction	720		—		375		—		5,090		6,185
Other	—		—		—		—		72		72
Commercial business loans	138		—		—		—		261		399
Consumer loans	236		—		—		—		7		243
Total loans held for investment, gross	$	368,926	$	132,892	$	274,123	$	10,316	$	27,627	$	813,884

The Corporation has developed an internal loan grading system to evaluate and quantify the Bank’s loans held for investment portfolio with respect to quality and risk. Management continually evaluates the credit quality of the Corporation’s loan portfolio and conducts a quarterly review of the adequacy of the allowance for loan losses using quantitative and qualitative methods. The Corporation has adopted an internal risk rating policy in which each loan is rated for credit quality with a rating of pass, special mention, substandard, doubtful or loss. The two primary components that are used during the loan review process to determine the proper allowance levels are individually evaluated allowances and collectively evaluated allowances. Quantitative loan loss factors are developed by determining the historical loss experience, expected future cash flows, discount rates and collateral fair values, among others. Qualitative loan loss factors are developed by assessing general economic indicators such as gross domestic product, retail sales, unemployment rates, employment growth, California home sales and median California home prices. The Corporation assigns individual factors for the quantitative and qualitative methods for each loan category and each internal risk rating.

The Corporation categorizes all of the loans held for investment into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:


▪	Pass - These loans range from minimal credit risk to average however still acceptable credit risk. The likelihood of loss is considered remote.


▪	Special mention - A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the bank is currently protected and loss is considered unlikely and not imminent.

▪

Substandard - A substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.


▪	Doubtful - A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.


▪	Loss - A loss loan is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.

The following tables summarize gross loans held for investment by loan types and risk category at the dates indicated:



		September 30, 2015
(In Thousands)		Single-family		Multi-family		Commercial Real Estate		Construction		Other Mortgage		Commercial Business		Consumer		Total

Pass		$	337,156	$	350,923	$	92,628	$	6,185	$	72	$	292	$	243	$	787,499
Special Mention		7,187		408		—		—		—		—		—		7,595
Substandard		12,620		4,111		1,952		—		—		107		—		18,790
	Total loans held for investment, gross	$	356,963	$	355,442	$	94,580	$	6,185	$	72	$	399	$	243	$	813,884



		June 30, 2015
(In Thousands)		Single-family		Multi-family		Commercial Real Estate		Construction		Commercial Business		Consumer		Total

Pass		$	347,301	$	339,093	$	98,254	$	8,191	$	557	$	244	$	793,640
Special Mention		7,766		413		—		—		—		—		8,179
Substandard		10,894		7,514		2,643		—		109		—		21,160
	Total loans held for investment, gross	$	365,961	$	347,020	$	100,897	$	8,191	$	666	$	244	$	822,979

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. The 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.

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 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 or collateral's fair value less estimated selling costs 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, 2015 and June 30, 2015:



(In Thousands)	September 30, 2015		June 30, 2015
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	6,261	$	5,202
Multi-family	1,943		2,616
Commercial real estate	697		734
Construction	40		42
Other	2		—
Commercial business loans	13		23
Consumer loans	9		9
Total collectively evaluated allowance	8,965		8,626

Individually evaluated for impairment:
Mortgage loans:
Single-family	49		78
Commercial business loans	20		20
Total individually evaluated allowance	69		98
Total loan loss allowance	$	9,034	$	8,724

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)	2015			2014

Allowance at beginning of period	$	8,724		$	9,744

Recovery from the allowance for loan losses	(38		)	(818		)

Recoveries:
Mortgage loans:
Single-family	69			109
Multi-family	56			71
Commercial real estate	216			—
Commercial business loans	85			—
Consumer loans	—			1
Total recoveries	426			181

Charge-offs:
Mortgage loans:
Single-family	(78		)	(219		)
Total charge-offs	(78		)	(219		)

Net recoveries (charge-offs)	348			(38		)
Balance at end of period	$	9,034		$	8,888

Allowance for loan losses as a percentage of gross loans held for investment	1.11		%	1.11		%
Net (recoveries) charge-offs as a percentage of average loans receivable, net, during the period (annualized)	(0.14		)%	0.02		%
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period	57.33		%	66.62		%

The following tables denote the past due status of the Corporation's loans held for investment, gross, at the dates indicated.



		September 30, 2015
(In Thousands)		Current		30-89 Days Past Due		Non-Accrual ⁽¹⁾		Total Loans Held for Investment, Gross

Mortgage loans:
	Single-family	$	343,126	$	1,217	$	12,620	$	356,963
	Multi-family	353,467		—		1,975		355,442
	Commercial real estate	93,564		—		1,016		94,580
	Construction	6,185		—		—		6,185
	Other	72		—		—		72
Commercial business loans		292		—		107		399
Consumer loans		241		2		—		243
	Total loans held for investment, gross	$	796,947	$	1,219	$	15,718	$	813,884

⁽¹⁾ All loans 90 days or greater past due are placed on non-accrual status.



