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EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20161231x10qxex311.htm
EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20161231x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20161231x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20161231x10qxex312.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, 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 January 31, 2017
Common stock, $ 0.01 par value, per share
 
7,952,866 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, 2016 and June 30, 2016
 
Condensed Consolidated Statements of Operations
 
 
 
for the Quarters and Six Months Ended December 31, 2016 and 2015
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
for the Quarters and Six Months Ended December 31, 2016 and 2015
 
Condensed Consolidated Statements of Stockholders’ Equity
 
 
 
for the Quarters and Six Months Ended December 31, 2016 and 2015
 
Condensed Consolidated Statements of Cash Flows
 
 
 
for the Six Months Ended December 31, 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 December 31, 2016 and June 30, 2016
 
Comparison of Operating Results
 
 
 
for the Quarters and Six Months Ended December 31, 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
 
December 31,
2016
June 30,
2016
 
(Unaudited)
 
Assets
 
 
Cash and cash equivalents
$
82,811

$
51,206

Investment securities – held to maturity, at cost
33,369

39,979

Investment securities – available for sale, at fair value
10,278

11,543

Loans held for investment, net of allowance for loan losses of
$8,391 and $8,670, respectively; includes $5,964 and $5,159 at fair value, respectively
867,985

840,022

Loans held for sale, at fair value
156,827

189,458

Accrued interest receivable
2,919

2,781

Real estate owned, net
2,949

2,706

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

8,094

Premises and equipment, net
5,769

6,043

Prepaid expenses and other assets
21,154

19,549

 
 

 

Total assets
$
1,192,155

$
1,171,381

 
 

 

Liabilities and Stockholders’ Equity
 

 

 
 

 

Liabilities:
 

 

Non interest-bearing deposits
$
73,830

$
71,158

Interest-bearing deposits
854,843

855,226

Total deposits
928,673

926,384

 
 

 

Borrowings
111,263

91,299

Accounts payable, accrued interest and other liabilities
19,664

20,247

Total liabilities
1,059,600

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;
17,871,115 and 17,847,365 shares issued; 7,915,116 and
7,975,250 shares outstanding, respectively)
179

178

Additional paid-in capital
92,215

90,802

Retained earnings
192,699

191,666

Treasury stock at cost (9,955,999 and 9,872,115 shares, respectively)
(152,802
)
(149,508
)
Accumulated other comprehensive income, net of tax
264

313

 
 

 

Total stockholders’ equity
132,555

133,451

 
 

 

Total liabilities and stockholders’ equity
$
1,192,155

$
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  
 December 31,
Six Months Ended 
 December 31,
 
2016
2015
2016
2015
Interest income:
 
 
 
 
Loans receivable, net
$
10,116

$
8,979

$
20,596

$
18,469

Investment securities
128

71

212

138

FHLB – San Francisco stock
458

179

643

379

Interest-earning deposits
101

134

156

234

Total interest income
10,803

9,363

21,607

19,220

 
 
 
 
 
Interest expense:
 
 
 
 
Checking and money market deposits
105

122

203

239

Savings deposits
146

169

290

337

Time deposits
731

835

1,503

1,693

Borrowings
736

648

1,438

1,296

Total interest expense
1,718

1,774

3,434

3,565

 
 
 
 
 
Net interest income
9,085

7,589

18,173

15,655

Recovery from the allowance for loan losses
(350
)
(362
)
(500
)
(400
)
Net interest income, after recovery from the allowance for loan losses
9,435

7,951

18,673

16,055

 
 
 
 
 
Non-interest income:
 
 
 
 
Loan servicing and other fees
310

306

577

417

Gain on sale of loans, net
6,478

6,044

14,474

14,968

Deposit account fees
552

590

1,102

1,200

(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net
(63
)
35

(166
)
264

Card and processing fees
361

352

725

714

Other
194

271

372

484

Total non-interest income
7,832

7,598

17,084

18,047

 
 
 
 
 
Non-interest expense:
 
 
 
 
Salaries and employee benefits
10,349

9,971

21,663

20,763

Premises and occupancy
1,235

1,170

2,524

2,278

Equipment
340

430

702

809

Professional expenses
630

472

1,135

972

Sales and marketing expenses
253

334

549

596

     Deposit insurance premiums and regulatory assessments
177

250

425

512

Other
1,684

1,232

3,302

2,289

Total non-interest expense
14,668

13,859

30,300

28,219

 
 
