PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20160930x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20160930x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20160930x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20160930x10qxex311.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, 2016



[ ]	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 4, 2016
Common stock, $ 0.01 par value, per share		7,989,516 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, 2016 and June 30, 2016	1
	Condensed Consolidated Statements of Operations
		for the Quarters Ended September 30, 2016 and 2015	2
	Condensed Consolidated Statements of Comprehensive Income
		for the Quarters Ended September 30, 2016 and 2015	3
	Condensed Consolidated Statements of Stockholders’ Equity
		for the Quarters Ended September 30, 2016 and 2015	4
	Condensed Consolidated Statements of Cash Flows
		for the Three Months Ended September 30, 2016 and 2015	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		36
	Safe-Harbor Statement		37
	Critical Accounting Policies		38
	Executive Summary and Operating Strategy		38
	Off-Balance Sheet Financing Arrangements and Contractual Obligations		39
	Comparison of Financial Condition at September 30, 2016 and June 30, 2016		40
	Comparison of Operating Results
		for the Quarters Ended September 30, 2016 and 2015	42
	Asset Quality		47
	Loan Volume Activities		55
	Liquidity and Capital Resources		56
	Supplemental Information		58

ITEM 3 -	Quantitative and Qualitative Disclosures about Market Risk		58

ITEM 4 -	Controls and Procedures		60

PART II -	OTHER INFORMATION

ITEM 1 -	Legal Proceedings		60
ITEM 1A -	Risk Factors		61
ITEM 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		61
ITEM 3 -	Defaults Upon Senior Securities		61
ITEM 4 -	Mine Safety Disclosures		61
ITEM 5 -	Other Information		61
ITEM 6 -	Exhibits		61

SIGNATURES			64

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Financial Condition

In Thousands, Except Share Information



	September 30, 2016			June 30, 2016
	(Unaudited)
Assets
Cash and cash equivalents	$	39,443		$	51,206
Investment securities – held to maturity, at cost	36,290			39,979
Investment securities – available for sale, at fair value	10,778			11,543
Loans held for investment, net of allowance for loan losses of $8,725 and $8,670, respectively; includes $5,529 and $5,159 at fair value, respectively	853,958			840,022
Loans held for sale, at fair value	264,379			189,458
Accrued interest receivable	3,078			2,781
Real estate owned, net	3,496			2,706
Federal Home Loan Bank (“FHLB”) – San Francisco stock	8,094			8,094
Premises and equipment, net	5,879			6,043
Prepaid expenses and other assets	17,119			19,549

Total assets	$	1,242,514		$	1,171,381

Liabilities and Stockholders’ Equity

Liabilities:
Non interest-bearing deposits	$	74,963		$	71,158
Interest-bearing deposits	868,539			855,226
Total deposits	943,502			926,384

Borrowings	146,281			91,299
Accounts payable, accrued interest and other liabilities	19,508			20,247
Total liabilities	1,109,291			1,037,930

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; 17,848,365 and 17,847,365 shares issued; 7,978,166 and 7,975,250 shares outstanding, respectively)	178			178
Additional paid-in capital	91,633			90,802
Retained earnings	192,227			191,666
Treasury stock at cost (9,870,199 and 9,872,115 shares, respectively)	(151,095		)	(149,508		)
Accumulated other comprehensive income, net of tax	280			313

Total stockholders’ equity	133,223			133,451

Total liabilities and stockholders’ equity	$	1,242,514		$	1,171,381

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,
	2016			2015
Interest income:
Loans receivable, net	$	10,480		$	9,490
Investment securities	84			67
FHLB – San Francisco stock	185			200
Interest-earning deposits	55			100
Total interest income	10,804			9,857

Interest expense:
Checking and money market deposits	98			117
Savings deposits	144			168
Time deposits	772			858
Borrowings	702			648
Total interest expense	1,716			1,791

Net interest income	9,088			8,066
Recovery from the allowance for loan losses	(150		)	(38		)
Net interest income, after recovery from the allowance for loan losses	9,238			8,104

Non-interest income:
Loan servicing and other fees	267			111
Gain on sale of loans, net	7,996			8,924
Deposit account fees	550			610
(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net	(103		)	229
Card and processing fees	364			362
Other	178			213
Total non-interest income	9,252			10,449

Non-interest expense:
Salaries and employee benefits	11,314			10,792
Premises and occupancy	1,289			1,108
Equipment	362			379
Professional expenses	505			500
Sales and marketing expenses	296			262
Deposit insurance premiums and regulatory assessments	248			262
Other	1,618			1,057
Total non-interest expense	15,632			14,360

