PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20170930x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20170930x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20170930x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20170930x10qxex311.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, 2017



[ ]	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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 October 31, 2017
Common stock, $ 0.01 par value, per share		7,609,552 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, 2017 and June 30, 2017	1
	Condensed Consolidated Statements of Operations
		for the Quarters Ended September 30, 2017 and 2016	2
	Condensed Consolidated Statements of Comprehensive Income
		for the Quarters Ended September 30, 2017 and 2016	3
	Condensed Consolidated Statements of Stockholders’ Equity
		for the Quarters Ended September 30, 2017 and 2016	4
	Condensed Consolidated Statements of Cash Flows
		for the Three Months Ended September 30, 2017 and 2016	5
	Notes to Unaudited Interim Condensed Consolidated Financial Statements		6

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

	General		37
	Safe-Harbor Statement		38
	Critical Accounting Policies		39
	Executive Summary and Operating Strategy		39
	Off-Balance Sheet Financing Arrangements and Contractual Obligations		40
	Comparison of Financial Condition at September 30, 2017 and June 30, 2017		41
	Comparison of Operating Results
		for the Quarters Ended September 30, 2017 and 2016	43
	Asset Quality		48
	Loan Volume Activities		56
	Liquidity and Capital Resources		57
	Supplemental Information		59

ITEM 3 -	Quantitative and Qualitative Disclosures about Market Risk		59

ITEM 4 -	Controls and Procedures		62

PART II -	OTHER INFORMATION

ITEM 1 -	Legal Proceedings		63
ITEM 1A -	Risk Factors		64
ITEM 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		64
ITEM 3 -	Defaults Upon Senior Securities		65
ITEM 4 -	Mine Safety Disclosures		65
ITEM 5 -	Other Information		65
ITEM 6 -	Exhibits		65

SIGNATURES			67

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Financial Condition

(Unaudited)

In Thousands, Except Share Information



	September 30, 2017			June 30, 2017
Assets
Cash and cash equivalents	$	49,217		$	72,826
Investment securities – held to maturity, at cost	64,751			60,441
Investment securities – available for sale, at fair value	8,940			9,318
Loans held for investment, net of allowance for loan losses of $8,063 and $8,039, respectively; includes $6,924 and $6,445 at fair value, respectively	908,060			904,919
Loans held for sale, at fair value	127,234			116,548
Accrued interest receivable	2,989			2,915
Real estate owned, net	—			1,615
Federal Home Loan Bank (“FHLB”) – San Francisco stock	8,108			8,108
Premises and equipment, net	7,333			6,641
Prepaid expenses and other assets	17,154			17,302

Total assets	$	1,193,786		$	1,200,633

Liabilities and Stockholders’ Equity

Liabilities:
Non interest-bearing deposits	$	82,415		$	77,917
Interest-bearing deposits	844,601			848,604
Total deposits	927,016			926,521

Borrowings	121,206			126,226
Accounts payable, accrued interest and other liabilities	20,643			19,656
Total liabilities	1,068,865			1,072,403

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; 17,970,865 and 17,949,365 shares issued; 7,609,552 and 7,714,052 shares outstanding, respectively)	180			180
Additional paid-in capital	93,669			93,209
Retained earnings	191,451			192,754
Treasury stock at cost (10,361,313 and 10,235,313 shares, respectively)	(160,609		)	(158,142		)
Accumulated other comprehensive income, net of tax	230			229

Total stockholders’ equity	124,921			128,230

Total liabilities and stockholders’ equity	$	1,193,786		$	1,200,633

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

In Thousands, Except Per Share Information



	Quarter Ended September 30,
	2017			2016
Interest income:
Loans receivable, net	$	10,157		$	10,480
Investment securities	257			84
FHLB – San Francisco stock	141			185
Interest-earning deposits	190			55
Total interest income	10,745			10,804

Interest expense:
Checking and money market deposits	103			98
Savings deposits	149			144
Time deposits	639			772
Borrowings	736			702
Total interest expense	1,627			1,716

Net interest income	9,118			9,088
Provision (recovery) for loan losses	169			(150		)
Net interest income, after provision (recovery) for loan losses	8,949			9,238