 
 
 
Income before income taxes
2,599

1,690

5,457

5,883

Provision for income taxes
1,095

708

2,359

2,458

Net income
$
1,504

$
982

$
3,098

$
3,425

 
 
 
 
 
Basic earnings per share
$
0.19

$
0.12

$
0.39

$
0.40

Diluted earnings per share
$
0.18

$
0.11

$
0.38

$
0.39

Cash dividends per share
$
0.13

$
0.12

$
0.26

$
0.24


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,
 
2016
2015
 
2016
2015
Net income
$
1,504

$
982

 
$
3,098

$
3,425

 
 
 
 
 
 
Change in unrealized holding loss on securities available for sale
(28
)
(93
)
 
(84
)
(147
)
Reclassification of (gains) losses to net income


 


Other comprehensive loss, before income taxes
(28
)
(93
)
 
(84
)
(147
)
 
 
 
 
 
 
Income tax benefit
(12
)
(39
)
 
(35
)
(62
)
Other comprehensive loss
(16
)
(54
)
 
(49
)
(85
)
 
 
 
 
 
 
Total comprehensive income
$
1,488

$
928

 
$
3,049

$
3,340



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, 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 September 30, 2016
7,978,166

$
178

$
91,633

$
192,227

$
(151,095
)
$
280

$
133,223

 
 
 
 
 
 
 
 
Net income
 
 
 
1,504

 
 
1,504

Other comprehensive loss
 
 
 
 
 
(16
)
(16
)
Purchase of treasury stock
(85,800
)
 
 
 
(1,659
)
 
(1,659
)
Exercise of stock options
22,750

1

267

 
 
 
268

Amortization of restricted stock
 
 
133

 
 
 
133

Awards of restricted stock
 
 
(25
)
 
25

 

Forfeiture of restricted stock
 
 
73

 
(73
)
 

Stock options expense
 
 
142

 
 
 
142

Tax effect from stock-based compensation
 
 
(8
)
 
 
 
(8
)
Cash dividends(1)
 
 
 
(1,032
)
 
 
(1,032
)
 
 
 
 
 
 
 
 
Balance at December 31, 2016
7,915,116

$
179

$
92,215

$
192,699

$
(152,802
)
$
264

$
132,555


(1) Cash dividends of $0.13 per share were paid in the quarter ended December 31, 2016.
 
 
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.


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

4



For the Six Months Ended December 31, 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
 
 
 
3,098

 
 
3,098

Other comprehensive loss
 
 
 
 
 
(49
)
(49
)
Purchase of treasury stock(1)
(171,634
)
 
 
 
(3,321
)
 
(3,321
)
Exercise of stock options
23,750

1

284

 
 
 
285

Distribution of restricted stock
87,750

 
 
 
 
 

Amortization of restricted stock
 
 
495

 
 
 
495

Awards of restricted stock
 
 
(161
)
 
161

 

Forfeitures of restricted stock
 
 
134

 
(134
)
 

Stock options expense
 
 
482

 
 

 
482

Tax effect from stock-based compensation
 
 
179

 
 
 
179

Cash dividends(2)
 
 
 

(2,065
)
 
 
(2,065
)
 
 
 
 
 
 
 
 
Balance at December 31, 2016
7,915,116

$
179

$
92,215

$
192,699

$
(152,802
)
$
264

$
132,555


(1) Includes the repurchase of 25,598 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2) Cash dividends of $0.26 per share were paid during the six months ended December 31, 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
 
 
 
3,425

 
 
3,425

Other comprehensive loss
 
 
 
 
 
(85
)
(85
)
Purchase of treasury stock
(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(1)
 
 
 
(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.


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,
 
2016
2015
Cash flows from operating activities:
 
 
Net income
$
3,098

$
3,425

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
1,334

861

Recovery from the allowance for loan losses
(500
)
(400
)
Provision (recovery) of losses on real estate owned
76

(97
)
Gain on sale of loans, net
(14,474
)
(14,968
)
Gain on sale of real estate owned, net
(33
)
(187
)
Stock-based compensation
977

549

Provision (benefit) for deferred income taxes
1,504

(646
)
Tax effect from stock based compensation
(179
)
(15
)
Increase (decrease) in accounts payable, accrued interest and other liabilities
2,940

