UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 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

(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.)

(Address of principal executive offices and zip 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   X     No        .

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes   X      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  [X]    Non-accelerated filer   [   ]     Smaller reporting company   [X]     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   X .

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 November 2, 2018
Common stock, $ 0.01 par value, per share		7,506,855 shares

PROVIDENT FINANCIAL HOLDINGS, INC.

Table of Contents

PART 1  -	FINANCIAL INFORMATION		Page
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:
	Condensed Consolidated Statements of Financial Condition
		as of September 30, 2018 and June 30, 2018	1
	Condensed Consolidated Statements of Operations
		for the Quarters Ended September 30, 2018 and 2017	2
	Condensed Consolidated Statements of Comprehensive Income
		for the Quarters Ended September 30, 2018 and 2017	3
	Condensed Consolidated Statements of Stockholders' Equity
		for the Quarters Ended September 30, 2018 and 2017	4
	Condensed Consolidated Statements of Cash Flows
		for the Three Months Ended September 30, 2018 and 2017	5
	Notes to Unaudited Interim Condensed Consolidated Financial Statements		6
ITEM 2  -	Management's Discussion and Analysis of Financial Condition and Results of Operations:
	General		42
	Safe-Harbor Statement		43
	Critical Accounting Policies		44
	Executive Summary and Operating Strategy		44
	Off-Balance Sheet Financing Arrangements and Contractual Obligations		45
	Comparison of Financial Condition at September 30, 2018 and June 30, 2018		46
	Comparison of Operating Results
		for the- Quarters Ended September 30, 2018 and 2017	48
	Asset Quality		54
	Loan Volume Activities		62
	Liquidity and Capital Resources		63
	Supplemental Information		65
ITEM 3  -	Quantitative and Qualitative Disclosures about Market Risk		65
ITEM 4  -	Controls and Procedures		69
PART II  -	OTHER INFORMATION
ITEM 1  -	Legal Proceedings		70
ITEM 1A -	Risk Factors		70
ITEM 2  -	Unregistered Sales of Equity Securities and Use of Proceeds		70
ITEM 3  -	Defaults Upon Senior Securities		70
ITEM 4  -	Mine Safety Disclosures		71
ITEM 5  -	Other Information		71
ITEM 6  -	Exhibits		71
SIGNATURES			73

.

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Financial Condition

(Unaudited)

In Thousands, Except Share Information

 

		September 30, 2018				June 30, 2018
Assets
Cash and cash equivalents		$	78,928			$	43,301
Investment securities – held to maturity, at cost			79,611				87,813
Investment securities – available for sale, at fair value			7,033				7,496
Loans held for investment, net of allowance for loan losses of   $7,155 and $7,385, respectively; includes $4,945 and $5,234 at fair value, respectively			877,091				902,685
Loans held for sale, at fair value			78,794				96,298
Accrued interest receivable			3,350				3,212
Real estate owned, net			524				906
Federal Home Loan Bank ("FHLB") – San Francisco stock			8,199				8,199
Premises and equipment, net			8,779				8,696
Prepaid expenses and other assets			15,171				16,943
Total assets		$	1,157,480			$	1,175,549
Liabilities and Stockholders' Equity
Liabilities:
Non interest-bearing deposits		$	87,250			$	86,174
Interest-bearing deposits			814,862				821,424
Total deposits			902,112				907,598
Borrowings			111,149				126,163
Accounts payable, accrued interest and other liabilities			22,539				21,331
Total liabilities			1,035,800				1,055,092
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;   18,048,115 and 18,033,115 shares issued; 7,500,860 and   7,421,426 shares outstanding, respectively)			181				181
Additional paid-in capital			95,795				94,957
Retained earnings			191,399				190,616
Treasury stock at cost (10,547,255 and 10,611,689 shares, respectively)			(165,884	)			(165,507	)
Accumulated other comprehensive income, net of tax			189				210
Total stockholders' equity			121,680				120,457
Total liabilities and stockholders' equity		$	1,157,480			$	1,175,549

