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PROVIDENT FINANCIAL HOLDINGS INC - Quarter Report: 2010 March (Form 10-Q)

q51010.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 …………………………………….....  March 31, 2010

[     ]
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      .No      .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [   ]    Accelerated filer [   ]     Non-accelerated filer [   ] 
Smaller reporting company [ X ]         

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 May 3, 2010
   
Common stock, $ 0.01 par value, per share 11,406,654 shares
 
 


 
 

 

PROVIDENT FINANCIAL HOLDINGS, INC.

Table of Contents

PART 1  -       
FINANCIAL INFORMATION
 
       
  ITEM 1  -       
Financial Statements.  The Unaudited Interim Condensed Consolidated Financial
Statements of Provident Financial Holdings, Inc. filed as a part of the report are as
follows:
 
     
Page
 
Condensed Consolidated Statements of Financial Condition
 
   
as of March 31, 2010 and June 30, 2009
1
 
Condensed Consolidated Statements of Operations
 
   
for the Quarters and Nine Months Ended March 31, 2010 and 2009
2
 
Condensed Consolidated Statements of Stockholders’ Equity
 
   
for the Quarters and Nine Months Ended March 31, 2010 and 2009
3
 
Condensed Consolidated Statements of Cash Flows
 
   
for the Nine Months Ended March 31, 2010 and 2009
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
  21
 
Safe-Harbor Statement
   21
 
Critical Accounting Policies
22
 
Executive Summary and Operating Strategy
23
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
24
 
Comparison of Financial Condition at March 31, 2010 and June 30, 2009
25
 
Comparison of Operating Results
 
   
for the Quarters and Nine Months Ended March 31, 2010 and 2009
27
 
Asset Quality
38
 
Loan Volume Activities
45
 
Liquidity and Capital Resources
46
 
Commitments and Derivative Financial Instruments
47
 
Supplemental Information
48
       
  ITEM 3  -       
Quantitative and Qualitative Disclosures about Market Risk
48
       
  ITEM 4  -       
Controls and Procedures
50
       
PART II  -       
OTHER INFORMATION
 
       
  ITEM 1  -       
Legal Proceedings
50
                   ITEM 1A -     
Risk Factors
50
  ITEM 2  -       
Unregistered Sales of Equity Securities and Use of Proceeds
51
  ITEM 3  -       
Defaults Upon Senior Securities
51
  ITEM 4  -       
(Removed and Reserved)
52
  ITEM 5  -       
Other Information
52
  ITEM 6  -       
Exhibits
52
       
                     SIGNATURES
54
   


 
 

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
Dollars in Thousands

 
March 31,
 
June 30,
 
 
2010
 
2009
 
Assets
       
     Cash and cash equivalents
$       86,018
 
$      56,903
 
     Investment securities – available for sale, at fair value
36,406
 
125,279
 
     Loans held for investment, net of allowance for loan losses of
       
          $50,849 and $45,445, respectively
1,033,014
 
1,165,529
 
     Loans held for sale, at fair value
155,800
 
135,490
 
     Loans held for sale, at lower of cost or market
-
 
10,555
 
     Accrued interest receivable
4,540
 
6,158
 
     Real estate owned, net
17,555
 
16,439
 
     Federal Home Loan Bank (“FHLB”) – San Francisco stock
33,023
 
33,023
 
     Premises and equipment, net
5,952
 
6,348
 
     Prepaid expenses and other assets
33,012
 
23,889
 
         
               Total assets
$ 1,405,320
 
 $ 1,579,613
 
 
 
     
Liabilities and Stockholders’ Equity
       
Liabilities:
       
     Non interest-bearing deposits
$       47,773
 
$      41,974
 
     Interest-bearing deposits
900,144
 
947,271
 
               Total deposits
947,917
 
989,245
 
         
     Borrowings
309,658
 
456,692
 
     Accounts payable, accrued interest and other liabilities
23,375
 
18,766
 
               Total liabilities
1,280,950
 
1,464,703
 
         
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 and 15,000,000 shares
         authorized, respectively; 17,610,865 and 12,435,865 shares
         issued, respectively; 11,406,654 and 6,219,654 shares
         outstanding, respectively)
       
       
 
176
 
 
124
 
     Additional paid-in capital
85,488
 
72,709
 
     Retained earnings
132,295
 
134,620
 
     Treasury stock at cost (6,204,211 and 6,216,211 shares,
          respectively)
       
(93,942
(93,942
)
     Unearned stock compensation
(271
)
(473
)
     Accumulated other comprehensive income, net of tax
624
 
1,872
 
         
               Total stockholders’ equity
124,370
 
114,910
 
         
               Total liabilities and stockholders’ equity
$  1,405,320
 
$ 1,579,613
 

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

 

 


PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
In Thousands, Except Per Share Information
 
 
Quarter Ended
March 31,
 
Nine Months Ended
March 31,
   
 
2010
 
2009
 
2010
 
2009
Interest income:
                     
     Loans receivable, net
$ 16,101
   
$ 18,850
   
$ 51,375
   
$ 59,156
 
     Investment securities
311
   
1,635
   
1,869
   
5,344
 
     FHLB – San Francisco stock
22
   
-
   
91
   
324
 
     Interest-earning deposits
71
   
6
   
191
   
16
 
     Total interest income
16,505
   
20,491
   
53,526
   
64,840
 
                       
Interest expense:
                     
     Checking and money market deposits
376
   
282
   
1,066
   
914
 
     Savings deposits
468
   
484
   
1,492
   
1,588
 
     Time deposits
2,738
   
4,479
   
9,838
   
16,047
 
     Borrowings
3,330
   
4,575
   
11,854
   
14,086
 
     Total interest expense
6,912
   
9,820
   
24,250
   
32,635
 
                       
Net interest income, before provision for loan losses
9,593
   
10,671
   
29,276
   
32,205
 
Provision for loan losses
2,322
   
13,541
   
21,843
   
35,809
 
Net interest income (expense), after provision for
    loan losses
 
7,271
   
 
(2,870
 
)
 
 
7,433
   
 
(3,604
 
)
                       
Non-interest income:
                     
     Loan servicing and other fees
219
   
91
   
637
   
605
 
     Gain on sale of loans, net
1,431
   
6,107
   
9,804
   
8,692
 
     Deposit account fees
667
   
684
   
2,135
   
2,219
 
     Gain on sale of investment securities, net
-
   
-
   
2,290
   
356
 
     Gain (loss) on sale and operations of real estate
       owned acquired in the settlement of loans, net
 
58
   
 
(952
 
)
 
 
247
   
 
(1,838
 
)
     Other
502
   
457
   
1,458
   
1,153
 
     Total non-interest income
2,877
   
6,387
   
16,571
   
11,187
 
                       
Non-interest expense:
                     
     Salaries and employee benefits
6,065
   
5,025
   
16,848
   
14,175
 
     Premises and occupancy
740
   
695
   
2,282
   
2,129
 
     Equipment
334
   
340
   
1,025
   
1,097
 
     Professional expenses
424
   
294
   
1,177
   
986
 
     Sales and marketing expenses
174
   
93
   
434
   
393
 
     Deposit insurance premiums and regulatory
       assessments
 
636
   
 
403
   
 
2,309
   
 
1,013
 
     Other
1,175
   
1,098
   
3,595
   
2,758
 
     Total non-interest expense
9,548
   
7,948
   
27,670
   
22,551
 
                       
Income (loss) before income taxes
600
   
(4,431
)
 
(3,666
)
 
(14,968
)
Provision (benefit) for income taxes
229
   
(1,861
)
 
(1,579
)
 
(6,216
)
     Net income (loss)
$      371
   
$  (2,570
)
 
$  (2,087
)
 
$  (8,752
)
                       
Basic earnings (loss) per share
$ 0.03
   
$ (0.41
)
 
$ (0.26
)
 
$ (1.41
)
Diluted earnings (loss) per share
$ 0.03
   
$ (0.41
)
 
$ (0.26
)
 
$ (1.41
)
Cash dividends per share
$ 0.01
   
$  0.03
   
$  0.03
   
$  0.13
 

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

 

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Dollars in Thousands
For the Quarters Ended March 31, 2010 and 2009


 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income,
   
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
 
Balance at January 1, 2010
11,395,454
 
$ 176
$ 85,111
 
$ 132,038
 
$ (93,942
)
$ (338
)
$     587
 
$ 123,632
   
                                 
Comprehensive income:
                               
   Net income
         
371
             
371
   
   Change in unrealized holding gain on
      investment securities available for
      sale, net of tax
                     
37
 
37
   
Total comprehensive income
                         
408
   
                                 
Common stock issuance, net of expenses
     
(26
)
               
(26
)
 
Distribution of restricted stock
11,200
                             
Amortization of restricted stock
     
235
                 
235
   
Stock options expense
     
186
                 
186
   
Allocations of contribution to ESOP (1)
     
(18
)
       
67
     
49
   
Cash dividends
         
(114
)
           
(114
)
 
                                 
Balance at March 31, 2010
11,406,654
 
$ 176
$ 85,488
 
$ 132,295
 
$ (93,942
)
$ (271
)
$     624
 
$ 124,370
   

(1)  
Employee Stock Ownership Plan (“ESOP”).

 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
 Income,
   
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
 
Balance at January 1, 2009
6,208,519
 
$ 124
$ 74,943
 
$ 136,251
 
$ (93,930
)
$ -
 
$ 466
 
$ 117,854
   
                                 
Comprehensive loss:
                               
   Net loss
         
(2,570
)
           
(2,570
)
 
   Change in unrealized holding gain on
      investment securities available for
      sale, net of tax
                     
 
 
798
 
 
 
798
   
Total comprehensive loss
                         
(1,772
)
 
                                 
Purchase of treasury stock (1)
(65
)
         
-
         
-
   
Distribution of restricted stock
11,200
                             
Amortization of restricted stock
     
112
                 
112
   
Forfeiture of restricted stock
     
12
     
(12
)
       
-
   
Stock options expense
     
185
                 
185
   
Cash dividends
         
(187
)
           
(187
)
 
                                 
Balance at March 31, 2009
6,219,654
 
$ 124
$ 75,252
 
$ 133,494
 
$ (93,942
)
$ -
 
$ 1,264
 
$ 116,192
   

(1)  
All of which are repurchases made to satisfy the minimum income tax required to be withheld from employees in connection with the vesting of restricted stock granted to them pursuant to the Corporation’s share-based compensation plans.


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


 

 


PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Dollars in Thousands
For the Nine Months Ended March 31, 2010 and 2009

 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
   
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
 
Balance at July 1, 2009
6,219,654
 
$ 124
$ 72,709
 
$ 134,620
 
$ (93,942
)
$ ( 473
)
$ 1,872
 
$ 114,910
   
                                 
Comprehensive loss:
                               
   Net loss
         
(2,087
)
           
(2,087
)
 
   Change in unrealized holding loss on
      investment securities available for
      sale, net of reclassification of $1.3
      million of net gain included in net
      loss, net of tax
                     
(1,248
)
(1,248
)
 
Total comprehensive loss
                         
(3,335
)
 
                                 
Common stock issuance, net of expenses
5,175,000
 
52
11,881
                 
11,933
   
Distribution of restricted stock
12,000
                             
Amortization of restricted stock
     
446
                 
446
   
Stock options expense
     
413
                 
413
   
Allocations of contribution to ESOP
     
39
         
202
     
241
   
Cash dividends
         
(238
)
           
(238
)
 
                                 
Balance at March 31, 2010
11,406,654
 
$ 176
$ 85,488
 
$ 132,295
 
$ (93,942
)
$ (271
)
$     624
 
$ 124,370
   


 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
 Income,
   
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
 
Balance at July 1, 2008
6,207,719
 
$ 124
$ 75,164
 
$ 143,053
 
$ (94,798
)
$ ( 102
)
$ 539
 
$ 123,980
   
                                 
Comprehensive loss:
                               
   Net loss
         
(8,752
)
           
(8,752
)
 
   Change in unrealized holding gain on
      investment securities available for
      sale, net of reclassification of
      $206 of net gain included in net
      loss, net of tax
                     
725
 
725
   
Total comprehensive loss
                         
(8,027
)
 
                                 
Purchase of treasury stock (1)
(65
)
         
-
         
-
   
Distribution of restricted stock
12,000
                             
Amortization of restricted stock
     
320
                 
320
   
Awards of restricted stock
     
(868
)
   
868
         
-
   
Forfeiture of restricted stock
     
12
     
(12
)
       
-
   
Stock options expense
     
554
                 
554
   
Allocations of contribution to ESOP
     
70
         
102
     
172
   
Cash dividends
         
(807
)
           
(807
)
 
                                 
Balance at March 31, 2009
6,219,654
 
$ 124
$ 75,252
 
$ 133,494
 
$ (93,942
)
$ -
 
$ 1,264
 
$ 116,192
   

(1)  
All of which are repurchases made to satisfy the minimum income tax required to be withheld from employees in connection with the vesting of restricted stock granted to them pursuant to the Corporation’s share-based compensation plans.

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

 

 


PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Nine Months Ended
March 31,
 
 
 
2010
   
2009
 
Cash flows from operating activities:
         
   Net loss
$     (2,087
)
 
$   (8,752
)
   Adjustments to reconcile net loss to net cash provided by (used for)
         
    operating activities:
         
       Depreciation and amortization
1,214
   
1,565
 
       Provision for loan losses
21,843
   
35,809
 
       Provision for losses on real estate owned
419
   
226
 
       Gain on sale of loans, net
(9,804
)
 
(8,692
)
       Gain on sale of investment securities, net
(2,290
)
 
(356
)
       (Gain) loss on sale of real estate owned, net
(2,042
)
 
109
 
       Stock-based compensation
1,097
   
1,019
 
       FHLB – San Francisco stock dividend
-
   
(804
)
       Decrease (increase) in current and deferred income taxes
1,249
   
(9,991
)
       Increase in cash surrender value of the bank owned life insurance
(149
)
 
(92
)
   (Decrease) increase in accounts payable and other liabilities
(1,371
)
 
2,015
 
   (Increase) decrease in prepaid expenses and other assets
(7,722
)
 
1,961
 
   Loans originated for sale
(1,315,799
)
 
(701,044
)
   Proceeds from sale of loans
1,323,764
   
620,464
 
Net cash provided by (used for) operating activities
8,322
   
(66,563
)
           
Cash flows from investing activities:
         
   Decrease in loans held for investment, net
78,743
   
89,067
 
   Maturity and call of investment securities available for sale
2,000
   
65
 
   Principal payments from investment securities available for sale
19,106
   
24,973
 
   Purchase of investment securities available for sale
-
   
(8,135
)
   Proceeds from sale of investment securities available for sale
67,778
   
480
 
   Purchase of the bank owned life insurance
(2,000
)
 
-
 
   Proceeds from sale of real estate owned
32,118
   
24,622
 
   Purchase of premises and equipment
(288
)
 
(675
)
Net cash provided by investing activities
197,457
   
130,397
 
           
Cash flows from financing activities:
         
   Decrease in deposits, net
(41,328
)
 
(64,463
)
   Repayments of short-term borrowings, net
-
   
(81,400
)
   Proceeds from long-term borrowings
-
   
130,000
 
   Repayments of long-term borrowings
(147,034
)
 
(50,032
)
   ESOP loan payment
3
   
8
 
   Cash dividends
(238
)
 
(807
)
   Proceeds from issuance of common stock
11,933
   
-
 
Net cash used for financing activities
(176,664
)
 
(66,694
)
           
Net increase (decrease) in cash and cash equivalents
29,115
   
(2,860
)
Cash and cash equivalents at beginning of period
56,903
   
15,114
 
Cash and cash equivalents at end of period
$    86,018
   
$   12,254
 
Supplemental information:
         
  Cash paid for interest
$ 24,723
   
$ 32,335
 
  Cash paid for income taxes
$   2,040
   
$   2,599
 
  Transfer of loans held for sale to loans held for investment
$           -
   
$   1,004
 
  Real estate acquired in the settlement of loans
$ 45,051
   
$ 41,636
 

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

 

 


PROVIDENT FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010


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 financial statements at June 30, 2009 are 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 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, 2009.  The results of operations for the quarter and nine months ended March 31, 2010 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2010.


Note 2: Recent Accounting Pronouncements

ASC 105:
In June 2009, the FASB issued ASC 105, “Generally Accepted Accounting Principles,” a replacement of previous statement, “The Hierarchy of Generally Accepted Accounting Principles.”  The FASB Accounting Standards Codification (“Codification”) is the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of this ASC, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  ASC 105 is effective for interim and annual financial statements issued after September 15, 2009.  The Corporation adopted this Statement on July 1, 2009, which did not have a material impact on the Corporation’s consolidated financial statements in terms of Codification references.

ASC 810:
In June 2009, the FASB issued ASC 810, “Consolidation,” to improve financial reporting by enterprises involved with variable interest entities (“VIEs”).  ASC 810 addresses: (1) the effects on certain provisions of ASC 810-10-05-8, “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special purpose entity (“SPE”) concept in ASC 860, and (2) constituent concerns about the application of certain key provisions of ASC 810-10-05-8, including those in which the accounting and disclosures under ASC 810-10-05-8 do not always provide timely and useful information about an enterprise’s involvement in a VIE.  ASC 810 is effective at the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual periods thereafter. Early adoption is prohibited.  The Corporation will be required to adopt ASC 810 on July 1, 2010, and has not yet assessed the impact of the adoption of this standard on the Corporation’s consolidated financial statements.

ASC 860:
In June 2009, the FASB issued ASC 860, “Transfers and Servicing.”   This statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  ASC 860 is effective at the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual periods thereafter.  Early adoption is prohibited. This statement must be applied to transfers occurring on or after the effective date.  However, the disclosure provisions of this statement should be applied to transfers that occurred both before and
 
 
6

 
after the effective date.  Additionally, on and after the effective date, the concept of a qualifying SPE is no longer relevant for accounting purposes.  Therefore, formerly qualifying SPEs, as defined under previous accounting standards, should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance.  The Corporation will be required to adopt ASC 810 on July 1, 2010, and has not yet assessed the impact of the adoption of this standard on the Corporation’s consolidated financial statements.

ASC 715-20-65-2:
In December 2008, the FASB issued ASC 715-20-65-2, “Employer’s Disclosures about Postretirement Benefit Plan Assets,” which amends ASC 715-20, “Employer’s Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan.  The objectives of the disclosures are to provide users of financial statements with an understanding of the plan investment policies and strategies regarding investment allocation, major categories of plan assets, use of fair valuation inputs and techniques, effect of fair value measurements using significant unobservable inputs (i.e., level 3 inputs), and significant concentrations of risk within plan assets.  ASC 715-20-65-2 is effective for financial statements issued for fiscal years beginning after December 15, 2009, with early adoption permitted.  This ASC does not require comparative disclosures for earlier periods. Management has not determined the impact of this ASC on the Corporation’s consolidated financial statements.


Note 3: Earnings (Loss) Per Share and Stock-Based Compensation

Earnings (Loss) Per Share:
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income or loss available to common shareholders by the weighted-average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the entity.  As of March 31, 2010 and 2009, there were outstanding options to purchase 905,200 shares and 905,500 shares of the Corporation’s common stock, respectively, of which 905,200 shares and 905,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive.  As of March 31, 2010 and 2009, there was outstanding unvested restricted stock of 124,300 shares and 136,300 shares, respectively, also excluded from the diluted EPS computation as their effect was anti-dilutive.


