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EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20151231x10qxex311.htm
EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20151231x10qxex322.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20151231x10qxex312.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20151231x10qxex321.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
December 31, 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 February 2, 2016
Common stock, $ 0.01 par value, per share
 
8,372,023 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 December 31, 2015 and June 30, 2015
 
Condensed Consolidated Statements of Operations
 
 
 
for the Quarters and Six Months Ended December 31, 2015 and 2014
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
for the Quarters and Six Months Ended December 31, 2015 and 2014
 
Condensed Consolidated Statements of Stockholders’ Equity
 
 
 
for the Quarters and Six Months Ended December 31, 2015 and 2014
 
Condensed Consolidated Statements of Cash Flows
 
 
 
for the Six Months Ended December 31, 2015 and 2014
 
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 December 31, 2015 and June 30, 2015
 
Comparison of Operating Results
 
 
 
for the Quarters and Six Months Ended December 31, 2015 and 2014
 
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
 
December 31,
2015
June 30,
2015
 
(Unaudited)
 
Assets
 
 
Cash and cash equivalents
$
111,359

$
81,403

Investment securities – held to maturity, at cost
10,963

800

Investment securities – available for sale, at fair value
12,678

14,161

Loans held for investment, net of allowance for loan losses of
$8,768 and $8,724, respectively; includes $4,210 and $4,518 at fair value, respectively
813,888

814,234

Loans held for sale, at fair value
175,998

224,715

Accrued interest receivable
2,612

2,839

Real estate owned, net
4,913

2,398

Federal Home Loan Bank (“FHLB”) – San Francisco stock
8,094

8,094

Premises and equipment, net
5,158

5,417

Prepaid expenses and other assets
18,879

20,494

 
 

 

Total assets
$
1,164,542

$
1,174,555

 
 

 

Liabilities and Stockholders’ Equity
 

 

 
 

 

Liabilities:
 

 

Non interest-bearing deposits
$
63,481

$
67,538

Interest-bearing deposits
854,268

856,548

Total deposits
917,749

924,086

 
 

 

Borrowings
91,334

91,367

Accounts payable, accrued interest and other liabilities
17,594

17,965

Total liabilities
1,026,677

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;
17,786,865 and 17,766,865 shares issued; 8,345,723 and
8,634,607 shares outstanding, respectively)
178

177

Additional paid-in capital
89,604

88,893

Retained earnings
189,590

188,206

Treasury stock at cost (9,441,142 and 9,132,258 shares, respectively)
(141,753
)
(136,470
)
Accumulated other comprehensive income, net of tax
246

331

 
 

 

Total stockholders’ equity
137,865

141,137

 
 

 

Total liabilities and stockholders’ equity
$
1,164,542

$
1,174,555



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  
 December 31,
Six Months Ended 
 December 31,
 
2015
2014
2015
2014
Interest income:
 
 
 
 
Loans receivable, net
$
8,979

$
9,376

$
18,469

$
18,571

Investment securities
71

72

138

148

FHLB – San Francisco stock
179

132

379

276

Interest-earning deposits
134

76

234

170

Total interest income
9,363

9,656

19,220

19,165

 
 
 
 
 
Interest expense:
 
 
 
 
Checking and money market deposits
122

110

239

214

Savings deposits
169

160

337

317

Time deposits
835

940

1,693

1,916

Borrowings
648

336

1,296

671

Total interest expense
1,774

1,546

3,565

3,118

 
 
 
 
 
Net interest income
7,589

8,110

15,655

16,047

Recovery from the allowance for loan losses
(362
)
(354
)
(400
)
(1,172
)
Net interest income, after recovery from the allowance for loan losses
7,951

8,464

16,055

17,219

 
 
 
 
 
Non-interest income:
 
 
 
 
Loan servicing and other fees
306

291

417

559

Gain on sale of loans, net
6,044

8,042

14,968

15,694

Deposit account fees
590

604

1,200

1,230

Gain (loss) on sale and operations of real estate owned acquired in the settlement of loans, net
35

(51
)
264

(70
)
Card and processing fees
352

336

714

692

Other
271

275

484

502

Total non-interest income
7,598

9,497

18,047

18,607

 
 
 
 
 
Non-interest expense:
 
 
 