 

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

In Thousands, Except Per Share Information

 

		Quarter Ended September 30,
		2018				2017
Interest income:
Loans receivable, net		$	10,174			$	10,157
Investment securities			345				257
FHLB – San Francisco stock			143				141
Interest-earning deposits			338				190
Total interest income			11,000				10,745
Interest expense:
Checking and money market deposits			108				103
Savings deposits			151				149
Time deposits			621				639
Borrowings			763				736
Total interest expense			1,643				1,627
Net interest income			9,357				9,118
(Recovery) provision for loan losses			(237	)			169
Net interest income, after (recovery) provision for loan losses			9,594				8,949
Non-interest income:
Loan servicing and other fees			324				363
Gain on sale of loans, net			3,132				4,847
Deposit account fees			505				558
Gain (loss) on sale and operations of real estate owned acquired in the settlement of loans, net			1				(40	)
Card and processing fees			398				381
Other			189				243
Total non-interest income			4,549				6,352
Non-interest expense:
Salaries and employee benefits			8,250				9,269
Premises and occupancy			1,345				1,314
Equipment			421				362
Professional expenses			447				520
Sales and marketing expenses			169				203
Deposit insurance premiums and regulatory assessments			165				184
Other(1)			907				3,882
Total non-interest expense			11,704				15,734
Income (loss) before income taxes			2,439				(433	)
Provision (benefit) for income taxes			616				(208	)
Net income (loss)		$	1,823			$	(225	)
Basic earnings (loss) per share		$	0.25			$	(0.03	)
Diluted earnings (loss) per share		$	0.24			$	(0.03	)
Cash dividends per share		$	0.14			$	0.14

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

 

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

In Thousands

 

		For the Quarters Ended September 30,
		2018				2017
Net income (loss)		$	1,823			$	(225	)
Change in unrealized holding (loss) gain on securities available for sale			(30	)			2
Reclassification of (gains) losses to net income			—				—
Other comprehensive (loss) income, before income taxes			(30	)			2
Income tax (benefit) provision			(9	)			1
Other comprehensive (loss) income			(21	)			1
Total comprehensive income (loss)		$	1,802			$	(224	)

 

 

 

 

 

 

 

 

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

 

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

In Thousands, Except Share Information

For the Quarters Ended September 30, 2018 and 2017:

		Common Stock								Additional												Accumulated Other Comprehensive
		Shares				Amount				Paid-In Capital				Retained Earnings				Treasury Stock				Income (Loss), Net of Tax				Total
Balance at June 30, 2018			7,421,426			$	181			$	94,957			$	190,616			$	(165,507	)		$	210			$	120,457
Net income															1,823												1,823
Other comprehensive loss																							(21	)			(21	)
Purchase of treasury stock(1)			(20,566	)															(377	)							(377	)
Exercise of stock options			15,000								153																153
Distribution of restricted stock			85,000																								—
Amortization of restricted stock											364																364
Stock options expense											321																321
Cash dividends(2)															(1,040	)											(1,040	)
Balance at September 30, 2018			7,500,860			$	181			$	95,795			$	191,399			$	(165,884	)		$	189			$	121,680

(1)	Includes the repurchase of 20,566 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 September 30, 2018.

 

		Common Stock								Additional												Accumulated Other Comprehensive
		Shares				Amount				Paid-In Capital				Retained Earnings				Treasury Stock				Income, Net of Tax				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.