 

 


The following table provides the basic and diluted EPS computations for the quarters and nine months ended March 31, 2010 and 2009, respectively.

 
For the Quarter
Ended
March 31,
 
For the Nine Months
Ended
March 31,
 
 
(In Thousands, Except Earnings (Loss) Per Share)
   
 
2010
 
2009
 
2010
 
2009
 
Numerator:
               
     Net income (loss) – numerator for basic earnings
        (loss) per share and diluted earnings (loss)
        per share - available to common stockholders
 
 
$ 371
 
 
 
$ (2,570
 
 
)
 
 
$ (2,087
 
 
)
 
 
$ (8,752
 
 
)
                 
Denominator:
               
     Denominator for basic earnings (loss) per share:
         Weighted-average shares
               
11,326
6,215
 
8,115
 
6,201
 
                 
     Effect of dilutive securities
-
 
-
 
-
 
-
 
                 
     Denominator for diluted earnings (loss) per share:
               
         Adjusted weighted-average shares
         and assumed conversions
 
11,326
 
 
6,215
 
 
8,115
 
 
6,201
 
                 
Basic earnings (loss) per share
$ 0.03
 
$ (0.41
)
$ (0.26
)
$ (1.41
)
Diluted earnings (loss) per share
$ 0.03
 
$ (0.41
)
$ (0.26
)
$ (1.41
)

ASC 718, “Compensation – Stock Compensation,” requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors.  Effective July 1, 2005, the Corporation adopted ASC 718 using the modified prospective method under which the provisions of ASC 718 are applied to new awards and to awards modified, repurchased or cancelled after June 30, 2005 and to awards outstanding on June 30, 2005 for which requisite service has not yet been rendered.


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 March 31, 2010 and 2009, respectively (in thousands).

 
For the Quarter Ended March 31, 2010
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, before provision for loan
   losses
 
$ 8,909
 
 
$     684
 
 
$ 9,593
 
Provision for loan losses
2,059
 
263
 
2,322
 
Net interest income, after provision for loan losses ..
6,850
 
421
 
7,271
 
             
Non-interest income:
           
     Loan servicing and other fees  
207
 
12
 
219
 
     (Loss) gain on sale of loans, net
(15
)
1,446
 
1,431
 
     Deposit account fees
667
 
-
 
667
 
     Gain on sale and operations of real estate
        owned acquired in the settlement of loans, net
 
25
 
 
33
 
 
58
 
     Other
502
 
-
 
502
 
          Total non-interest income
1,386
 
1,491
 
2,877
 
             
Non-interest expense:
           
     Salaries and employee benefits
3,581
 
2,484
 
6,065
 
     Premises and occupancy
569
 
171
 
740
 
     Operating and administrative expenses
1,574
 
1,169
 
2,743
 
          Total non-interest expense
5,724
 
3,824
 
9,548
 
Income (loss) before income taxes
2,512
 
(1,912
)
600
 
Provision (benefit) for income taxes
1,033
 
(804
)
229
 
Net income (loss)
$ 1,479
 
$ (1,108
)
$    371
 
Total assets, end of period
$ 1,250,341
 
$ 154,979
 
$ 1,405,320
 

 

 




 
For the Quarter Ended March 31, 2009
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, before provision for loan
   losses
 
$ 10,485
 
 
$    186
 
 
$ 10,671
 
Provision for loan losses
12,178
 
1,363
 
13,541
 
Net interest expense, after provision for loan losses
(1,693
)
(1,177
)
(2,870
)
             
Non-interest income:
           
     Loan servicing and other fees (1)
50
 
41
 
91
 
     Gain on sale of loans, net
6
 
6,101
 
6,107
 
     Deposit account fees
684
 
-
 
684
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
(896
 
)
 
(56
 
)
 
(952
 
)
     Other
454
 
3
 
457
 
          Total non-interest income
298
 
6,089
 
6,387
 
             
Non-interest expense:
           
     Salaries and employee benefits
3,478
 
1,547
 
5,025
 
     Premises and occupancy
564
 
131
 
695
 
     Operating and administrative expenses
1,218
 
1,010
 
2,228
 
          Total non-interest expense
5,260
 
2,688
 
7,948
 
(Loss) income before taxes
(6,655
)
2,224
 
(4,431
)
(Benefit) provision for income taxes
(2,796
)
935
 
(1,861
)
Net (loss) income
$ (3,859
)
$ 1,289
 
$ (2,570
)
Total assets, end of period
$ 1,445,310
 
$ 117,658
 
$ 1,562,968
 

(1)  
Includes an inter-company charge of $21 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.

 
10 

 

The following tables set forth condensed consolidated statements of operations and total assets for the Corporation’s operating segments for the nine months ended March 31, 2010 and 2009, respectively (in thousands).

 
For the Nine Months Ended March 31, 2010
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, before provision for loan
  losses
 
$ 26,986
 
 
$  2,290
 
 
$  29,276
 
Provision for loan losses
21,261
 
582
 
21,843
 
Net interest income, after provision for loan losses .
5,725
 
1,708
 
7,433
 
             
Non-interest income:
           
     Loan servicing and other fees (1)
596
 
41
 
637
 
     (Loss) gain on sale of loans, net
(5
)
9,809
 
9,804
 
     Deposit account fees
2,135
 
-
 
2,135
 
     Gain on sale of investment securities, net
2,290
 
-
 
2,290
 
     Gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
208
 
 
39
 
 
247
 
     Other
1,458
 
-
 
1,458
 
          Total non-interest income
6,682
 
9,889
 
16,571
 
             
Non-interest expense:
           
     Salaries and employee benefits
9,559
 
7,289
 
16,848
 
     Premises and occupancy
1,767
 
515
 
2,282
 
     Operating and administrative expenses
5,204
 
3,336
 
8,540
 
          Total non-interest expense
16,530
 
11,140
 
27,670
 
(Loss) income before taxes
(4,123
)
457
 
(3,666
)
Benefit (provision) for income taxes
(1,771
)
192
 
(1,579
)
Net (loss) income
$ (2,352
)
$     265
 
$  (2,087
)
Total assets, end of period
$ 1,250,341
 
$ 154,979
 
$ 1,405,320
 

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


 
11 

 



 
For the Nine Months Ended March 31, 2009
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, before provision for loan
  losses
 
$ 31,862
 
 
$      343
 
 
$  32,205
 
Provision for loan losses
32,387
 
3,422
 
35,809
 
Net interest expense, after provision for loan losses
(525
)
(3,079
)
(3,604
)
             
Non-interest income:
           
     Loan servicing and other fees (1)
393
 
212
 
605
 
     Gain on sale of loans, net
13
 
8,679
 
8,692
 
     Deposit account fees
2,219
 
-
 
2,219
 
     Gain on sale of investment securities
356
 
-
 
356
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
(1,516
 
)
 
(322
 
)
 
(1,838
 
)
     Other
1,147
 
6
 
1,153
 
          Total non-interest income
2,612
 
8,575
 
11,187
 
             
Non-interest expense:
           
     Salaries and employee benefits
10,144
 
4,031
 
14,175
 
     Premises and occupancy
1,749
 
380
 
2,129
 
     Operating and administrative expenses
3,528
 
2,719
 
6,247
 
          Total non-interest expense
15,421
 
7,130
 
22,551
 
Loss before taxes
(13,334
)
(1,634
)
(14,968
)
Benefit for income taxes
(5,529
)
(687
)
(6,216
)
Net loss
$ (7,805
)
$     (947
)
$  (8,752
)
Total assets, end of period
$ 1,445,310
 
$ 117,658
 
$ 1,562,968
 

(1)  
Includes an inter-company charge of $123 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.


Note 5: Derivative and Other Financial Instruments with Off-Balance Sheet Risks

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit, and loan sale commitments to third parties.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Condensed Consolidated Statements of Financial Condition.  The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments.  The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.  As of March 31, 2010 and June 30, 2009, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $124.1 million and $105.7 million, respectively.  The following table provides information regarding undisbursed funds to borrowers on existing loans and lines of credit with the Bank as well as commitments to originate loans to be held for investment.

 
12 

 


 
March 31,
 
June 30,
Commitments
2010
 
2009
(In Thousands)
     
       
Undisbursed loan funds – Construction loans
$      19
 
$    305
Undisbursed lines of credit – Mortgage loans
1,560
 
2,171
Undisbursed lines of credit – Commercial business loans
3,417
 
4,148
Undisbursed lines of credit – Consumer loans
1,785
 
1,617
Commitments to extend credit on loans to be held for investment
676
 
1,053
Total
$ 7,457
 
$ 9,294

In accordance with ASC 815, “Derivatives and Hedging,” and interpretations of the Derivatives Implementation Group of the FASB, the fair value of the commitments to extend credit on loans to be held for sale, loan sale commitments, commitments to sell mortgage-backed securities (“MBS”), put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition, and are included in other assets totaling $1.2 million at March 31, 2010; and $2.1 million of other assets and $97,000 in other liabilities at June 30, 2009.  The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings.  The net impact of derivative financial instruments on the Condensed Consolidated Statements of Operations during the quarters ended March 31, 2010 and 2009 was a loss of $(1.4) million and a gain of $2.5 million, respectively, recorded in the gain on sale of loans.  For the nine months ended March 31, 2010 and 2009, the net impact of derivative financial instruments on the Condensed Consolidated Statements of Operations was a loss of $(790,000) and a gain of $3.1 million, respectively, recorded in the gain on sale of loans.

 
 March 31, 2010
 
 June 30, 2009
 
     
Fair
     
Fair
 
Derivative Financial Instruments
Amount
 
Value
 
Amount
 
Value
 
(In Thousands)
               
                 
Commitments to extend credit on loans
               
  to be held for sale (1)
$ 123,449
 
$    367
 
$  104,630
 
$ 1,316
 
Best efforts loan sale commitments
(8,710
)
-
 
(12,834
)
-
 
Mandatory loan sale commitments
(254,193
)
816
 
(207,239
)
656
 
Total
$ (139,454
)
$ 1,183
 
$ (115,443
)
$ 1,972
 

(1)  
Net of 30.3 percent at March 31, 2010 and 34.5 percent at June 30, 2009 of commitments, which may not fund.


Note 6: Income Taxes

FASB ASC 740, “Income Taxes,” requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns.  If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.  Management has determined that there are no unrecognized tax benefits to be reported in the Corporation’s financial statements, and none are anticipated during the fiscal year ending June 30, 2010.

ASC 740 requires that when determining the need for a valuation allowance against a deferred tax asset, management must assess both positive and negative evidence with regard to the realizability of the tax losses represented by that asset.  To the extent available sources of taxable income are insufficient to absorb tax losses, a valuation allowance is necessary.  Sources of taxable income for this analysis include prior years’ tax returns, the expected reversals of taxable temporary differences between book and tax income, prudent and feasible tax-planning strategies, and future taxable income.   The Corporation’s deferred tax asset has decreased during the first nine months of fiscal 2010 due to charge-offs of non-performing loans, partly offset by an increase in its allowance for loan losses.  The deferred tax asset related to the allowance will be realized when actual charge-offs are made against the allowance.  Based on the availability of loss carry-backs and projected taxable income during the periods
 
 
13

 
for which loss carry-forwards are available, management believes it is more likely than not the Corporation will realize the deferred tax asset.  The Corporation continues to monitor the deferred tax asset on a quarterly basis for a valuation allowance.   The future realization of these tax benefits primarily hinges on adequate future earnings to utilize the tax benefit.  Prospective earnings or losses, tax law changes or capital changes could prompt the Corporation to reevaluate the assumptions which may be used to establish a valuation allowance.  As of March 31, 2010, the estimated deferred tax asset was $14.3 million.   This compares to the estimated deferred tax asset of $15.4 million at June 30, 2009.  The Corporation did not have any liabilities for uncertain tax positions or any known unrecognized tax benefit at March 31, 2010 and June 30, 2009.

The Corporation files income tax returns for the United States and state of California jurisdictions.  The Internal Revenue Service has audited the Bank’s income tax returns through 1996 and the California Franchise Tax Board has audited the Bank through 1990.  The Internal Revenue Service also completed a review of the Corporation’s income tax returns for fiscal 2006 and 2007.  Tax years subsequent to 2007 remain subject to federal examination, while the California state tax returns for years subsequent to 2004 are subject to examination by state taxing authorities.  It is the Corporation’s policy to record any penalties or interest arising from federal or state taxes as a component of income tax expense.  There were no penalties or interest included in the Condensed Consolidated Statements of Operations for the quarter and the nine months ended March 31, 2010 and 2009.


Note 7: Fair Value of Financial Instruments

The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” on July 1, 2008 and elected the fair value option (ASC 825, “Financial Instruments”) on May 28, 2009 on loans originated for sale by PBM.  ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 825 permits entities to elect to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the Fair Value Option) at specified election dates.  At each subsequent reporting date, an entity is required to report unrealized gains and losses on items in earnings for which the fair value option has been elected.  The objective of the statement is to provide entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply complex accounting provisions.
 
 
The following table describes the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale at fair value.
 
 
 
(In Thousands)
 
 
Aggregate
Fair Value
 
Aggregate
Unpaid
Principal
Balance
 
 
Net
Unrealized
Gain
 
As of March 31, 2010:
           
Single-family loans measured at fair value
$ 155,800
 
$ 152,217
 
$ 3,583
 

On April 9, 2009, the FASB issued ASC 820-10-65-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  This ASC provides additional guidance for estimating fair value in accordance with ASC 820, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased.

ASC 820 establishes a three-level valuation hierarchy that prioritizes inputs to valuation techniques used in fair value calculations.  The three levels of inputs are defined as follows:

Level 1
-
Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
 
Level 2
-
Observable inputs other than Level 1 such as: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated to observable market data for substantially the full term of the asset or liability.
 

 
14 

 


Level 3
-
Unobservable inputs for the asset or liability that use significant assumptions, including assumptions of risks.  These unobservable assumptions reflect the Corporation’s estimate of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of pricing models, discounted cash flow models and similar techniques.

ASC 820 requires the Corporation to maximize the use of observable inputs and minimize the use of unobservable inputs.  If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

The Corporation’s financial assets and liabilities measured at fair value on a recurring basis consist of investment securities, loans held for sale at fair value, interest-only strips and derivative financial instruments; while non-performing loans, mortgage servicing assets and real estate owned are measured at fair value on a nonrecurring basis.

Investment securities are primarily comprised of U.S. government sponsored enterprise debt securities, U.S. government agency mortgage-backed securities, U.S. government sponsored enterprise mortgage-backed securities and private issue collateralized mortgage obligations.  The Corporation utilizes unadjusted quoted prices in active markets for identical securities (Level 1) for its fair value measurement of debt securities, quoted prices in active and less than active markets for similar securities (Level 2) for its fair value measurement of mortgage-backed securities and broker price indications for similar securities in non-active markets (Level 3) for its fair value measurement of collateralized mortgage obligations (“CMO”).

Derivative financial instruments are comprised of commitments to extend credit on loans to be held for sale and mandatory loan sale commitments.  The fair value is determined, when possible, using quoted secondary-market prices.  If no such quoted price exists, the fair value of a commitment is determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment.

Loans held for sale at fair value are primarily single-family loans.  The fair value is determined, when possible, using quoted secondary-market prices such as mandatory loan sale commitments.  If no such quoted price exists, the fair value of a loan is determined by quoted prices for a similar loan or loans, adjusted for the specific attributes of each loan.

Non-performing loans are loans which are inadequately protected by the current net worth and paying capacity of the borrowers or of the collateral pledged.  The non-performing loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  The fair value of an impaired loan is determined based on an observable market price or current appraised value of the underlying collateral, less selling costs.  Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the borrower.  For non-performing loans which are also restructured loans, the fair value is derived from discounted cash flow analysis, except those which are in the process of foreclosure, for which the fair value is derived from the appraised value of its collateral, less selling costs.  Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.  This loss is not recorded directly as an adjustment to current earnings or other comprehensive income, but rather as a component in determining the overall adequacy of the allowance for losses on loans.  These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for losses on loans recorded in current earnings.

The Corporation uses the amortization method for its mortgage servicing assets, which amortizes servicing assets in proportion to and over the period of estimated net servicing income and assesses servicing assets for impairment based on fair value at each reporting date.  The fair value of mortgage servicing assets is calculated using the present value method; which includes a third party’s prepayment projections of similar instruments, weighted average coupon rates and the estimated average life.

The rights to future income from serviced loans that exceed contractually specified servicing fees are recorded as interest-only strips.  The fair value of interest-only strips is calculated using the same assumptions that are used to value the related servicing assets.
 
 
15


The fair value of real estate owned is derived from the lower of the appraised value at the time of foreclosure, less selling costs or the listing price, less selling costs.

The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following fair value hierarchy table presents information about the Corporation’s assets measured at fair value on a recurring basis:

 
Fair Value Measurement at March 31, 2010 Using:
(In Thousands)
Level 1
Level 2
 
Level 3
 
Total
 
Investment securities:
             
 
U.S. government sponsored
 enterprise debt securities
 
$ 3,335
 
$            -
 
 
$         -
 
 
$     3,335
 
 
U.S. government agency MBS
-
18,400
 
-
 
18,400
 
 
U.S. government sponsored
 enterprise MBS
 
-
 
13,123
 
 
-
 
 
13,123
 
 
Private issue CMO
-
-
 
1,548
 
1,548
 
Loans held for sale, at fair value
-
155,800
 
-
 
155,800
 
Interest-only strips
-
-
 
274
 
274
 
Derivative financial instruments
-
532
 
651
 
1,183
 
Total
$ 3,335
$ 187,855
 
$ 2,473
 
$ 193,663
 


 
Fair Value Measurement at June 30, 2009 Using:
(In Thousands)
Level 1
Level 2
 
Level 3
 
Total
 
Investment securities:
             
 
U.S. government sponsored
 enterprise debt securities
 
$ 5,353
 
$            -
 
 
$         -
 
 
$     5,353
 
 
U.S. government agency MBS
-
74,064
 
-
 
74,064
 
 
U.S. government sponsored
 enterprise MBS
 
-
 
44,436
 
 
-
 
 
44,436
 
 
Private issue CMO
-
-
 
1,426
 
1,426
 
Loans held for sale, at fair value
-
135,490
 
-
 
135,490
 
Interest-only strips
-
-
 
294
 
294
 
Derivative financial instruments
-
(97
)
2,069
 
1,972
 
Total
$ 5,353
$ 253,893
 
$ 3,789
 
$ 263,035
 

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying Condensed Consolidated Statements of Financial Condition using Level 3 inputs:

 
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
(In Thousands)
 CMO  
Interest-Only
Strips
 
Derivative
Financial
Instruments
   Total    
Beginning balance at January 1, 2010
$ 1,580
 
$ 275
 
$ 1,497
 
$ 3,352
   
 
Total gains or losses (realized/unrealized):
                 
 
Included in earnings
-
 
(11
)
(1,497
)
(1,508
)
 
 
Included in other comprehensive income
1
 
10
 
-
 
11
   
 
Purchases, issuances, and settlements
(33
)
-
 
651
 
618
   
 
Transfers in and/or out of Level 3
-
 
-
 
-
 
-
   
Ending balance at March 31, 2010
$ 1,548
 
$ 274
 
$    651
 
$ 2,473
   

 
16


 
 
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
(In Thousands)
CMO
 
Interest-Only
Strips
 
Derivative Financial Instruments
   Total    
Beginning balance at July 1, 2009
$ 1,426
 
$ 294
 
$ 2,069
 
$ 3,789
   
 
Total gains or losses (realized/unrealized):
                 
 
Included in earnings
-
 
(47
)
(4,473
)
(4,520
)
 
 
Included in other comprehensive income
292
 
27
 
-
 
319
   
 
Purchases, issuances, and settlements
(170
)
-
 
3,055
 
2,885
   
 
Transfers in and/or out of Level 3
-
 
-
 
-
 
-
   
Ending balance at March 31, 2010
$ 1,548
 
$ 274
 
$    651
 
$ 2,473
   

The following fair value hierarchy table presents information about the Corporation’s assets measured at fair value on a nonrecurring basis:

 
Fair Value Measurement at March 31, 2010 Using:
(In Thousands)
Level 1
 
Level 2
 
Level 3
 
           Total
 
Non-performing loans (1)
$ -
 
$ 45,218
 
$ 26,538
 
$ 71,756
 
Mortgage servicing assets
-
 
-
 
404
 
404
 
Real estate owned (1)
-
 
19,091
 
-
 
19,091
 
Total
$ -
 
$ 64,309
 
$ 26,942
 
$ 91,251
 

(1) Amounts exclude estimated selling costs.