Income before income taxes	2,858			4,193
Provision for income taxes	1,264			1,750
Net income	$	1,594		$	2,443

Basic earnings per share	$	0.20		$	0.29
Diluted earnings per share	$	0.20		$	0.28
Cash dividends per share	$	0.13		$	0.12

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,
	2016			2015
Net income	$	1,594		$	2,443

Change in unrealized holding loss on securities available for sale	(57		)	(53		)
Reclassification of (gains) losses to net income	—			—
Other comprehensive loss, before income taxes	(57		)	(53		)

Income tax benefit	(24		)	(22		)
Other comprehensive loss	(33		)	(31		)

Total comprehensive income	$	1,561		$	2,412

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, 2016 and 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, 2016	7,975,250		$	178	$	90,802		$	191,666		$	(149,508	)	$	313		$	133,451

Net income								1,594									1,594
Other comprehensive loss														(33		)	(33		)
Purchase of treasury stock⁽¹⁾	(85,834	)									(1,662		)				(1,662		)
Exercise of stock options	1,000		—		17												17
Distribution of restricted stock	87,750																—
Amortization of restricted stock					362												362
Awards of restricted stock					(136		)				136						—
Forfeiture of restricted stock					61						(61		)				—
Stock options expense					340												340
Tax effect from stock based compensation					187												187
Cash dividends⁽²⁾								(1,033		)							(1,033		)

Balance at September 30, 2016	7,978,166		$	178	$	91,633		$	192,227		$	(151,095	)	$	280		$	133,223

⁽¹⁾Includes the repurchase of 25,598 shares of distributed restricted stock in settlement of employee withholding tax obligations.

⁽²⁾Cash dividends of $0.13 per share were paid in the quarter ended September 30, 2016.



	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.

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,
	2016			2015
Cash flows from operating activities:
Net income	$	1,594		$	2,443
Adjustments to reconcile net income to net cash (used for) provided by operating activities:
Depreciation and amortization	697			307
Recovery from the allowance for loan losses	(150		)	(38		)
Provision (recovery) of losses on real estate owned	100			(161		)
Gain on sale of loans, net	(7,996		)	(8,924		)
Gain on sale of real estate owned, net	(54		)	(30		)
Stock-based compensation	702			289
Provision (benefit) for deferred income taxes	1,420			(632		)
Tax effect from stock based compensation	(187		)	(1		)
Increase in accounts payable, accrued interest and other liabilities	1,327			1,617
(Increase) decrease in prepaid expenses and other assets	(361		)	1,711
Loans originated for sale	(647,342		)	(540,289		)
Proceeds from sale of loans	579,698			613,940
Net cash (used for) provided by operating activities	(70,552		)	70,232

Cash flows from investing activities:
(Increase) decrease in loans held for investment, net	(15,097		)	7,289
Principal payments from investment securities available for sale	4,048			650
Proceeds from sale of real estate owned	307			463
Purchase of premises and equipment	(78		)	(71		)
Net cash (used for) provided by investing activities	(10,820		)	8,331

Cash flows from financing activities:
Increase in deposits, net	17,118			780
Proceeds from short-term borrowings, net	35,000			—
Proceeds from long-term borrowings	20,000			—
Repayments of long-term borrowings	(18		)	(16		)
Exercise of stock options	17			96
Tax effect from stock based compensation	187			1
Cash dividends	(1,033		)	(1,032		)
Treasury stock purchases	(1,662		)	(3,649		)
Net cash provided by (used for) financing activities	69,609			(3,820		)

Net (decrease) increase in cash and cash equivalents	(11,763		)	74,743
Cash and cash equivalents at beginning of period	51,206			81,403
Cash and cash equivalents at end of period	$	39,443		$	156,146
Supplemental information:
Cash paid for interest	$	1,671		$	1,788
Cash paid for income taxes	$	100		$	—
Transfer of loans held for sale to held for investment	$	760		$	1,552
Real estate acquired in the settlement of loans	$	1,298		$	1,006

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, 2016

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, 2016 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, 2016. The results of operations for the quarter ended September 30, 2016 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2017.

Note 2: Accounting Standard Updates (“ASU”)

There have been no accounting standard updates or changes in the status of their adoptions that are applicable to the Corporation as previously disclosed in Note 1 of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2016.

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, 2016 and 2015, there were outstanding options to purchase 932,000 shares and 1.0 million shares of the Corporation’s common stock, respectively, of which 200,000 shares and 236,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of September 30, 2016 and 2015, there were outstanding restricted stock awards of 110,250 shares and 197,500 shares, respectively, all of which have dilutive effects.