 

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In Thousands)

 

		Three Months Ended September 30,
		2018				2017
Cash flows from operating activities:
Net income (loss)		$	1,823			$	(225	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating       activities:
Depreciation and amortization			928				664
(Recovery) provision for loan losses			(237	)			169
Recovery of losses on real estate owned			—				(552	)
Gain on sale of loans, net			(3,132	)			(4,847	)
(Gain) loss on sale of real estate owned, net			(13	)			580
Stock-based compensation			685				266
Provision (benefit) for deferred income taxes			505				(930	)
Increase in accounts payable, accrued interest and other liabilities			2,446				1,039
Decrease in prepaid expenses and other assets			1,172				617
Loans originated for sale			(196,321	)			(392,292	)
Proceeds from sale of loans			215,761				386,799
Net cash provided by (used for) operating activities			23,617				(8,712	)
Cash flows from investing activities:
Decrease (increase) in loans held for investment, net			25,927				(3,517	)
Maturity of investment securities held to maturity			200				—
Principal payments from investment securities held to maturity			7,915				5,570
Principal payments from investment securities available for sale			432				383
Purchase of investment securities held to maturity			(200	)			(10,102	)
Proceeds from sale of real estate owned			395				1,587
Purchase of premises and equipment			(307	)			(901	)
Net cash provided by (used for) investing activities			34,362				(6,980	)
Cash flows from financing activities:
(Decrease) increase in deposits, net			(5,486	)			495
Repayments of short-term borrowings, net			(15,000	)			(5,000	)
Repayments of long-term borrowings			(14	)			(20	)
Exercise of stock options			153				177
Withholding taxes on stock based compensation			(588	)			(41	)
Cash dividends			(1,040	)			(1,078	)
Treasury stock purchases			(377	)			(2,450	)
Net cash used for financing activities			(22,352	)			(7,917	)
Net increase (decrease) in cash and cash equivalents			35,627				(23,609	)
Cash and cash equivalents at beginning of period			43,301				72,826
Cash and cash equivalents at end of period		$	78,928			$	49,217
Supplemental information:
Cash paid for interest		$	1,623			$	1,606
Cash paid for income taxes		$	—			$	—
Transfer of loans held for sale to held for investment		$	724			$	521
Real estate acquired in the settlement of loans		$	—			$	—

 

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

 

PROVIDENT FINANCIAL HOLDINGS, INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

September 30, 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, 2018 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, 2018.  The results of operations for the quarter ended September 30, 2018 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2019.

Note 2: Accounting Standard Updates ("ASU")

 

There have been no accounting standard updates or changes in the status of their adoption that are significant 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, 2018, other than:

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers," which created FASB Accounting Standards Codification (ASC) Topic 606 ("ASC 606"). ASC 606 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 was effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. The Corporation adopted ASC 606 on July 1, 2018 using the modified retrospective approach. Therefore, the comparative information has not been adjusted and continues to be reported under superseded ASC 605. There was no cumulative effect adjustment as of July 1, 2018, and there were no material changes to the timing or amount of revenue recognized for the three months ended September 30, 2018; however, additional disclosures were incorporated in the footnotes upon adoption. The majority of the Company's revenue is comprised of interest income from financial assets, which is explicitly excluded from the scope of ASC 606. The Corporation elected to apply the practical expedient pursuant to ASC 606 and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Corporation to expense costs related to obtaining a contract as incurred when the original amortization period would have been one year or less. See Note 12 for additional discussion.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." This ASU introduces a lessee model that brings most leases on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard, ASC 606, Revenue From Contracts With Customers. The new leases standard represents a wholesale change to lease accounting and will most likely result in significant implementation challenges during the transition period and beyond. This ASU will be effective for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning on January 1, 2019), and interim periods therein, early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases, Targeted Improvements, which allows entities the option of initially applying the new leases standard at the adoption date (such as January 1, 2019, for calendar year- end public business entities) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Corporation plans to adopt ASU 2018-11 on July 1, 2019. Management is currently assessing the impact of ASU 2016-02 on the Corporation's financial position and results of operations but does not believe that adoption of ASU 2018-11 will have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements on fair value measurements to improve their effectiveness. The guidance permits entities to consider materiality when evaluating fair value measurement disclosures and, among other modifications, requires certain new disclosures related to Level 3 fair value measurements. The guidance will be effective beginning January 1, 2020, with early adoption permitted. The guidance only affects disclosures in the notes to the consolidated financial statements and will not affect the Corporation's financial position or results of operations.