Note 8: Incentive Plans

As of March 31, 2010, the Corporation had three share-based compensation plans, which are described below.  These plans are the 2006 Equity Incentive Plan, 2003 Stock Option Plan and 1996 Stock Option Plan.  The compensation cost that has been charged against income for these plans was $421,000 and $297,000 for the quarters ended March 31, 2010 and 2009, respectively, and there was no tax benefit from these plans during either quarter.  For the nine months ended March 31, 2010 and 2009, the compensation cost for these plans was $859,000 and $855,000, respectively, and there was no tax benefit from these plans during either period.

Equity Incentive Plan.  The Corporation established and the shareholders approved the 2006 Equity Incentive Plan (“2006 Plan”) for directors, advisory directors, directors emeriti, officers and employees of the Corporation and its subsidiary.  The 2006 Plan authorizes 365,000 stock options and 185,000 shares of restricted stock.  The 2006 Plan also provides that no person may be granted more than 73,000 shares of stock options or 27,750 shares of restricted stock in any one year.

Equity Incentive Plan - Stock Options.  Under the 2006 Plan, options may not be granted at a price less than the fair market value at the date of the grant.  Options typically vest over a five-year or shorter period as long as the director, advisory director, director emeriti, officer or employee remains in service to the Corporation.  The options are exercisable after vesting for up to the remaining term of the original grant.  The maximum term of the options granted is 10 years.

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option valuation model with the assumptions noted in the following table.  The expected volatility is based on implied volatility from historical common stock closing prices for the prior 84 months.  The expected dividend yield is based on the most recent quarterly dividend on an annualized basis.  The expected term is based on the historical experience of all fully vested stock option grants and is reviewed annually.  The risk-free interest rate is based on the U.S. Treasury note rate with a term similar to the underlying stock option on the particular grant date.

 
17 

 


 
Quarter
Quarter
Nine Months
Nine Months
 
Ended
Ended
Ended
Ended
 
March 31,
March 31,
March 31,
March 31,
 
2010
2009
2010
2009
Expected volatility
-
 
-
 
-
 
35%
 
Weighted-average volatility
-
 
-
 
-
 
           35%
 
Expected dividend yield
-
 
-
 
-
 
2.8%
 
Expected term (in years)
-
 
-
 
-
 
7.0
 
Risk-free interest rate
-
 
-
 
-
 
3.5%
 

In the third quarter of fiscal 2010, there were no stock options granted, exercised or forfeited.  This compares to a total of 2,200 stock options forfeited, and no stock options granted nor exercised in the third quarter of fiscal 2009.  For the first nine months of fiscal 2010, there were no stock options granted nor exercised but there were 300 stock options forfeited.  This compares to a total of 182,000 stock options with a three-year cliff vesting schedule and fair value of $2.14 per stock option, 2,200 stock options forfeited and no stock options granted in the first nine months of fiscal 2009.  As of March 31, 2010 and 2009, there were 10,200 stock options and 9,900 stock options available for future grants under the 2006 Plan, respectively.

The following table summarizes the stock option activity in the 2006 Plan for the quarter and nine months ended March 31, 2010.

Options
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
($000)
Outstanding at January 1, 2010
354,800
 
$ 17.45
         
Granted
-
 
$         -
         
Exercised
-
 
$         -
         
Forfeited
-
 
$         -
         
Outstanding at March 31, 2010
354,800
 
 $ 17.45
 
7.62
 
    $ -
 
Vested and expected to vest at March 31, 2010
292,170
 
$ 18.42
 
7.56
 
    $ -
 
Exercisable at March 31, 2010
104,280
 
$ 28.31
 
6.86
 
     $ -
 

Options
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
($000)
Outstanding at July 1, 2009
355,100
 
$ 17.46
         
Granted
-
 
$         -
         
Exercised
-
 
$         -
         
Forfeited
(300
)
$ 28.31
         
Outstanding at March 31, 2010
354,800
 
 $ 17.45
 
7.62
 
    $ -
 
Vested and expected to vest at March 31, 2010
292,170
 
$ 18.42
 
7.56
 
    $ -
 
Exercisable at March 31, 2010
104,280
 
$ 28.31
 
6.86
 
     $ -
 

As of March 31, 2010 and 2009, there was $642,000 and $799,000 of unrecognized compensation expense, respectively, related to unvested share-based compensation arrangements granted under the stock options in the 2006 Plan.  The expense is expected to be recognized over a weighted-average period of 1.7 years and 2.7 years, respectively.  The forfeiture rate during the first nine months of fiscal 2010 was 25 percent and was calculated by using the historical forfeiture experience of all fully vested stock option grants and is reviewed annually.

Equity Incentive Plan – Restricted Stock.  The Corporation used 185,000 shares of its treasury stock to fund the 2006 Plan.  Awarded shares typically vest over a five-year or shorter period as long as the director, advisory director, director emeriti, officer or employee remains in service to the Corporation.  Once vested, a recipient of
 
 
18

 
restricted stock will have all rights of a shareholder, including the power to vote and the right to receive dividends.  The Corporation recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

In the third quarter of fiscal 2010, a total of 11,200 shares of restricted stock were vested and distributed, while no restricted stock was awarded or forfeited.  This compares to a total of 11,200 shares of restricted stock vested and distributed, 1,400 shares forfeited and no shares awarded in the comparable period in fiscal 2009.  For the first nine months of fiscal 2010, a total of 12,000 shares of restricted stock were vested and distributed, while no shares were awarded or forfeited.  This compares to a total of 100,300 shares of restricted stock awarded with a three-year cliff vesting schedule, 12,000 shares vested and distributed, and 1,400 shares forfeited during the first nine months of fiscal 2009.  As of March 31, 2010 and 2009, there were 25,350 shares and 25,350 shares of restricted stock available for future awards, respectively.

The following table summarizes the unvested restricted stock activity in the quarter and nine months ended March 31, 2010.

Unvested Shares
Shares
Weighted-Average
Award Date
Fair Value
Unvested at January 1, 2010
135,500
 
$ 11.63
 
Granted
-
 
$         -
 
Vested
(11,200
)
$ 26.49
 
Forfeited
-
 
$         -
 
Unvested at March 31, 2010
124,300
 
$ 10.29
 
Expected to vest at March 31, 2010
93,225
 
$ 10.29
 

Unvested Shares
Shares
Weighted-Average
Award Date
Fair Value
Unvested at July 1, 2009
136,300
 
$ 11.67
 
Granted
-
 
$         -
 
Vested
(12,000
)
$ 25.93
 
Forfeited
-
 
$         -
 
Unvested at March 31, 2010
124,300
 
$ 10.29
 
Expected to vest at March 31, 2010
93,225
 
$ 10.29
 

As of March 31, 2010 and 2009, the unrecognized compensation expense was $955,000 and $1.7 million, respectively, related to unvested share-based compensation arrangements awarded under the restricted stock in the 2006 Plan, and reported as a reduction to stockholders’ equity.  This expense is expected to be recognized over a weighted-average period of 1.7 years and 2.7 years, respectively.  Similar to stock options, a forfeiture rate of 25 percent has been applied for the restricted stock compensation expense calculations in the first nine months of fiscal 2010.  The fair value of shares vested and distributed during the quarter ended March 31, 2010 and 2009 was $34,000 and $46,000, respectively.  For the first nine months of fiscal 2010 and 2009, the fair value of shares vested and distributed was $38,000 and $52,000, respectively.

Stock Option Plans.  The Corporation established the 1996 Stock Option Plan and the 2003 Stock Option Plan (collectively, the “Stock Option Plans”) for key employees and eligible directors under which options to acquire up to 1.15 million shares and 352,500 shares of common stock, respectively, may be granted.  Under the Stock Option Plans, stock options may not be granted at a price less than the fair market value at the date of the grant.  Stock options vest over a five-year period on a pro-rata basis as long as the employee or director remains in service to the Corporation.  The stock options are exercisable after vesting for up to the remaining term of the original grant.  The maximum term of the stock options granted is 10 years.

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option valuation model with the assumptions noted in the following table.  The expected volatility is based on implied volatility from historical common stock closing prices for the prior 84 months.  The expected dividend yield is based on the most recent quarterly dividend on an annualized basis.  The expected term is based on the historical
 
 
19

 
experience of all fully vested stock option grants and is reviewed annually.  The risk-free interest rate is based on the U.S. Treasury note rate with a term similar to the underlying stock option on the particular grant date.

There was no activity in the third quarter and first nine months of fiscal 2010 and 2009.  As of March 31, 2010 and 2009, the number of stock options available for future grants under the Stock Option Plans were 14,900 and 14,900 stock options, respectively.

The following is a summary of the activity in the Stock Option Plans for the quarter and nine months ended March 31, 2010.

Options
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
($000)
Outstanding at January 1, 2010
550,400
 
 $ 20.52
         
Granted
-
 
$         -
         
Exercised
-
 
$         -
         
Forfeited
-
 
$         -
         
Outstanding at March 31, 2010
550,400
 
 $ 20.52
 
3.86
 
$ -
 
Vested and expected to vest at March 31, 2010
535,925
 
$ 20.40
 
3.78
 
$ -
 
Exercisable at March 31, 2010
492,500
 
$ 20.02
 
3.51
 
$ -
 

Options
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
($000)
Outstanding at July 1, 2009
550,400
 
 $ 20.52
         
Granted
-
 
$         -
         
Exercised
-
 
$         -
         
Forfeited
-
 
$         -
         
Outstanding at March 31, 2010
550,400
 
 $ 20.52
 
3.86
 
$ -
 
Vested and expected to vest at March 31, 2010
535,925
 
$ 20.40
 
3.78
 
$ -
 
Exercisable at March 31, 2010
492,500
 
$ 20.02
 
3.51
 
$ -
 

As of March 31, 2010 and 2009, there was $264,000 and $1.1 million of unrecognized compensation expense, respectively, related to unvested share-based compensation arrangements granted under the Stock Option Plans.  The expense is expected to be recognized over a weighted-average period of 1.7 years at both period ends.  The forfeiture rate during the first nine months of fiscal 2010 was 25% and was calculated by using the historical forfeiture experience of all fully vested stock option grants and is reviewed annually.


Note 9: Subsequent Events

Management has evaluated events through the date that the financial statements were issued.  No material subsequent events have occurred since March 31, 2010 that would require recognition or disclosure in these condensed consolidated financial statements.



 
20 

 


ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of Provident Savings Bank, F.S.B. upon the Bank’s conversion from a federal mutual to a federal stock savings bank (“Conversion”).  The Conversion was completed on June 27, 1996.  At March 31, 2010, the Corporation had total assets of $1.41 billion, total deposits of $947.9 million and total stockholders’ equity of $124.4 million.  The Corporation has not engaged in any significant activity other than holding the stock of the Bank.  Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.

The Bank, founded in 1956, is a federally chartered stock savings bank headquartered in Riverside, California.  The Bank is regulated by the Office of Thrift Supervision (“OTS”), its primary federal regulator, and the Federal Deposit Insurance Corporation (“FDIC”), the insurer of its deposits.  The Bank’s deposits are federally insured up to applicable limits by the FDIC.  The Bank has been a member of the Federal Home Loan Bank System since 1956.

The Bank’s business consists of community banking activities and mortgage banking activities, conducted by Provident Bank and Provident Bank Mortgage, a division of the Bank.  Community banking activities primarily consist of accepting deposits from customers within the communities surrounding the Bank’s full service offices and investing those funds in single-family loans, multi-family loans, commercial real estate loans, construction loans, commercial business loans, consumer loans and other real estate loans.  The Bank also offers business checking accounts, other business banking services, and services loans for others.  Mortgage banking activities consist of the origination and sale of mortgage and consumer loans secured primarily by single-family residences.  The Bank currently operates 14 retail/business banking offices in Riverside County and San Bernardino County (commonly known as the Inland Empire).  Provident Bank Mortgage operates wholesale loan production offices in Pleasanton and Rancho Cucamonga, California and retail loan production offices in City of Industry, Escondido, Glendora and Riverside (2), California.  The Bank’s revenues are derived principally from interest on its loans and investment securities and fees generated through its community banking and mortgage banking activities.  There are various risks inherent in the Bank’s business including, among others, the general business environment, interest rates, the California real estate market, the demand for loans, the prepayment of loans, the repurchase of loans previously sold to investors, the secondary market conditions to sell loans, competitive conditions, legislative and regulatory changes, fraud and other risks.

The Corporation began to distribute quarterly cash dividends in the quarter ended September 30, 2002.  On January 28, 2010, the Corporation declared a quarterly cash dividend of $0.01 per share for the Corporation’s shareholders of record at the close of business on February 25, 2010, which was paid on March 23, 2010.  Future declarations or payments of dividends will be subject to the consideration of the Corporation’s Board of Directors, which will take into account the Corporation’s financial condition, results of operations, tax considerations, capital requirements, industry standards, legal restrictions, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation.  Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the current fiscal year and/or the preceding fiscal year in which the dividend is declared.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Corporation.  The information contained in this section should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements and accompanying selected Notes to Unaudited Interim Condensed Consolidated Financial Statements.


Safe-Harbor Statement

This Form 10-Q contains statements that the Corporation believes are “forward-looking statements.”  These statements relate to the Corporation’s financial condition, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Corporation may make.  Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Corporation.  The
 
 
21

 
Corporation does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for fiscal 2010 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Corporation’s operating and stock price performance.  Factors which could cause actual results to differ materially include, but are not limited to the credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the OTS or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal or informal enforcement action or to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules; our ability to attract and retain deposits; further increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; computer systems on which we depend could fail or experience a security breach;  our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; adverse changes in the securities markets;  inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described as detailed in the Corporation’s reports filed with the SEC, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2009 and subsequently filed Quarterly Reports on Form 10-Q.


Critical Accounting Policies

The discussion and analysis of the Corporation’s financial condition and results of operations is based upon the Corporation’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the financial statements.  Actual results may differ from these estimates under different assumptions or conditions.

The allowance for loan losses involves significant judgment and assumptions by management, which has a material impact on the carrying value of net loans.  Management considers the accounting estimate related to the allowance for loan losses a critical accounting estimate because it is highly susceptible to change from period to period, requiring management to make assumptions about probable incurred losses inherent in the loan portfolio at the balance sheet date. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

The allowance is based on two principles of accounting:  (i) ASC 450, “Contingencies,” which requires that losses be accrued when they are probable of occurring and can be estimated; and (ii) ASC 310, “Receivables,” which require that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.  The allowance has two
 
 
22

 
components: a formula allowance for groups of homogeneous loans and a specific valuation allowance for identified problem loans.  Each of these components is based upon estimates that can change over time.  The formula allowance is based primarily on historical experience and as a result can differ from actual losses incurred in the future.  The history is reviewed at least quarterly and adjustments are made as needed.  Various techniques are used to arrive at specific loss estimates, including historical loss information, discounted cash flows and the fair market value of collateral.  The use of these techniques is inherently subjective and the actual losses could be greater or less than the estimates.
 
 
Interest is not accrued on any loan when its contractual payments are more than 90 days delinquent or if the loan is deemed impaired.  In addition, interest is not recognized on any loan where management has determined that collection is not reasonably assured.  A non-accrual loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected.

ASC 815 requires that derivatives of the Corporation be recorded in the consolidated financial statements at fair value.  Management considers its policy for accounting for derivatives to be a critical accounting policy because these instruments have certain interest rate risk characteristics that change in value based upon changes in the capital markets.  The Bank’s derivatives are primarily the result of its mortgage banking activities in the form of commitments to extend credit, commitments to sell loans, commitments to sell MBS and option contracts to mitigate the risk of the commitments to extend credit.  Estimates of the percentage of commitments to extend credit on loans to be held for sale that may not fund are based upon historical data and current market trends.  The fair value adjustments of the derivatives are recorded in the consolidated statements of operations with offsets to other assets or other liabilities in the consolidated statements of financial condition.

Management accounts for income taxes by estimating future tax effects of temporary differences between the tax and book basis of assets and liabilities considering the provisions of enacted tax laws.  These differences result in deferred tax assets and liabilities, which are included in the Corporation’s Condensed Consolidated Statements of Financial Condition.  The application of income tax law is inherently complex.  Laws and regulations in this area are voluminous and are often ambiguous.  As such, management is required to make many subjective assumptions and judgments regarding the Corporation’s income tax exposures, including judgments in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income.  Interpretations of and guidance surrounding income tax laws and regulations change over time.  As such, changes in management’ subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.  Therefore, management considers its accounting for income taxes a critical accounting policy.


Executive Summary and Operating Strategy

Provident Savings Bank, F.S.B., established in 1956, is a financial services company committed to serving consumers and small to mid-sized businesses in the Inland Empire region of Southern California.  The Bank conducts its business operations as Provident Bank, Provident Bank Mortgage, a division of the Bank, and through its subsidiary, Provident Financial Corp.  The business activities of the Corporation, primarily through the Bank and its subsidiary, consist of community banking, mortgage banking and, to a lesser degree, investment services for customers and trustee services on behalf of the Bank.

Community banking operations primarily consist of accepting deposits from customers within the communities surrounding the Bank’s full service offices and investing those funds in single-family, multi-family, commercial real estate, construction, commercial business, consumer and other loans.  The primary source of income in community banking is net interest income, which is the difference between the interest income earned on loans and investment securities, and the interest expense paid on interest-bearing deposits and borrowed funds.  Additionally, certain fees are collected from depositors, such as returned check fees, deposit account service charges, ATM fees, IRA/KEOGH fees, safe deposit box fees, travelers check fees, and wire transfer fees, among others.  During the next three years, although not immediately given the uncertain environment, the Corporation intends to improve the community banking business by moderately growing total assets; by decreasing the concentration of single-family mortgage loans within loans held for investment; and by increasing the concentration of higher yielding multi-family, commercial real estate, construction and commercial business loans (which are sometimes referred to in this report as “preferred loans”).  In addition, over time, the Corporation intends to decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts.  This strategy is
 
 
23

 
intended to improve core revenue through a higher net interest margin and ultimately, coupled with the growth of the Corporation, an increase in net interest income.  While the Corporation’s long-term strategy is for moderate growth, management has determined that deleveraging the balance sheet is the most prudent short-term strategy in response to current weaknesses in general economic conditions.  Deleveraging the balance sheet improves capital ratios and mitigates credit and liquidity risk.

