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EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20160930x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20160930x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20160930x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-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
 
Condensed Consolidated Statements of Operations
 
 
 
for the Quarters Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
for the Quarters Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Stockholders’ Equity
 
 
 
for the Quarters Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Cash Flows
 
 
 
for the Three Months Ended September 30, 2016 and 2015
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
 
 
 
 
ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
 
 
 
 
General
 
Safe-Harbor Statement
 
Critical Accounting Policies
 
Executive Summary and Operating Strategy
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
 
Comparison of Financial Condition at September 30, 2016 and June 30, 2016
 
Comparison of Operating Results
 
 
 
for the Quarters Ended September 30, 2016 and 2015
 
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
 
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.

1



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.

2



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.

3



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.

4



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.

5



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.


6



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




7



Note 4: Operating Segment Reports

The Corporation operates in two business segments: community banking through the Bank and mortgage banking through Provident Bank Mortgage (“PBM”), a division of the Bank.

The following tables set forth condensed consolidated statements of operations and total assets for the Corporation’s operating segments for the quarters ended September 30, 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.

8




 
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.
 
 
 
 
 
 
 
 



9



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.
  

10



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




11



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.


12



 
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.


13



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.


14



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



15



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
 %



16



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.



17



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
%


18



 
 
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.

19



 
 
 
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.

20



 
 
 
At June 30, 2016
 
 
 
Unpaid
 
 
 
Net
 
 
 
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
</