Note 3: Earnings (Loss) Per Share

Basic earnings (loss) 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, 2018 and 2017, there were outstanding options to purchase 514,000 shares and 591,250 shares of the Corporation's common stock, respectively. Of those shares, as of September 30, 2018 and 2017, there were 20,000 shares and 591,250 shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive. As of September 30, 2018, there were outstanding restricted stock awards of 13,500 shares which have a dilutive effect in the first quarter of fiscal 2019; and 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.

 

The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2018 and 2017, respectively.

(In Thousands, Except Earnings Per Share)		For the Quarters Ended September 30,
		2018				2017
Numerator:
Net income (loss) – numerator for basic earnings per share and diluted earnings per share -       available to common stockholders		$	1,823			$	(225	)
Denominator:
Denominator for basic earnings per share:
Weighted-average shares			7,431				7,694
Effect of dilutive shares:
Stock options			91				—
Restricted stock			35				—
Denominator for diluted earnings per share:
Adjusted weighted-average shares and assumed conversions			7,557				7,694
Basic earnings (loss) per share		$	0.25			$	(0.03	)
Diluted earnings (loss) per share		$	0.24			$	(0.03	)

 

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, 2018 and 2017, respectively.

		For the Quarter Ended September 30, 2018
(In Thousands)		Provident Bank				Provident Bank Mortgage				Consolidated Totals
Net interest income		$	9,000			$	357			$	9,357
(Recovery) provision for loan losses			(332	)			95				(237	)
Net interest income, after (recovery) provision for loan losses			9,332				262				9,594
Non-interest income:
Loan servicing and other fees (1)			133				191				324
Gain on sale of loans, net (2)			34				3,098				3,132
Deposit account fees			505				—				505
Gain on sale and operations of real estate owned         acquired in the settlement of loans, net			1				—				1
Card and processing fees			398				—				398
Other			189				—				189
Total non-interest income			1,260				3,289				4,549
Non-interest expense:
Salaries and employee benefits			4,836				3,414				8,250
Premises and occupancy			908				437				1,345
Operating and administrative expenses			926				1,183				2,109
Total non-interest expense			6,670				5,034				11,704
Income (loss) before income taxes			3,922				(1,483	)			2,439
Provision (benefit) for income taxes			1,055				(439	)			616
Net income (loss)		$	2,867			$	(1,044	)		$	1,823
Total assets, end of period		$	1,078,441			$	79,039			$	1,157,480

(1)	Includes an inter-company charge of $168 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.

(2)	Includes an inter-company charge of $6 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.

 

 

 

		For the Quarter Ended September 30, 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.

Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 2018 and June 30, 2018 were as follows:

September 30, 2018		Amortized Cost				Gross Unrealized Gains				Gross Unrealized (Losses)				Estimated Fair Value				Carrying Value
(In Thousands)
Held to maturity:
U.S. government sponsored enterprise MBS (1)		$	76,051			$	215			$	(835	)		$	75,431			$	76,051
U.S. SBA securities (2)			2,960				—				(17	)			2,943				2,960
Certificate of deposits			600				—				—				600				600
Total investment securities - held to maturity		$	79,611			$	215			$	(852	)		$	78,974			$	79,611
Available for sale:
U.S. government agency MBS		$	4,024			$	132			$	—			$	4,156			$	4,156
U.S. government sponsored enterprise MBS			2,451				110				—				2,561				2,561
Private issue CMO (3)			313				3				—				316				316
Total investment securities - available for sale		$	6,788			$	245			$	—			$	7,033			$	7,033
Total investment securities		$	86,399			$	460			$	(852	)		$	86,007			$	86,644

(1)	Mortgage-Backed Securities ("MBS").

(2)	Small Business Administration ("SBA").

(3)	Collateralized Mortgage Obligations ("CMO").