		June 30, 2015
(In Thousands)		Current		30-89 Days Past Due		Non-Accrual ⁽¹⁾		Total Loans Held for Investment, Gross

Mortgage loans:
	Single-family	$	354,082	$	1,335	$	10,544	$	365,961
	Multi-family	344,774		—		2,246		347,020
	Commercial real estate	99,198		—		1,699		100,897
	Construction	8,191		—		—		8,191
Commercial business loans		557		—		109		666
Consumer loans		244		—		—		244
	Total loans held for investment, gross	$	807,046	$	1,335	$	14,598	$	822,979

⁽¹⁾ All loans 90 days or greater past due are placed on non-accrual status.

The following tables summarize the Corporation’s allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated.



		Quarter Ended September 30, 2015
(In Thousands)		Single-family			Multi-family			Commercial Real Estate			Construction			Other Mortgage			Commercial Business			Consumer			Total
Allowance for loan losses:
Allowance at beginning of period		$	5,280		$	2,616		$	734		$	42		$	—		$	43		$	9		$	8,724
Provision (recovery) for loan losses		1,039			(729		)	(253		)	(2		)	2			(95		)	—			(38		)
Recoveries		69			56			216			—			—			85			—			426
Charge-offs		(78		)	—			—			—			—			—			—			(78		)
	Allowance for loan losses, end of period	$	6,310		$	1,943		$	697		$	40		$	2		$	33		$	9		$	9,034

Allowance for loan losses:
Individually evaluated for impairment		$	49		$	—		$	—		$	—		$	—		$	20		$	—		$	69
Collectively evaluated for impairment		6,261			1,943			697			40			2			13			9			8,965
	Allowance for loan losses, end of period	$	6,310		$	1,943		$	697		$	40		$	2		$	33		$	9		$	9,034

Loans held for investment:
Individually evaluated for impairment		$	8,204		$	1,975		$	1,016		$	—		$	—		$	107		$	—		$	11,302
Collectively evaluated for impairment		348,759			353,467			93,564			6,185			72			292			243			802,582
	Total loans held for investment, gross	$	356,963		$	355,442		$	94,580		$	6,185		$	72		$	399		$	243		$	813,884
Allowance for loan losses as a percentage of gross loans held for investment		1.77		%	0.55		%	0.74		%	0.65		%	2.78		%	8.27		%	3.70		%	1.11		%



		Quarter Ended September 30, 2014
(In Thousands)		Single-family			Multi-family			Commercial Real Estate			Construction			Commercial Business			Consumer			Total
Allowance for loan losses:
Allowance at beginning of period		$	5,476		$	3,142		$	989		$	35		$	92		$	10		$	9,744
(Recovery) provision for loan losses		(714		)	(91		)	25			(30		)	(7		)	(1		)	(818		)
Recoveries		109			71			—			—			—			1			181
Charge-offs		(219		)	—			—			—			—			—			(219		)
	Allowance for loan losses, end of period	$	4,652		$	3,122		$	1,014		$	5		$	85		$	10		$	8,888

Allowance for loan losses:
Individually evaluated for impairment		$	—		$	—		$	—		$	—		$	41		$	—		$	41
Collectively evaluated for impairment		4,652			3,122			1,014			5			44			10			8,847
	Allowance for loan losses, end of period	$	4,652		$	3,122		$	1,014		$	5		$	85		$	10		$	8,888

Loans held for investment:
Individually evaluated for impairment		$	6,515		$	2,194		$	2,317		$	—		$	118		$	—		$	11,144
Collectively evaluated for impairment		370,718			312,680			98,410			4,378			991			271			787,448
	Total loans held for investment, gross	$	377,233		$	314,874		$	100,727		$	4,378		$	1,109		$	271		$	798,592
Allowance for loan losses as a percentage of gross loans held for investment		1.23		%	0.99		%	1.01		%	0.11		%	7.66		%	3.69		%	1.11		%

The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the periods indicated. Generally, a loan is placed on non-accrual status when it becomes 90 days past due as to principal or interest or if the loan is deemed impaired, after considering economic and business conditions and collection efforts, where the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured. A non-performing loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected on a timely basis. Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell to establish realizable value. This analysis may identify a specific impairment amount needed or may conclude that no reserve is needed. Loans without a related allowance reserve have not been individually evaluated for impairment, but have been included in pools of homogeneous loans for evaluation of related allowance reserves.



			At September 30, 2015
			Unpaid										Net
			Principal		Related			Recorded					Recorded
(In Thousands)			Balance		Charge-offs			Investment		Allowance⁽¹⁾			Investment

Mortgage loans:
	Single-family:
		With a related allowance	$	5,078	$	—		$	5,078	$	(973	)	$	4,105
		Without a related allowance⁽²⁾	9,387		(1,806		)	7,581		—			7,581
	Total single-family		14,465		(1,806		)	12,659		(973		)	11,686

	Multi-family:
		Without a related allowance⁽²⁾	3,179		(1,204		)	1,975		—			1,975
	Total multi-family		3,179		(1,204		)	1,975		—			1,975

	Commercial real estate:
		Without a related allowance⁽²⁾	1,016		—			1,016		—			1,016
	Total commercial real estate		1,016		—			1,016		—			1,016

Commercial business loans:
	With a related allowance		107		—			107		(20		)	87
Total commercial business loans			107		—			107		(20		)	87

Total non-performing loans			$	18,767	$	(3,010	)	$	15,757	$	(993	)	$	14,764

⁽¹⁾ Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan, and fair value credit adjustments.

⁽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 loan balance.

PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q - November 9, 2015

Attached files