Non-interest income:
Loan servicing and other fees	363			267
Gain on sale of loans, net	4,847			7,996
Deposit account fees	558			550
Loss on sale and operations of real estate owned acquired in the settlement of loans, net	(40		)	(103		)
Card and processing fees	381			364
Other	243			178
Total non-interest income	6,352			9,252

Non-interest expense:
Salaries and employee benefits	9,269			11,314
Premises and occupancy	1,314			1,289
Equipment	362			362
Professional expenses	520			505
Sales and marketing expenses	203			296
Deposit insurance premiums and regulatory assessments	184			248
Other⁽¹⁾	3,882			1,618
Total non-interest expense	15,734			15,632

(Loss) income before income taxes	(433		)	2,858
(Benefit) provision for income taxes	(208		)	1,264
Net (loss) income	$	(225	)	$	1,594

Basic (loss) earnings per share	$	(0.03	)	$	0.20
Diluted (loss) earnings per share	$	(0.03	)	$	0.20
Cash dividends per share	$	0.14		$	0.13

^.^.

⁽¹⁾ Includes $2.75 million of litigation settlement expense for the quarter ended September 30, 2017.

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

In Thousands



	For the Quarters Ended September 30,
	2017			2016
Net (loss) income	$	(225	)	$	1,594

Change in unrealized holding gain (loss) on securities available for sale	2			(57		)
Reclassification of (gains) losses to net income	—			—
Other comprehensive income (loss), before income taxes	2			(57		)

Income tax provision (benefit)	1			(24		)
Other comprehensive income (loss)	1			(33		)

Total comprehensive (loss) income	$	(224	)	$	1,561

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

In Thousands, Except Share Information

For the Quarters Ended September 30, 2017 and 2016:



	Common Stock				Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income, Net of Tax
	Shares		Amount												Total
Balance at June 30, 2017	7,714,052		$	180	$	93,209	$	192,754		$	(158,142	)	$	229	$	128,230

Net loss							(225		)						(225		)
Other comprehensive income													1		1
Purchase of treasury stock	(126,000	)								(2,450		)			(2,450		)
Exercise of stock options	21,500				177										177
Amortization of restricted stock					149										149
Forfeiture of restricted stock					17					(17		)			—
Stock options expense					117										117
Cash dividends⁽¹⁾							(1,078		)						(1,078		)

Balance at September 30, 2017	7,609,552		$	180	$	93,669	$	191,451		$	(160,609	)	$	230	$	124,921

⁽¹⁾Cash dividends of $0.14 per share were paid in the quarter ended September 30, 2017.



	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.

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In Thousands)



	Three Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net (loss) income	$	(225	)	$	1,594
Adjustments to reconcile net (loss) income to net cash used for operating activities:
Depreciation and amortization	664			697
Provision (recovery) for loan losses	169			(150		)
(Recovery) provision of losses on real estate owned	(552		)	100
Gain on sale of loans, net	(4,847		)	(7,996		)
Loss (gain) on sale of real estate owned, net	580			(54		)
Stock-based compensation	266			702
(Benefit) provision for deferred income taxes	(930		)	1,420
Tax effect from stock based compensation	—			(187		)
Increase in accounts payable, accrued interest and other liabilities	1,039			1,828
Decrease (increase) in prepaid expenses and other assets	617			(361		)
Loans originated for sale	(392,292		)	(647,342		)
Proceeds from sale of loans	386,799			579,698
Net cash used for operating activities	(8,712		)	(70,051		)

Cash flows from investing activities:
Increase in loans held for investment, net	(3,517		)	(15,097		)
Principal payments from investment securities held to maturity	5,570			3,481
Principal payments from investment securities available for sale	383			567
Purchase of investment securities held to maturity	(10,102		)	—
Proceeds from sale of real estate owned	1,587			307
Purchase of premises and equipment	(901		)	(78		)
Net cash used for investing activities	(6,980		)	(10,820		)

Cash flows from financing activities:
Increase in deposits, net	495			17,118
(Repayments) proceeds from short-term borrowings, net	(5,000		)	35,000
Proceeds from long-term borrowings	—			20,000
Repayments of long-term borrowings	(20		)	(18		)
Exercise of stock options	177			17
Withholding taxes on stock based compensation	(41		)	(501		)
Tax effect from stock based compensation	—			187
Cash dividends	(1,078		)	(1,033		)
Treasury stock purchases	(2,450		)	(1,662		)
Net cash (used for) provided by financing activities	(7,917		)	69,108