 
Salaries and employee benefits
9,971

9,950

20,763

19,531

Premises and occupancy
1,170

1,150

2,278

2,498

Equipment
430

414

809

886

Professional expenses
472

493

972

957

Sales and marketing expenses
334

399

596

730

     Deposit insurance premiums and regulatory assessments
250

238

512

511

Other
1,232

1,268

2,289

2,538

Total non-interest expense
13,859

13,912

28,219

27,651

 
 
 
 
 
Income before income taxes
1,690

4,049

5,883

8,175

Provision for income taxes
708

1,721

2,458

3,457

Net income
$
982

$
2,328

$
3,425

$
4,718

 
 
 
 
 
Basic earnings per share
$
0.12

$
0.26

$
0.40

$
0.51

Diluted earnings per share
$
0.11

$
0.25

$
0.39

$
0.50

Cash dividends per share
$
0.12

$
0.11

$
0.24

$
0.22


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  
 December 31,
For the Six Months Ended 
 December 31,
 
2015
2014
2015
2014
Net income
$
982

$
2,328

$
3,425

$
4,718

 
 
 
 
 
Change in unrealized holding (loss) gain on securities available for sale
(93
)
95

(147
)
79

Reclassification of (gains) losses to net income




Other comprehensive (loss) income, before income taxes
(93
)
95

(147
)
79

 
 
 
 
 
Income tax (benefit) provision
(39
)
40

(62
)
33

Other comprehensive (loss) income
(54
)
55

(85
)
46

 
 
 
 
 
Total comprehensive income
$
928

$
2,383

$
3,340

$
4,764



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 December 31, 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 September 30, 2015
8,429,678

$
178

$
89,278

$
189,617

$
(140,119
)
$
300

$
139,254

 
 
 
 
 
 
 
 
Net income
 
 
 
982

 
 
982

Other comprehensive loss
 
 
 
 
 
(54
)
(54
)
Purchase of treasury stock
(90,955
)
 
 
 
(1,634
)
 
(1,634
)
Exercise of stock options
7,000


52

 
 
 
52

Amortization of restricted stock
 
 
133

 
 
 
133

Stock options expense
 
 
127

 
 
 
127

Tax effect from stock based compensation
 
 
14

 
 
 
14

Cash dividends(1)
 
 
 
(1,009
)
 
 
(1,009
)
 
 
 
 
 
 
 
 
Balance at December 31, 2015
8,345,723

$
178

$
89,604

$
189,590

$
(141,753
)
$
246

$
137,865


(1) Cash dividends of $0.12 per share were paid in the quarter ended December 31, 2015.
 
 
Common
Stock
Additional
Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income,
Net of Tax
 
 
Shares
Amount
Total
Balance at September 30, 2014
9,152,065

$
177

$
86,759

$
183,825

$
(126,175
)
$
377

$
144,963

 
 
 
 
 
 
 
 
Net income
 
 
 
2,328

 
 
2,328

Other comprehensive income
 
 
 
 
 
55

55

Purchase of treasury stock
(156,916
)
 
 
 
(2,385
)
 
(2,385
)
Amortization of restricted stock
 
 
182

 
 
 
182

Stock options expense
 
 
212

 
 
 
212

Cash dividends(1)
 
 
 
(1,005
)
 
 
(1,005
)
 
 
 
 
 
 
 
 
Balance at December 31, 2014
8,995,149

$
177

$
87,153

$
185,148

$
(128,560
)
$
432

$
144,350


(1) Cash dividends of $0.11 per share were paid in the quarter ended December 31, 2014.

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

4



For the Six Months Ended December 31, 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
 
 
 
3,425

 
 
3,425

Other comprehensive loss
 
 
 
 
 
(85
)
(85
)
Purchase of treasury stock(1)
(311,384
)
 
 
 
(5,283
)
 
(5,283
)
Exercise of stock options
20,000

1

147

 
 
 
148

Distribution of restricted stock
2,500

 
 
 
 
 

Amortization of restricted stock
 
 
294

 
 
 
294

Stock options expense
 
 
255

 
 

 
255

Tax effect from stock based compensation
 
 
15

 
 
 
15

Cash dividends(2)
 
 
 

(2,041
)
 
 
(2,041
)
 
 
 
 
 
 
 
 
Balance at December 31, 2015
8,345,723

$
178

$
89,604

$
189,590

$
(141,753
)
$
246

$
137,865


(1) Includes the repurchase of 4,500 shares from a cashless stock option exercise.
(2) Cash dividends of $0.24 per share were paid during the six months ended December 31, 2015.

