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EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-2018331x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-2018331x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INCprov-2018331x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCprov-2018331x10qxex311.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
March 31, 2018
[     ]
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 April 30, 2018
Common stock, $ 0.01 par value, per share
 
7,460,804 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 March 31, 2018 and June 30, 2017
 
 
 
 
for the Quarters and Nine Months Ended March 31, 2018 and 2017
 
 
 
 
for the Quarters and Nine Months Ended March 31, 2018 and 2017
 
 
 
 
for the Quarters and Nine Months Ended March 31, 2018 and 2017
 
 
 
 
for the Nine Months Ended March 31, 2018 and 2017
 
 
 
 
 
ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
 
 
 
 
 
 
 
 
 
Comparison of Financial Condition at March 31, 2018 and June 30, 2017
 
 
 
 
for the Quarters and Nine Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
 
 
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
 
March 31,
2018
June 30,
2017
Assets
 
 
Cash and cash equivalents
$
50,574

$
72,826

Investment securities – held to maturity, at cost
95,724

60,441

Investment securities – available for sale, at fair value
8,002

9,318

Loans held for investment, net of allowance for loan losses of
$7,531 and $8,039, respectively; includes $4,996 and $6,445 at fair value, respectively
894,167

904,919

Loans held for sale, at fair value
89,823

116,548

Accrued interest receivable
3,100

2,915

Real estate owned, net
787

1,615

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

8,108

Premises and equipment, net
8,734

6,641

Prepaid expenses and other assets
17,583

17,302

 
 

 

Total assets
$
1,176,602

$
1,200,633

 
 

 

Liabilities and Stockholders’ Equity
 

 

 
 

 

Liabilities:
 

 

Non interest-bearing deposits
$
87,520

$
77,917

Interest-bearing deposits
834,979

848,604

Total deposits
922,499

926,521

 
 

 

Borrowings
111,176

126,226

Accounts payable, accrued interest and other liabilities
22,327

19,656

Total liabilities
1,056,002

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;
18,033,115 and 17,949,365 shares issued; 7,460,804 and
7,714,052 shares outstanding, respectively)
180

180

Additional paid-in capital
94,719

93,209

Retained earnings
190,301

192,754

Treasury stock at cost (10,572,311 and 10,235,313 shares, respectively)
(164,786
)
(158,142
)
Accumulated other comprehensive income, net of tax
186

229

 
 

 

Total stockholders’ equity
120,600

128,230

 
 

 

Total liabilities and stockholders’ equity
$
1,176,602

$
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  
 March 31,
Nine Months Ended 
 March 31,
 
2018
2017
2018
2017
Interest income:
 
 
 
 
Loans receivable, net
$
9,933

$
9,704

$
29,825

$
30,300

Investment securities
382

142

958

354

FHLB – San Francisco stock
144

184

428

827

Interest-earning deposits
233

250

591

406

Total interest income
10,692

10,280

31,802

31,887

 
 
 
 
 
Interest expense:
 
 
 
 
Checking and money market deposits
96

90

311

293

Savings deposits
147

144

445

434

Time deposits
613

686

1,877

2,189

Borrowings
712

713

2,176

2,151

Total interest expense
1,568

1,633

4,809

5,067

 
 
 
 
 
Net interest income
9,124

8,647

26,993

26,820

Recovery from the allowance for loan losses
(505
)
(165
)
(347
)
(665
)
Net interest income, after recovery from the allowance for loan losses
9,629

8,812

27,340

27,485

 
 
 
 
 
Non-interest income:
 
 
 
 
Loan servicing and other fees
493

362

1,173

939

Gain on sale of loans, net
3,597

5,395

12,761

19,869

Deposit account fees
529

562

1,623

1,664

Loss on sale and operations of real estate owned acquired in the settlement of loans, net
(19
)
(74
)
(81
)
(240
)
Card and processing fees
372

338

1,126

1,063

Other
238

208

701

580

Total non-interest income
5,210

6,791

17,303

23,875

 
 
 
 
 
Non-interest expense:
 
 
 
 
Salaries and employee benefits
8,808

10,370

26,710

32,033

Premises and occupancy
1,255

1,241

3,829

3,765

Equipment
442

352

1,179

1,054

Professional expenses
400

436

1,441

1,571

Sales and marketing expenses
213

421

717

970

     Deposit insurance premiums and regulatory assessments
189

189

591

614

Other(1)
1,132

759

6,919

4,061

Total non-interest expense
12,439

13,768

41,386

44,068

 
 
