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EX-32 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INCprov10q93018exh322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INCprov10q93018exh321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INCprov10q93018exh312.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INCprov10q93018exh311.htm
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

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   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
 
1


 
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.
 
2

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.
 
3

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.
4

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.
 
5

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:

ASU 2014-09:
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.

6


ASU 2018-11
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.

ASU 2018-13
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.
 
7

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
)
 
 

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 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.
 
 
9

 
   
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.


10

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.

11

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.
12


 
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
 
(1)
Net of $1.5 million and $495 of undisbursed lines of credit as of September 30, 2018 and June 30, 2018, respectively.
(2)
Net of $497 and $503 of undisbursed lines of credit as of September 30, 2018 and June 30, 2018, respectively.
(3)
Comprised solely of undisbursed construction loan funds.
 
 
13

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.
 
 
14

 
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
15

 
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
 
 
16

 
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
%
 
The following tables denote the past due status of the Corporation's gross loans held for investment, net of fair value adjustments, at the dates indicated.
   
September 30, 2018 
(In Thousands)
 
Current
   
30-89 Days
Past Due
   
Non-Accrual (1)
  
Total Loans Held for
Investment, Gross
                         
Mortgage loans:
                       
Single-family
 
$
301,055
   
$
   
$
6,425
   
$
307,480
 
Multi-family
   
454,821
     
     
     
454,821
 
Commercial real estate
   
112,026
     
     
     
112,026
 
Construction
   
6,906
     
     
2,050
     
8,956
 
Other
   
167
     
     
     
167
 
Commercial business loans
   
348
     
     
68
     
416
 
Consumer loans
   
104
     
     
     
104
 
     Total loans held for investment, gross
 
$
875,427
   
$
   
$
8,543
   
$
883,970
 
(1)  All loans 90 days or greater past due are placed on non-accrual status.
 
 
 
17

   
June 30, 2018 
(In Thousands)
 
Current
   
30-89 Days
Past Due
   
Non-Accrual (1)
  
Total Loans Held for
Investment, Gross 
                         
Mortgage loans:
                       
Single-family
 
$
307,863
   
$
804
   
$
6,141
   
$
314,808
 
Multi-family
   
476,008
     
     
     
476,008
 
Commercial real estate
   
109,726
     
     
     
109,726
 
Construction
   
7,476
     
     
     
7,476
 
Other
   
167
     
     
     
167
 
Commercial business loans
   
430
     
     
70
     
500
 
Consumer loans
   
108
     
1
     
     
109
 
     Total loans held for investment, gross
 
$
901,778
   
$
805
   
$
6,211
   
$
908,794
 
 
(1)  All loans 90 days or greater past due are placed on non-accrual status.

The following tables summarize the Corporation's allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated.
    Quarter Ended September 30, 2018  
(In Thousands)
 
Single-
family
   
Multi-
family
   
Commercial
Real Estate
   
Construction
   
Other
   
Commercial
Business
   
Consumer
   
Total
 
Allowance for loan losses:
                                               
Allowance at beginning of  period
 
$
2,783
   
$
3,492
   
$
1,030
   
$
47
   
$
3
   
$
24
   
$
6
   
$
7,385
 
Recovery from the allowance for loan
 losses
   
(49
)
   
(156
)
   
(18
)
   
(9
)
   
     
(5
)
   
     
(237
)
Recoveries
   
32
     
     
     
     
     
     
1
     
33
 
Charge-offs
   
(25
)
   
     
     
     
     
     
(1
)
   
(26
)
     Allowance for loan losses,
      end of period
 
$
2,741
   
$
3,336
   
$
1,012
   
$
38
   
$
3
   
$
19
   
$
6
   
$