Net decrease in cash and cash equivalents	(23,609		)	(11,763		)
Cash and cash equivalents at beginning of period	72,826			51,206
Cash and cash equivalents at end of period	$	49,217		$	39,443
Supplemental information:
Cash paid for interest	$	1,606		$	1,671
Cash paid for income taxes	$	—		$	100
Transfer of loans held for sale to held for investment	$	521		$	760
Real estate acquired in the settlement of loans	$	—		$	1,298

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

PROVIDENT FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

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, 2017 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, 2017. The results of operations for the quarter and three months ended September 30, 2017 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2018.

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, 2017, except the adoption of ASU 2016-09 beginning in fiscal 2018 which did not have a material impact on its condensed consolidated financial statements.

Note 3: (Loss) Earnings Per Share

Basic (loss) 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, 2017 and 2016, there were outstanding options to purchase 591,250 shares and 932,000 shares of the Corporation’s common stock, respectively. Of those shares, as of September 30, 2017 and 2016, there were 591,250 shares and 200,000 shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive. As of September 30, 2017, there were outstanding restricted stock awards of 109,000 shares with no dilutive effect in the first quarter of fiscal 2018; and as of September 30, 2016, there were outstanding restricted stock awards of 110,250 shares which had a dilutive effect in the first quarter of fiscal 2017.

The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2017 and 2016, respectively.



(In Thousands, Except Earnings Per Share)	For the Quarters Ended September 30,
	2017			2016
Numerator:
Net (loss) income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders	$	(225	)	$	1,594

Denominator:
Denominator for basic earnings per share:
Weighted-average shares	7,694			7,948

Effect of dilutive shares:
Stock options	—			158
Restricted stock	—			48

Denominator for diluted earnings per share:
Adjusted weighted-average shares and assumed conversions	7,694			8,154

Basic (loss) earnings per share	$	(0.03	)	$	0.20
Diluted (loss) earnings per share	$	(0.03	)	$	0.20

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, 2017 and 2016, respectively.



	For the Quarter Ended September 30, 2017
(In Thousands)	Provident Bank			Provident Bank Mortgage			Consolidated Totals
Net interest income	$	8,550		$	568		$	9,118
Provision for loan losses	169			—			169
Net interest income, after provision for loan losses	8,381			568			8,949

Non-interest income:
Loan servicing and other fees ⁽¹⁾	47			316			363
Gain on sale of loans, net ⁽²⁾	—			4,847			4,847
Deposit account fees	558			—			558
Loss on sale and operations of real estate owned acquired in the settlement of loans, net	(40		)	—			(40		)
Card and processing fees	381			—			381
Other	243			—			243
Total non-interest income	1,189			5,163			6,352

Non-interest expense:
Salaries and employee benefits	4,502			4,767			9,269
Premises and occupancy	827			487			1,314
Operating and administrative expenses	2,251			2,900			5,151
Total non-interest expense	7,580			8,154			15,734
Income (loss) before income taxes	1,990			(2,423		)	(433		)
Provision (benefit) for income taxes	811			(1,019		)	(208		)
Net income (loss)	$	1,179		$	(1,404	)	$	(225	)
Total assets, end of period	$	1,066,294		$	127,492		$	1,193,786


⁽¹⁾	Includes an inter-company charge of $240 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.


⁽²⁾	Includes an inter-company charge of $59 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.



	For the Quarter Ended September 30, 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.

Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 2017 and June 30, 2017 were as follows:



September 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value		Carrying Value
(In Thousands)
Held to maturity:
Certificates of deposit	$	600	$	—	$	—		$	600	$	600
U.S. government sponsored enterprise MBS ⁽¹⁾	64,151		205		(28		)	64,328		64,151
Total investment securities - held to maturity	$	64,751	$	205	$	(28	)	$	64,928	$	64,751

Available for sale:
U.S. government agency MBS	$	4,943	$	199	$	—		$	5,142	$	5,142
U.S. government sponsored enterprise MBS	3,186		164		—			3,350		3,350
Private issue CMO ⁽²⁾	442		6		—			448		448
Total investment securities - available for sale	$	8,571	$	369	$	—		$	8,940	$	8,940
Total investment securities	$	73,322	$	574	$	(28	)	$	73,868	$	73,691


