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EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20171231x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20171231x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-20171231x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-20171231x10qxex311.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, 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 January 31, 2018
Common stock, $ 0.01 par value, per share
 
7,477,776 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
 
 
 
 
as of December 31, 2017 and June 30, 2017
 
 
 
 
for the Quarters and Six Months Ended December 31, 2017 and 2016
 
 
 
 
for the Quarters and Six Months Ended December 31, 2017 and 2016
 
 
 
 
for the Quarters and Six Months Ended December 31, 2017 and 2016
 
 
 
 
for the Six Months Ended December 31, 2017 and 2016
 
 
 
 
 
ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 3  -
 
 
 
 
ITEM 4  -
 
 
 
 
PART II  -
OTHER INFORMATION
 
 
 
 
 
ITEM 1  -
ITEM 1A -
ITEM 2  -
ITEM 3  -
ITEM 4  -
ITEM 5  -
ITEM 6  -
 
 
 
 





.
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
In Thousands, Except Share Information
 
December 31,
2017
June 30,
2017
Assets
 
 
Cash and cash equivalents
$
47,173

$
72,826

Investment securities – held to maturity, at cost
87,626

60,441

Investment securities – available for sale, at fair value
8,405

9,318

Loans held for investment, net of allowance for loan losses of
$8,075 and $8,039, respectively; includes $5,157 and $6,445 at fair value, respectively
885,976

904,919

Loans held for sale, at fair value
96,589

116,548

Accrued interest receivable
3,147

2,915

Real estate owned, net
621

1,615

Federal Home Loan Bank (“FHLB”) – San Francisco stock
8,108

8,108

Premises and equipment, net
7,816

6,641

Prepaid expenses and other assets
16,670

17,302

 
 

 

Total assets
$
1,162,131

$
1,200,633

 
 

 

Liabilities and Stockholders’ Equity
 

 

 
 

 

Liabilities:
 

 

Non interest-bearing deposits
$
77,144

$
77,917

Interest-bearing deposits
830,644

848,604

Total deposits
907,788

926,521

 
 

 

Borrowings
111,189

126,226

Accounts payable, accrued interest and other liabilities
22,454

19,656

Total liabilities
1,041,431

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;
17,976,615 and 17,949,365 shares issued; 7,474,776 and
7,714,052 shares outstanding, respectively)
180

180

Additional paid-in capital
94,011

93,209

Retained earnings
189,610

192,754

Treasury stock at cost (10,501,839 and 10,235,313 shares, respectively)
(163,311
)
(158,142
)
Accumulated other comprehensive income, net of tax
210

229

 
 

 

Total stockholders’ equity
120,700

128,230

 
 

 

Total liabilities and stockholders’ equity
$
1,162,131

$
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  
 December 31,
Six Months Ended 
 December 31,
 
2017
2016
2017
2016
Interest income:
 
 
 
 
Loans receivable, net
$
9,735

$
10,116

$
19,892

$
20,596

Investment securities
319

128

576

212

FHLB – San Francisco stock
143

458

284

643

Interest-earning deposits
168

101

358

156

Total interest income
10,365

10,803

21,110

21,607

 
 
 
 
 
Interest expense:
 
 
 
 
Checking and money market deposits
112

105

215

203

Savings deposits
149

146

298

290

Time deposits
625

731

1,264

1,503

Borrowings
728

736

1,464

1,438

Total interest expense
1,614

1,718

3,241

3,434

 
 
 
 
 
Net interest income
8,751

9,085

17,869

18,173

(Recovery) provision for loan losses
(11
)
(350
)
158

(500
)
Net interest income, after (recovery) provision for loan losses
8,762

9,435

17,711

18,673

 
 
 
 
 
Non-interest income:
 
 
 
 
Loan servicing and other fees
317

310

680

577

Gain on sale of loans, net
4,317

6,478

9,164

14,474

Deposit account fees
536

552

1,094

1,102

Loss on sale and operations of real estate owned acquired in the settlement of loans, net
(22
)
(63
)
(62
)
(166
)
Card and processing fees
373

361

754

725

Other
220

194

463

372

Total non-interest income
5,741

7,832

12,093

17,084

 
 
 
 
 
Non-interest expense:
 
 
 
 
Salaries and employee benefits
8,633

10,349

17,902

21,663

Premises and occupancy
1,260

1,235

2,574

2,524

Equipment
375

340

737

702

Professional expenses
521

630

1,041

1,135

Sales and marketing expenses
301

253

504

549

     Deposit insurance premiums and regulatory assessments
218

177

402

425

Other(1)
1,905

1,684

5,787

3,302

Total non-interest expense
13,213

14,668

28,947

30,300

 
 