 
Common
Stock
Additional
Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income,
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
 
 
 
4,718

 
 
4,718

Other comprehensive income
 
 
 
 
 
46

46

Purchase of treasury stock
(319,120
)
 
 
 
(4,783
)
 
(4,783
)
Exercise of stock options
2,000


14

 
 
 
14

Amortization of restricted stock
 
 
241

 
 
 
241

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

 

Stock options expense
 
 
296

 
 
 
296

Tax effect from stock based compensation
 
 
(16
)
 
 
 
(16
)
Cash dividends(1)
 
 
 
(2,028
)
 
 
(2,028
)
 
 
 
 
 
 
 
 
Balance at December 31, 2014
8,995,149

$
177

$
87,153

$
185,148

$
(128,560
)
$
432

$
144,350


(1) Cash dividends of $0.22 per share were paid during the six months ended December 31, 2014.


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

5



PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Six Months Ended 
 December 31,
 
2015
2014
Cash flows from operating activities:
 
 
Net income
$
3,425

$
4,718

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
Depreciation and amortization
861

1,041

Recovery from the allowance for loan losses
(400
)
(1,172
)
Unrealized gain on real estate owned
(97
)
(17
)
Gain on sale of loans, net
(14,968
)
(15,694
)
Gain on sale of real estate owned, net
(187
)
(6
)
Stock-based compensation
549

537

(Benefit) provision for deferred income taxes
(646
)
1,294

Tax effect from stock based compensation
(15
)
16

(Decrease) increase in accounts payable and other liabilities
(182
)
302

Increase in prepaid expenses and other assets
(418
)
(258
)
Loans originated for sale
(1,012,792
)
(1,079,427
)
Proceeds from sale of loans
1,079,764

1,025,890

Net cash provided by (used for) operating activities
54,894

(62,776
)
 
 
 
Cash flows from investing activities:
 
 
Increase in loans held for investment, net
(4,980
)
(26,544
)
Principal payments from investment securities available for sale
1,347

1,297

Purchase of investment securities held to maturity
(10,166
)

Purchase of investment securities available for sale

(250
)
Proceeds from sale of real estate owned
2,592

883

Purchase of premises and equipment
(200
)
(267
)
Net cash used for investing activities
(11,407
)
(24,881
)
 
 
 
Cash flows from financing activities:
 
 
(Decrease) increase in deposits, net
(6,337
)
7,642

Repayments of long-term borrowings
(33
)
(31
)
Exercise of stock options
148

14

Tax effect from stock based compensation
15

(16
)
Cash dividends
(2,041
)
(2,028
)
Treasury stock purchases
(5,283
)
(4,783
)
Net cash (used for) provided by financing activities
(13,531
)
798

 
 
 
Net increase (decrease) in cash and cash equivalents
29,956

(86,859
)
Cash and cash equivalents at beginning of period
81,403

118,937

Cash and cash equivalents at end of period
$
111,359

$
32,078

Supplemental information:
 
 
Cash paid for interest
$
3,581

$
3,129

Cash paid for income taxes
$
3,045

$
2,175

Transfer of loans held for sale to held for investment
$
2,083

$
1,762

Real estate acquired in the settlement of loans
$
4,231

$
2,292


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

6



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

December 31, 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 and six months ended December 31, 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 2015-05:
In April 2015, the Financial Accounting Standards Board (“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 to 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 to 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, with earlier adoption permitted. The Corporation's adoption of this ASU is not expected to have a material impact on its consolidated financial statements.
 


7



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 December 31, 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 216,500 shares and 271,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of December 31, 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 and six months ended December 31, 2015 and 2014, respectively.
 