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


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



June 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value		Carrying Value
(In Thousands)
Held to maturity:
Certificates of deposit	$	600	$	—	$	—		$	600	$	600
U.S. government sponsored enterprise MBS	59,841		265		(77		)	60,029		59,841
Total investment securities - held to maturity	$	60,441	$	265	$	(77	)	$	60,629	$	60,441

Available for sale:
U.S. government agency MBS	$	5,197	$	186	$	—		$	5,383	$	5,383
U.S. government sponsored enterprise MBS	3,301		173		—			3,474		3,474
Private issue CMO	456		5		—			461		461
Total investment securities - available for sale	$	8,954	$	364	$	—		$	9,318	$	9,318
Total investment securities	$	69,395	$	629	$	(77	)	$	69,947	$	69,759

In the first quarters of fiscal 2018 and 2017, the Corporation received MBS principal payments of $6.0 million and $4.0 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased U.S. government sponsored enterprise MBS totaling $10.1 million, to be held to maturity, during the first quarter of fiscal 2018 and no purchases were made during the first quarter of fiscal 2017.

The Corporation held investments with an unrealized loss position of $28,000 at September 30, 2017 and $77,000 at June 30, 2017.



As of September 30, 2017	Unrealized Holding Losses				Unrealized Holding Losses				Unrealized Holding Losses
(In Thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Held to maturity:
U.S. government sponsored enterprise MBS	$	35,179	$	28	$	—	$	—	$	35,179	$	28
Total investment securities	$	35,179	$	28	$	—	$	—	$	35,179	$	28



As of June 30, 2017	Unrealized Holding Losses				Unrealized Holding Losses				Unrealized Holding Losses
(In Thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Held to maturity:
U.S. government sponsored enterprise MBS	$	28,722	$	77	$	—	$	—	$	28,722	$	77
Total investment securities	$	28,722	$	77	$	—	$	—	$	28,722	$	77

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. As of September 30, 2017 and June 30, 2017, 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, 2017 and 2016; therefore, no impairment losses were recorded for the quarters ended September 30, 2017 and 2016.

Contractual maturities of investment securities as of September 30, 2017 and June 30, 2017 were as follows:



	September 30, 2017				June 30, 2017
(In Thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Held to maturity:
Due in one year or less	$	600	$	600	$	600	$	600
Due after one through five years	7,840		7,882		4,698		4,708
Due after five through ten years	44,245		44,236		41,404		41,374
Due after ten years	12,066		12,210		13,739		13,947
Total investment securities - held to maturity	$	64,751	$	64,928	$	60,441	$	60,629

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	8,571		8,940		8,954		9,318
Total investment securities - available for sale	$	8,571	$	8,940	$	8,954	$	9,318
Total investment securities	$	73,322	$	73,868	$	69,395	$	69,947

Note 6: Loans Held for Investment

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



(In Thousands)	September 30, 2017			June 30, 2017
Mortgage loans:
Single-family	$	322,363		$	322,197
Multi-family	482,617			479,959
Commercial real estate	96,863			97,562
Construction	16,290			16,009
Commercial business loans	466			576
Consumer loans	131			129
Total loans held for investment, gross	918,730			916,432

Undisbursed loan funds	(8,189		)	(9,015		)
Advance payments of escrows	24			61
Deferred loan costs, net	5,558			5,480
Allowance for loan losses	(8,063		)	(8,039		)
Total loans held for investment, net	$	908,060		$	904,919

The following table sets forth information at September 30, 2017 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 2% of loans held for investment at both September 30, 2017 and June 30, 2017. Adjustable rate loans having no stated repricing dates that reprice when the index they are tied to reprices (e.g. prime rate index) and checking account overdrafts are reported as repricing within one year. The table does not include any estimate of prepayments which may cause the Corporation’s actual repricing experience to differ materially from that shown.