 
 
 
Income before income taxes
2,400

1,835

3,257

7,292

Provision for income taxes(2)
667

690

2,526

3,049

Net income
$
1,733

$
1,145

$
731

$
4,243

 
 
 
 
 
Basic earnings per share
$
0.23

$
0.14

$
0.10

$
0.53

Diluted earnings per share
$
0.23

$
0.14

$
0.09

$
0.52

Cash dividends per share
$
0.14

$
0.13

$
0.42

$
0.39

.. 
(1) Includes $3.4 million of litigation settlement expenses for the nine months ended March 31, 2018.
(2) Includes a net tax charge of $1.9 million resulting from the revaluation of net deferred tax assets consistent with the Tax Cuts
and Jobs Act for the nine months ended March 31, 2018.

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  
 March 31,
For the Nine Months Ended 
 March 31,
 
2018
2017
2018
2017
Net income
$
1,733

$
1,145

$
731

$
4,243

 
 
 
 
 
Change in unrealized holding loss on securities available for sale
(35
)
(28
)
(113
)
(112
)
Reclassification adjustment for net loss on securities available
  for sale included in net income
(2
)

43


Other comprehensive loss, before income tax benefit
(37
)
(28
)
(70
)
(112
)
 
 
 
 
 
Income tax benefit
(13
)
(12
)
(27
)
(47
)
Other comprehensive loss
(24
)
(16
)
(43
)
(65
)
 
 
 
 
 
Total comprehensive income
$
1,709

$
1,129

$
688

$
4,178



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 March 31, 2018 and 2017:
 
Common
Stock
Additional
Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at December 31, 2017
7,474,776

$
180

$
94,011

$
189,610

$
(163,311
)
$
210

$
120,700

 
 
 
 
 
 
 
 
Net income
 
 
 
1,733

 
 
1,733

Other comprehensive loss
 
 
 
 
 
(24
)
(24
)
Purchase of treasury stock(1)
(80,972
)
 
 
 
(1,475
)
 
(1,475
)
Exercise of stock options
56,500


416

 
 
 
416

Distribution of restricted stock
10,500

 
 
 
 
 

Amortization of restricted stock
 
 
167

 
 
 
167

Stock options expense
 
 
125

 
 
 
125

Cash dividends(2)
 
 
 
(1,042
)
 
 
(1,042
)
 
 
 
 
 
 
 
 
Balance at March 31, 2018
7,460,804

$
180

$
94,719

$
190,301

$
(164,786
)
$
186

$
120,600


(1) Includes the repurchase of 3,291 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2) Cash dividends of $0.14 per share were paid in the quarter ended March 31, 2018.
 
 
Common
Stock
Additional
Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at December 31, 2016
7,915,116

$
179

$
92,215

$
192,699

$
(152,802
)
$
264

$
132,555

 
 
 
 
 
 
 
 
Net income
 
 
 
1,145

 
 
1,145

Other comprehensive loss
 
 
 
 
 
(16
)
(16
)
Purchase of treasury stock
(89,819
)
 
 
 
(1,678
)
 
(1,678
)
Exercise of stock options
60,250



524

 
 
 
524

Amortization of restricted stock
 
 
139

 
 
 
139

Awards of restricted stock
 
 
(53
)
 
53

 

Stock options expense
 
 
115

 
 
 
115

Tax effect from stock-based compensation
 
 
(165
)
 
 
 
(165
)
Cash dividends(1)
 
 
 
(1,028
)
 
 
(1,028
)
 
 
 
 
 
 
 
 
Balance at March 31, 2017
7,885,547

$
179

$
92,775

$
192,816

$
(154,427
)
$
248

$
131,591


(1) Cash dividends of $0.13 per share were paid in the quarter ended March 31, 2017.







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

4




For the Nine Months Ended March 31, 2018 and 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, 2017
7,714,052

$
180

$
93,209

$
192,754

$
(158,142
)
$
229

$
128,230

 
 
 
 
 
 
 
 
Net income
 
 
 
731

 
 
731

Other comprehensive loss
 
 
 
 
 
(43
)
(43
)
Purchase of treasury stock(1)
(347,498
)
 
 
 
(6,627
)
 
(6,627
)
Exercise of stock options
83,750


677

 
 
 
677

Distribution of restricted stock
10,500

 
 
 
 
 

Amortization of restricted stock
 
 
458

 
 
 
458

Forfeitures of restricted stock
 
 
17

 
(17
)
 

Stock options expense
 
 
358

 
 

 
358

Cash dividends(2)
 
 
 

(3,184
)
 
 
(3,184
)
 
 
 
 
 
 
 
 
Balance at March 31, 2018
7,460,804

$
180

$
94,719

$
190,301

$
(164,786
)
$
186

$
120,600


(1) Includes the repurchase of 3,291 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2) Cash dividends of $0.42 per share were paid in the nine months ended March 31, 2018.