The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2016 and 2015, respectively.



(In Thousands, Except Earnings Per Share)	For the Quarters Ended September 30,
	2016		2015
Numerator:
Net income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders	$	1,594	$	2,443

Denominator:
Denominator for basic earnings per share:
Weighted-average shares	7,948		8,566

Effect of dilutive shares:
Stock options	158		111
Restricted stock	48		67

Denominator for diluted earnings per share:
Adjusted weighted-average shares and assumed conversions	8,154		8,744

Basic earnings per share	$	0.20	$	0.29
Diluted earnings per share	$	0.20	$	0.28

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, 2016 and 2015, respectively.



	For the Quarter Ended September 30, 2016
(In Thousands)	Provident Bank			Provident Bank Mortgage			Consolidated Totals
Net interest income	$	7,575		$	1,513		$	9,088
Provision (recovery) for loan losses	36			(186		)	(150		)
Net interest income, after provision (recovery) for loan losses	7,539			1,699			9,238

Non-interest income:
Loan servicing and other fees ⁽¹⁾	69			198			267
Gain on sale of loans, net ⁽²⁾	1			7,995			7,996
Deposit account fees	550			—			550
(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net	(105		)	2			(103		)
Card and processing fees	364			—			364
Other	178			—			178
Total non-interest income	1,057			8,195			9,252

Non-interest expense:
Salaries and employee benefits	4,894			6,420			11,314
Premises and occupancy	856			433			1,289
Operating and administrative expenses	1,147			1,882			3,029
Total non-interest expense	6,897			8,735			15,632
Income before income taxes	1,699			1,159			2,858
Provision for income taxes	777			487			1,264
Net income	$	922		$	672		$	1,594
Total assets, end of period	$	977,964		$	264,550		$	1,242,514


⁽¹⁾	Includes an inter-company charge of $95 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 $59 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, 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.

Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 2016 and June 30, 2016 were as follows:



September 30, 2016	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⁾	35,490		459		—		35,949		35,490
Total investment securities - held to maturity	$	36,290	$	459	$	—	$	36,749	$	36,290

Available for sale:
U.S. government agency MBS	$	5,906	$	225	$	—	$	6,131	$	6,131
U.S. government sponsored enterprise MBS	3,875		212		—		4,087		4,087
Private issue CMO ⁽²⁾	556		4		—		560		560
Total investment securities - available for sale	$	10,337	$	441	$	—	$	10,778	$	10,778
Total investment securities	$	46,627	$	900	$	—	$	47,527	$	47,068


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


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



June 30, 2016	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	39,179		459		—			39,638		39,179
Total investment securities - held to maturity	$	39,979	$	459	$	—		$	40,438	$	39,979

Available for sale:
U.S. government agency MBS	$	6,308	$	264	$	—		$	6,572	$	6,572
U.S. government sponsored enterprise MBS	3,998		225		—			4,223		4,223
Private issue CMO	598		4		(1		)	601		601
Common stock - community development financial institution	147		—		—			147		147
Total investment securities - available for sale	$	11,051	$	493	$	(1	)	$	11,543	$	11,543
Total investment securities	$	51,030	$	952	$	(1	)	$	51,981	$	51,522

In the first quarters of fiscal 2017 and 2016, the Corporation received MBS principal payments of $4.0 million and $650,000, respectively, and there were no sales of investment securities during these periods. The Corporation did not purchase any investment securities in the first quarter of fiscal 2017 and 2016. In the first quarter of fiscal 2017, the Corporation received the cash proceeds from its equity investment in a community development financial institution, consistent with the purchase agreement between the acquiring institution and the community development financial institution.

The Corporation held investments with an unrealized loss position of $0 at September 30, 2016 and $1,000 at June 30, 2016.



As of June 30, 2016	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:
Private issue CMO	$	103	$	1	$	—	$	—	$	103	$	1
Total investment securities	$	103	$	1	$	—	$	—	$	103	$	1

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. As of June 30, 2016, the unrealized holding loss was less than 12 months. The Corporation does not believe that there are any other-than-temporary impairments on the investment securities at September 30, 2016 and 2015; therefore, no impairment losses were recorded for the quarters ended September 30, 2016 and 2015.