(In Thousands, Except Earnings Per Share)
For the Quarters Ended
December 31,
For the Six Months Ended
December 31,
 
2015
2014
2015
2014
Numerator:
 
 
 
 
Net income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders
$
982

$
2,328

$
3,425

$
4,718

 
 
 
 
 
Denominator:
 

 

 

 

Denominator for basic earnings per share:
 

 

 

 

 Weighted-average shares
8,396

9,120

8,481

9,187

 
 
 
 
 
   Effect of dilutive shares:
 
 
 
 
Stock options
142

62

127

117

Restricted stock
62

56

64

49

 
 
 
 
 
Denominator for diluted earnings per share:
 

 

 

 

Adjusted weighted-average shares and assumed conversions
8,600

9,238

8,672

9,353

 
 
 
 
 
Basic earnings per share
$
0.12

$
0.26

$
0.40

$
0.51

Diluted earnings per share
$
0.11

$
0.25

$
0.39

$
0.50




8



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 and six months ended December 31, 2015 and 2014, respectively.
 
For the Quarter Ended December 31, 2015
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
6,701

$
888

$
7,589

Recovery from the allowance for loan losses
(353
)
(9
)
(362
)
Net interest income, after recovery from the allowance for loan losses
7,054

897

7,951

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
188

118

306

     (Loss) gain on sale of loans, net (2)
(1
)
6,045

6,044

Deposit account fees
590


590

     Gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
35


35

Card and processing fees
352


352

Other
271


271

Total non-interest income
1,435

6,163

7,598

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,255

5,716

9,971

Premises and occupancy
748

422

1,170

Operating and administrative expenses
1,246

1,472

2,718

Total non-interest expense
6,249

7,610

13,859

Income (loss) before income taxes
2,240

(550
)
1,690

Provision (benefit) for income taxes
939

(231
)
708

Net income (loss)
$
1,301

$
(319
)
$
982

Total assets, end of period
$
988,323

$
176,219

$
1,164,542


(1) 
Includes an inter-company charge of $103 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 $191 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.

9




 
For the Quarter Ended December 31, 2014
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
6,925

$
1,185

$
8,110

(Recovery) provision for loan losses
(373
)
19

(354
)
Net interest income after (recovery) provision for loan losses
7,298

1,166

8,464

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
85

206

291

     Gain on sale of loans, net (2)
75

7,967

8,042

Deposit account fees
604


604

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(50
)
(1
)
(51
)
Card and processing fees
336


336

Other
275


275

Total non-interest income
1,325

8,172

9,497

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,528

5,422

9,950

Premises and occupancy
716

434

1,150

Operating and administrative expenses
1,093

1,719

2,812

Total non-interest expense
6,337

7,575

13,912

Income before income taxes
2,286

1,763

4,049

Provision for income taxes
988

733

1,721

Net income
$
1,298

$
1,030

$
2,328

Total assets, end of period
$
883,665

$
228,725

$
1,112,390


(1) 
Includes an inter-company charge of $144 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 $61 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.

10



 
For the Six Months Ended December 31, 2015
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
13,604

$
2,051

$
15,655

Recovery from the allowance for loan losses
(341
)
(59
)
(400
)
Net interest income, after recovery from the allowance for loan losses
13,945

2,110

16,055

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
332

85

417

     Gain on sale of loans, net (2)

14,968

14,968

Deposit account fees
1,200


1,200

     Gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
259

5

264

Card and processing fees
714


714

Other
484


484

Total non-interest income
2,989

15,058

18,047

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
8,808

11,955

20,763

Premises and occupancy
1,444

834

2,278

Operating and administrative expenses
2,235

2,943

5,178

Total non-interest expense
12,487

15,732

28,219

Income before income taxes
4,447

1,436

5,883

Provision for income taxes
1,854

604

2,458

Net income
$
2,593

$
832

$
3,425

Total assets, end of period
$
988,323

$
176,219

$
1,164,542


(1) 
Includes an inter-company charge of $168 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 $299 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.


11



 
For the Six Months Ended December 31, 2014
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
13,820

$
2,227

$
16,047

(Recovery) provision for loan losses
(1,263
)
91

(1,172
)
Net interest income, after (recovery) provision for loan losses
15,083

2,136

17,219

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
93

466

559

     Gain on sale of loans, net (2)
146

15,548

15,694

Deposit account fees
1,230


1,230

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(69
)
(1
)
(70
)
Card and processing fees
692


692

Other
502


502

Total non-interest income
2,594

16,013

18,607

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
8,795

10,736

19,531

Premises and occupancy
1,588

910

2,498

Operating and administrative expenses
2,249

3,373

5,622

Total non-interest expense
12,632

15,019

27,651

Income before income taxes
5,045

3,130

8,175

Provision for income taxes
2,155

1,302

3,457

Net income
$
2,890

$
1,828

$
4,718

Total assets, end of period
$
883,665

$
228,725

$
1,112,390


(1) 
Includes an inter-company charge of $302 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 $75 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.