Mortgage banking operations primarily consist of the origination and sale of mortgage loans secured by single-family residences.  The primary sources of income in mortgage banking are gain on sale of loans and certain fees collected from borrowers in connection with the loan origination process.  The Corporation will continue to modify its operations in response to the rapidly changing mortgage banking environment.  Most recently, the Corporation has been increasing the number of mortgage banking personnel to capitalize on the increasing loan demand, the result of significantly lower mortgage interest rates.  Changes may also include a different product mix, further tightening of underwriting standards, variations in its operating expenses or a combination of these and other changes.

Provident Financial Corp performs trustee services for the Bank’s real estate secured loan transactions and has in the past held, and may in the future, hold real estate for investment.  Investment services operations primarily consist of selling alternative investment products such as annuities and mutual funds to the Bank’s depositors.  Investment services and trustee services contribute a very small percentage of gross revenue.

There are a number of risks associated with the business activities of the Corporation, many of which are beyond the Corporation’s control, including: changes in accounting principles, regulation and interest rates and the economy, among others.  The Corporation attempts to mitigate many of these risks through prudent banking practices such as interest rate risk management, credit risk management, operational risk management, and liquidity risk management.  The current economic environment presents heightened risk for the Corporation primarily with respect to falling real estate values and higher loan delinquencies.  Declining real estate values may lead to higher loan losses since the majority of the Corporation’s loans are secured by real estate located within California.  Significant declines in the value of California real estate may inhibit the Corporation’s ability to recover on defaulted loans by selling the underlying real estate.  For further details on risk factors, see the “Safe-Harbor Statement” on page 21 and “Item 1A – Risk Factors” on page 50.


Off-Balance Sheet Financing Arrangements and Contractual Obligations

The following table summarizes the Corporation’s contractual obligations at March 31, 2010 and the effect these obligations are expected to have on the Corporation’s liquidity and cash flows in future periods (in thousands):

 
Payments Due by Period
 
1 year
 
Over 1 year
 
Over 3 years
 
Over
   
 
or less
 
to 3 years
 
to 5 years
 
5 years
 
Total
Operating obligations
$        895
 
$     1,186
 
$        268
 
$           -
 
$     2,349
Pension benefits
-
 
248
 
396
 
6,174
 
6,818
Time deposits
364,478
 
77,266
 
68,391
 
3,411
 
513,546
FHLB – San Francisco advances
119,529
 
144,237
 
66,339
 
2,291
 
332,396
FHLB – San Francisco letter of credit
11,000
 
-
 
-
 
-
 
11,000
FHLB – San Francisco MPF credit
  enhancement
 
3,147
 
 
-
 
 
-
 
 
-
 
 
3,147
Total
$ 499,049
 
$ 222,937
 
$ 135,394
 
$ 11,876
 
$ 869,256

The expected obligation for time deposits and FHLB – San Francisco advances include anticipated interest accruals based on the respective contractual terms.

In addition to the off-balance sheet financing arrangements and contractual obligations mentioned above, the Corporation has derivatives and other financial instruments with off-balance sheet risks as described in Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements on page 12.



 
24 

 

Comparison of Financial Condition at March 31, 2010 and June 30, 2009

Total assets decreased $174.3 million, or 11 percent, to $1.41 billion at March 31, 2010 from $1.58 billion at June 30, 2009.  The decrease was primarily attributable to decreases in investment securities and loans held for investment, partly offset by an increase in cash and cash equivalents and an increase in loans held for sale at fair value.  The decline in total assets and the increase in cash and cash equivalents are consistent with the Corporation strategy of deleveraging the balance sheet to improve capital ratios and to mitigate credit and liquidity risk.
 
 
Total cash and cash equivalents, primarily excess cash at the Federal Reserve Bank of San Francisco, increased $29.1 million, or 51 percent, to $86.0 million at March 31, 2010 from $56.9 million at June 30, 2009.

Total investment securities decreased $88.9 million, or 71 percent, to $36.4 million at March 31, 2010 from $125.3 million at June 30, 2009.  The decrease was primarily the result of the sale of $65.3 million of investment securities for a net gain of $2.3 million as well as the scheduled and accelerated principal payments on mortgage-backed securities of $19.1 million.  The Bank determined that the sale of investment securities would help satisfy its short-term deleveraging strategy.  The Bank evaluates individual investment securities quarterly for other-than-temporary declines in market value.  The Bank does not believe that there are any other-than-temporary impairments at March 31, 2010; therefore, no impairment losses have been recorded for the quarter ended March 31, 2010.

The amortized cost and estimated fair value of investment securities as of March 31, 2010 and June 30, 2009 were as follows:

 
 
March 31, 2010
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
                 
Available for sale
                 
 
U.S. government sponsored
  enterprise debt securities
 
$   3,250
 
 
$   85
 
 
$     -
 
 
$   3,335
 
 
$   3,335
 
U.S. government agency MBS (1)
17,971
 
429
 
-
 
18,400
 
18,400
 
U.S. government sponsored
  enterprise MBS
 
12,734
 
 
389
 
 
-
 
 
13,123
 
 
13,123
 
Private issue CMO (2)
1,646
 
-
 
(98
)
1,548
 
1,548
Total investment securities
$ 35,601
 
$ 903
 
$ (98
)
$ 36,406
 
$ 36,406

(1)  
Mortgage-backed securities (“MBS”).
(2)  
Collateralized Mortgage Obligations (“CMO”).

 
 
June 30, 2009
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
                 
Available for sale
                 
 
U.S. government sponsored
  enterprise debt securities
 
$     5,250
 
 
$    103
 
 
$       -
 
 
$    5,353
 
 
$     5,353
 
U.S. government agency MBS
72,209
 
1,855
 
-
 
74,064
 
74,064
 
U.S. government sponsored
  enterprise MBS
 
43,016
 
 
1,420
 
 
-
 
 
44,436
 
 
44,436
 
Private issue CMO
1,817
 
-
 
(391
)
1,426
 
1,426
Total investment securities
$ 122,292
 
$ 3,378
 
$ (391
)
$ 125,279
 
$ 125,279


 
25 

 

 
Contractual maturities of investment securities as of March 31, 2010 and June 30, 2009 were as follows:

 
 
 
(In Thousands)
March 31, 2010
June 30, 2009
   
Estimated
     
Estimated
Amortized
 
Fair
 
Amortized
 
Fair
Cost
 
Value
 
Cost
 
Value
Available for sale
             
Due in one year or less
$           -
 
$           -
 
$             -
 
$             -
Due after one through five years
3,250
 
3,335
 
-
 
-
Due after five through ten years
-
 
-
 
5,250
 
5,353
Due after ten years
32,351
 
33,071
 
117,042
 
119,926
Total investment securities
 $ 35,601
 
 $ 36,406
 
 $ 122,292
 
 $ 125,279


Loans held for investment decreased $132.5 million, or 11 percent, to $1.03 billion at March 31, 2010 from $1.17 billion at June 30, 2009.  Total loan principal payments during the first nine months of fiscal 2010 were $99.0 million, compared to $126.0 million during the comparable period in fiscal 2009.  In addition, real estate owned acquired in the settlement of loans in the first nine months of fiscal 2010 was $45.1 million, an increase from $41.6 million in the same period last year.  During the first nine months of fiscal 2010, the Bank originated $2.3 million of loans held for investment, primarily commercial real estate loans, compared to $20.1 million for the same period last year.  The Bank did not purchase any loans to be held for investment in the first nine months of fiscal 2010 as compared to $595,000 in the same period in fiscal 2009, given the economic uncertainty of the current banking environment.  The balance of preferred loans decreased to $470.4 million, or 43 percent of loans held for investment at March 31, 2010, as compared to $508.7 million, or 42 percent of loans held for investment at June 30, 2009.  Purchased loans serviced by others at March 31, 2010 were $23.7 million, or two percent of loans held for investment, compared to $125.4 million, or 11 percent of loans held for investment at June 30, 2009.  The decrease in the purchased loans serviced by others was primarily attributable to the Bank’s decision in September 2009 to acquire approximately $95.3 million of loan servicing from one of its loan servicers who no longer met their contractual loan servicing covenants, resulting in a 25 basis point increase to the loan yield of these loans.

The table below describes the geographic dispersion of real estate secured loans held for investment at March 31, 2010, as a percentage of the total dollar amount outstanding (dollars in thousands):

 
Inland
Empire
Southern
California (1)
Other
California (2)
Other
States
 
Total
Loan Category
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
Single-family
$184,780
30%
$332,312
55%
$  83,636
14%
$6,761
1%
$607,489
100%
Multi-family
32,405
10%
250,992
72%
60,004
17%
3,643
1%
347,044
100%
Commercial real estate
57,145
50%
52,214
46%
2,325
2%
1,629
2%
113,313
100%
Construction
1,944
83%
400
17%
-
0%
-
0%
2,344
100%
Other
1,532
100%
-
0%
-
0%
-
0%
1,532
100%
Total
$277,806
26%
$635,918
59%
$145,965
14%
$12,033
1%
$1,071,722
100%

(1)  
Other than the Inland Empire.
(2)  
Other than the Inland Empire and Southern California.

Total deposits decreased $41.3 million, or four percent, to $947.9 million at March 31, 2010 from $989.2 million at June 30, 2009.  Time deposits declined $138.5 million to $498.4 million at March 31, 2010 from $636.9 million at June 30, 2009, while transaction accounts increased $97.1 million to $449.5 million at March 31, 2010 from $352.4 million at June 30, 2009.  The decrease in time deposits was primarily attributable to the strategic decision to compete less aggressively on time deposit interest rates and the Bank’s marketing strategy to promote transaction accounts.  Additionally, in the quarter ended September 30, 2009, the Bank prepaid and did not offer time deposit renewal rates to a single depositor with balances of $83.0 million and the accounts were closed.

Borrowings, consisting of FHLB – San Francisco advances, decreased $147.0 million, or 32 percent, to $309.7 million at March 31, 2010 from $456.7 million at June 30, 2009.  The decrease was due to scheduled maturities and $102.0 million of prepayments consistent with the Corporation’s short-term strategy to deleverage the balance sheet.  The weighted-average maturity of the Bank’s FHLB – San Francisco advances was approximately 23 months (21 months, if put options are exercised by the FHLB – San Francisco) at March 31, 2010, as compared to the weighted-
 
 
26

 
average maturity of 28 months (26 months, if put options were exercised by the FHLB – San Francisco) at June 30, 2009.
 
Total stockholders’ equity increased $9.5 million, or eight percent, to $124.4 million at March 31, 2010, from $114.9 million at June 30, 2009, primarily as a result of additional capital, partly offset by the net loss and the quarterly cash dividends paid, during the first nine months of fiscal 2010.  Retained earnings declined $2.3 million, or two percent, to $132.3 million at March 31, 2010 from $134.6 million at June 30, 2009, primarily attributable to the net loss during the period.  The accumulated other comprehensive income, net of tax, declined $1.2 million, or 67 percent, to $624,000 at March 31, 2010 from $1.9 million at June 30, 2009, primarily attributable to the sale of investment securities for a gain of $2.3 million, or $1.3 million, net of statutory taxes.

The Corporation raised $12.0 million of capital in December 2009 through a follow-on public offering, issuing 5.18 million shares of common stock at $2.50 per share.  During the first nine months of fiscal 2010, no stock options were exercised and no common stock was repurchased.  The total cash dividend paid to the Corporation’s shareholders in the first nine months of fiscal 2010 was $238,000.


Comparison of Operating Results for the Quarters and Nine Months Ended March 31, 2010 and 2009

The Corporation’s net income for the quarter ended March 31, 2010 was $371,000, compared to a net loss of $(2.6) million during the same quarter of fiscal 2009.  The improvement in net earnings was primarily a result of a decrease in the provision for loan losses, partly offset by a decrease in net interest income (before provision for loan losses), a decrease in non-interest income and an increase in operating expenses.  For the nine months ended March 31, 2010, the Corporation’s net loss was $(2.1) million, compared to a net loss of $(8.8) million during the same period of fiscal 2009.  The improvement in net loss was primarily a result of a decrease in the provision for loan losses and an increase in non-interest income, partly offset by a decrease in net interest income (before provision for loan losses) and an increase in operating expenses.
 
The Corporation’s efficiency ratio, defined as non-interest expense divided by the sum of net interest income (before provision for loan losses) and non-interest income, increased to 77 percent in the third quarter of fiscal 2010 from 47 percent in the same period of fiscal 2009.  The increase in the efficiency ratio was a result of a decrease in net interest income (before provision for loan losses), a decrease in non-interest income and an increase in non-interest expense.  For the nine months ended March 31, 2010, the efficiency ratio increased to 60 percent from 52 percent in the nine months ended March 31, 2009.  The increase in the efficiency ratio was a result of a decrease in net interest income (before provision for loan losses) and an increase in non-interest expense, partly offset by an increase in non-interest income.

Return on average assets for the quarter ended March 31, 2010 increased 77 basis points to 0.10 percent from (0.67) percent in the same period last year.  For the nine months ended March 31, 2010 and 2009, the return on average assets was (0.19) percent and (0.74) percent, respectively, an improvement of 55 basis points.
 
Return on average equity for the quarter ended March 31, 2010 increased to 1.20 percent from (8.69) percent for the same period last year.  For the nine months ended March 31, 2010, the return on average equity improved to (2.38) percent from (9.62) percent for the same period last year.

Diluted earnings per share for the quarter ended March 31, 2010 were $0.03, compared to the diluted loss per share of $(0.41) for the quarter ended March 31, 2009.  For the nine months ended March 31, 2010 and 2009, the diluted loss per share was $(0.26) and $(1.41), respectively.

Net Interest Income:

For the Quarters Ended March 31, 2010 and 2009.  Net interest income (before the provision for loan losses) decreased $1.1 million, or 10 percent, to $9.6 million for the quarter ended March 31, 2010 from $10.7 million in the comparable period in fiscal 2009 due primarily to a decline in average earning assets and a lower net interest margin.  The average balance of earning assets decreased $140.6 million, or nine percent, to $1.35 billion in the third quarter of fiscal 2010 from $1.49 billion in the comparable period of fiscal 2009.  The net interest margin was 2.85 percent in the third quarter of fiscal 2010, down two basis points from 2.87 percent for the same period of fiscal 2009.  The decrease in the net interest margin during the third quarter of fiscal 2010 was primarily attributable to an increase in interest-earning deposits, primarily consisting of excess liquidity at the Federal Reserve Bank – San
 
 
27

 
Francisco, with an average yield of 25 basis points, much lower than the weighted average yield of all earning assets.
 
For the Nine Months Ended March 31, 2010 and 2009.  Net interest income (before the provision for loan losses) decreased $2.9 million, or nine percent, to $29.3 million for the nine months ended March 31, 2010 from $32.2 million in the comparable period in fiscal 2009 due primarily to a decline in average earning assets and a lower net interest margin.  The average balance of earning assets decreased $104.1 million to $1.42 billion in the first nine months of fiscal 2010 from $1.52 billion in the comparable period of fiscal 2009.  The net interest margin was 2.75 percent in the first nine months of fiscal 2010, down seven basis points from 2.82 percent for the same period of fiscal 2009.  The decrease in the net interest margin during the first nine months of fiscal 2010 was primarily attributable to an increase in interest-earning deposits with a much lower average yield than the weighted average yield of all earning assets.

Interest Income:

For the Quarters Ended March 31, 2010 and 2009.  Total interest income decreased by $4.0 million, or 20 percent, to $16.5 million for the third quarter of fiscal 2010 from $20.5 million in the same quarter of fiscal 2009.  This decrease was primarily the result of a lower average earning asset yield and a lower average balance of earning assets.  The average yield on earning assets during the third quarter of fiscal 2010 was 4.90 percent, 61 basis points lower than the average yield of 5.51 percent during the same period of fiscal 2009.  The average balance of earning assets decreased $140.6 million to $1.35 billion during the third quarter of fiscal 2010 from $1.49 billion during the comparable period of fiscal 2009.

Loans receivable interest income decreased $2.8 million, or 15 percent, to $16.1 million in the quarter ended March 31, 2010 from $18.9 million for the same quarter of fiscal 2009.  This decrease was attributable to a lower average loan yield and a lower average loan balance.  The average loan yield during the third quarter of fiscal 2010 decreased 24 basis points to 5.54 percent from 5.78 percent during the same quarter last year.  The decrease in the average loan yield was primarily attributable to accrued interest income reversals from newly classified non-accrual loans, the repricing of adjustable rate loans to lower interest rates and payoffs on loans which carried a higher average yield than the average yield of loans receivable.  The average balance of loans outstanding, including loans held for sale, decreased $141.8 million, or 11 percent, to $1.16 billion during the third quarter of fiscal 2010 from $1.30 billion in the same quarter of fiscal 2009.

Interest income from investment securities decreased $1.3 million, or 81 percent, to $311,000 during the quarter ended March 31, 2010 from $1.6 million in the same quarter of fiscal 2009.  This decrease was primarily a result of a decrease in the average balance and a decrease in average yield.  The average balance of investment securities decreased $103.9 million, or 73 percent, to $37.9 million during the third quarter of fiscal 2010 from $141.8 million during the same quarter of fiscal 2009.  The decrease in the average balance was primarily due to the sale of $65.3 million of investment securities in August, September and December 2009 as well as scheduled and accelerated principal payments on mortgage-backed securities.  The average yield on investment securities decreased 133 basis points to 3.28 percent during the quarter ended March 31, 2010 from 4.61 percent during the quarter ended March 31, 2009.  The decrease in the average yield of investment securities was primarily attributable to the sale of investment securities with a higher average yield, the repricing of mortgage-backed securities to lower interest rates and a lower net premium amortization ($9,000 in the third quarter of fiscal 2010 as compared to $63,000 in the comparable quarter of fiscal 2009).  The lower net premium amortization was attributable to lower MBS principal payments with lower outstanding premiums during the quarter ended March 31, 2010 as compared to the same quarter last year.  During the third quarter of fiscal 2010, the Bank did not purchase any investment securities, while $1.8 million of principal payments were received on mortgage-backed securities.

In February 2010, the FHLB – San Francisco declared a cash dividend for the quarter ended December 31, 2009 at an annualized dividend rate of 0.27%; the $22,000 cash dividend was received in the third quarter of fiscal 2010.  No cash dividend was received in the comparable quarter last year.  The FHLB – San Francisco has not resumed its normally scheduled redemption of excess capital stock held by member banks because of its stated desire to strengthen its capital ratios.

For the Nine Months ended March 31, 2010 and 2009.  Total interest income decreased by $11.3 million, or 17 percent, to $53.5 million for the first nine months of fiscal 2010 from $64.8 million in the comparable period of fiscal 2009.  This decrease was primarily the result of a lower average earning asset yield and a lower average balance of earning assets.  The average yield on earning assets during the first nine months of fiscal 2010 was 5.03
 
 
28

 
percent, 64 basis points lower than the average yield of 5.67 percent during the same period of fiscal 2009.  The average balance of earning assets decreased $104.1 million to $1.42 billion during the first nine months of fiscal 2010 from $1.52 billion during the comparable period of fiscal 2009.

Loans receivable interest income decreased $7.8 million, or 13 percent, to $51.4 million in the nine months ended March 31, 2010 from $59.2 million for the same period of fiscal 2009.  This decrease was attributable to a lower average loan yield and a lower average loan balance.  The average loan yield during the first nine months of fiscal 2010 decreased 30 basis points to 5.61 percent from 5.91 percent during the same period last year.  The decrease in the average loan yield was primarily attributable to accrued interest income reversals from newly classified non-accrual loans, the repricing of adjustable rate loans to lower interest rates and payoffs on loans which carried a higher average yield than the average yield of loans receivable.  The average balance of loans outstanding, including loans held for sale, decreased $112.9 million, or eight percent, to $1.22 billion during the first nine months of fiscal 2010 from $1.33 billion in the same period of fiscal 2009.

Interest income from investment securities decreased $3.4 million, or 64 percent, to $1.9 million during the nine months ended March 31, 2010 from $5.3 million in the same period of fiscal 2009.  This decrease was primarily a result of a decrease in the average balance and a decrease in average yield.  The average balance of investment securities decreased $84.4 million, or 57 percent, to $64.2 million for the first nine months of fiscal 2010 from $148.6 million in the same period of fiscal 2009.  The decrease in the average balance was primarily due to the sale of $65.3 million of investment securities for a net gain of $2.3 million as well as scheduled and accelerated principal payments on mortgage-backed securities.  The average yield on investment securities decreased 91 basis points to 3.88 percent during the nine months ended March 31, 2010 from 4.79 percent during the same period ended March 31, 2009.  The decrease in the average yield of investment securities was primarily attributable to the sale of investment securities with a higher average yield, the repricing of adjustable rate mortgage-backed securities to lower interest rates and a slightly lower net premium amortization ($106,000 in the first nine months of fiscal 2010 as compared to $110,000 in the comparable period of fiscal 2009).  The lower net premium amortization was attributable to lower MBS principal payments with lower outstanding premiums in the first nine months of fiscal 2010 as compared to the same period last year.  During the first nine months of fiscal 2010, the Bank did not purchase any investment securities, while $19.1 million of principal payments were received on mortgage-backed securities.

The FHLB – San Francisco declared a $91,000 cash dividend on its stock in the first nine months of fiscal 2010 as compared to the stock dividend of $324,000 in the first nine months of fiscal 2009.

Interest Expense:

For the Quarter Ended March 31, 2010 and 2009.  Total interest expense for the quarter ended March 31, 2010 was $6.9 million as compared to $9.8 million for the same period of fiscal 2009, a decrease of $2.9 million, or 30 percent.  This decrease was primarily attributable to a lower average cost of interest-bearing liabilities, particularly deposits, and to a much lesser extent, a lower average balance of other interest-bearing liabilities.  The average cost of interest-bearing liabilities, principally deposits and borrowings, was 2.21 percent during the quarter ended March 31, 2010, down 63 basis points from 2.84 percent during the same period of fiscal 2009.  The average balance of interest-bearing liabilities, principally deposits and borrowings, decreased $130.6 million, or nine percent, to $1.27 billion during the third quarter of fiscal 2010 from $1.40 billion during the same period of fiscal 2009.

Interest expense on deposits for the quarter ended March 31, 2010 was $3.6 million as compared to $5.2 million for the same period of fiscal 2009, a decrease of $1.6 million, or 31 percent.  The decrease in interest expense on deposits was primarily attributable to a lower average cost, partly offset by a slightly higher average balance.  The average cost of deposits decreased to 1.54 percent during the quarter ended March 31, 2010 from 2.26 percent during the same quarter of fiscal 2009, a decrease of 72 basis points.  The decrease in the average cost of deposits was attributable primarily to new time deposits with a lower average cost replacing maturing time deposits with a higher average cost, consistent with declining short-term market interest rates.  The average balance of deposits increased $1.7 million to $942.8 million during the quarter ended March 31, 2010 from $941.1 million during the same period of fiscal 2009.  The increase in the average balance was primarily attributable to an increase in transaction (core) deposits, partly offset by a decrease in time deposits.  Strategically, the Bank has been promoting core deposits and competing less aggressively for time deposits.  The increase in transaction accounts was also attributable to the impact of depositors seeking an alternative to lower yielding time deposits in light of the currently low interest rate environment.  The average balance of transaction deposits to total deposits in the third quarter of fiscal 2010 was 46 percent, compared to 35 percent in the same period of fiscal 2009.
 
 
29


Interest expense on borrowings, consisting of FHLB – San Francisco advances, for the quarter ended March 31, 2010 decreased $1.3 million, or 28 percent, to $3.3 million from $4.6 million for the same period of fiscal 2009.  The decrease in interest expense on borrowings was primarily a result of a lower average balance, partly offset by a higher average cost.  The average balance of borrowings decreased $132.3 million, or 29 percent, to $328.0 million during the quarter ended March 31, 2010 from $460.3 million during the same period of fiscal 2009, consistent with the Corporation’s short-term deleveraging strategy.  The decrease in the average balance was due to scheduled maturities and prepayment of advances.  A total of $25.0 million of advances were prepaid with a net prepayment gain of $155,000 in the third quarter of fiscal 2010.  The average cost of borrowings increased to 4.12 percent for the quarter ended March 31, 2010 from 4.03 percent in the same quarter of fiscal 2009, an increase of nine basis points.
 
 
For the Nine Months Ended March 31, 2010 and 2009.  Total interest expense for the nine months ended March 31, 2010 was $24.3 million as compared to $32.6 million for the same period of fiscal 2009, a decrease of $8.3 million, or 25 percent.  This decrease was primarily attributable to a lower average cost of interest-bearing liabilities, particularly deposits, and a lower average balance.  The average cost of interest-bearing liabilities, principally deposits and borrowings, was 2.40 percent during the nine months ended March 31, 2010, down 65 basis points from 3.05 percent during the same period of fiscal 2009.  The average balance of interest-bearing liabilities decreased $78.2 million, or five percent, to $1.35 billion during the first nine months of fiscal 2010 from $1.43 billion during the same period of fiscal 2009.

Interest expense on deposits for the nine months ended March 31, 2010 was $12.4 million as compared to $18.5 million for the same period of fiscal 2009, a decrease of $6.1 million, or 33 percent.  The decrease in interest expense on deposits was primarily attributable to a lower average cost and a slightly lower average balance.  The average cost of deposits decreased to 1.73 percent during the nine months ended March 31, 2010 from 2.59 percent during the same nine months of fiscal 2009, a decrease of 86 basis points.  The decrease in the average cost of deposits was attributable primarily to new time deposits with a lower average cost replacing maturing time deposits with a higher average cost, consistent with declining short-term market interest rates.  The average balance of deposits decreased $1.1 million to $952.1 million during the nine months ended March 31, 2010 from $953.2 million during the same period of fiscal 2009.  The decline in the average balance was primarily in time deposits, the result of the Bank’s strategic decision to compete less aggressively for this product, partly offset by an increase in transaction (core) deposits.  The average balance of transaction deposits to total deposits in the first nine months of fiscal 2010 was 42 percent, compared to 35 percent in the same period of fiscal 2009.

Interest expense on borrowings, consisting of FHLB – San Francisco advances, for the nine months ended March 31, 2010 decreased $2.2 million, or 16 percent, to $11.9 million from $14.1 million for the same period of fiscal 2009.  The decrease in interest expense on borrowings was primarily a result of a lower average balance, partly offset by a slightly higher average cost.  The average balance of borrowings decreased $77.2 million, or 16 percent, to $394.7 million during the nine months ended March 31, 2010 from $471.9 million during the same period of fiscal 2009, consistent with the Corporation’s short-term deleveraging strategy.  The decrease in the average balance was due to the scheduled maturities and $102.0 million of prepayments with a net prepayment gain of $52,000 in the first nine months of fiscal 2010.  The average cost of borrowings increased slightly to 4.00 percent for the nine months ended March 31, 2010 from 3.98 percent in the same nine months of fiscal 2009, an increase of two basis points.

 
30 

 


The following table depicts the average balance sheets for the quarters and nine months ended March 31, 2010 and 2009, respectively:

Average Balance Sheets
(Dollars in thousands)

 
Quarter Ended
 
Quarter Ended
 
March 31, 2010
 
March 31, 2009
 
Average
     
Yield/
 
Average
     
Yield/
 
Balance
 
Interest
 
Cost
 
Balance
 
Interest
 
Cost
Interest-earning assets:
                     
Loans receivable, net (1)
$ 1,161,785
 
$ 16,101
 
5.54%
 
$ 1,303,625
 
$ 18,850
 
5.78%
Investment securities
37,878
 
311
 
3.28%
 
141,802
 
1,635
 
4.61%
FHLB – San Francisco stock
33,023
 
22
 
0.27%
 
32,929
 
-
 
-%
Interest-earning deposits
113,803
 
71
 
0.25%
 
8,707
 
6
 
0.28%
                       
Total interest-earning assets
1,346,489
 
16,505
 
4.90%
 
1,487,063
 
20,491
 
5.51%
                       
Non interest-earning assets
68,017
         
53,521
       
                       
Total assets
$ 1,414,506
         
$ 1,540,584
       
                       
Interest-bearing liabilities:
                     
Checking and money market accounts (2)
$    239,711
 
376
 
0.64%
 
$    189,339
 
282
 
0.60%
Savings accounts
192,325
 
468
 
0.99%
 
140,717
 
484
 
1.39%
Time deposits
510,797
 
2,738
 
2.17%
 
611,032
 
4,479
 
2.97%
                       
Total deposits
942,833
 
3,582
 
1.54%
 
941,088
 
5,245
 
2.26%
                       
Borrowings
327,996
 
3,330
 
4.12%
 
460,296
 
4,575
 
4.03%
                       
Total interest-bearing liabilities
1,270,829
 
6,912
 
2.21%
 
1,401,384
 
9,820
 
2.84%
                       
Non interest-bearing liabilities
19,939
         
20,934
       
                       
Total liabilities
1,290,768
         
1,422,318
       
                       
Stockholders’ equity
123,738
         
118,266
       
Total liabilities and stockholders’
     equity
                     
$ 1,414,506
$ 1,540,584
                       
Net interest income
   
$   9,593
         
$ 10,671
   
                       
Interest rate spread (3)
       
2.69%
         
2.67%
Net interest margin (4)
       
2.85%
         
2.87%
Ratio of average interest-earning
     assets to average interest-bearing
     liabilities
                     
   
105.95%
106.11%
Return (loss) on average assets
       
0.10%
         
(0.67)%
Return (loss) on average equity
       
1.20%
         
(8.69)%
 
(1) Includes loans held for sale and non-performing loans, as well as net deferred loan cost amortization of $121 and $142 for the quarters ended March 31, 2010 and 2009, respectively. 
(2)  Includes the average balance of non interest-bearing checking accounts of $44.7 million and $43.7 million during the quarters ended March 31, 2010 and 2009, respectively. 
(3)  Represents the difference between the weighted-average yield on all interest-earning assets and the weighted-average rate on all interest-bearing liabilities. 
(4)  Represents net interest income before provision for loan losses as a percentage of average interest-earning assets. 
 


 
31 

 

Average Balance Sheets
(Dollars in thousands)

 
Nine Months Ended
 
Nine Months Ended
 
March 31, 2010
 
March 31, 2009
 
Average
     
Yield/
 
Average
     
Yield/
 
Balance
 
Interest
 
Cost
 
Balance
 
Interest
 
Cost
Interest-earning assets:
                     
Loans receivable, net (1)
$ 1,221,897
 
$ 51,375
 
5.61%
 
$ 1,334,841
 
$ 59,156
 
5.91%
Investment securities
64,162
 
1,869
 
3.88%
 
148,625
 
5,344
 
4.79%
FHLB – San Francisco stock
33,023
 
91
 
0.37%
 
32,692
 
324
 
1.32%
Interest-earning deposits
101,068
 
191
 
0.25%
 
8,167
 
16
 
0.26%
                       
Total interest-earning assets
1,420,150
 
53,526
 
5.03%
 
1,524,325
 
64,840
 
5.67%
                       
Non interest-earning assets
63,894
         
42,463
       
                       
Total assets
$ 1,484,044
         
$ 1,566,788
       
                       
Interest-bearing liabilities:
                     
Checking and money market accounts (2)
$    220,720
 
1,066
 
0.64%
 
$    190,600
 
914
 
0.64%
Savings accounts
178,563
 
1,492
 
1.11%
 
139,200
 
1,588
 
1.52%
Time deposits
552,835
 
9,838
 
2.37%
 
623,383
 
16,047
 
3.43%
                       
Total deposits
952,118
 
12,396
 
1.73%
 
953,183
 
18,549
 
2.59%
                       
Borrowings
394,727
 
11,854
 
4.00%
 
471,860
 
14,086
 
3.98%
                       
Total interest-bearing liabilities
1,346,845
 
24,250
 
2.40%
 
1,425,043
 
32,635
 
3.05%
                       
Non interest-bearing liabilities
20,195
         
20,462
       
                       
Total liabilities
1,367,040
         
1,445,505
       
                       
Stockholders’ equity
117,004
         
121,283
       
Total liabilities and stockholders’
     equity
                     
$ 1,484,044
$ 1,566,788
                       
Net interest income
   
$ 29,276
         
$ 32,205
   
                       
Interest rate spread (3)
       
2.63%
         
2.62%
Net interest margin (4)
       
2.75%
         
2.82%
Ratio of average interest-earning
     assets to average interest-bearing
     liabilities
                     
   
105.44%
106.97%
Loss on average assets
       
(0.19)%
         
(0.74)%
Loss on average equity
       
(2.38)%
         
(9.62)%
 
(1) Includes loans held for sale and non-performing loans, as well as net deferred loan cost amortization of $318 and $430 for the nine months ended March 31, 2010 and 2009, respectively. 
(2)  Includes the average balance of non interest-bearing checking accounts of $43.8 million and $43.0 million during the nine months ended March 31, 2010 and 2009, respectively.
(3)  Represents the difference between the weighted-average yield on all interest-earning assets and the weighted-average rate on all interest-bearing liabilities.
(4)  Represents net interest income before provision for loan losses as a percentage of average interest-earning assets.

 
 
32 

 

The following table provides the rate/volume variances for the quarters and nine months ended March 31, 2010 and 2009, respectively:

Rate/Volume Variance
(In Thousands)

 
Quarter Ended March 31, 2010 Compared
 
To Quarter Ended March 31, 2009
 
Increase (Decrease) Due to
         
Rate/
   
 
Rate
 
Volume
 
Volume
 
Net
Interest-earning assets:
                     
     Loans receivable (1)
$   (784
)
 
$ (2,050
)
 
$   85
   
$ (2,749
)
     Investment securities
(472
)
 
(1,198
)
 
346
   
(1,324
)
     FHLB – San Francisco stock
22
   
-
   
-
   
22
 
     Interest-bearing deposits
(1
)
 
74
   
(8
)
 
65
 
Total net change in income
     on interest-earning assets
                     
(1,235
)
(3,174
)
423
 
(3,986
)
 
                     
Interest-bearing liabilities:
                     
     Checking and money market accounts
14
   
75
   
5
   
94
 
     Savings accounts
(142
)
 
177
   
(51
)
 
(16
)
     Time deposits
(1,205
)
 
(734
)
 
198
   
(1,741
)
     Borrowings
99
   
(1,315
)
 
(29
)
 
(1,245
)
Total net change in expense on
     interest-bearing liabilities
                     
(1,234
)
(1,797
)
123
 
(2,908
)
Net (decrease) increase  in net interest
     income
                     
$       (1
)
$ (1,377
)
$ 300
 
$ (1,078
)
 
(1) Includes loans held for sale and non-performing loans.  For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted-average balance outstanding. 
 
 
Nine Months Ended March 31, 2010 Compared
 
To Nine Months Ended March 31, 2009
 
Increase (Decrease) Due to
         
Rate/
   
 
Rate
 
Volume
 
Volume
 
Net
Interest-earning assets:
                     
     Loans receivable (1)
$ (3,029
)
 
$ (5,006
)
 
$ 254
   
$ (7,781
)
     Investment securities
(1,017
)
 
(3,034
)
 
576
   
(3,475
)
     FHLB – San Francisco stock
(234
)
 
3
   
(2
)
 
(233
)
     Interest-bearing deposits
1
   
181
   
(7
)
 
175
 
Total net change in income
     on interest-earning assets
                     
(4,279
)
(7,856
)
821
 
(11,314
)
 
                     
Interest-bearing liabilities:
                     
     Checking and money market accounts
7
   
145
   
-
   
152
 
     Savings accounts
(424
)
 
449
   
(121
)
 
(96
)
     Time deposits
(4,953
)
 
(1,817
)
 
561
   
(6,209
)
     Borrowings
85
   
(2,305
)
 
(12
)
 
(2,232
)
Total net change in expense on
     interest-bearing liabilities
                     
(5,285
)
(3,528
)
428
 
(8,385
)
Net increase (decrease) in net interest
     income
                     
$  1,006
 
$ (4,328
)
$ 393
 
$ (2,929
)
   
(1) Includes loans held for sale and non-performing loans.  For purposes of calculating volume, rate and rate/volume variances, non-performing loans were included in the weighted-average balance outstanding.

 
33


 
Provision for Loan Losses:

For the Quarter Ended March 31, 2010 and 2009.  During the third quarter of fiscal 2010, the Corporation recorded a provision for loan losses of $2.3 million, compared to a provision for loan losses of $13.5 million during the same period of fiscal 2009.  The loan loss provision in the third quarter of fiscal 2010 was primarily attributable to loan classification downgrades ($3.3 million), partly offset by a decrease in loans held for investment ($952,000 loan loss provision recovery).
 
 
For the Nine Months Ended March 31, 2010 and 2009.  During the first nine months of fiscal 2010, the Corporation recorded a provision for loan losses of $21.8 million, compared to a provision for loan losses of $35.8 million during the same period of fiscal 2009.  The loan loss provision in the first nine months of fiscal 2010 was primarily attributable to loan classification downgrades ($14.3 million) and an increase in the general loan loss provision for loans held for investment ($10.7 million, inclusive of a $9.0 million increase resulting from the refinement of the general loan loss provision described below), partly offset by a decrease in loans held for investment ($3.2 million loan loss provision recovery).

The general loan loss allowance was refined through quantitative and qualitative adjustments to include specific loan loss allowances in the loss experience analysis and to reflect the impact on loans held for investment resulting from the deteriorating general economic conditions of the U.S. and California economy such as the higher unemployment rates, lower retail sales, and declining home prices in California.  See related discussion on “Asset Quality” on page 38.

At March 31, 2010, the allowance for loan losses was $50.8 million, comprised of $26.6 million of general loan loss reserves and $24.2 million of specific loan loss reserves, in comparison to the allowance for loan losses of $45.4 million at June 30, 2009, comprised of $20.1 million of general loan loss reserves and $25.3 million of specific loan loss reserves.  The allowance for loan losses as a percentage of gross loans held for investment was 4.69 percent at March 31, 2010 compared to 3.75 percent at June 30, 2009.  Management considers, based on currently available information, the allowance for loan losses sufficient to absorb potential losses inherent in loans held for investment.

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.  Provisions for loan losses are charged against operations on a monthly 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 Bank’s loans held for investment, will not request that the Bank significantly increase 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 control of the Bank.


 
34 

 

The following table is provided to disclose additional details on the Corporation’s allowance for loan losses:

 
For the Quarter Ended
 
For the Nine Months Ended
 
March 31,
 
March 31,
(Dollars in Thousands)
2010
 
2009
 
2010
 
2009
                       
Allowance at beginning of period
$ 55,364
   
$ 34,953
   
$ 45,445
   
$ 19,898
 
                       
Provision for loan losses
2,322
   
13,541
   
21,843
   
35,809
 
                       
Recoveries:
                     
Mortgage loans:
                     
 
Single-family
149
   
44
   
442
   
155
 
 
Construction
-
   
21
   
47
   
71
 
Consumer loans
-
   
-
   
-
   
1
 
     Total recoveries
149
   
65
   
489
   
227
 
                       
Charge-offs:
                     
Mortgage loans:
                     
 
Single-family
(6,522
)
 
(6,350
)
 
(16,215
)
 
(13,610
)
 
Multi-family
(205
)
 
-
   
(450
)
 
-
 
 
Commercial real estate
(254
)
 
-
   
(254
)
 
-
 
 
Construction
-
   
-
   
-
   
(73
)
 
Other
-
   
(29
)
 
-
   
(67
)
Consumer loans
(5
)
 
(2
)
 
(9
)
 
(6
)
     Total charge-offs
(6,986
)
 
(6,381
)
 
(16,928
)
 
(13,756
)
                       
     Net charge-offs
(6,837
)
 
(6,316
)
 
(16,439
)
 
(13,529
)
          Balance at end of period
$ 50,849
   
$ 42,178
   
$ 50,849
   
$ 42,178
 
                       
Allowance for loan losses as a
     percentage of gross loans held for
     investment at the end of the period
                     
 
4.69%
 
3.36%
   
 
4.69%
   
 
3.36%
 
                       
Net charge-offs as a percentage of
     average loans receivable, net, during
     the period (annualized)
                     
 
2.35%
 
1.94%
   
 
1.79%
   
 
1.35%
 
                       
Allowance for loan losses as a
     percentage of non-performing loans
     at the end of the period
                     
 
68.86%
 
62.82%
   
 
68.86%
   
 
62.82%
 


Non-Interest Income:

For the Quarter Ended March 31, 2010 and 2009.  Total non-interest income decreased $3.5 million, or 55 percent, to $2.9 million during the quarter ended March 31, 2010 from $6.4 million during the same period of fiscal 2009.  The decrease was primarily attributable to a decrease in the gain on sale of loans, partly offset by an improved net result on sale and operations of real estate owned that was acquired in the settlement of loans.

The net gain on sale of loans decreased $4.7 million, or 77 percent, to $1.4 million for the quarter ended March 31, 2010 from $6.1 million in the same quarter of fiscal 2009.  Total loans sold for the quarter ended March 31, 2010 were $343.0 million, an increase of $42.6 million or 14 percent, from $300.4 million for the same quarter last year.  The average loan sale margin for PBM during the third quarter of fiscal 2010 was 0.36 percent, down 97 basis points from 1.33 percent in the same period of fiscal 2009.  The gain on sale of loans for the third quarter of fiscal 2010 includes a $1.2 million recourse provision on loans sold that are subject to repurchase, compared to a $378,000 recourse provision in the comparable quarter last year.  The gain on sale of loans also includes an unfavorable fair-value adjustment on derivative financial instruments pursuant to ASC 815, a loss of $(1.4) million, in the third
 
 
35

 
quarter of fiscal 2010 as compared to a favorable fair-value adjustment, a gain of $2.5 million, in the same period last year.  As of March 31, 2010, the fair value of derivative financial instruments was a gain of $1.2 million, compared to a gain of $2.0 million at June 30, 2009 and a gain of $2.8 million at March 31, 2009.  As of March 31, 2010, the total recourse reserve for loans sold that are subject to repurchase was $6.1 million, compared to $3.4 million at June 30, 2009 and $3.1 million at March 31, 2009.

Total loans originated for sale decreased slightly to $359.2 million in the third quarter of fiscal 2010 as compared to $366.4 million during the same period last year.  The loan origination volumes were achieved as a result of favorable liquidity in the secondary mortgage markets particularly in FHA/VA, Fannie Mae and Freddie Mac loan products, and an increase in activity resulting from relatively low mortgage interest rates. The mortgage banking environment remains highly volatile as a result of the well-publicized weakness of the single-family real estate market.  In addition, purchases of mortgage-backed securities by the U.S. government have been curtailed and a tax credit for homebuyers expired on April 30, 2010.  It is too soon to determine the longer term impact to the mortgage and housing market as the U.S. government emergency actions are removed.
 
The net gain on sale and operations of real estate owned acquired in the settlement of loans was $58,000 in the third quarter of fiscal 2010 compared to a net loss of $(952,000) in the same quarter last year.  The improved result was due primarily to the improvement in the real estate market and real estate values, relatively low mortgage interest rates and favorable liquidity in the secondary mortgage market.  Twenty-five real estate owned properties were sold in the quarter ended March 31, 2010 as compared to 28 properties sold in the quarter ended March 31, 2009.  See the related discussion on “Asset Quality” on page 38.

For the Nine Months Ended March 31, 2010 and 2009.  Total non-interest income increased $5.4 million, or 48 percent, to $16.6 million during the nine months ended March 31, 2010 from $11.2 million during the same period of fiscal 2009.  The increase was primarily attributable to an increase in the gain on sale of loans, an increase in gain on sale of investment securities and a net gain on sale and operations of real estate owned that was acquired in the settlement of loans.

The net gain on sale of loans increased $1.1 million, or 13 percent, to $9.8 million for the nine months ended March 31, 2010 from $8.7 million in the same period of fiscal 2009.  Total loans sold for the nine months ended March 31, 2010 were $1.31 billion, an increase of $689.7 million or 112 percent, from $616.8 million for the same period last year.  The average loan sale margin for PBM during the first nine months of fiscal 2010 was 0.73 percent, down 36 basis points from 1.09 percent in the same period of fiscal 2009.  The gain on sale of loans for the first nine months of fiscal 2010 includes a $4.2 million recourse provision on loans sold that are subject to repurchase, compared to a $2.7 million recourse provision in the comparable period last year.  The gain on sale of loans also includes an unfavorable fair-value adjustment on derivative financial instruments pursuant to ASC 815, a loss of $(790,000), in the first nine months of fiscal 2010 as compared to a gain of $3.1 million in the same period last year.  The mortgage banking environment has shown improvement as a result of relatively low mortgage interest rates but remains volatile.

Total loans originated for sale increased to $1.32 billion in the first nine months of fiscal 2010 as compared to $701.0 million during the same period last year.
 
A total of $65.3 million of investment securities, comprised of U.S. government sponsored enterprise MBS and U.S. government agency MBS, were sold in the nine months ended March 31, 2010 for a net gain of $2.3 million as part of the Corporation’s short-term deleveraging strategy.  For the nine months ended March 31, 2009, a $356,000 gain on sale of equity investments was realized.

The net gain on sale and operations of real estate owned acquired in the settlement of loans was $247,000 in the first nine months of fiscal 2010 compared to a net loss of $(1.8) million in the same period last year.  A total of 115 real estate owned properties were sold in the nine months ended March 31, 2010 as compared to 75 properties sold in the nine months ended March 31, 2009.

 
36 

 

Non-Interest Expense:

For the Quarter Ended March 31, 2010 and 2009.  Total non-interest expense in the quarter ended March 31, 2010 was $9.5 million, an increase of $1.6 million or 20 percent, as compared to $7.9 million in the same quarter of fiscal 2009.  The increase in non-interest expense was primarily the result of a significant increase in mortgage banking operating expenses and higher deposit insurance premiums and regulatory assessments.

Total compensation increased $1.1 million, or 22 percent, to $6.1 million in the third quarter of fiscal 2010 from $5.0 million in the same period of fiscal 2009.  The increase was primarily attributable to compensation incentives related to higher retail loan originations (refer to “Loan Volume Activities” on page 45 for details), partly offset by lower deferred compensation costs.

Total deposit insurance premiums and regulatory assessments increased $233,000, or 58 percent, to $636,000 in the third quarter of fiscal 2010 from $403,000 in the same period of fiscal 2009.  The increase was primarily attributable to higher FDIC deposit insurance premiums.

For the Nine Months Ended March 31, 2010 and 2009.  Total non-interest expense in the nine months ended March 31, 2010 was $27.7 million, an increase of $5.1 million or 23 percent, as compared to $22.6 million in the same period of fiscal 2009.  The increase in non-interest expense was primarily the result of a significant increase in mortgage banking operating expenses and higher deposit insurance premiums and regulatory assessments.

Total compensation increased $2.6 million, or 18 percent, to $16.8 million in the first nine months of fiscal 2010 from $14.2 million in the same period of fiscal 2009.  The increase was primarily attributable to compensation incentives related to higher mortgage banking loan volume (refer to “Loan Volume Activities” on page 45 for details), partly offset by lower deferred compensation costs.

Total deposit insurance premiums and regulatory assessments increased $1.3 million, or 130 percent, to $2.3 million in the first nine months of fiscal 2010 from $1.0 million in the same period of fiscal 2009.  The increase was primarily attributable to higher FDIC deposit insurance premiums.

Total other operating expenses increased $837,000, or 30 percent, to $3.6 million in the first nine months of fiscal 2010 from $2.8 million at the same period last year.  The increase was primarily due to higher costs related to the increase in mortgage banking loan volume (e.g. appraisal, credit report and contract underwriting costs) and an increase in business/corporate insurance premiums.

Provision (benefit) for income taxes:

The income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, adjusted for the effect of all permanent differences between income for tax and financial reporting purposes, such as non-deductible stock-based compensation, bank-owned life insurance policies and certain California tax-exempt loans.  Therefore, there are normal fluctuations in the effective rate from period to period based on the relationship of net permanent differences to income before tax.

For the Quarter Ended March 31, 2010 and 2009.  The income tax provision was $229,000 for the quarter ended March 31, 2010 as compared to an income tax benefit of $(1.9) million during the same period of fiscal 2009.  The effective income tax rate for the quarter ended March 31, 2010 was 38.2 percent as compared to 42.0 percent in the same quarter last year.  The decrease in the effective income tax rate was primarily the result of a lower percentage of permanent tax differences relative to income or loss before taxes.  The Corporation believes that the effective income tax rate applied in the third quarter of fiscal 2010 reflects its current income tax obligations.

For the Nine Months Ended March 31, 2010 and 2009.  The income tax benefit was $(1.6) million for the nine months ended March 31, 2010 as compared to an income tax benefit of $(6.2) million during the same period of fiscal 2009.  The effective income tax rate for the nine months ended March 31, 2010 increased slightly to 43.1 percent as compared to 41.5 percent for the same period last year.  The increase in the effective income tax rate was primarily the result of a higher percentage of permanent tax differences relative to income or loss before taxes.  The Corporation believes that the effective income tax rate applied in the first nine months of fiscal 2010 reflects its current income tax obligations.



 
37 

 

Asset Quality

Non-performing loans, consisting solely of non-accrual loans with collateral primarily located in Southern California, increased to $73.8 million at March 31, 2010 from $71.8 million at June 30, 2009.  The non-performing loans at March 31, 2010 were primarily comprised of 201 single-family loans ($62.7 million); seven multi-family loans ($6.6 million); five commercial real estate loans ($2.8 million); 11 construction loans ($692,000, nine of which, or $24,000, are associated with the previously disclosed Coachella, California construction loan fraud); seven commercial business loans ($144,000); and eight single-family loans repurchased from, or unable to sell to investors ($905,000).  No interest accruals were made for loans that were past due 90 days or more or if the loans were deemed impaired.

When a loan is considered impaired as defined by ASC 310, “Receivables,” the Corporation measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate.  However, if the loan is “collateral-dependent” or foreclosure is probable, impairment is measured based on the fair value of the collateral.  At least quarterly, management reviews impaired loans.  When the measure of an impaired loan is less than the recorded investment in the loan, the Corporation records a specific valuation allowance equal to the excess of the recorded investment in the loan over its measured value, which is updated quarterly.  A general loan loss allowance is provided on loans not specifically identified as impaired (non-impaired loans).  The general loan loss allowance is determined based on a quantitative and a qualitative analysis using a loss migration methodology.  The loans are classified by type and loan grade, and the historical loss migration is tracked for the various stratifications.  Loss experience is quantified for the most recent four quarters, and that loss experience is applied to the stratified portfolio at each quarter end.  The qualitative analysis includes current unemployment rates, retail sales, gross domestic product, real estate value trends, and commercial real estate vacancy rates, among other current economic data.
 
 
As of March 31, 2010, restructured loans increased to $60.4 million from $40.9 million at June 30, 2009.  At March 31, 2010 and June 30, 2009, $30.2 million and $29.8 million, respectively, of these restructured loans were classified as non-performing.  As of March 31, 2010, 85 percent, or $51.4 million, of the restructured loans have a current payment status; this compares to 83 percent, or $33.9 million of restructured loans that had a current payment status as of June 30, 2009.

The non-performing loans as a percentage of loans held for investment increased to 7.15 percent at March 31, 2010 from 6.16 percent at June 30, 2009.  Real estate owned was $17.6 million (75 properties) at March 31, 2010, an increase of $1.2 million or seven percent from $16.4 million (80 properties) at June 30, 2009.  Non-performing assets, which includes non-performing loans and real estate owned, as a percentage of total assets increased to 6.50 percent at March 31, 2010 from 5.59 percent at June 30, 2009.  Restructured loans which are performing in accordance with their modified terms and are not otherwise classified non-accrual are not included in non-performing assets.

During the third quarter of fiscal 2010, the Bank did not repurchase any loans from investors as compared to $1.3 million repurchased in the same period last year, fulfilling certain recourse/repurchase covenants in the respective loan sale agreements.  For the first nine months of fiscal 2010 and 2009, the Bank repurchased $368,000 and $2.8 million, respectively, although some repurchase requests were settled that did not result in the repurchase of the loan itself.  As of March 31, 2010, the total recourse reserve for loans sold that are subject to repurchase was $6.1 million, compared to $3.4 million at June 30, 2009 and $3.1 million at March 31, 2009.  Many of the repurchases and loans that could not be sold were the result of borrower fraud.  The Bank has implemented tighter underwriting standards to reduce this problem, including higher credit scores, generally lower debt-to-income ratios, and verification of income and assets, among others.

A decline in real estate values subsequent to the time of origination of the Corporation’s real estate secured loans could result in higher loan delinquency levels, foreclosures, provisions for loan losses and net charge-offs.  Real estate values and real estate markets are beyond the Corporation’s control and are generally affected by changes in national, regional or local economic conditions and other factors.  These factors include fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes and national disasters particular to California where substantially all of the Corporation’s real estate collateral is located.  If real estate values continue to decline further from the levels described in the following tables (which were calculated at the time of loan origination), the value of real estate collateral securing the Corporation’s loans could be significantly reduced.  The Corporation’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and it would
 
 
38

 
be more likely to suffer losses on defaulted loans.  The Corporation does not periodically update the loan to value ratio (“LTV”) on its loans held for investment by obtaining new appraisals or broker price opinions (nor does the Corporation intend to do so in the future as a result of the costs and inefficiencies associated with completing the task) unless a specific loan has demonstrated deterioration or the Corporation receives a loan modification request from a borrower (in which case specific loan valuation allowances are established, if required).  Therefore, it is reasonable to assume that the LTV ratios disclosed in the following tables may be understated in comparison to their current LTV ratios as a result of their year of origination, the subsequent general decline in real estate values that may have occurred and the specific location of the individual properties.  The Corporation cannot quantify the current LTVs of its loans held for investment nor quantify the impact the decline in real estate values has had to the current LTVs of its loans held for investment by loan type, geography, or other subsets.

The following table describes certain credit risk characteristics of the Corporation’s single-family, first trust deed, mortgage loans held for investment as of March 31, 2010:

   
Weighted-
Weighted-
Weighted-
 
Outstanding
Average
Average
Average
(Dollars In Thousands)
Balance (1)
FICO (2)
LTV (3)
Seasoning (4)
Interest only
$ 354,533
735
73%
3.75 years
Stated income (5)
$ 313,556
732
72%
4.26 years
FICO less than or equal to 660
$   18,398
641
70%
5.00 years
Over 30-year amortization
$   20,447
739
68%
4.53 years

(1)  
The outstanding balance presented on this table may overlap more than one category.  Of the outstanding balance, $60.0 million of “Interest Only,” $52.6 million of “Stated Income,” $2.8 million of “FICO Less Than or Equal to 660,” and $2.7 million of “Over 30-Year Amortization” balances were non-performing.
(2)  
The FICO score represents the creditworthiness of a borrower based on the borrower’s credit history, as reported by an independent third party at the time of origination.  A higher FICO score indicates a greater degree of creditworthiness.  Bank regulators have issued guidance stating that a FICO score of 660 and below is indicative of a “subprime” borrower.
(3)  
LTV is the ratio calculated by dividing the current loan balance by the original appraised value of the real estate collateral.
(4)  
Seasoning describes the number of years since the funding date of the loan.
(5)  
Stated income is defined as borrower provided income which is not subject to verification during the loan origination process.

The following table summarizes the amortization schedule of the Corporation’s interest only single-family, first trust deed, mortgage loans held for investment, including the percentage of those which are identified as non-performing or 30 – 89 days delinquent as of March 31, 2010:

 
(Dollars In Thousands)
 
Balance
 
Non-Performing (1)
30 - 89 Days
Delinquent (1)
Fully amortize in the next 12 months
$   54,873
19%
-%
Fully amortize between 1 year and 5 years
15,193
44%
2%
Fully amortize after 5 years
284,467
15%
1%
Total
$ 354,533
17%
1%

(1)  
As a percentage of each category.

The following table summarizes the interest rate reset (repricing) schedule of the Corporation’s stated income single-family, first trust deed, mortgage loans held for investment, including the percentage of those which are identified as non-performing or 30 – 89 days delinquent as of March 31, 2010:

 
(Dollars In Thousands)
 
Balance (1)
 
Non-Performing (1)
30 - 89 Days
Delinquent (1)
Interest rate reset in the next 12 months
$ 203,093
16%
1%
Interest rate reset between 1 year and 5 years
110,045
18%
2%
Interest rate reset after 5 years
418
  -%
 -%
Total
$ 313,556
17%
2%

(1)
As a percentage of each category.  Also, the loan balances and percentages on this table may overlap with the interest only single-family, first trust deed, mortgage loans held for investment table.
 

 
39

The reset of interest rates on adjustable rate mortgage loans (primarily interest only single-family loans) to a fully-amortizing status has not created a payment shock for most of the Bank’s borrowers primarily because the loans are repricing at a 2.75% margin over six-month LIBOR which has resulted in a lower interest rate than the borrowers pre-adjustment interest rate.  Management expects that the economic recovery will be slow to develop, which may translate to an extended period of lower interest rates and a reduced risk of mortgage payment shock for the foreseeable future.  The higher delinquency levels experienced by the Bank during fiscal 2009 and the first nine months of fiscal 2010 were primarily due to higher unemployment, the recession and the decline in real estate values, particularly in Southern California.

The following table describes certain credit risk characteristics, geographic locations and the year of loan origination of the Corporation’s single-family, first trust deed, mortgage loans held for investment, at March 31, 2010:

 
Year of Origination
 
 
2002 &
Prior
 
2003
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
Total
Loan balance (in thousands)
$13,499
$23,212
$85,157
$190,501
$150,907
$95,870
$42,735
$1,656
-
$603,537
Weighted-average LTV (1)
52%
70%
76%
72%
70%
73%
75%
57%
-
72%
Weighted-average age (in years)
14.01
6.60
5.54
4.69
3.71
2.72
1.99
0.85
-
4.33
Weighted-average FICO (2)
696
722
722
731
742
734
743
750
-
   733
Number of loans
145
   90
256
490
338
185
  78
    7
-
1,589
                     
Geographic breakdown (%)
                   
 
Inland Empire
  36%
  40%
30%
 31%
 29%
 29%
 26%
100%
-
 30%
 
Southern California (3)
  58%
  56%
63%
 61%
 52%
 43%
 48%
    -%
-
 55%
 
Other California (4)
    4%
    4%
  6%
   7%
 17%
 27%
 26%
    -%
-
 14%
 
Other States
    2%
    -%
  1%
   1%
   2%
   1%
    -%
    -%
-
   1%
 
Total
100%
100%
100%
100%
100%
100%
100%
100%
-
100%

(1)  
LTV is the ratio calculated by dividing the current loan balance by the original appraised value of the real estate collateral.
(2)  
At time of loan origination.
(3)  
Other than the Inland Empire.
(4)  
Other than the Inland Empire and Southern California.

The following table describes certain credit risk characteristics, geographic locations and the year of loan origination of the Corporation’s multi-family loans held for investment, at March 31, 2010:

 
Year of Origination
 
 
2002 &
Prior
 
2003
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
Total
Loan balance (in thousands)
$6,116
$17,085
$41,780
$57,526
$103,727
$102,163
$16,508
$1,624
$515
$347,044
Weighted-average LTV (1)
39%
56%
51%
54%
56%
57%
52%
50%
69%
55%
Weighted-average DCR (2)
1.89x
1.43x
1.46x
1.29x
1.27x
1.25x
1.40x
1.21x
1.28x
1.31x
Weighted-average age (in years)
9.85
6.63
5.76
4.74
3.79
2.73
1.93
1.12
0.01
4.01
Weighted-average FICO (3)
740
731
710
709
712
701
755
735
777
716
Number of loans
  15
   30
  57
  92
116
122
  22
     1
     2
457
                     
Geographic breakdown (%)
                   
 
Inland Empire
 36%
   5%
 21%
   7%
 12%
   3%
   9%
    -%
    -%
 10%
 
Southern California (4)
 64%
 87%
 75%
 65%
 60%
 83%
 89%
100%
    -%
 72%
 
Other California (5)
    -%
   8%
   3%
 27%
 25%
 14%
   2%
     -%
100%
 17%
 
Other States
    -%
    -%
   1%
   1%
   3%
   -%
    -%
      -%
    -%
   1%
 
Total
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

(1)  
LTV is the ratio calculated by dividing the current loan balance by the original appraised value of the real estate collateral.
(2)  
Debt Coverage Ratio (“DCR”) at time of origination.
(3)  
At time of loan origination.
(4)  
Other than the Inland Empire.
(5)  
Other than the Inland Empire and Southern California.

 
40 

 


The following table summarizes the interest rate reset or maturity schedule of the Corporation’s multi-family loans held for investment, including the percentage of those which are identified as non-performing, 30 – 89 days delinquent or not fully amortizing as of March 31, 2010:
 
 
(Dollars In Thousands)
 
 
Balance
 
Non-
Performing (1)
 
30 - 89 Days
Delinquent (1)
Percentage
Not Fully
Amortizing (1)
Interest rate reset or mature in the next 12 months
$ 160,535
3%
-%
10%
Interest rate reset or mature between 1 year and 5 years
144,576
2%
-%
  2%
Interest rate reset or mature after 5 years
   41,933
-%
-%
18%
Total
$ 347,044
3%
-%
 8%

(1)  
As a percentage of each category.

The following table describes certain credit risk characteristics, geographic locations and the year of loan origination of the Corporation’s commercial real estate loans held for investment, at March 31, 2010:

 
Year of Origination
 
 
2002 &
Prior
 
2003
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
Total
(5) (6)
Loan balance (in thousands)
$9,837
$12,808
$12,382
$16,835
$22,383
$21,526
$6,289
$11,253
-
$113,313
Weighted-average LTV (1)
47%
46%
50%
49%
57%
55%
38%
 60%
 -
52%
Weighted-average DCR (2)
1.44x
1.64x
2.27x
2.14x
2.37x
2.39x
1.74x
1.06x
-
2.00x
Weighted-average age (in years)
10.03
6.76
5.72
4.71
3.65
2.76
1.93
0.75
-
4.39
Weighted-average FICO (2)
736
729
713
699
721
716
756
722
-
719
Number of loans
16
 21
  20
 22
 26
  24
  10
    5
-
144
                     
Geographic breakdown (%):
                   
 
Inland Empire
 90%
53%
 46%
 66%
 23%
 44%
   7%
 86%
-
 50%
 
Southern California (3)
   9%
47%
 54%
 34%
 76%
 47%
 93%
    -%
-
 46%
 
Other California (4)
   1%
   -%
    -%
   -%
   1%
   9%
   -%
    -%
-
   2%
 
Other States
    -%
   -%
    -%
    -%
    -%
    -%
    -%
 14%
-
   2%
 
Total
100%
100%
100%
100%
100%
100%
100%
100%
-
100%
 
(1)
LTV is the ratio calculated by dividing the current loan balance by the original appraised value of the real estate collateral.
(2) At time of loan origination. 
(3)  Other than the Inland Empire. 
(4)  Other than the Inland Empire and Southern California. 
(5) 
Comprised of the following: $28.4 million in Retail; $27.3 million in Office; $11.6 million in Mixed Use; $10.7 million in Light Industrial/Manufacturing; $10.6 million in Medical/Dental Office; $5.9 million in Warehouse; $3.7 million in Restaurant/Fast Food; $3.6 million in Mini-Storage; $3.1 million in Research and Development; $2.6 million in Mobile Home Park; $2.0 million in School; $1.9 million in Hotel and Motel; $1.1 million in Automotive – Non Gasoline; and $803,000 in Other.
(6) 
Consisting of $73.2 million or 64.6% in investment properties and $40.1 million or 35.4% in owner occupied properties.

The following table summarizes the interest rate reset or maturity schedule of the Corporation’s commercial real estate loans held for investment, including the percentage of those which are identified as non-performing, 30 – 89 days delinquent or not fully amortizing as of March 31, 2010:

 
 
(Dollars In Thousands)
 
 
Balance
 
Non-
Performing (1)
 
30 - 89 Days
Delinquent (1)
Percentage
Not Fully
Amortizing (1)
Interest rate reset or mature in the next 12 months
$   51,381
3%
-%
28%
Interest rate reset or mature between 1 year and 5 years
45,785
3%
-%
10%
Interest rate reset or mature after 5 years
 16,147
-%
-%
61%
Total
$ 113,313
3%
-%
25%

(1)  
As a percentage of each category.



 
41 

 

The following table sets forth information with respect to the Bank’s non-performing assets and restructured loans, net of specific loan loss reserves at the dates indicated:

     
   At March 31,
   
At June 30,
     
           2010
   
     2009
(Dollars In Thousands)
       
       
Loans on non-accrual status:
     
Mortgage loans:
       
 
Single-family
 $ 37,670
   
 $ 35,434
 
Multi-family
4,016
   
4,930
 
Commercial real estate
1,571
   
1,255
 
Construction
373
   
250
Commercial business loans
-
   
198
 
Total
43,630
   
42,067
             
Accruing loans past due 90 days or
       
  more
-
   
-
       
Restructured loans on non-accrual status:
     
Mortgage loans:
       
 
Single-family
25,982
   
23,695
 
Multi-family
2,540
   
-
 
Commercial real estate
1,224
   
1,406
 
Construction
319
   
2,037
 
Other
-
   
1,565
Commercial business loans
144
   
1,048
 
Total
30,209
   
29,751
             
Total non-performing loans
73,839
   
71,818
             
Real estate owned, net
17,555
   
16,439
Total non-performing assets
 $ 91,394
   
$ 88,257
             
Restructured loans on accrual status:
     
Mortgage loans:
       
 
Single-family
 $ 27,594
   
 $ 10,880
 
Commercial real estate
537
   
-
 
Other
1,292
   
240
Commercial business loans
750
   
-
 
Total
$ 30,173
   
$ 11,120
             
Non-performing loans as a percentage of loans held for investment, net
   of allowance for loan losses
 
7.15%
   
 
6.16%
             
Non-performing loans as a percentage of total assets
5.25%
   
4.55%
             
Non-performing assets as a percentage of total assets
6.50%
   
5.59%



 
42 

 


The following table describes the non-performing loans by the year of origination as of March 31, 2010:

 
Year of Origination
 
 
(Dollars In Thousands)
2002 & Prior
 
2003
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
Total
Mortgage loans:
                   
 
Single-family
 $ 132
 $ 1,288
$ 11,636
$ 22,866
$ 14,494
$ 8,044
$ 5,107
$   85
-
$ 63,652
 
Multi-family
-
-
-
2,300
4,256
-
-
-
-
6,556
 
Commercial real estate
-
-
1,571
663
561
 -
-
-
-
 2,795
 
Construction
-
-
-
-
342
 350
-
-
-
 692
Commercial business loans
-
 -
-
 -
 -
-
-
 144
-
144
 
Total
$ 132
$1,288
$ 13,207
$ 25,829
$ 19,653
$ 8,394
$ 5,107
$ 229
-
$ 73,839


The following table describes the non-performing loans by the geographic location as of March 31, 2010:

 
(Dollars In Thousands)
 
Inland Empire
Southern
California (1)
Other
California (2)
 
Other States
 
Total
Mortgage loans:
         
 
Single-family
$ 17,526
$ 37,332
$   7,941
$ 853
$ 63,652
 
Multi-family
662
1,487
4,407
-
6,556
 
Commercial real estate
1,224
1,571
-
-
2,795
 
Construction
342
350
-
-
692
Commercial business loans
-
144
-
-
144
 
Total
$ 19,754
$ 40,884
$ 12,348
$ 853
$ 73,839

(1)  
Other than the Inland Empire.
(2)  
Other than the Inland Empire and Southern California.

For the quarter ended March 31, 2010, 15 loans for $6.8 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans.  For the nine months ended March 31, 2010, 102 loans for $47.7 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans.  As of March 31, 2010, the outstanding balance of restructured loans was $60.4 million:  57 were classified as pass and remain on accrual status ($25.6 million); eight were classified as special mention and remain on accrual status ($4.6 million); 81 were classified as substandard on non-accrual status ($30.2 million); and five were classified as loss and fully reserved on non-accrual status.

The Corporation upgrades restructured single-family loans to the pass category if the borrower has demonstrated satisfactory contractual payments for at least six to 12 consecutive months; and if the borrower has demonstrated satisfactory contractual payments beyond 12 consecutive months, the loan is no longer categorized as a restructured loan.  In addition to the payment history describe above, preferred loans must also demonstrate a combination of the following characteristics to be upgraded, such as: satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others.

To qualify for restructuring, a borrower must provide evidence of their creditworthiness such as, current financial statements, their most recent income tax returns, current paystubs, current W-2s, and most recent bank statements, among other documents, which are then verified by the Bank.  The Bank re-underwrites the loan with the borrower’s updated financial information, new credit report, current loan balance, new interest rate, remaining loan term, updated property value and modified payment schedule, among other considerations, to determine if the borrower qualifies.

Total classified loans (including loans designated as special mention) were $93.5 million at March 31, 2010, a decrease of $6.2 million or six percent, from $99.7 million at June 30, 2009.  The classified loans at March 31, 2010 consist of 40 loans in the special mention category (30 single-family loans of $9.6 million, seven commercial real estate loans of $5.8 million, one multi-family loan of $1.0 million, one land loan of $1.3 million and one commercial business loan of $750,000) and 244 loans in the substandard category (213 single-family loans of $64.2 million, seven multi-family loans of $6.6 million, six commercial real estate loans of $3.4 million, 11 construction loans of $692,000 and seven commercial business loans of $144,000).
 
 
43


The classified loans at June 30, 2009 consisted of 43 loans in the special mention category (31 single-family loans of $12.4 million, five multi-family loans of $7.8 million, five commercial real estate loans of $3.5 million, one land loan of $480,000 and one commercial business loan of $144,000) and 240 loans in the substandard category (205 single-family loans of $60.7 million, seven multi-family loans of $5.8 million, eight commercial real estate loans of $3.4 million, 11 construction loans of $2.7 million, one land loan of $1.6 million and eight commercial business loans of $1.2 million).

During the quarter ended March 31, 2010, 45 real estate owned properties were acquired in the settlement of loans, while 25 real estate owned properties were sold for a $470,000 net gain.  During the nine months ended March 31, 2010, 110 real estate owned properties were acquired in the settlement of loans, while 115 real estate owned properties were sold for a net gain of $2.0 million.  As of March 31, 2010, real estate owned was comprised of 75 properties with a net fair value of $17.6 million (two from loan repurchases and loans which could not be sold and 73 from loans held for investment), primarily located in Southern California.  This compares to 80 real estate owned properties (three from loan repurchases and loans which could not be sold and 77 from loans held for investment), primarily located in Southern California, with a net fair value of $16.4 million at June 30, 2009.  A new appraisal was obtained on each of the properties at the time of foreclosure and fair value was calculated by using the lower of appraised value or the listing price of the property, net of disposition costs.  Any initial loss was recorded as a charge to the allowance for loan losses before being transferred to real estate owned.  Subsequently, if there is further deterioration in real estate values, specific real estate owned loss reserves are established and charged to the statement of operations.  In addition, the Corporation reflects costs to carry real estate owned as real estate operating expenses as incurred.
 
 
The following table summarizes classified assets, which is comprised of classified loans and real estate owned at the dates indicated:

     
   At March 31, 2010
 
At June 30, 2009
(Dollars In Thousands)
         Balance
Count
 
Balance
Count
         
Special mention loans:
       
Mortgage loans:
         
 
Single-family
$     9,621
30
 
$   12,356
31
 
Multi-family
1,054
1
 
7,835
5
 
Commercial real estate
5,820
7
 
3,465
5
 
Other
1,292
1
 
480
1
Commercial business loans
750
1
 
144
1
 
Total special mention loans
18,537
40
 
24,280
43
               
Substandard loans:
       
Mortgage loans:
         
 
Single-family
64,164
213
 
60,730
205
 
Multi-family
6,556
7
 
5,772
7
 
Commercial real estate
3,414
6
 
3,414
8
 
Construction
692
11
 
2,687
11
 
Other
-
-
 
1,565
1
Commercial business loans
144
7
 
1,246
8
 
Total substandard loans
74,970
244
 
75,414
240
               
Total classified loans
93,507
284
 
99,694
283
               
Real estate owned:
       
 
Single-family
15,285
52
 
15,167
63
 
Multi-family
715
3
 
-
-
 
Commercial real estate
1,094
3
 
-
-
 
Other
461
17
 
1,272
17
 
Total real estate owned
17,555
75
 
16,439
80
               
Total classified assets
$ 111,062
359
 
$ 116,133
363
             

 
44 

 


Loan Volume Activities

The following table is provided to disclose details related to the volume of loans originated, purchased and sold (in thousands):

 
For the Quarter
Ended
 
For the Nine Months
Ended
 
March 31,
 
March 31,
 
2010
 
2009
 
2010
 
2009
Loans originated for sale:
                     
     Retail originations
$   101,002
   
$    66,965
   
$    304,410
   
$ 166,792
 
     Wholesale originations
258,247
   
299,419
   
1,011,389
   
534,252
 
        Total loans originated for sale (1)
359,249
   
366,384
   
$ 1,315,799
   
701,044
 
                       
Loans sold:
                     
     Servicing released
(342,952
)
 
(300,398
)
 
(1,305,049
)
 
(616,560
)
     Servicing retained
-
   
-
   
(1,492
)
 
(193
)
        Total loans sold (2)
(342,952
)
 
(300,398
)
 
(1,306,541
)
 
(616,753
)
                       
Loans originated for investment:
                     
     Mortgage loans:
                     
          Single-family
-
   
802
   
323
   
8,278
 
          Multi-family
515
   
1,750
   
515
   
6,250
 
          Commercial real estate
-
   
-
   
1,300
   
2,073
 
          Construction
-
   
-
   
-
   
265
 
          Other
-
   
-
   
-
   
1,740
 
     Commercial business loans
-
   
358
   
-
   
938
 
     Consumer loans
18
   
-
   
124
   
531
 
        Total loans originated for investment (3)
533
   
2,910
   
2,262
   
20,075
 
                       
Loans purchased for investment:
                     
     Mortgage loans:
                     
          Single-family
-
   
595
   
-
   
595
 
        Total loans purchased for investment
-
   
595
   
-
   
595
 
                       
Mortgage loan principal payments
(28,073
)
 
(36,246
)
 
(98,975
)
 
(125,977
)
Real estate acquired in settlement of loans
(19,050
)
 
(15,485
)
 
(45,051
)
 
(41,636
)
Increase (decrease) in other items, net (4)
10,450
   
(145
)
 
9,746
   
(4,480
)
Net (decrease) increase in loans held for
    investment, loans held for sale at fair value
                     
    and loans held for sale at lower cost or
    market
 
$  (19,843
 
)
 
 
$    17,615
   
 
$  (122,760
 
)
 
 
$  (67,132
 
)

(1)  
Includes PBM loans originated for sale during the quarters and nine months ended March 31, 2010 and 2009 totaling $359.2 million, $366.3 million, $1.32 billion and $701.0 million, respectively.
(2)  
Includes PBM loans sold during the quarters and nine months ended March 31, 2010 and 2009 totaling $342.9 million, $296.6 million, $1.31 billion and $613.0 million, respectively.
(3)  
Includes PBM loans originated for investment during the quarters and nine months ended March 31, 2010 and 2009 totaling $0, $802, $223 and $8.8 million, respectively.
(4)  
Includes net changes in undisbursed loan funds, deferred loan fees or costs, allowance for loan losses and fair value of loans held for sale.


 
45 

 


Liquidity and Capital Resources

The Corporation’s primary sources of funds are deposits, proceeds from the sale of loans originated for sale, proceeds from principal and interest payments on loans, proceeds from the maturity and sale of investment securities, FHLB – San Francisco advances, and access to the discount window facility at the Federal Reserve Bank of San Francisco.  While maturities and scheduled amortization of loans and investment securities are a relatively predictable source of funds, deposit flows, mortgage prepayments and loan sales are greatly influenced by general interest rates, economic conditions and competition.
 
 
The primary investing activity of the Bank is the origination and purchase of loans held for investment.  During the first nine months of fiscal 2010 and 2009, the Bank originated $1.32 billion and $721.1 million of loans, respectively.  The Bank did not purchase any loans from other financial institutions in the first nine months of fiscal 2010 and only purchased $595,000 in the same period of fiscal 2009.  The total loans sold in the first nine months of fiscal 2010 and 2009 were $1.31 billion and $616.8 million, respectively.  At March 31, 2010, the Bank had loan origination commitments totaling $124.1 million and undisbursed loans in process and lines of credit totaling $6.8 million.  The Bank anticipates that it will have sufficient funds available to meet its current loan commitments.

The Bank’s primary financing activity is gathering deposits.  During the first nine months of fiscal 2010, the net decrease in deposits was $41.3 million in comparison to a net decrease in deposits of $64.5 million during the same period in fiscal 2009.  The decrease in deposits was consistent with the Corporation’s short-term strategy to deleverage the balance sheet (refer to “Executive Summary and Operating Strategy” on page 23).  On March 31, 2010, time deposits that are scheduled to mature in one year or less were $358.2 million.  Historically, the Bank has been able to retain a significant amount of its time deposits as they mature by adjusting deposit rates to the current interest rate environment.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities.  The Bank generally maintains sufficient cash and cash equivalents to meet short-term liquidity needs.  At March 31, 2010, total cash and cash equivalents were $86.0 million, or 6.12 percent of total assets.    Depending on market conditions and the pricing of deposit products and FHLB – San Francisco advances, the Bank may continue to rely on FHLB – San Francisco advances for part of its liquidity needs.  As of March 31, 2010, the financing availability at FHLB – San Francisco was limited to 37 percent of total assets; the remaining borrowing facility was $199.6 million and the remaining unused collateral was $293.5 million.  In addition, the Bank has secured a $17.3 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $19.3 million.  As of March 31, 2010, there was no outstanding borrowing under this facility.

In October 2008, the FDIC introduced the Temporary Liquidity Guarantee Program (the “TLGP”), a program designed to improve the functioning of the credit markets and to strengthen capital in the financial system during this period of economic distress.  The TLGP has two components: 1) a debt guarantee program, guaranteeing certain newly issued senior unsecured debt, and 2) a transaction account guarantee program, providing a full guarantee of non-interest bearing deposit transaction accounts, Negotiable Order of Withdrawal (or “NOW”) accounts paying a minimal or no annual interest, and Interest on Lawyers Trust Accounts, regardless of the amount.  The Bank has not issued any debt under this program and our ability to participate in the debt guarantee program expired April 30, 2010.  The Bank is presently participating in the transaction account guarantee program, which has been extended through the period ending December 31, 2010.  If by October 29, 2010, the FDIC finds that a further extension is warranted, the transaction account guarantee program will remain in effect through December 31, 2011.  The annualized program fees are 15 basis points on transaction account balances over $250,000 for institutions assigned to Risk Category I for deposit insurance purposes (or 20 basis points for those in Risk Category II and 25 basis points for those in Risk Categories III and IV).
 
Although the OTS eliminated the minimum liquidity requirement for savings institutions in April 2002, the regulation still requires thrifts to maintain adequate liquidity to assure safe and sound operations. The Bank’s average liquidity ratio (defined as the ratio of average qualifying liquid assets to average deposits and borrowings) for the quarter ended March 31, 2010 increased to 26.1 percent from 20.7 percent during the quarter ended June 30, 2009.  The relatively high level of liquidity is consistent with the Corporation’s strategy to mitigate liquidity risk during this period of economic uncertainty.
 
 
46


The Bank is required to maintain specific amounts of capital pursuant to OTS requirements.  Under the OTS prompt corrective action provisions, a minimum ratio of 1.5 percent for Tangible Capital is required to be deemed other than “critically undercapitalized,” while a minimum of 5.0 percent for Core Capital, 10.0 percent for Total Risk-Based Capital and 6.0 percent for Tier 1 Risk-Based Capital is required to be deemed “well capitalized.”  As of March 31, 2010, the Bank exceeded all regulatory capital requirements to be deemed “well capitalized.”  The Bank’s actual and required capital amounts and ratios as of March 31, 2010 are as follows (dollars in thousands):

 
        Amount
 
 Percent
       
Tangible capital
$ 119,875
 
8.53%
Requirement
28,095
 
   2.00   
       
Excess over requirement
$   91,780
 
6.53%
       
Core capital
$ 119,875
 
8.53%
Requirement to be “Well Capitalized”
 70,238
 
   5.00    
       
Excess over requirement
 $   49,637
 
3.53%
       
Total risk-based capital
$ 127,306
 
15.53%
Requirement to be “Well Capitalized”
 81,985
 
10.00    
       
Excess over requirement
$   45,321
 
5.53%
       
Tier 1 risk-based capital
$ 116,856
 
14.25%
Requirement to be “Well Capitalized”
 49,191
 
  6.00    
       
Excess over requirement
$   67,665
 
8.25%

The ability of the Corporation to pay dividends to stockholders depends primarily on the ability of the Bank to pay dividends to the Corporation.  The Bank may not declare or pay a cash dividend if the effect thereof would cause its net worth to be reduced below the regulatory capital requirements imposed by federal and state regulation.  The Corporation paid $238,000 of cash dividends to its shareholders in the first nine months of fiscal 2010.
 
In December 2009, the Corporation raised $12.0 million of capital through a public offering of common stock, issuing 5.18 million shares of common stock at $2.50 per share, less underwriting fees and other costs.  The proceeds strengthened the Bank’s regulatory capital ratios as a result of the Corporation’s $12.0 million capital contribution to the Bank in December 2009.


Commitments and Derivative Financial Instruments

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, and mandatory loan sale agreements to third parties.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying condensed consolidated statements of financial condition.  The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments.  The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.  For a discussion on commitments and derivative financial instruments, see Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements on page 12.



 
47 

 

 
 
Supplemental Information

 
At
 
At
 
At
 
March 31,
 
June 30,
 
March 31,
 
2010
 
2009
 
2009
           
Loans serviced for others (in thousands)
$ 140,462
 
$ 156,025
 
$ 166,939
           
Book value per share
$ 10.90
 
$ 18.48
 
$     18.68


ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk.

The Corporation’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating interest rates.  The Corporation has sought to reduce the exposure of its earnings to changes in interest rates by attempting to manage the repricing mismatch between interest-earning assets and interest-bearing liabilities.  The principal element in achieving this objective is to increase the interest-rate sensitivity of the Corporation’s interest-earning assets by retaining for its portfolio new loan originations with interest rates subject to periodic adjustment to market conditions and by selling fixed-rate, single-family mortgage loans.  In addition, the Corporation maintains an investment portfolio, which is largely in U.S. government agency MBS and U.S. government sponsored enterprise MBS with contractual maturities of up to 30 years that reprice frequently.  The Corporation relies on retail deposits as its primary source of funds while utilizing FHLB – San Francisco advances as a secondary source of funding.  Management believes retail deposits, unlike brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.  As part of its interest rate risk management strategy, the Corporation promotes transaction accounts and time deposits with terms up to five years.

Through the use of an internal interest rate risk model and the OTS interest rate risk model, the Bank is able to analyze its interest rate risk exposure by measuring the change in net portfolio value (“NPV”) over a variety of interest rate scenarios.  NPV is defined as the net present value of expected future cash flows from assets, liabilities and off-balance sheet contracts.  The calculation is intended to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of -100, +100, +200 and +300 basis points (“bp”) with no effect given to steps that management might take to counter the effect of the interest rate movement.  The results of the internal interest rate risk model are reconciled with the results provided by the OTS on a quarterly basis.  Significant deviations are researched and adjusted where applicable.

The following table is derived from the OTS interest rate risk model and represents the NPV based on the indicated changes in interest rates as of March 31, 2010 (dollars in thousands).  

               
NPV as Percentage
   
   
Net
 
NPV
 
Portfolio
 
of Portfolio Value
 
Sensitivity
Basis Points ("bp")
 
Portfolio
 
Change
 
Value of
 
Assets
 
Measure
Change in Rates
 
Value
 
(1)
 
Assets
  (2)  
(3)
                     
+300 bp
   
 $ 129,276
 
$ (27,695
)
 $ 1,401,749
 
               9.22%
 
    -158 bp
+200 bp
   
$ 145,617
 
$ (11,354
)
 $ 1,425,541
 
             10.21%
 
      -58 bp
+100 bp
   
$ 155,662
 
$   (1,309
)
 $ 1,443,457
 
             10.78%
 
        -2 bp
0 bp
   
$ 156,971
 
$            -
 
 $ 1,453,503
 
             10.80%
 
          -
-100 bp
   
$ 153,336
 
$   (3,635
)
 $ 1,460,945
 
             10.50%
 
      -30 bp
                     

(1)  
Represents the decrease of the NPV at the indicated interest rate change in comparison to the NPV at March 31, 2010 (“base case”).
(2)  
Calculated as the NPV divided by the portfolio value of total assets.
(3)  
Calculated as the change in the NPV ratio from the base case amount assuming the indicated change in interest rates (expressed in basis points).
 

 
48

The following table is derived from the OTS interest rate risk model, the OTS interest rate risk regulatory guidelines, and represents the change in the NPV at a +200 basis point rate shock at March 31, 2010 and a -100 basis point rate shock at June 30, 2009.

 
At March 31, 2010
 
       At June 30, 2009
 
 
 (+200 bp rate shock)
 
       (-100 bp rate shock)
 
Pre-Shock NPV ratio: NPV as a % of PV Assets
 10.80
%
7.28
%
Post-Shock NPV ratio: NPV as a % of PV Assets
10.21
%
6.91
%
Sensitivity Measure: Change in NPV Ratio
58
bp
37
bp
TB 13a Level of Risk
Minimal       
 
Minimal       
   

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.  Additionally, certain assets, such as adjustable rate mortgage (“ARM”) loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.  Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from time deposits could likely deviate significantly from those assumed when calculating the results described in the tables above.  It is also possible that, as a result of an interest rate increase, the higher mortgage payments required from ARM borrowers could result in an increase in delinquencies and defaults.  Changes in market interest rates may also affect the volume and profitability of the Corporation’s mortgage banking operations.  Accordingly, the data presented in the tables in this section should not be relied upon as indicative of actual results in the event of changes in interest rates.  Furthermore, the NPV presented in the foregoing tables is not intended to present the fair market value of the Bank, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Corporation.

The Bank also models the sensitivity of net interest income for the 12-month period subsequent to any given month-end assuming a dynamic balance sheet (accounting for the Bank’s current balance sheet, 12-month business plan, embedded options, rate floors, periodic caps, lifetime caps, and loan, investment, deposit and borrowing cash flows, among others), and immediate, permanent and parallel movements in interest rates of plus 200, plus 100 and minus 100 basis points.  The following table describes the results of the analysis at March 31, 2010 and June 30, 2009.

At March 31, 2010
 
At June 30, 2009
Basis Point (bp)
 
Change in
Basis Point (bp)
 
Change in
Change in Rates
 
Net Interest Income
Change in Rates
 
Net Interest Income
+200 bp
 
        +22.14%
+200 bp
 
          +20.03%
+100 bp
 
        +12.46%
+100 bp
 
          +18.28%
-100 bp
 
         -20.83%
-100 bp
 
           +2.60%

At March 31, 2010 the Bank was asset sensitive as its interest-earning assets are expected to reprice more quickly than its interest-bearing liabilities during the subsequent 12-month period.  Therefore, in a rising interest rate environment, the model projects an increase in net interest income over the subsequent 12-month period.  In a falling interest rate environment, the results project a decrease in net interest income over the subsequent 12-month period.  At June 30, 2009, the Bank was also asset sensitive, as its interest-earning assets are expected to reprice more quickly during the subsequent 12-month period than its interest-bearing liabilities.  Therefore, in a rising interest rate environment, the model also projects an increase in net interest income over the subsequent 12-month period.  In a falling interest rate environment, the results also project a slight increase in net interest income over the subsequent 12-month period.

Management believes that the assumptions used to complete the analysis described in the table above are reasonable.  However, past experience has shown that immediate, permanent and parallel movements in interest rates will not necessarily occur.  Additionally, while the analysis provides a tool to evaluate the projected net interest income to changes in interest rates, actual results may be substantially different if actual experience differs from the assumptions used to complete the analysis, particularly with respect to the 12-month business plan when asset growth is forecast.  Therefore, the model results that the Corporation discloses should be thought of as a risk management tool to compare the trends of the Corporation’s current disclosure to previous disclosures, over time, within the context of the actual performance of the treasury yield curve.
 
 
49

 
ITEM 4 – Controls and Procedures.

a) An evaluation of the Corporation’s disclosure controls and procedure (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Corporation’s Chief Executive Officer, Chief Financial Officer and the Corporation’s Disclosure Committee as of the end of the period covered by this quarterly report.  In designing and evaluating the Corporation’s disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Based on their evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as of March 31, 2010 are effective, at the reasonable assurance level, in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

b) There have been no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended March 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.  The Corporation does not expect that its internal control over financial reporting will prevent all error and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.


PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

From time to time, the Corporation or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Corporation’s financial position or results of operations.


Item 1A.  Risk Factors.

There have been no material changes in the risk factors previously disclosed in Part I, Item IA of our Annual Report of Form 10-K for the year ended June 30, 2009, except as set forth in our Form 10-Q for the quarters ended September 30, 2009 and December 31, 2009.

We are subject to various regulatory requirements, expect to be subject to an enforcement action and may be subject to future additional regulatory restrictions and enforcement actions.
 
In light of the current challenging operating environment, along with our elevated level of non-performing assets, delinquencies, and adversely classified assets, we are subject to increased regulatory scrutiny and additional
 
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regulatory restrictions, and may become subject to potential enforcement actions.  Such enforcement actions could place limitations on our business and adversely affect our ability to implement our business plans.  Even though the Bank remains well-capitalized, the regulatory agencies have the authority to restrict our operations to those consistent with adequately capitalized institutions.  For example, if the regulatory agencies were to impose such a restriction, we would likely have limitations on our lending activities.  The regulatory agencies also have the power to limit the rates paid by the Bank to attract retail deposits in its local markets.  We also may be required to reduce our levels of non-performing assets within specified time frames.  These time frames might not necessarily result in maximizing the price that might otherwise be received for the underlying properties.  In addition, if such restrictions were also imposed upon other institutions that operate in the Bank’s markets, multiple institutions disposing of properties at the same time could further diminish the potential proceeds received from the sale of these properties.  If any of these or other additional restrictions are placed on us, it would limit the resources currently available to us as a well-capitalized institution.

Along with our level of certain non traditional loans including stated income and interest only loans,  non-performing assets, delinquencies, and adversely classified assets, we are subject to increased regulatory scrutiny as well as increased FDIC premiums as a result of the potential risk of loss in our loan portfolio.  Following the regulators’ most recent examination of the Bank, we and the Bank expect to become subject to an enforcement action with the OTS.  This action, as well as any other future corrective action we may become subject to, could require us to limit our lending activities and reduce our levels of non-traditional loans and classified or non-performing assets within specified timeframes which might not necessarily result in maximizing the price which might otherwise be received for the underlying properties.  In addition, this action, as well as any other future corrective action, could require us to, among other things; increase our allowance for loan losses and dispose of certain assets and liabilities within a prescribed period of time.

In addition, in July 2009, the OTS has notified both Provident and the Bank that each had been designated to be in “troubled condition.” As a result of that designation, neither Provident nor the Bank may appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the OTS. In addition, neither party may make indemnification and severance payments or enter into other forms of compensation agreements with any of their respective directors or officers without the prior written approval of the OTS. Dividend payments by Provident require the prior written non-objection of the OTS regional Director and dividend payments by the Bank requires the Bank to submit an application to the OTS and receive OTS approval before a dividend payment can be made. The Bank is also subject to restrictions on asset growth.  These restrictions require the Bank to limit its asset growth in any quarter to an amount not to exceed net interest credited on deposit liabilities, excluding permitted growth as a result of cash capital contributions from Provident. Also, the Bank may also not enter into any third party contracts outside of the ordinary course of business without regulatory approval.  In addition, the Bank may not accept, renew or roll over any brokered deposit.  The Bank, however, has not relied upon brokered deposits as a significant source of funds and at March 31, 2010 the Bank had only $19.6 million of brokered deposits.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

During the quarter ended March 31, 2010, the Corporation did not purchase any equity securities and did not sell any securities that were not registered under the Securities Act of 1933.


Item 3.  Defaults Upon Senior Securities.

Not applicable.



 
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Item 4.  (Removed and Reserved).

Not applicable.


Item 5.  Other Information.

Not applicable.


Item 6.  Exhibits.

Exhibits:
 
3.1    
 
Certificate of Incorporation of Provident Financial Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to the Corporation’s Registration Statement on Form S-1 (File No. 333-02230))
     
3.2    
 
Bylaws of Provident Financial Holdings, Inc. (Incorporated by reference to Exhibit 3.2 to the Corporation’s Form 8-K dated October 25, 2007).
     
10.1    
Employment Agreement with Craig G. Blunden (Incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K dated December 19, 2005)
     
10.2     Post-Retirement Compensation Agreement with Craig G. Blunden (Incorporated by reference to Exhibit 10.2 to the Corporation’s Form 8-K dated December 19, 2005) 
     
10.3    
1996 Stock Option Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated December 12, 1996)
     
10.4     1996 Management Recognition Plan (incorporated by reference to Exhibit B to the Corporation’s proxy statement dated December 12, 1996) 
     
10.5    
Severance Agreement with Richard L. Gale, Kathryn R. Gonzales, Lilian Salter,  Donavon P. Ternes and David S. Weiant (incorporated by reference to Exhibit 10.1 in the Corporation’s Form 8-K dated July 3, 2006)
     
10.6    
2003 Stock Option Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 21, 2003)
     
10.7    
Form of Incentive Stock Option Agreement for options granted under the 2003 Stock Option Plan (incorporated by reference to Exhibit 10.13 to the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2005)
     
10.8     Form of Non-Qualified Stock Option Agreement for options granted under the 2003 Stock Option Plan (incorporated by reference to Exhibit 10.14 to the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2005) 
     
10.9     2006 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 12, 2006) 
     
10.10   Form of Incentive Stock Option Agreement for options granted under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.10 in the Corporation’s Form 10-Q ended March 31, 2006) 
     
10.11   Form of Non-Qualified Stock Option Agreement for options granted under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 in the Corporation’s Form 10-Q ended March 31, 2006) 
     
10.12   Form of Restricted Stock Agreement for restricted shares awarded under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.12 in the Corporation’s Form 10-Q ended March 31, 2006) 
 
 
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10.13   Post-Retirement Compensation Agreement with Donavon P. Ternes (Incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K dated July 10, 2009) 
     
14     
 
Code of Ethics for the Corporation’s directors, officers and employees (incorporated by reference to Exhibit 14 in the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2008)
     
31.1     Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 
     
31.2    
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1    
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
      
32.2       Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
 

 
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
  Provident Financial Holdings, Inc. 
   
   
   
May 10, 2010  /s/ Craig. G. Blunden                                           
  Craig G. Blunden 
  Chairman, President and Chief Executive Officer 
  (Principal Executive Officer) 
   
   
   
   
May 10, 2010  /s/ Donavon P. Ternes                                        
  Donavon P. Ternes 
  Chief Operating Officer and Chief Financial Officer 
  (Principal Financial and Accounting Officer) 
 

 
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Exhibit Index


31.1  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1  
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2  
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.