 
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
 
 
 
4,243

 
 
4,243

Other comprehensive loss
 
 
 
 
 
(65
)
(65
)
Purchase of treasury stock(1)
(261,453
)
 
 
 
(4,999
)
 
(4,999
)
Exercise of stock options
84,000

1

808

 
 
 
809

Distribution of restricted stock
87,750

 
 
 
 
 

Amortization of restricted stock
 
 
634

 
 
 
634

Awards of restricted stock
 
 
(214
)
 
214

 

Forfeitures of restricted stock
 
 
134

 
(134
)
 

Stock options expense
 
 
597

 
 
 
597

Tax effect from stock-based compensation
 
 
14

 
 
 
14

Cash dividends(2)
 
 
 
(3,093
)
 
 
(3,093
)
 
 
 
 
 
 
 
 
Balance at March 31, 2017
7,885,547

$
179

$
92,775

$
192,816

$
(154,427
)
$
248

$
131,591


(1) Includes the repurchase of 25,598 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2) Cash dividends of $0.39 per share were paid in the nine months ended March 31, 2017.


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)
 
Nine Months Ended 
 March 31,
 
2018
2017
Cash flows from operating activities:
 
 
Net income
$
731

$
4,243

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
2,229

1,948

Recovery from the allowance for loan losses
(347
)
(665
)
(Recovery) provision of losses on real estate owned
(552
)
145

Gain on sale of loans, net
(12,761
)
(19,869
)
Loss (gain) on sale of real estate owned, net
564

(84
)
Stock-based compensation
816

1,231

(Benefit) provision for deferred income taxes
(28
)
1,335

Tax effect from stock based compensation

(14
)
Increase in accounts payable, accrued interest and other liabilities
3,294

1,507

Increase in prepaid expenses and other assets
(482
)
(572
)
Loans originated for sale
(944,349
)
(1,507,162
)
Proceeds from sale of loans
983,504

1,609,636

Net cash provided by operating activities
32,619

91,679

 
 
 
Cash flows from investing activities:
 
 
Decrease (increase) in loans held for investment, net
8,956

(42,052
)
Principal payments from investment securities held to maturity
18,082

9,398

Principal payments from investment securities available for sale
1,252

1,434

Purchase of investment securities held to maturity
(54,147
)
(10,970
)
Proceeds from sale of real estate owned
2,223

1,497

Purchase of premises and equipment
(2,713
)
(991
)
Net cash used for investing activities
(26,347
)
(41,684
)
 
 
 
Cash flows from financing activities:
 
 
(Decrease) increase in deposits, net
(4,022
)
11,922

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

Proceeds from long-term borrowings
10,000

20,000

Repayments of long-term borrowings
(10,050
)
(55
)
Exercise of stock options
677

809

Withholding taxes on stock based compensation
(318
)
(501
)
Tax effect from stock based compensation

14

Cash dividends
(3,184
)
(3,093
)
Treasury stock purchases
(6,627
)
(4,999
)
Net cash (used for) provided by financing activities
(28,524
)
24,097

 
 
 
Net (decrease) increase in cash and cash equivalents
(22,252
)
74,092

Cash and cash equivalents at beginning of period
72,826

51,206

Cash and cash equivalents at end of period
$
50,574

$
125,298

Supplemental information:
 
 
Cash paid for interest
$
4,816

$
5,043

Cash paid for income taxes
$
2,400

$
2,384

Transfer of loans held for sale to held for investment
$
1,122

$
2,280

Real estate acquired in the settlement of loans
$
1,659

$
1,845


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

March 31, 2018

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 nine months ended March 31, 2018 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: Earnings Per Share

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

As of March 31, 2018 and 2017, there were outstanding options to purchase 529,000 shares and 683,250 shares of the Corporation’s common stock, respectively. Of those shares, as of March 31, 2018 and 2017, there were 26,000 shares and 76,000 shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive. As of March 31, 2018, there were outstanding restricted stock awards of 98,500 shares which had a dilutive effect in the third quarter of fiscal 2018; and as of March 31, 2017, there were outstanding restricted stock awards of 111,000 shares which had a dilutive effect in the third quarter of fiscal 2017.