12



Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of December 31, 2015 and June 30, 2015 were as follows:
December 31, 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

U.S. government sponsored enterprise MBS (1)
10,163


(34
)
10,129

10,163

Total investment securities - held to maturity
$
10,963

$

$
(34
)
$
10,929

$
10,963

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
U.S. government agency MBS
$
7,025

$
229

$

$
7,254

$
7,254

U.S. government sponsored enterprise MBS
4,385

242


4,627

4,627

Private issue CMO (2)
647

7


654

654

Common stock - community development financial institution
250


(107
)
143

143

Total investment securities - available for sale
$
12,307

$
478

$
(107
)
$
12,678

$
12,678

Total investment securities
$
23,270

$
478

$
(141
)
$
23,607

$
23,641


(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 second quarters of fiscal 2016 and 2015, the Corporation received MBS principal payments of $697,000 and $517,000, respectively, and did not sell investment securities. The Corporation purchased U.S. government sponsored enterprise MBS totaling $10.2 million to be held to maturity in the second quarter of fiscal 2016 and did not purchase any investment securities in the second quarter of fiscal 2015. For both the first six months of fiscal 2016 and 2015, the Corporation received MBS principal payments of $1.3 million. The Corporation purchased the $10.2 million of U.S. government sponsored enterprise MBS to be held to maturity in the second quarter of fiscal 2016 and, in the first quarter of fiscal 2015, $250,000 in the common stock of a community development financial institution to help fulfill the Bank's Community Reinvestment Act ("CRA") obligation and held as available for sale.
  

13



The Corporation held investments with unrealized loss position of $141,000 at December 31, 2015 and $99,000 at June 30, 2015.
As of December 31, 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
Held to maturity:
 
 
 
 
 
 
 
 
U.S. government sponsored enterprise MBS
$
10,129

$
34

 
$

$

 
$
10,129

$
34

Total investment securities - held to maturity
$
10,129

$
34

 
$

$

 
$
10,129

$
34

 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
Common stock(1)
$
143

$
107

 
$

$

 
$
143

$
107

Total investment securities - available for sale
$
143

$
107

 
$

$

 
$
143

$
107

Total investment securities
$
10,272

$
141

 
$

$


$
10,272

$
141


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
Available for sale:
 
 
 
 
 
 
 
 
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 December 31, 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 December 31, 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 December 31, 2015 and 2014; therefore, no impairment losses have been recorded for the quarters and six months ended December 31, 2015 and 2014.  


14



Contractual maturities of investment securities as of December 31, 2015 and June 30, 2015 were as follows:
 
December 31, 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
10,163

10,129

 


Due after ten years


 


Total investment securities - held to maturity
$
10,963

$
10,929

 
$
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
12,057

12,535

 
13,404

14,010

No stated maturity (common stock)
250

143

 
250

151

Total investment securities - available for sale
$
12,307

$
12,678

 
$
13,654

$
14,161

Total investment securities
$
23,270

$
23,607

 
$
14,454

$
14,961



Note 6: Loans Held for Investment
 
Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands)
December 31,
2015
June 30,
2015
Mortgage loans:
 
 
Single-family
$
343,999

$
365,961

Multi-family
372,100

347,020

Commercial real estate
98,574

100,897

Construction
10,173

8,191

Other
72


Commercial business loans
487

666

Consumer loans
241

244

Total loans held for investment, gross
825,646

822,979

 
 
 
Undisbursed loan funds
(6,725
)
(3,360
)
Advance payments of escrows
101

199

Deferred loan costs, net
3,634

3,140

Allowance for loan losses
(8,768
)
(8,724
)
Total loans held for investment, net
$
813,888