	Adjustable Rate
(In Thousands)	Within One Year		After One Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		Fixed Rate		Total
Mortgage loans:
Single-family	$	161,098	$	21,404	$	77,223	$	48,293	$	14,345	$	322,363
Multi-family	111,180		174,809		179,602		14,441		2,585		482,617
Commercial real estate	23,134		40,725		32,377		—		627		96,863
Construction	15,861		—		—		—		429		16,290
Commercial business loans	61		—		—		—		405		466
Consumer loans	131		—		—		—		—		131
Total loans held for investment, gross	$	311,465	$	236,938	$	289,202	$	62,734	$	18,391	$	918,730

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

product, retail sales, unemployment rates, employment growth, California home sales and median California home prices. The Corporation assigns individual factors for the quantitative and qualitative methods for each loan category and each internal risk rating.

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


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


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

▪

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


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


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

The following tables summarize gross loans held for investment, net of fair value adjustments, by loan types and risk category at the dates indicated:



		September 30, 2017
(In Thousands)		Single-family		Multi-family		Commercial Real Estate		Construction		Commercial Business		Consumer		Total

Pass		$	309,744	$	482,617	$	96,863	$	15,364	$	387	$	131	$	905,106
Special Mention		4,267		—		—		926		—		—		5,193
Substandard		8,352		—		—		—		79		—		8,431
	Total loans held for investment, gross	$	322,363	$	482,617	$	96,863	$	16,290	$	466	$	131	$	918,730



		June 30, 2017
(In Thousands)		Single-family		Multi-family		Commercial Real Estate		Construction		Commercial Business		Consumer		Total

Pass		$	310,738	$	479,687	$	97,361	$	16,009	$	496	$	129	$	904,420
Special Mention		3,443		272		—		—		—		—		3,715
Substandard		8,016		—		201		—		80		—		8,297
	Total loans held for investment, gross	$	322,197	$	479,959	$	97,562	$	16,009	$	576	$	129	$	916,432

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management’s continuing analysis of the factors underlying the quality of the loans held for investment. These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans. The provision (recovery) for (from) the allowance for loan losses is charged (credited) against operations on a quarterly basis, as necessary, to maintain the allowance at appropriate levels. Although management believes it uses the best information available to make such determinations, there can

be no assurance that regulators, in reviewing the Corporation’s loans held for investment, will not request a significant increase in its allowance for loan losses. Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the Corporation’s control.

Non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans. For loans that were modified from their original terms, were re-underwritten and identified in the Corporation’s asset quality reports as troubled debt restructurings (“restructured loans”), the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent. The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses. The allowance for loan losses for non-performing loans is determined by applying Accounting Standards Codification (“ASC”) 310, “Receivables.” For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method. For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method. For non-performing commercial real estate loans, an individually evaluated allowance is derived based on the loan's discounted cash flow fair value (for restructured loans) or collateral fair value less estimated selling costs and if the fair value is higher than the loan balance, no allowance is required.

The following table summarizes the Corporation’s allowance for loan losses at September 30, 2017 and June 30, 2017:



(In Thousands)	September 30, 2017		June 30, 2017
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	3,562	$	3,515
Multi-family	3,431		3,420
Commercial real estate	875		879
Construction	140		96
Commercial business loans	16		21
Consumer loans	7		7
Total collectively evaluated allowance	8,031		7,938

Individually evaluated for impairment:
Mortgage loans:
Single-family	17		86
Commercial business loans	15		15
Total individually evaluated allowance	32		101
Total loan loss allowance	$	8,063	$	8,039

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)	2017			2016

Allowance at beginning of period	$	8,039		$	8,670

Provision (recovery) for loan losses	169			(150		)

Recoveries:
Mortgage loans:
Single-family	84			263
Multi-family	—			7
Consumer loans	—			1
Total recoveries	84			271

Charge-offs:
Mortgage loans:
Single-family	(229		)	(66		)
Total charge-offs	(229		)	(66		)

Net (charge-offs) recoveries	(145		)	205
Balance at end of period	$	8,063		$	8,725

Allowance for loan losses as a percentage of gross loans held for investment at the end of the period	0.88		%	1.01		%
Net charge-offs (recoveries) as a percentage of average loans receivable, net, during the period (annualized)	0.06		%	(0.08		)%

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, 2017
(In Thousands)		Current		30-89 Days Past Due		Non-Accrual ⁽¹⁾		Total Loans Held for Investment

Mortgage loans:
	Single-family	$	312,499	$	1,512	$	8,352	$	322,363
	Multi-family	482,617		—		—		482,617
	Commercial real estate	96,863		—		—		96,863
	Construction	16,290		—		—		16,290
Commercial business loans		387		—		79		466
Consumer loans		131		—		—		131
	Total loans held for investment, gross	$	908,787	$	1,512	$	8,431	$	918,730

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



		June 30, 2017
(In Thousands)		Current		30-89 Days Past Due		Non-Accrual ⁽¹⁾		Total Loans Held for Investment

Mortgage loans:
	Single-family	$	313,146	$	1,035	$	8,016	$	322,197
	Multi-family	479,959		—		—		479,959
	Commercial real estate	97,361		—		201		97,562
	Construction	16,009		—		—		16,009
Commercial business loans		496		—		80		576
Consumer loans		129		—		—		129
	Total loans held for investment, gross	$	907,100	$	1,035	$	8,297	$	916,432

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

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



		Quarter Ended September 30, 2017
(In Thousands)		Single-family			Multi-family			Commercial Real Estate			Construction			Commercial Business			Consumer			Total
Allowance for loan losses:
Allowance at beginning of period		$	3,601		$	3,420		$	879		$	96		$	36		$	7		$	8,039
Provision (recovery) for loan losses		123			11			(4		)	44			(5		)	—			169
Recoveries		84			—			—			—			—			—			84
Charge-offs		(229		)	—			—			—			—			—			(229		)
	Allowance for loan losses, end of period	$	3,579		$	3,431		$	875		$	140		$	31		$	7		$	8,063

Allowance for loan losses:
Individually evaluated for impairment		$	17		$	—		$	—		$	—		$	15		$	—		$	32
Collectively evaluated for impairment		3,562			3,431			875			140			16			7			8,031
	Allowance for loan losses, end of period	$	3,579		$	3,431		$	875		$	140		$	31		$	7		$	8,063

Loans held for investment:
Individually evaluated for impairment		$	6,239		$	—		$	—		$	—		$	79		$	—		$	6,318
Collectively evaluated for impairment		316,124			482,617			96,863			16,290			387			131			912,412
	Total loans held for investment, gross	$	322,363		$	482,617		$	96,863		$	16,290		$	466		$	131		$	918,730
Allowance for loan losses as a percentage of gross loans held for investment		1.11		%	0.71		%	0.90		%	0.86		%	6.65		%	5.34		%	0.88		%



		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		%

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, the borrower(s) has demonstrated sustained payment performance and future monthly principal and interest payments are expected to be collected on a timely basis. Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell, to establish realizable value. This analysis may identify a specific impairment amount needed or may conclude that no reserve is needed. Loans that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves.



			At September 30, 2017
			Unpaid										Net
			Principal		Related			Recorded					Recorded
(In Thousands)			Balance		Charge-offs			Investment		Allowance⁽¹⁾			Investment

Mortgage loans:
	Single-family:
		With a related allowance	$	2,407	$	—		$	2,407	$	(463	)	$	1,944
		Without a related allowance⁽²⁾	7,013		(1,030		)	5,983		—			5,983
	Total single-family		9,420		(1,030		)	8,390		(463		)	7,927

Commercial business loans:
	With a related allowance		79		—			79		(15		)	64
Total commercial business loans			79		—			79		(15		)	64

Total non-performing loans			$	9,499	$	(1,030	)	$	8,469	$	(478	)	$	7,991

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

⁽²⁾ There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.



			At June 30, 2017
			Unpaid										Net
			Principal		Related			Recorded					Recorded
(In Thousands)			Balance		Charge-offs			Investment		Allowance⁽¹⁾			Investment

Mortgage loans:
	Single-family:
		With a related allowance	$	1,821	$	—		$	1,821	$	(325	)	$	1,496
		Without a related allowance⁽²⁾	7,119		(886		)	6,233		—			6,233
	Total single-family		8,940		(886		)	8,054		(325		)	7,729

	Commercial real estate:
		Without a related allowance⁽²⁾	201		—			201		—			201
	Total commercial real estate		201		—			201		—			201

Commercial business loans:
	With a related allowance		80		—			80		(15		)	65
Total commercial business loans			80		—			80		(15		)	65

PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q - November 7, 2017

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