Contractual maturities of investment securities as of September 30, 2016 and June 30, 2016 were as follows:



	September 30, 2016				June 30, 2016
(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	17,384		17,702		18,904		19,203
Due after ten years	18,106		18,247		20,275		20,435
Total investment securities - held to maturity	$	36,290	$	36,749	$	39,979	$	40,438

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	10,337		10,778		10,904		11,396
No stated maturity (common stock)	—		—		147		147
Total investment securities - available for sale	$	10,337	$	10,778	$	11,051	$	11,543
Total investment securities	$	46,627	$	47,527	$	51,030	$	51,981

Note 6: Loans Held for Investment

Loans held for investment, net of fair value adjustments, consisted of the following:



(In Thousands)	September 30, 2016			June 30, 2016
Mortgage loans:
Single-family	$	312,795		$	324,497
Multi-family	438,423			415,627
Commercial real estate	100,136			99,528
Construction	15,811			14,653
Other	331			332
Commercial business loans	624			636
Consumer loans	199			203
Total loans held for investment, gross	868,319			855,476

Undisbursed loan funds	(10,447		)	(11,258		)
Advance payments of escrows	23			56
Deferred loan costs, net	4,788			4,418
Allowance for loan losses	(8,725		)	(8,670		)
Total loans held for investment, net	$	853,958		$	840,022

As of September 30, 2016, the Corporation had $10.0 million in mortgage loans that are subject to negative amortization, consisting of $6.9 million in multi-family loans, $3.0 million in single-family loans and $155,000 in commercial real estate loans. This compares to $10.2 million of negative amortization mortgage loans at June 30, 2016, consisting of $6.9 million in multi-family loans, $3.1 million in single-family loans and $170,000 in commercial real estate loans. During the first quarters of fiscal 2017 and 2016, 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, 2016 and June 30, 2016, the interest-only ARM loans were $53.7 million and $64.7 million, or 6.2% and 7.6% of loans held for investment, respectively. As of September 30, 2016, the Corporation had $5.5 million of single-family loans, 19 loans, held for investment which were originated for sale but were subsequently transferred to loans held for investment and are carried at fair value. This compares to $5.2 million of single-family loans, 18 loans, held for investment at June 30, 2016 which were originated for sale but were subsequently transferred to loans held for investment and are carried at fair value.

The following table sets forth information at September 30, 2016 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, 2016 and June 30, 2016. 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	$	226,639	$	14,936	$	52,519	$	5,697	$	13,004	$	312,795
Multi-family	67,240		178,065		179,594		10,567		2,957		438,423
Commercial real estate	11,039		39,975		46,163		—		2,959		100,136
Construction	9,556		—		—		—		6,255		15,811
Other	—		—		—		—		331		331
Commercial business loans	107		—		—		—		517		624
Consumer loans	197		—		—		—		2		199
Total loans held for investment, gross	$	314,778	$	232,976	$	278,276	$	16,264	$	26,025	$	868,319

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, but 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, net of fair value adjustments, by loan types and risk category at the dates indicated:



		September 30, 2016
(In Thousands)		Single-family		Multi-family		Commercial Real Estate		Construction		Other Mortgage		Commercial Business		Consumer		Total

Pass		$	298,937	$	432,567	$	100,136	$	15,811	$	331	$	530	$	199	$	848,511
Special Mention		3,879		5,013		—		—		—		—		—		8,892
Substandard		9,979		843		—		—		—		94		—		10,916
	Total loans held for investment, gross	$	312,795	$	438,423	$	100,136	$	15,811	$	331	$	624	$	199	$	868,319



		June 30, 2016
(In Thousands)		Single-family		Multi-family		Commercial Real Estate		Construction		Other Mortgage		Commercial Business		Consumer		Total

Pass		$	309,380	$	410,804	$	99,528	$	14,653	$	332	$	540	$	203	$	835,440
Special Mention		4,858		3,974		—		—		—		—		—		8,832
Substandard		10,259		849		—		—		—		96		—		11,204
	Total loans held for investment, gross	$	324,497	$	415,627	$	99,528	$	14,653	$	332	$	636	$	203	$	855,476

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 derived based on the loan's discounted cash flow fair value (for restructured loans) or collateral 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, 2016 and June 30, 2016:



(In Thousands)	September 30, 2016		June 30, 2016
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	4,575	$	4,933
Multi-family	3,186		2,800
Commercial real estate	854		848
Construction	53		31
Other	7		7
Commercial business loans	22		23
Consumer loans	8		8
Total collectively evaluated allowance	8,705		8,650

Individually evaluated for impairment:
Commercial business loans	20		20
Total individually evaluated allowance	20		20
Total loan loss allowance	$	8,725	$	8,670

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)	2016			2015

Allowance at beginning of period	$	8,670		$	8,724

Recovery from the allowance for loan losses	(150		)	(38		)

Recoveries:
Mortgage loans:
Single-family	263			69
Multi-family	7			56
Commercial real estate	—			216
Commercial business loans	—			85
Consumer loans	1			—
Total recoveries	271			426

Charge-offs:
Mortgage loans:
Single-family	(66		)	(78		)
Total charge-offs	(66		)	(78		)

Net recoveries	205			348
Balance at end of period	$	8,725		$	9,034

Allowance for loan losses as a percentage of gross loans held for investment	1.01		%	1.11		%
Net recoveries as a percentage of average loans receivable, net, during the period (annualized)	(0.08		)%	(0.14		)%
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period	79.93		%	57.33		%

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.