 

 

June 30, 2018		Amortized Cost				Gross Unrealized Gains				Gross Unrealized (Losses)				Estimated Fair Value				Carrying Value
(In Thousands)
Held to maturity:
U.S. government sponsored enterprise MBS		$	84,227			$	203			$	(762	)		$	83,668			$	84,227
U.S. SBA securities			2,986				—				(15	)			2,971				2,986
Certificate of deposits			600				—				—				600				600
Total investment securities - held to maturity		$	87,813			$	203			$	(777	)		$	87,239			$	87,813
Available for sale:
U.S. government agency MBS		$	4,234			$	150			$	—			$	4,384			$	4,384
U.S. government sponsored enterprise MBS			2,640				122				—				2,762				2,762
Private issue CMO			346				4				—				350				350
Total investment securities - available for sale		$	7,220			$	276			$	—			$	7,496			$	7,496
Total investment securities		$	95,033			$	497			$	(777	)		$	94,735			$	95,309

 

In the first quarters of fiscal 2019 and 2018, the Corporation received MBS principal payments of $8.3 million and $6.0 million, respectively, and there were no sales of investment securities during these periods.  The Corporation did not purchase any investment securities in the first quarter of fiscal 2019; while 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.

The Corporation held investments with an unrealized loss position of $852,000 at September 30, 2018 and $777,000 at June 30, 2018.

As of September 30, 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. government sponsored enterprise MBS		$	16,232			$	264			$	26,623			$	571			$	42,855			$	835
U.S. SBA securities			2,936				17				—				—				2,936				17
Total investment securities		$	19,168			$	281			$	26,623			$	571			$	45,791			$	852

 

As of June 30, 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. government sponsored enterprise MBS		$	47,045			$	762			$	—			$	—			$	47,045			$	762
U.S. SBA securities			2,964				15				—				—				2,964				15
Total investment securities		$	50,009			$	777			$	—			$	—			$	50,009			$	777

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. At September 30, 2018, $571,000 of the total $852,000 unrealized holding losses were more than 12 months; while at June 30, 2018, all of the unrealized holding loss was less than 12 months. The Corporation does not believe that there were any other-than-temporary impairments on the investment securities at September 30, 2018 and 2017; therefore, no impairment losses were recorded for the quarters ended September 30, 2018 and 2017.

 

Contractual maturities of investment securities as of September 30, 2018 and June 30, 2018 were as follows:

 

		September 30, 2018								June 30, 2018
(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			29,549				28,969				24,961				24,569
Due after five through ten years			14,141				13,886				22,847				22,477
Due after ten years			35,321				35,519				39,405				39,593
Total investment securities - held to maturity		$	79,611			$	78,974			$	87,813			$	87,239
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			6,788				7,033				7,220				7,496
Total investment securities - available for sale		$	6,788			$	7,033			$	7,220			$	7,496
Total investment securities		$	86,399			$	86,007			$	95,033			$	94,735

 

Note 6: Loans Held for Investment

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

(In Thousands)		September 30, 2018				June 30, 2018
Mortgage loans:
Single-family		$	307,480			$	314,808
Multi-family			454,821				476,008
Commercial real estate			112,026				109,726
Construction			8,956				7,476
Other			167				167
Commercial business loans (1)			416				500
Consumer loans (2)			104				109
Total loans held for investment, gross			883,970				908,794
Undisbursed loan funds (3)			(5,110	)			(4,302	)
Advance payments of escrows			3				18
Deferred loan costs, net			5,383				5,560
Allowance for loan losses			(7,155	)			(7,385	)
Total loans held for investment, net		$	877,091			$	902,685

 

