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PROVIDENT FINANCIAL HOLDINGS INC - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[  ü ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
September 30, 2016
[     ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to _________________
 
Commission File Number 000-28304

PROVIDENT FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware  
 
33-0704889
(State or other jurisdiction of 
 
(I.R.S.  Employer 
incorporation or organization) 
 
Identification No.) 
 
3756 Central Avenue, Riverside, California 92506
(Address of principal executive offices and zip code)

(951) 686-6060
(Registrant’s telephone number, including area code)

_________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ü     No      .

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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 [ ü ]
 
Non-accelerated filer [   ] 
Smaller reporting company [   ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Yes            No  ü  .
APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of class:
 
As of November 4, 2016
Common stock, $ 0.01 par value, per share
 
7,989,516 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 September 30, 2016 and June 30, 2016
 
Condensed Consolidated Statements of Operations
 
 
 
for the Quarters Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Comprehensive Income
 
 
 
for the Quarters Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Stockholders’ Equity
 
 
 
for the Quarters Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Cash Flows
 
 
 
for the Three Months Ended September 30, 2016 and 2015
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
 
 
 
 
ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
 
 
 
 
General
 
Safe-Harbor Statement
 
Critical Accounting Policies
 
Executive Summary and Operating Strategy
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
 
Comparison of Financial Condition at September 30, 2016 and June 30, 2016
 
Comparison of Operating Results
 
 
 
for the Quarters Ended September 30, 2016 and 2015
 
Asset Quality
 
Loan Volume Activities
 
Liquidity and Capital Resources
 
Supplemental Information
 
 
 
 
ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
ITEM 4  -
Controls and Procedures
 
 
 
 
PART II  -
OTHER INFORMATION
 
 
 
 
 
ITEM 1  -
Legal Proceedings
ITEM 1A -
Risk Factors
ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3  -
Defaults Upon Senior Securities
ITEM 4  -
Mine Safety Disclosures
ITEM 5  -
Other Information
ITEM 6  -
Exhibits
 
 
 
 
SIGNATURES






PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
In Thousands, Except Share Information
 
September 30,
2016
June 30,
2016
 
(Unaudited)
 
Assets
 
 
Cash and cash equivalents
$
39,443

$
51,206

Investment securities – held to maturity, at cost
36,290

39,979

Investment securities – available for sale, at fair value
10,778

11,543

Loans held for investment, net of allowance for loan losses of
$8,725 and $8,670, respectively; includes $5,529 and $5,159 at fair value, respectively
853,958

840,022

Loans held for sale, at fair value
264,379

189,458

Accrued interest receivable
3,078

2,781

Real estate owned, net
3,496

2,706

Federal Home Loan Bank (“FHLB”) – San Francisco stock
8,094

8,094

Premises and equipment, net
5,879

6,043

Prepaid expenses and other assets
17,119

19,549

 
 

 

Total assets
$
1,242,514

$
1,171,381

 
 

 

Liabilities and Stockholders’ Equity
 

 

 
 

 

Liabilities:
 

 

Non interest-bearing deposits
$
74,963

$
71,158

Interest-bearing deposits
868,539

855,226

Total deposits
943,502

926,384

 
 

 

Borrowings
146,281

91,299

Accounts payable, accrued interest and other liabilities
19,508

20,247

Total liabilities
1,109,291

1,037,930

 
 

 

Commitments and Contingencies




 
 

 

Stockholders’ equity:
 

 

Preferred stock, $.01 par value (2,000,000 shares authorized;
none issued and outstanding)


Common stock, $.01 par value (40,000,000 shares authorized;
17,848,365 and 17,847,365 shares issued; 7,978,166 and
7,975,250 shares outstanding, respectively)
178

178

Additional paid-in capital
91,633

90,802

Retained earnings
192,227

191,666

Treasury stock at cost (9,870,199 and 9,872,115 shares, respectively)
(151,095
)
(149,508
)
Accumulated other comprehensive income, net of tax
280

313

 
 

 

Total stockholders’ equity
133,223

133,451

 
 

 

Total liabilities and stockholders’ equity
$
1,242,514

$
1,171,381



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

1



PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
In Thousands, Except Per Share Information
 
Quarter Ended  
 September 30,
 
2016
2015
Interest income:
 
 
Loans receivable, net
$
10,480

$
9,490

Investment securities
84

67

FHLB – San Francisco stock
185

200

Interest-earning deposits
55

100

Total interest income
10,804

9,857

 
 
 
Interest expense:
 
 
Checking and money market deposits
98

117

Savings deposits
144

168

Time deposits
772

858

Borrowings
702

648

Total interest expense
1,716

1,791

 
 
 
Net interest income
9,088

8,066

Recovery from the allowance for loan losses
(150
)
(38
)
Net interest income, after recovery from the allowance for loan losses
9,238

8,104

 
 
 
Non-interest income:
 
 
Loan servicing and other fees
267

111

Gain on sale of loans, net
7,996

8,924

Deposit account fees
550

610

(Loss) gain on sale and operations of real estate owned acquired in the settlement of loans, net
(103
)
229

Card and processing fees
364

362

Other
178

213

Total non-interest income
9,252

10,449

 
 
 
Non-interest expense:
 
 
Salaries and employee benefits
11,314

10,792

Premises and occupancy
1,289

1,108

Equipment
362

379

Professional expenses
505

500

Sales and marketing expenses
296

262

     Deposit insurance premiums and regulatory assessments
248

262

Other
1,618

1,057

Total non-interest expense
15,632

14,360

 
 
 
Income before income taxes
2,858

4,193

Provision for income taxes
1,264

1,750

Net income
$
1,594

$
2,443

 
 
 
Basic earnings per share
$
0.20

$
0.29

Diluted earnings per share
$
0.20

$
0.28

Cash dividends per share
$
0.13

$
0.12


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

2



PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
In Thousands
 
For the Quarters Ended  
 September 30,
 
2016
2015
Net income
$
1,594

$
2,443

 
 
 
Change in unrealized holding loss on securities available for sale
(57
)
(53
)
Reclassification of (gains) losses to net income


Other comprehensive loss, before income taxes
(57
)
(53
)
 
 
 
Income tax benefit
(24
)
(22
)
Other comprehensive loss
(33
)
(31
)
 
 
 
Total comprehensive income
$
1,561

$
2,412



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

3



PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
In Thousands, Except Share Information

For the Quarters Ended September 30, 2016 and 2015:
 
Common
Stock
Additional
Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at June 30, 2016
7,975,250

$
178

$
90,802

$
191,666

$
(149,508
)
$
313

$
133,451

 
 
 
 
 
 
 
 
Net income
 
 
 
1,594

 
 
1,594

Other comprehensive loss
 
 
 
 
 
(33
)
(33
)
Purchase of treasury stock(1)
(85,834
)
 
 
 
(1,662
)
 
(1,662
)
Exercise of stock options
1,000


17

 
 
 
17

Distribution of restricted stock
87,750

 
 
 
 
 

Amortization of restricted stock
 
 
362

 
 
 
362

Awards of restricted stock
 
 
(136
)
 
136

 

Forfeiture of restricted stock
 
 
61

 
(61
)
 

Stock options expense
 
 
340

 
 
 
340

Tax effect from stock based compensation
 
 
187

 
 
 
187

Cash dividends(2)
 
 
 
(1,033
)
 
 
(1,033
)
 
 
 
 
 
 
 
 
Balance at September 30, 2016
7,978,166

$
178

$
91,633

$
192,227

$
(151,095
)
$
280

$
133,223


(1) Includes the repurchase of 25,598 shares of distributed restricted stock in settlement of employee withholding tax obligations.
(2) Cash dividends of $0.13 per share were paid in the quarter ended September 30, 2016.
 
 
Common
Stock
Additional
Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
 
Shares
Amount
Total
Balance at June 30, 2015
8,634,607

$
177

$
88,893

$
188,206

$
(136,470
)
$
331

$
141,137

 
 
 
 
 
 
 
 
Net income
 
 
 
2,443

 
 
2,443

Other comprehensive loss
 
 
 
 
 
(31
)
(31
)
Purchase of treasury stock(1)
(220,429
)
 
 
 
(3,649
)
 
(3,649
)
Exercise of stock options
13,000

1

95

 
 
 
96

Distribution of restricted stock
2,500

 
 
 
 
 

Amortization of restricted stock
 
 
161

 
 
 
161

Stock options expense
 
 
128

 
 
 
128

Tax effect from stock based compensation
 
 
1

 
 
 
1

Cash dividends(2)
 
 
 
(1,032
)
 
 
(1,032
)
 
 
 
 
 
 
 
 
Balance at September 30, 2015
8,429,678

$
178

$
89,278

$
189,617

$
(140,119
)
$
300

$
139,254


(1) Includes the repurchase of 4,500 shares from a cashless stock option exercise.
(2) Cash dividends of $0.12 per share were paid in the quarter ended September 30, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

4



PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Three Months Ended 
 September 30,
 
2016
2015
Cash flows from operating activities:
 
 
Net income
$
1,594

$
2,443

Adjustments to reconcile net income to net cash (used for) provided by operating activities:
 
 
Depreciation and amortization
697

307

Recovery from the allowance for loan losses
(150
)
(38
)
Provision (recovery) of losses on real estate owned
100

(161
)
Gain on sale of loans, net
(7,996
)
(8,924
)
Gain on sale of real estate owned, net
(54
)
(30
)
Stock-based compensation
702