		September 30, 2016
(In Thousands)		Current		30-89 Days Past Due		Non-Accrual ⁽¹⁾		Total Loans Held for Investment

Mortgage loans:
	Single-family	$	301,433	$	1,383	$	9,979	$	312,795
	Multi-family	437,580		—		843		438,423
	Commercial real estate	100,136		—		—		100,136
	Construction	15,811		—		—		15,811
	Other	331		—		—		331
Commercial business loans		530		—		94		624
Consumer loans		197		2		—		199
	Total loans held for investment, gross	$	856,018	$	1,385	$	10,916	$	868,319

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



		June 30, 2016
(In Thousands)		Current		30-89 Days Past Due		Non-Accrual ⁽¹⁾		Total Loans Held for Investment

Mortgage loans:
	Single-family	$	312,595	$	1,644	$	10,258	$	324,497
	Multi-family	414,777		—		850		415,627
	Commercial real estate	99,528		—		—		99,528
	Construction	14,653		—		—		14,653
	Other	332		—		—		332
Commercial business loans		540		—		96		636
Consumer loans		203		—		—		203
	Total loans held for investment, gross	$	842,628	$	1,644	$	11,204	$	855,476

⁽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, 2016
(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		$	4,933		$	2,800		$	848		$	31		$	7		$	43		$	8		$	8,670
(Recovery) provision for loan losses		(555		)	379			6			22			—			(1		)	(1		)	(150		)
Recoveries		263			7			—			—			—			—			1			271
Charge-offs		(66		)	—			—			—			—			—			—			(66		)
	Allowance for loan losses, end of period	$	4,575		$	3,186		$	854		$	53		$	7		$	42		$	8		$	8,725

Allowance for loan losses:
Individually evaluated for impairment		$	—		$	—		$	—		$	—		$	—		$	20		$	—		$	20
Collectively evaluated for impairment		4,575			3,186			854			53			7			22			8			8,705
	Allowance for loan losses, end of period	$	4,575		$	3,186		$	854		$	53		$	7		$	42		$	8		$	8,725

Loans held for investment:
Individually evaluated for impairment		$	6,634		$	377		$	—		$	—		$	—		$	94		$	—		$	7,105
Collectively evaluated for impairment		306,161			438,046			100,136			15,811			331			530			199			861,214
	Total loans held for investment, gross	$	312,795		$	438,423		$	100,136		$	15,811		$	331		$	624		$	199		$	868,319
Allowance for loan losses as a percentage of gross loans held for investment		1.46		%	0.73		%	0.85		%	0.34		%	2.11		%	6.73		%	4.02		%	1.01		%



		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		%

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 that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves.



			At September 30, 2016
			Unpaid										Net
			Principal		Related			Recorded					Recorded
(In Thousands)			Balance		Charge-offs			Investment		Allowance⁽¹⁾			Investment

Mortgage loans:
	Single-family:
		With a related allowance	$	3,383	$	—		$	3,383	$	(781	)	$	2,602
		Without a related allowance⁽²⁾	7,708		(1,074		)	6,634		—			6,634
	Total single-family		11,091		(1,074		)	10,017		(781		)	9,236

	Multi-family:
		With a related allowance	466		—			466		(140		)	326
		Without a related allowance⁽²⁾	388		(11		)	377		—			377
	Total multi-family		854		(11		)	843		(140		)	703

Commercial business loans:
	With a related allowance		94		—			94		(20		)	74
Total commercial business loans			94		—			94		(20		)	74

Consumer loans:
	Without a related allowance⁽²⁾		12		(12		)	—		—			—
Total consumer loans			12		(12		)	—		—			—

Total non-performing loans			$	12,051	$	(1,097	)	$	10,954	$	(941	)	$	10,013

⁽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.

At June 30, 2016

Unpaid

Net

Principal

Recorded

(In Thousands)

Balance

Charge-offs

Investment

PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q - November 7, 2016

Attached files