7



The following table provides the basic and diluted EPS computations for the quarters and nine months ended March 31, 2018 and 2017, respectively.
 
(In Thousands, Except Earnings Per Share)
For the Quarters Ended
March 31,
For the Nine Months Ended
March 31,
 
2018
2017
2018
2017
Numerator:
 
 
 
 
Net income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders
$
1,733

$
1,145

$
731

$
4,243

 
 
 
 
 
Denominator:
 

 

 

 

Denominator for basic earnings per share:
 

 

 

 

 Weighted-average shares
7,457

7,926

7,573

7,943

 
 
 
 
 
   Effect of dilutive shares:
 
 
 
 
Stock options
97

142

111

153

Restricted stock
62

26

53

30

 
 
 
 
 
Denominator for diluted earnings per share:
 

 

 

 

Adjusted weighted-average shares and assumed conversions
7,616

8,094

7,737

8,126

 
 
 
 
 
Basic earnings per share
$
0.23

$
0.14

$
0.10

$
0.53

Diluted earnings per share
$
0.23

$
0.14

$
0.09

$
0.52





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 nine months ended March 31, 2018 and 2017, respectively.
 
For the Quarter Ended March 31, 2018
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
8,750

$
374

$
9,124

Recovery from the allowance for loan losses
(505
)

(505
)
Net interest income, after recovery from the allowance for loan losses
9,255

374

9,629

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
313

180

493

     (Loss) gain on sale of loans, net (2)
(1
)
3,598

3,597

Deposit account fees
529


529

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(19
)

(19
)
Card and processing fees
372


372

Other
238


238

Total non-interest income
1,432

3,778

5,210

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,763

4,045

8,808

Premises and occupancy
842

413

1,255

Operating and administrative expenses
1,050

1,326

2,376

Total non-interest expense
6,655

5,784

12,439

Income (loss) before income taxes
4,032

(1,632
)
2,400

Provision (benefit) for income taxes
1,252

(585
)
667

Net income (loss)
$
2,780

$
(1,047
)
$
1,733

Total assets, end of period
$
1,086,437

$
90,165

$
1,176,602


(1) 
Includes an inter-company charge of $222 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 $44 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.



9




 
For the Quarter Ended March 31, 2017
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
7,940

$
707

$
8,647

Recovery from the allowance for loan losses
(121
)
(44
)
(165
)
Net interest income after recovery from the allowance for loan losses
8,061

751

8,812

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
125

237

362

     Gain on sale of loans, net (2)
1

5,394

5,395

Deposit account fees
562


562

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(68
)
(6
)
(74
)
Card and processing fees
338


338

Other
208


208

Total non-interest income
1,166

5,625

6,791

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,662

5,708

10,370

Premises and occupancy
784

457

1,241

Operating and administrative expenses
1,333

824

2,157

Total non-interest expense
6,779

6,989

13,768

Income (loss) before income taxes
2,448

(613
)
1,835

Provision (benefit) for income taxes
948

(258
)
690

Net income (loss)
$
1,500

$
(355
)
$
1,145

Total assets, end of period
$
1,093,715

$
105,730

$
1,199,445


(1) 
Includes an inter-company charge of $173 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 $48 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 Nine Months Ended March 31, 2018
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
25,517

$
1,476

$
26,993

Recovery from the allowance for loan losses
(347
)

(347
)
Net interest income, after recovery from the allowance for loan losses
25,864

1,476

27,340

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
468

705

1,173

     Gain on sale of loans, net (2)
21

12,740

12,761

Deposit account fees
1,623


1,623

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(81
)

(81
)
Card and processing fees
1,126


1,126

Other
701


701

Total non-interest income
3,858

13,445

17,303

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
13,714

12,996

26,710

Premises and occupancy
2,491

1,338

3,829

Operating and administrative expenses(3)
4,490

6,357

10,847

Total non-interest expense
20,695

20,691

41,386

Income (loss) before income taxes
9,027

(5,770
)
3,257

Provision (benefit) for income taxes(4)
4,595

(2,069
)
2,526

Net income (loss)
$
4,432

$
(3,701
)
$
731

Total assets, end of period
$
1,086,437

$
90,165

$
1,176,602


(1) 
Includes an inter-company charge of $561 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 $182 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 settlement expenses for the first nine months of fiscal 2018 with $2.1 million allocated to PBM.
(4) 
Includes a net tax charge of $1.9 million resulting from the revaluation of net deferred tax assets consistent with the Tax Cuts and Jobs Act for the nine months ended March 31, 2018, all charged to the Bank.