(182
)
Increase in prepaid expenses and other assets
(497
)
(418
)
Loans originated for sale
(1,189,253
)
(1,012,792
)
Proceeds from sale of loans
1,230,321

1,079,764

Net cash provided by operating activities
35,314

54,894

 
 
 
Cash flows from investing activities:
 
 
Increase in loans held for investment, net
(29,008
)
(4,980
)
Principal payments from investment securities available for sale
7,296

1,347

Purchase of investment securities held to maturity

(10,166
)
Proceeds from sale of real estate owned
857

2,592

Purchase of premises and equipment
(185
)
(200
)
Net cash used for by investing activities
(21,040
)
(11,407
)
 
 
 
Cash flows from financing activities:
 
 
Increase (decrease) in deposits, net
2,289

(6,337
)
Proceeds from long-term borrowings
20,000


Repayments of long-term borrowings
(36
)
(33
)
Exercise of stock options
285

148

Tax effect from stock based compensation
179

15

Cash dividends
(2,065
)
(2,041
)
Treasury stock purchases
(3,321
)
(5,283
)
Net cash provided by (used for) financing activities
17,331

(13,531
)
 
 
 
Net increase in cash and cash equivalents
31,605

29,956

Cash and cash equivalents at beginning of period
51,206

81,403

Cash and cash equivalents at end of period
$
82,811

$
111,359

Supplemental information:
 
 
Cash paid for interest
$
3,411

$
3,581

Cash paid for income taxes
$
1,934

$
3,045

Transfer of loans held for sale to held for investment
$
1,584

$
2,083

Real estate acquired in the settlement of loans
$
1,298

$
4,231


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, 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 and six months ended December 31, 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 adoption 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, except the adoption of ASU 2015-05, ASU 2015-10 and ASU 2015-12 beginning in fiscal 2017 which did not have a material impact on its condensed consolidated financial statements and the newly issued ASU 2016-19 mentioned below.
 
ASU 2016-19:
In December 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-19, "Technical Corrections and Improvements." The amendments in this ASU cover a wide range of topics in the Codification. The reason is provided before each amendment for clarity and ease of understanding. The amendments in this ASU are generally related to: (1) 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. The amendments in this ASU are effective upon issuance and the Corporation's adoption of this ASU did not have a material impact on its condensed consolidated financial statements.


Note 3: Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the entity.

As of December 31, 2016 and 2015, there were outstanding options to purchase 903,000 shares and 1.0 million shares of the Corporation’s common stock, respectively, of which 151,000 shares and 216,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of December 31, 2016 and 2015, there were outstanding restricted stock awards of 105,000 shares and 197,500 shares, respectively, all of which had a dilutive effect.


7



The following table provides the basic and diluted EPS computations for the quarters and six months ended December 31, 2016 and 2015, respectively.
 
(In Thousands, Except Earnings Per Share)
For the Quarters Ended
December 31,
For the Six Months Ended
December 31,
 
2016
2015
2016
2015
Numerator:
 
 
 
 
Net income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders
$
1,504

$
982

$
3,098

$
3,425

 
 
 
 
 
Denominator:
 

 

 

 

Denominator for basic earnings per share:
 

 

 

 

 Weighted-average shares
7,954

8,396

7,951

8,481

 
 
 
 
 
   Effect of dilutive shares:
 
 
 
 
Stock options
170

142

164

127

Restricted stock
21

62

35

64

 
 
 
 
 
Denominator for diluted earnings per share:
 

 

 

 

Adjusted weighted-average shares and assumed conversions
8,145

8,600

8,150

8,672

 
 
 
 
 
Basic earnings per share
$
0.19

$
0.12

$
0.39

$
0.40

Diluted earnings per share
$
0.18

$
0.11

$
0.38

$
0.39




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, 2016 and 2015, respectively.
 
For the Quarter Ended December 31, 2016
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
7,821

$
1,264

$
9,085

Recovery from the allowance for loan losses
(346
)
(4
)
(350
)
Net interest income, after recovery from the allowance for loan losses
8,167

1,268

9,435

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
250

60

310

     Gain on sale of loans, net (2)
37

6,441

6,478

Deposit account fees
552


552

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(58
)
(5
)
(63
)
Card and processing fees
361


361

Other
194


194

Total non-interest income
1,336

6,496

7,832

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,642

5,707

10,349

Premises and occupancy
792

443

1,235

Operating and administrative expenses
1,152

1,932

3,084

Total non-interest expense
6,586

8,082

14,668

Income (loss) before income taxes
2,917

(318
)
2,599

Provision (benefit) for income taxes
1,228

(133
)
1,095

Net income (loss)
$
1,689

$
(185
)
$
1,504

Total assets, end of period
$
1,035,158

$
156,997

$
1,192,155


(1) 
Includes an inter-company charge of $128 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 $109 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, 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.