 
 
 
Income before income taxes
1,290

2,599

857

5,457

Provision for income taxes(2)
2,067

1,095

1,859

2,359

Net (loss) income
$
(777
)
$
1,504

$
(1,002
)
$
3,098

 
 
 
 
 
Basic (loss) earnings per share
$
(0.10
)
$
0.19

$
(0.13
)
$
0.39

Diluted (loss) earnings per share
$
(0.10
)
$
0.18

$
(0.13
)
$
0.38

Cash dividends per share
$
0.14

$
0.13

$
0.28

$
0.26

.. 
(1) Includes $650,000 of litigation expense accrual related to "McKeen-Chaplin" and "Neal" matters for the quarter ended December 31, 2017 and $3.4 million
of litigation expense accruals related to "McKeen-Chaplin," "Neal" and "Cannon" matters for the six months ended December 31, 2017.
(2) Includes a net tax charge of $1.8 million resulting from the revaluation of net deferred tax assets consistent with the Tax Cuts and Jobs Act for the quarter and
six months ended December 31, 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  
 December 31,
For the Six Months Ended 
 December 31,
 
2017
2016
2017
2016
Net (loss) income
$
(777
)
$
1,504

$
(1,002
)
$
3,098

 
 
 
 
 
Change in unrealized holding loss on securities available for sale
(80
)
(28
)
(78
)
(84
)
Reclassification adjustment for net loss on securities available
  for sale included in net loss
45


45


Other comprehensive loss, before income taxes
(35
)
(28
)
(33
)
(84
)
 
 
 
 
 
Income tax benefit
(15
)
(12
)
(14
)
(35
)
Other comprehensive loss
(20
)
(16
)
(19
)
(49
)
 
 
 
 
 
Total comprehensive (loss) income
$
(797
)
$
1,488

$
(1,021
)
$
3,049



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, 2017 and 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, 2017
7,609,552

$
180

$
93,669

$
191,451

$
(160,609
)
$
230

$
124,921

 
 
 
 
 
 
 
 
Net loss
 
 
 
(777
)
 
 
(777
)
Other comprehensive loss
 
 
 
 
 
(20
)
(20
)
Purchase of treasury stock
(140,526
)
 
 
 
(2,702
)
 
(2,702
)
Exercise of stock options
5,750


84

 
 
 
84

Amortization of restricted stock
 
 
142

 
 
 
142

Stock options expense
 
 
116

 
 
 
116

Cash dividends(1)
 
 
 
(1,064
)
 
 
(1,064
)
 
 
 
 
 
 
 
 
Balance at December 31, 2017
7,474,776

$
180

$
94,011

$
189,610

$
(163,311
)
$
210

$
120,700


(1) Cash dividends of $0.14 per share were paid in the quarter ended December 31, 2017.
 
 
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.








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

4



For the Six Months Ended December 31, 2017 and 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, 2017
7,714,052

$
180

$
93,209

$
192,754

$
(158,142
)
$
229

$
128,230

 
 
 
 
 
 
 
 
Net loss
 
 
 
(1,002
)
 
 
(1,002
)
Other comprehensive loss
 
 
 
 
 
(19
)
(19
)
Purchase of treasury stock
(266,526
)
 
 
 
(5,152
)
 
(5,152
)
Exercise of stock options
27,250


261

 
 
 
261

Amortization of restricted stock
 
 
291

 
 
 
291

Forfeitures of restricted stock
 
 
17

 
(17
)
 

Stock options expense
 
 
233

 
 

 
233

Cash dividends(1)
 
 
 

(2,142
)
 
 
(2,142
)
 
 
 
 
 
 
 
 
Balance at December 31, 2017
7,474,776

$
180

$
94,011

$
189,610

$
(163,311
)
$
210

$
120,700


(1) Cash dividends of $0.28 per share were paid in the six months ended December 31, 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
 
 
 
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 in the six months ended December 31, 2016.


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,
 
2017
2016
Cash flows from operating activities:
 
 
Net (loss) income
$
(1,002
)
$
3,098

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
Depreciation and amortization
1,582

1,334

Provision (recovery) for loan losses
158

(500
)
(Recovery) provision of losses on real estate owned
(552
)
76

Gain on sale of loans, net
(9,164
)
(14,474
)
Loss (gain) on sale of real estate owned, net
580

(33
)
Stock-based compensation
524

977

(Benefit) provision for deferred income taxes
(79
)
1,504

Tax effect from stock based compensation

(179
)
Increase in accounts payable, accrued interest and other liabilities
3,278

3,441

Increase in prepaid expenses and other assets
(306
)
(497
)
Loans originated for sale
(724,156
)
(1,189,253
)
Proceeds from sale of loans
753,571

1,230,321

Net cash provided by operating activities
24,434

35,815

 
 
 
Cash flows from investing activities:
 
 
Decrease (increase) in loans held for investment, net
17,548

(29,008
)
Principal payments from investment securities held to maturity
10,837

6,252

Principal payments from investment securities available for sale
885

1,044

Purchase of investment securities held to maturity
(38,511
)

Proceeds from sale of real estate owned
1,587

857

Purchase of premises and equipment
(1,589
)
(185
)
Net cash used for investing activities
(9,243
)
(21,040
)
 
 
 
Cash flows from financing activities:
 
 
(Decrease) increase in deposits, net
(18,733
)
2,289

Repayments of short-term borrowings, net
(15,000
)

Proceeds from long-term borrowings

20,000

Repayments of long-term borrowings
(37
)
(36
)
Exercise of stock options
261

285

Withholding taxes on stock based compensation
(41
)
(501
)
Tax effect from stock based compensation

179

Cash dividends
(2,142
)
(2,065
)
Treasury stock purchases
(5,152
)
(3,321
)
Net cash (used for) provided by financing activities
(40,844
)
16,830

 
 
 
Net (decrease) increase in cash and cash equivalents
(25,653
)
31,605

Cash and cash equivalents at beginning of period
72,826

51,206

Cash and cash equivalents at end of period
$
47,173

$
82,811

Supplemental information:
 
 
Cash paid for interest
$
3,252

$
3,411

Cash paid for income taxes
$
2,350

$
1,934

Transfer of loans held for sale to held for investment
$
521

$
1,584

Real estate acquired in the settlement of loans
$
700

$
1,298


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, 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 six months ended December 31, 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, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting)," 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 December 31, 2017 and 2016, there were outstanding options to purchase 585,500 shares and 903,000 shares of the Corporation’s common stock, respectively. Of those shares, as of December 31, 2017 and 2016, there were 585,500 shares and 151,000 shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive. As of December 31, 2017, there were outstanding restricted stock awards of 109,000 shares with no dilutive effect in the second quarter of fiscal 2018; and as of December 31, 2016, there were outstanding restricted stock awards of 105,000 shares which had a dilutive effect in the second quarter of fiscal 2017.



7



The following table provides the basic and diluted EPS computations for the quarters and six months ended December 31, 2017 and 2016, respectively.
 
(In Thousands, Except Earnings Per Share)
For the Quarters Ended
December 31,
For the Six Months Ended
December 31,
 
2017
2016
2017
2016
Numerator:
 
 
 
 
Net (loss) income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders
$
(777
)
$
1,504

$
(1,002
)
$
3,098

 
 
 
 
 
Denominator:
 

 

 

 

Denominator for basic earnings per share:
 

 

 

 

 Weighted-average shares
7,566

7,954

7,630

7,951

 
 
 
 
 
   Effect of dilutive shares:
 
 
 
 
Stock options

170


164

Restricted stock

21


35

 
 
 
 
 
Denominator for diluted earnings per share:
 

 

 

 

Adjusted weighted-average shares and assumed conversions
7,566

8,145

7,630

8,150

 
 
 
 
 
Basic (loss) earnings per share
$
(0.10
)
$
0.19

$
(0.13
)
$
0.39

Diluted (loss) earnings per share
$
(0.10
)
$
0.18

$
(0.13
)
$
0.38





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, 2017 and 2016, respectively.
 
For the Quarter Ended December 31, 2017
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
8,217

$
534

$
8,751

Recovery from the allowance for loan losses
(11
)

(11
)
Net interest income, after recovery from the allowance for loan losses
8,228

534

8,762

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
108

209

317

     Gain on sale of loans, net (2)
22

4,295

4,317

Deposit account fees
536


536

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(22
)

(22
)
Card and processing fees
373


373

Other
220


220

Total non-interest income
1,237

4,504

5,741

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,449

4,184

8,633

Premises and occupancy
822

438

1,260

Operating and administrative expenses(3)
1,189

2,131

3,320

Total non-interest expense
6,460

6,753

13,213

Income (loss) before income taxes
3,005

(1,715
)
1,290

Provision (benefit) for income taxes(4)
2,532

(465
)
2,067

Net income (loss)
$
473

$
(1,250
)
$
(777
)
Total assets, end of period
$
1,065,204

$
96,927

$
1,162,131


(1) 
Includes an inter-company charge of $99 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 $79 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
(3) 
Includes $650,000 of litigation expense accrual for the second quarter of fiscal 2018, all of which was allocated to PBM.
(4) 
Includes a net tax charge of $1.8 million resulting from the revaluation of net deferred tax assets consistent with the Tax Cuts and Jobs Act for the quarter ended December 31, 2017.



9




 
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.


10



 
For the Six Months Ended December 31, 2017
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
16,767

$
1,102

$
17,869

Provision for loan losses
158


158

Net interest income, after provision for loan losses
16,609

1,102

17,711

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
155

525

680

     Gain on sale of loans, net (2)
22

9,142

9,164

Deposit account fees
1,094


1,094

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(62
)

(62
)
Card and processing fees
754


754

Other
463


463

Total non-interest income
2,426

9,667

12,093

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
8,951

8,951

17,902

Premises and occupancy
1,649

925

2,574

Operating and administrative expenses(3)
3,440

5,031

8,471

Total non-interest expense
14,040

14,907

28,947

Income (loss) before income taxes
4,995

(4,138
)
857

Provision (benefit) for income taxes(4)
3,343

(1,484
)
1,859

Net income (loss)
$
1,652

$
(2,654
)
$
(1,002
)
Total assets, end of period
$
1,065,204

$
96,927

$
1,162,131


(1) 
Includes an inter-company charge of $339 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 $138 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
(3) 
Includes $3.4 million of litigation accrual expense for the first six months of fiscal 2018, of which $2.1 million was allocated to PBM.
(4) 
Includes a net tax charge of $1.8 million resulting from the revaluation of net deferred tax assets consistent with the Tax Cuts and Jobs Act for the six months ended December 31, 2017.



11



 
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.





12



Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of December 31, 2017 and June 30, 2017 were as follows:
As of December 31, 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)
87,026

147

437

86,736

87,026

Total investment securities - held to maturity
$
87,626

$
147

$
437

$
87,336

$
87,626

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
U.S. government agency MBS
$
4,678

$
181

$

$
4,859

$
4,859

U.S. government sponsored enterprise MBS
2,977

150


3,127

3,127

Private issue CMO (2)
413

6


419

419

Total investment securities - available for sale
$
8,068

$
337

$

$
8,405

$
8,405

Total investment securities
$
95,694

$
484

$
437

$
95,741

$
96,031


(1) 
Mortgage-Backed Securities (“MBS”).
(2) 
Collateralized Mortgage Obligations (“CMO”).

As of 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 second quarters of fiscal 2018 and 2017, the Corporation received MBS principal payments of $5.8 million and $3.2 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased U.S. government sponsored enterprise MBS totaling $28.4 million, to be held to maturity, during the second quarter of fiscal 2018 and no purchases were made during the second quarter of fiscal 2017. For the first six months of fiscal 2018 and 2017, the Corporation received MBS principal payments of $11.7 million and $7.3 million, respectively, and there were no sales of investment securities during these periods. In the first six months of fiscal 2018, the Corporation purchased U.S. government sponsored enterprise MBS totaling $38.5 million, to be held to maturity, and none were purchased in the first six months of fiscal 2017.
  


13



The Corporation held investments with an unrealized loss position of $437,000 at December 31, 2017 and $77,000 at June 30, 2017.
As of December 31, 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
$
71,893

$
437

 
$

$

 
$
71,893

$
437

Total investment securities
$
71,893

$
437

 
$

$

 
$
71,893

$
437


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 December 31, 2017 and June 30, 2017, the unrealized holding losses were for a term of less than 12 months. The Corporation does not believe that there are any other-than-temporary impairments on the investment securities at December 31, 2017 and 2016; therefore, no impairment losses were recorded for the quarters and six months ended December 31, 2017 and 2016.