11



 
For the Nine Months Ended March 31, 2017
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
23,336

$
3,484

$
26,820

Recovery from the allowance for loan losses
(431
)
(234
)
(665
)
Net interest income, after recovery from the allowance for loan losses
23,767

3,718

27,485

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
444

495

939

     Gain on sale of loans, net (2)
39

19,830

19,869

Deposit account fees
1,664


1,664

     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
(231
)
(9
)
(240
)
Card and processing fees
1,063


1,063

Other
580


580

Total non-interest income
3,559

20,316

23,875

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
14,198

17,835

32,033

Premises and occupancy
2,432

1,333

3,765

Operating and administrative expenses
3,632

4,638

8,270

Total non-interest expense
20,262

23,806

44,068

Income before income taxes
7,064

228

7,292

Provision for income taxes
2,953

96

3,049

Net income
$
4,111

$
132

$
4,243

Total assets, end of period
$
1,093,715

$
105,730

$
1,199,445


(1) 
Includes an inter-company charge of $396 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 $216 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 March 31, 2018 and June 30, 2017 were as follows:
As of March 31, 2018
 
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. SBA loan pool securities(1)
3,009


18

2,991

3,009

U.S. government sponsored enterprise MBS (2)
92,115

110

875

91,350

92,115

Total investment securities - held to maturity
$
95,724

$
110

$
893

$
94,941

$
95,724

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
U.S. government agency MBS
$
4,490

$
166

$

$
4,656

$
4,656

U.S. government sponsored enterprise MBS
2,820

131


2,951

2,951

Private issue CMO (3)
391

4


395

395

Total investment securities - available for sale
$
7,701

$
301

$

$
8,002

$
8,002

Total investment securities
$
103,425

$
411

$
893

$
102,943

$
103,726


(1) 
Small Business Administration ("SBA").
(2) 
Mortgage-Backed Securities (“MBS”).
(3) 
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 third quarters of fiscal 2018 and 2017, the Corporation received MBS principal payments of $7.6 million and $3.5 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased $12.6 million of U.S. government sponsored enterprise MBS and $3.0 million of U.S. SBA loan pool securities, to be held to maturity, during the third quarter of fiscal 2018; while the Corporation purchased $11.0 million of U.S. government sponsored enterprise MBS during the third quarter of fiscal 2017. For the first nine months of fiscal 2018 and 2017, the Corporation received MBS principal payments of $19.3 million and $10.8 million, respectively, and there were no sales of investment securities during these periods. For the first nine months of fiscal 2018, the Corporation purchased $51.1 million in U.S. government sponsored enterprise MBS and $3.0 million in U.S. SBA loan pool securities, to be held to maturity; while the Corporation purchased $11.0 million in U.S. government sponsored enterprise MBS during the first nine months of fiscal 2017.


13



  
The Corporation held investments with an unrealized loss position of $893,000 at March 31, 2018 and $77,000 at June 30, 2017. At March 31, 2018 and June 30, 2017, the gross unrealized losses and the fair value for investment securities by investment category aggregated by the length of time that individual securities have been in a continuous unrealized loss position was as follows:
As of March 31, 2018
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. SBA loan pool securities
$
2,984

$
18

 
$

$

 
$
2,984

$
18

U.S. government sponsored enterprise MBS
80,725

875

 


 
80,725

875

Total investment securities
$
83,709

$
893

 
$

$

 
$
83,709

$
893


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 March 31, 2018 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 March 31, 2018 and 2017; therefore, no impairment losses were recorded for the quarters and nine months ended March 31, 2018 and 2017.