$
814,234


As of December 31, 2015, the Corporation had $11.2 million in mortgage loans that are subject to negative amortization, consisting of $7.9 million in multi-family loans, $3.1 million in single-family loans and $199,000 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 second quarters and six months 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

15



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 December 31, 2015 and June 30, 2015, the interest-only ARM loans were $103.6 million and $152.6 million, or 12.6% and 18.6% of loans held for investment, respectively. As of December 31, 2015, the Corporation had $4.2 million of single-family loans, 15 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 December 31, 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 December 31, 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
$
270,765

$
5,372

$
53,265

$
1,974

$
12,623

$
343,999

Multi-family
71,493

117,248

174,961

5,351

3,047

372,100

Commercial real estate
13,282

36,260

43,716


5,316

98,574

Construction
4,708


375


5,090

10,173

Other




72

72

Commercial business loans
163




324

487

Consumer loans
236




5

241

Total loans held for investment, gross
$
360,647

$
158,880

$
272,317

$
7,325

$
26,477

$
825,646


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

16



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, net of fair value adjustments, by loan types and risk category at the dates indicated:
 
 
December 31, 2015
(In Thousands)
Single-family
Multi-family
Commercial Real Estate
Construction
Other Mortgage
Commercial Business
Consumer
Total
 
 
 
 
 
 
 
 
 
 
Pass
$
328,396

$
368,018

$
97,646

$
8,902

$
72

$
387

$
241

$
803,662

Special Mention
4,676

1,339






6,015

Substandard
10,927

2,743

928

1,271


100


15,969

 
Total loans held for
   investment, gross
$
343,999

$
372,100

$
98,574

$
10,173

$
72

$
487

$
241

$
825,646


 
 
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

17



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 derived 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 December 31, 2015 and June 30, 2015:
(In Thousands)
December 31,
2015
June 30,
2015
Collectively evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family
$
5,720

$
5,202

Multi-family
1,919

2,616

Commercial real estate
778

734

Construction
304

42

Other
1


Commercial business loans
17

23

Consumer loans
9

9

Total collectively evaluated allowance
8,748

8,626

 
 
 
Individually evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family

78

Commercial business loans
20

20

Total individually evaluated allowance
20

98

Total loan loss allowance
$
8,768

$
8,724



18



The following table is provided to disclose additional details on the Corporation’s allowance for loan losses:
 
For the Quarters Ended
December 31,
For the Six Months Ended
December 31,
(Dollars in Thousands)
2015
2014
2015
2014
 
 
 
 
 
Allowance at beginning of period
$
9,034

$
8,888

$
8,724

$
9,744

 
 
 
 
 
Recovery from the allowance for loan losses
(362
)
(354
)
(400
)
(1,172
)
 
 
 
 
 
Recoveries:
 

 

 

 

Mortgage loans:
 

 

 

 

Single-family
158

164

227

273

Multi-family
58

93

114

164

Commercial real estate


216


Commercial business loans


85


Consumer loans



1

Total recoveries
216

257

642

438

 
 
 
 
 
Charge-offs:
 

 

 

 

Mortgage loans:
 

 

 

 

Single-family
(118
)
(98
)
(196
)
(317
)
Consumer loans
(2
)

(2
)

Total charge-offs
(120
)
(98
)
(198
)
(317
)
 
 
 
 
 
Net recoveries
96

159

444

121

Balance at end of period
$
8,768

$
8,693

$
8,768

$
8,693

 
 

 

 

 

Allowance for loan losses as a percentage of gross loans held for investment
1.07
 %
1.08
 %
1.07
 %
1.08
 %
Net recoveries as a percentage of average loans receivable, net, during the period (annualized)
(0.04
)%
(0.07
)%
(0.09
)%
(0.03
)%
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period
67.35
 %
73.88
 %
67.35
 %
73.88
 %



19



The following tables denote the past due status of the Corporation's gross loans held for investment, net of fair value adjustments, at the dates indicated.
 
 
December 31, 2015
(In Thousands)
Current
30-89 Days Past Due
Non-Accrual (1)
Total Loans Held for Investment
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Single-family
$
332,550

$
522

$
10,927

$
343,999

 
Multi-family
370,147


1,953

372,100

 
Commercial real estate
98,574



98,574

 
Construction
10,173



10,173

 
Other
72