Contractual maturities of investment securities as of December 31, 2017 and June 30, 2017 were as follows:
 
December 31, 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
11,036

11,002

 
4,698

4,708

Due after five through ten years
43,596

43,286

 
41,404

41,374

Due after ten years
32,394

32,448

 
13,739

13,947

Total investment securities - held to maturity
$
87,626

$
87,336

 
$
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
8,068

8,405

 
8,954

9,318

Total investment securities - available for sale
$
8,068

$
8,405

 
$
8,954

$
9,318

Total investment securities
$
95,694

$
95,741

 
$
69,395

$
69,947





14



Note 6: Loans Held for Investment
 
Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands)
December 31, 2017
June 30, 2017
Mortgage loans:
 
 
Single-family
$
313,837

$
322,197

Multi-family
463,786

479,959

Commercial real estate
103,366

97,562

Construction
14,430

16,009

Commercial business loans
478

576

Consumer loans
144

129

Total loans held for investment, gross
896,041

916,432

 
 
 
Undisbursed loan funds
(7,358
)
(9,015
)
Advance payments of escrows
46

61

Deferred loan costs, net
5,322

5,480

Allowance for loan losses
(8,075
)
(8,039
)
Total loans held for investment, net
$
885,976

$
904,919


The following table sets forth information at December 31, 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 percent of loans held for investment at both December 31, 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
$
152,732

$
23,887

$
73,968

$
51,007

$
12,243

$
313,837

Multi-family
117,609

169,374

160,034

14,216

2,553

463,786

Commercial real estate
27,941

38,106

31,511

5,220

588

103,366

Construction
12,527




1,903

14,430

Commercial business loans
46




432

478

Consumer loans
144





144

Total loans held for investment, gross
$
310,999

$
231,367

$
265,513

$
70,443

$
17,719

$
896,041


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 other components. Qualitative loan loss factors are developed by assessing general economic indicators such as


15



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:
 
 
December 31, 2017
(In Thousands)
Single-family
Multi-family
Commercial Real Estate
Construction
Commercial Business
Consumer
Total
 
 
 
 
 
 
 
 
 
Pass
$
302,868

$
463,786

$
103,366

$
10,734

$
402

$
144

$
881,300

Special Mention
2,842



926



3,768

Substandard
8,127



2,770

76


10,973

 
Total loans held for
   investment, gross
$
313,837

$
463,786

$
103,366

$
14,430

$
478

$
144

$
896,041


 
 
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


16



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 December 31, 2017 and June 30, 2017:
(In Thousands)
December 31, 2017
June 30, 2017
Collectively evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family
$
3,303

$
3,515

Multi-family
3,295

3,420

Commercial real estate
933

879

Construction
504

96

Commercial business loans
17

21

Consumer loans
8

7

Total collectively evaluated allowance
8,060

7,938

 
 
 
Individually evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family

86

Commercial business loans
15

15

Total individually evaluated allowance
15

101

Total loan loss allowance
$
8,075

$
8,039




17



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)
2017
2016
2017
2016
 
 
 
 
 
Allowance at beginning of period
$
8,063

$
8,725

$
8,039

$
8,670

 
 
 
 
 
(Recovery) provision for loan losses
(11
)
(350
)
158

(500
)
 
 
 
 
 
Recoveries:
 

 

 

 

Mortgage loans:
 

 

 

 

Single-family
48

33

132

296

Multi-family

6


13

Consumer loans



1

Total recoveries
48

39

132

310

 
 
 
 
 
Charge-offs:
 

 

 

 

Mortgage loans:
 

 

 

 

Single-family
(25
)
(21
)
(254
)
(87
)
Consumer loans

(2
)

(2
)
Total charge-offs
(25
)
(23
)
(254
)
(89
)
 
 
 
 
 
Net recoveries (charge-offs)
23

16

(122
)
221

Balance at end of period
$
8,075

$
8,391

$
8,075

$
8,391

 
 

 

 

 

Allowance for loan losses as a percentage of gross loans held for investment at the end of the period
0.90
 %
0.96
 %
0.90
%
0.96
 %
Net (recoveries) charge-offs as a percentage of average loans receivable, net, during the period (annualized)
(0.01
)%
(0.01
)%
0.02
%
(0.04
)%

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, 2017
(In Thousands)
Current
30-89 Days Past Due
Non-Accrual (1)
Total Loans Held for Investment
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Single-family
$
304,173

$
1,537

$
8,127

$
313,837

 
Multi-family
463,786



463,786

 
Commercial real estate
103,366



103,366

 
Construction
14,430



14,430

Commercial business loans
402


76

478

Consumer loans
144



144

 
Total loans held for investment, gross
$
886,301

$
1,537

$
8,203

$
896,041


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


18



 
 
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