Contractual maturities of investment securities as of March 31, 2018 and June 30, 2017 were as follows:
 
March 31, 2018
 
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
16,745

16,534

 
4,698

4,708

Due after five through ten years
35,636

35,139

 
41,404

41,374

Due after ten years
42,743

42,668

 
13,739

13,947

Total investment securities - held to maturity
$
95,724

$
94,941

 
$
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
7,701

8,002

 
8,954

9,318

Total investment securities - available for sale
$
7,701

$
8,002

 
$
8,954

$
9,318

Total investment securities
$
103,425

$
102,943

 
$
69,395

$
69,947




14




Note 6: Loans Held for Investment
 
Loans held for investment, net of fair value adjustments, consisted of the following at the dates indicated:
(In Thousands)
March 31, 2018
June 30, 2017
Mortgage loans:
 
 
Single-family
$
316,912

$
322,197

Multi-family
466,266

479,959

Commercial real estate
106,937

97,562

Construction
10,915

16,009

Commercial business loans
450

576

Consumer loans
130

129

Total loans held for investment, gross
901,610

916,432

 
 
 
Undisbursed loan funds
(5,591
)
(9,015
)
Advance payments of escrows
160

61

Deferred loan costs, net
5,519

5,480

Allowance for loan losses
(7,531
)
(8,039
)
Total loans held for investment, net
$
894,167

$
904,919


The following table sets forth information at March 31, 2018 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 two percent of loans held for investment at both March 31, 2018 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
$
140,839

$
30,990

$
74,783

$
57,090

$
13,210

$
316,912

Multi-family
130,608

166,749

157,761

10,914

234

466,266

Commercial real estate
29,657

40,992

35,740


548

106,937

Construction
9,011




1,904

10,915

Commercial business loans
26




424

450

Consumer loans
130





130

Total loans held for investment, gross
$
310,271

$
238,731

$
268,284

$
68,004

$
16,320

$
901,610


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


15



values, among other components. 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:
 
 
March 31, 2018
(In Thousands)
Single-family
Multi-family
Commercial Real Estate
Construction
Commercial Business
Consumer
Total
 
 
 
 
 
 
 
 
 
Pass
$
306,519

$
466,266

$
106,937

$
9,989

$
377

$
130

$
890,218

Special Mention
1,913



926



2,839

Substandard
8,480




73


8,553

 
Total loans held for
   investment, gross
$
316,912

$
466,266

$
106,937

$
10,915

$
450

$
130

$
901,610


 
 
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


16



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 March 31, 2018 and June 30, 2017:
(In Thousands)
March 31, 2018
June 30, 2017
Collectively evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family
$
2,960

$
3,515

Multi-family
3,312

3,420

Commercial real estate
966

879

Construction
94

96

Commercial business loans
16

21

Consumer loans
7

7

Total collectively evaluated allowance
7,355

7,938

 
 
 
Individually evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family
161

86

Commercial business loans
15

15

Total individually evaluated allowance
176

101

Total loan loss allowance
$
7,531

$
8,039




17



The following table is provided to disclose additional details on the Corporation’s allowance for loan losses for the quarters and nine months ended March 31, 2018 and 2017, respectively:
 
For the Quarters Ended
March 31,
For the Nine Months Ended
March 31,
(Dollars in Thousands)
2018
2017
2018
2017
 
 
 
 
 
Allowance at beginning of period
$
8,075

$
8,391

$
8,039

$
8,670

 
 
 
 
 
Recovery from the allowance for loan losses
(505
)
(165
)
(347
)
(665
)
 
 
 
 
 
Recoveries:
 

 

 

 

Mortgage loans:
 

 

 

 

Single-family
71

83

203

379

Multi-family

3


16

Commercial business loans

75


75

Consumer loans

1


2

Total recoveries
71

162

203

472

 
 
 
 
 
Charge-offs:
 

 

 

 

Mortgage loans:
 

 

 

 

Single-family
(110
)
(112
)
(364
)
(199
)
Consumer loans

(1
)

(3
)
Total charge-offs
(110
)
(113
)
(364
)
(202
)
 
 
 
 
 
Net (charge-offs) recoveries
(39
)
49

(161
)
270

Balance at end of period
$
7,531

$
8,275

$
7,531

$
8,275

 
 

 

 

 

Allowance for loan losses as a percentage of gross loans held for investment at the end of the period
0.84
%
0.93
 %
0.84
%
0.93
 %
Net charge-offs (recoveries) as a percentage of average loans receivable, net, during the period (annualized)
0.02
%
(0.02
)%
0.02
%
(0.03
)%

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.
 
 
March 31, 2018
(In Thousands)
Current
30-89 Days Past Due
Non-Accrual (1)
Total Loans Held for Investment
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Single-family
$
309,932

$
157

$
6,823

$
316,912

 
Multi-family
466,266



466,266

 
Commercial real estate
106,937



106,937

 
Construction
10,915



10,915

Commercial business loans
377


73

450

Consumer loans
127

3


130

 
Total loans held for investment, gross
$
894,554

$
160

$
6,896

$
901,610


(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: