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EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20170930x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20170930x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20170930x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-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
 
Condensed Consolidated Statements of Operations
 
 
 
for the Quarters Ended September 30, 2017 and 2016
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
for the Quarters Ended September 30, 2017 and 2016
 
Condensed Consolidated Statements of Stockholders’ Equity
 
 
 
for the Quarters Ended September 30, 2017 and 2016
 
Condensed Consolidated Statements of Cash Flows
 
 
 
for the Three Months Ended September 30, 2017 and 2016
 
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, 2017 and June 30, 2017
 
Comparison of Operating Results
 
 
 
for the Quarters Ended September 30, 2017 and 2016
 
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
(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.

1



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.

2



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.

3



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.

4



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.

5



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.
 



6



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





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, 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.


8




 
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.
 
 
 
 
 
 
 
 




9



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.
  


10



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





11



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


12



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


13



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




14



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.


15



 
 
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
%



16



 
 
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
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



17



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.


18



 
 
 
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