10



 
For the Six Months Ended December 31, 2016
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
15,396

$
2,777

$
18,173

Recovery from the allowance for loan losses
(310
)
(190
)
(500
)
Net interest income, after recovery from the allowance for loan losses
15,706

2,967

18,673

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
319

258

577

     Gain on sale of loans, net (2)
38

14,436

14,474

Deposit account fees
1,102


1,102

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(163
)
(3
)
(166
)
Card and processing fees
725


725

Other
372


372

Total non-interest income
2,393

14,691

17,084

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
9,536

12,127

21,663

Premises and occupancy
1,648

876

2,524

Operating and administrative expenses
2,299

3,814

6,113

Total non-interest expense
13,483

16,817

30,300

Income before income taxes
4,616

841

5,457

Provision for income taxes
2,005

354

2,359

Net income
$
2,611

$
487

$
3,098

Total assets, end of period
$
1,035,158

$
156,997

$
1,192,155


(1) 
Includes an inter-company charge of $223 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 $168 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, 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.



12



Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of December 31, 2016 and June 30, 2016 were as follows:
December 31, 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)
32,569

283

(2
)
32,850

32,569

Total investment securities - held to maturity
$
33,369

$
283

$
(2
)
$
33,650

$
33,369

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
U.S. government agency MBS
$
5,698

$
217

$

$
5,915

$
5,915

U.S. government sponsored enterprise MBS
3,628

197


3,825

3,825

Private issue CMO (2)
534

4


538

538

Total investment securities - available for sale
$
9,860

$
418

$

$
10,278

$
10,278

Total investment securities
$
43,229

$
701

$
(2
)
$
43,928

$
43,647


(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 second quarters of fiscal 2017 and 2016, the Corporation received MBS principal payments of $3.2 million and $697,000, respectively, and there were no sales of investment securities during these periods. The Corporation did not purchase any investment securities in the second quarter of fiscal 2017, but in the second quarter of fiscal 2016, the Corporation purchased U.S. government sponsored enterprise MBS totaling $10.2 million to be held to maturity. For the first six months of fiscal 2017 and 2016, the Corporation received MBS principal payments of $7.3 million and$1.3 million, respectively, and there were no sales of investment securities during these periods. The Corporation did not purchase any investment securities in the first six months of fiscal 2017, but in the first six months of fiscal 2016, the Corporation purchased U.S. government sponsored enterprise MBS totaling $10.2 million to be held to maturity. In July 2016, 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.

13



  
The Corporation held investments with an unrealized loss position of $2,000 at December 31, 2016 and $1,000 at June 30, 2016.
As of December 31, 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:
 
 
 
 
 
 
 
 
U.S. government sponsored enterprise MBS
$
3,035

$
2

 
$

$

 
$
3,035

$
2

Total investment securities
$
3,035

$
2

 
$

$


$
3,035

$
2

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 December 31, 2016 and 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 December 31, 2016 and 2015; therefore, no impairment losses were recorded for the quarters and six months ended December 31, 2016 and 2015.

Contractual maturities of investment securities as of December 31, 2016 and June 30, 2016 were as follows:
 
December 31, 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
15,854

15,896

 
18,904

19,203

Due after ten years
16,715

16,954

 
20,275

20,435

Total investment securities - held to maturity
$
33,369

$
33,650

 
$
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
9,860

10,278

 
10,904

11,396

No stated maturity (common stock)


 
147

147

Total investment securities - available for sale
$
9,860

$
10,278

 
$
11,051

$
11,543

Total investment securities
$
43,229

$
43,928

 
$
51,030

$
51,981




14



Note 6: Loans Held for Investment
 
Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands)
December 31,
2016
June 30,
2016
Mortgage loans:
 
 
Single-family
$
316,595

$
324,497

Multi-family
448,465

415,627

Commercial real estate
98,044

99,528

Construction
16,872

14,653

Other
265

332

Commercial business loans
610

636

Consumer loans
184

203

Total loans held for investment, gross
881,035

855,476

 
 