The following table sets forth information at September 30, 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 2% of loans held for investment at both September 30, 2018 and June 30, 2018.  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		$	116,585			$	28,559			$	93,276			$	57,120			$	11,940			$	307,480
Multi-family			130,379				161,337				148,803				14,093				209				454,821
Commercial real estate			32,602				43,629				35,269				—				526				112,026
Construction			7,273				—				—				—				1,683				8,956
Other			—				—				—				—				167				167
Commercial business loans			42				—				—				—				374				416
Consumer loans			104				—				—				—				—				104
Total loans held for investment,        gross		$	286,985			$	233,525			$	277,348			$	71,213			$	14,899			$	883,970

 

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

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

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

▪	Special Mention - A special mention loan 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, 2018
In Thousands)	Single- family				Multi- family				Commercial Real Estate				Construction				Other Mortgage				Commercial Business				Consumer				Total
Pass	$	298,414			$	450,894			$	112,026			$	6,906			$	167			$	348			$	104			$	868,859
Special Mention		1,141				3,927				—				—				—				—				—				5,068
Substandard		7,925				—				—				2,050				—				68				—				10,043
Total loans held       for investment,       gross	$	307,480			$	454,821			$	454,821			$	8,956			$	167			$	416			$	104			$	883,970

	June 30, 2018
In Thousands)	Single- family				Multi- family				Commercial Real Estate				Construction				Other Mortgage				Commercial Business				Consumer				Total
Pass	$	304,619			$	472,061			$	108,786			$	7,476			$	167			$	430			$	109			$	893,648
Special Mention		2,548				3,947				940				—				—				—				—				7,435
Substandard		7,641				—				—				—				—				70				—				7,711
Total loans held       for investment,       gross	$	314,808			$	476,008			$	109,726			$	7,476			$	167			$	500			$	109			$	908,794

 

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management's continuing analysis of the factors underlying the quality of the loans held for investment.  These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans.  The provision (recovery) for (from) the allowance for loan losses is charged (credited) against operations on a quarterly basis, as necessary, to maintain the allowance at appropriate levels.  Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Corporation's loans held for investment, will not request a significant increase in its allowance for loan losses.  Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the Corporation's control.

Non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans.  For loans that were modified from their original terms, were re-underwritten and identified in the Corporation's asset quality reports as troubled debt restructurings ("restructured loans"), the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent.  The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses.  The allowance for loan losses for non-performing loans

 

is determined by applying Accounting Standards Codification ("ASC") 310, "Receivables."  For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and  containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method.  For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method.  For non-performing commercial real estate loans, an individually evaluated allowance is derived based on the loan's discounted cash flow fair value (for restructured loans) or collateral fair value less estimated selling costs and if the fair value is higher than the loan balance, no allowance is required.

The following table summarizes the Corporation's allowance for loan losses at September 30, 2018 and June 30, 2018:

 

(In Thousands)		September 30, 2018			June 30, 2018
Collectively evaluated for impairment:
Mortgage loans:
Single-family		$	2,617			$	2,632
Multi-family			3,336				3,492
Commercial real estate			1,012				1,030
Construction			38				47
Other			3				3
Commercial business loans			14				18
Consumer loans			6				6
Total collectively evaluated allowance			7,026				7,228
Individually evaluated for impairment:
Mortgage loans:
Single-family			124				151
Commercial business loans			5				6
Total individually evaluated allowance			129				157
Total loan loss allowance		$	7,155			$	7,385

 

 

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)		2018				2017
Allowance at beginning of period		$	7,385			$	8,039
(Recovery) provision for loan losses			(237	)			169
Recoveries:
Mortgage loans:
Single-family			32				84
Consumer loans			1				—
Total recoveries			33				84
Charge-offs:
Mortgage loans:
Single-family			(25	)			(229	)
Consumer loans			(1	)			—
Total charge-offs			(26	)			(229	)
Net recoveries (charge-offs)			7				(145	)
Balance at end of period		$	7,155			$	8,063
Allowance for loan losses as a percentage of gross loans held for investment at the end of    the period			0.81	%			0.88	%
Net (recoveries) charge-offs as a percentage of average loans receivable, net, during the    period (annualized)			0.00	%			0.06	%