 
Undisbursed loan funds
(9,953
)
(11,258
)
Advance payments of escrows
99

56

Deferred loan costs, net
5,195

4,418

Allowance for loan losses
(8,391
)
(8,670
)
Total loans held for investment, net
$
867,985

$
840,022


As of December 31, 2016, the Corporation had $9.9 million in mortgage loans that are subject to negative amortization, consisting of $6.8 million in multi-family loans, $3.0 million in single-family loans and $140,000 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 second quarters and six months 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 adjustable rate mortgage ("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, 2016 and June 30, 2016, the interest-only ARM loans were $35.8 million and $64.7 million, or 4.1% and 7.6% of loans held for investment, respectively. As of December 31, 2016, the Corporation had $6.0 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 carried at fair value.

The following table sets forth information at December 31, 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 both December 31, 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.


15



 
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
$
212,860

$
18,008

$
61,426

$
11,151

$
13,150

$
316,595

Multi-family
74,859

181,691

168,987

20,002

2,926

448,465

Commercial real estate
17,909

40,959

36,270


2,906

98,044

Construction
11,217




5,655

16,872

Other




265

265

Commercial business loans
96




514

610

Consumer loans
184





184

Total loans held for investment, gross
$
317,125

$
240,658

$
266,683

$
31,153

$
25,416

$
881,035


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.


16



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, 2016
(In Thousands)
Single-family
Multi-family
Commercial Real Estate
Construction
Other Mortgage
Commercial Business
Consumer
Total
 
 
 
 
 
 
 
 
 
 
Pass
$
301,958

$
444,303

$
98,044

$
16,872

$
265

$
525

$
184

$
862,151

Special Mention
4,710

3,511






8,221

Substandard
9,927

651




85


10,663

 
Total loans held for
   investment, gross
$
316,595

$
448,465

$
98,044

$
16,872

$
265

$
610

$
184

$
881,035


 
 
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.


17



The following table summarizes the Corporation’s allowance for loan losses at December 31, 2016 and June 30, 2016:
(In Thousands)
December 31, 2016
June 30, 2016
Collectively evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family
$
4,186

$
4,933

Multi-family
3,156

2,800

Commercial real estate
836

848

Construction
65

31

Other
6

7

Commercial business loans
22

23

Consumer loans
8

8

Total collectively evaluated allowance
8,279

8,650

 
 
 
Individually evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family
97


Commercial business loans
15

20

Total individually evaluated allowance
112

20

Total loan loss allowance
$
8,391

$
8,670



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)
2016
2015
2016
2015
 
 
 
 
 
Allowance at beginning of period
$
8,725

$
9,034

$
8,670

$
8,724

 
 
 
 
 
Recovery from the allowance for loan losses
(350
)
(362
)
(500
)
(400
)
 
 
 
 
 
Recoveries:
 

 

 

 

Mortgage loans:
 

 

 

 

Single-family
33

158

296

227

Multi-family
6

58

13

114

Commercial real estate



216

Commercial business loans



85

Consumer loans


1


Total recoveries
39

216

310

642

 
 
 
 
 
Charge-offs:
 

 

 

 

Mortgage loans:
 

 

 

 

Single-family
(21
)
(118
)
(87
)
(196
)
Consumer loans
(2
)
(2
)
(2
)
(2
)
Total charge-offs
(23
)
(120
)
(89
)
(198
)
 
 
 
 
 
Net recoveries
16

96

221

444

Balance at end of period
$
8,391

$
8,768

$
8,391

$
8,768

 
 

 

 

 

Allowance for loan losses as a percentage of gross loans held for investment at the end of the period
0.96
 %
1.07
 %
0.96
 %
1.07
 %
Net recoveries as a percentage of average loans receivable, net, during the period (annualized)
(0.01
)%
(0.04
)%
(0.04
)%
(0.09
)%
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period
78.69
 %
67.35
 %
78.69
 %
67.35
 %



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, 2016
(In Thousands)
Current
30-89 Days Past Due
Non-Accrual (1)
Total Loans Held for Investment
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Single-family
$
305,371

$
1,297

$
9,927

$
316,595

 
Multi-family
447,814


651

448,465

 
Commercial real estate
98,044



98,044

 
Construction
16,872



16,872

 
Other
265



265

Commercial business loans