289

Provision (benefit) for deferred income taxes
1,420

(632
)
Tax effect from stock based compensation
(187
)
(1
)
Increase in accounts payable, accrued interest and other liabilities
1,327

1,617

(Increase) decrease in prepaid expenses and other assets
(361
)
1,711

Loans originated for sale
(647,342
)
(540,289
)
Proceeds from sale of loans
579,698

613,940

Net cash (used for) provided by operating activities
(70,552
)
70,232

 
 
 
Cash flows from investing activities:
 
 
(Increase) decrease in loans held for investment, net
(15,097
)
7,289

Principal payments from investment securities available for sale
4,048

650

Proceeds from sale of real estate owned
307

463

Purchase of premises and equipment
(78
)
(71
)
Net cash (used for) provided by investing activities
(10,820
)
8,331

 
 
 
Cash flows from financing activities:
 
 
Increase in deposits, net
17,118

780

Proceeds from short-term borrowings, net
35,000


Proceeds from long-term borrowings
20,000


Repayments of long-term borrowings
(18
)
(16
)
Exercise of stock options
17

96

Tax effect from stock based compensation
187

1

Cash dividends
(1,033
)
(1,032
)
Treasury stock purchases
(1,662
)
(3,649
)
Net cash provided by (used for) financing activities
69,609

(3,820
)
 
 
 
Net (decrease) increase in cash and cash equivalents
(11,763
)
74,743

Cash and cash equivalents at beginning of period
51,206

81,403

Cash and cash equivalents at end of period
$
39,443

$
156,146

Supplemental information:
 
 
Cash paid for interest
$
1,671

$
1,788

Cash paid for income taxes
$
100

$

Transfer of loans held for sale to held for investment
$
760

$
1,552

Real estate acquired in the settlement of loans
$
1,298

$
1,006


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

5



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

September 30, 2016

Note 1: Basis of Presentation

The unaudited interim condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim periods presented.  All such adjustments are of a normal, recurring nature.  The condensed consolidated statement of financial condition at June 30, 2016 is derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. and its wholly-owned subsidiary, Provident Savings Bank, F.S.B. (the “Bank”) (collectively, the “Corporation”).  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) with respect to interim financial reporting.  It is recommended that these unaudited interim condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2016.  The results of operations for the quarter ended September 30, 2016 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2017.


Note 2: Accounting Standard Updates (“ASU”)

There have been no accounting standard updates or changes in the status of their adoptions that are applicable to the Corporation as previously disclosed in Note 1 of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2016.


Note 3: Earnings Per Share

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

As of September 30, 2016 and 2015, there were outstanding options to purchase 932,000 shares and 1.0 million shares of the Corporation’s common stock, respectively, of which 200,000 shares and 236,500 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive. As of September 30, 2016 and 2015, there were outstanding restricted stock awards of 110,250 shares and 197,500 shares, respectively, all of which have dilutive effects.


6



The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2016 and 2015, respectively.
 
(In Thousands, Except Earnings Per Share)
For the Quarters Ended
September 30,
 
2016
2015
Numerator:
 
 
Net income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders
$
1,594

$
2,443

 
 
 
Denominator:
 

 

Denominator for basic earnings per share:
 

 

 Weighted-average shares
7,948

8,566

 
 
 
   Effect of dilutive shares:
 
 
Stock options
158

111

Restricted stock
48

67

 
 
 
Denominator for diluted earnings per share:
 

 

Adjusted weighted-average shares and assumed conversions
8,154

8,744

 
 
 
Basic earnings per share
$
0.20

$
0.29

Diluted earnings per share
$
0.20

$
0.28




7



Note 4: Operating Segment Reports

The Corporation operates in two business segments: community banking through the Bank and mortgage banking through Provident Bank Mortgage (“PBM”), a division of the Bank.

The following tables set forth condensed consolidated statements of operations and total assets for the Corporation’s operating segments for the quarters ended September 30, 2016 and 2015, respectively.
 
For the Quarter Ended September 30, 2016
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
7,575

$
1,513

$
9,088

Provision (recovery) for loan losses
36

(186
)
(150
)
Net interest income, after provision (recovery) for loan losses
7,539

1,699

9,238

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
69

198

267

     Gain on sale of loans, net (2)
1

7,995

7,996

Deposit account fees
550


550

     (Loss) gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
(105
)
2

(103
)
Card and processing fees
364


364

Other
178


178

Total non-interest income
1,057

8,195

9,252

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,894

6,420

11,314

Premises and occupancy
856

433

1,289

Operating and administrative expenses
1,147

1,882

3,029

Total non-interest expense
6,897

8,735

15,632

Income before income taxes
1,699

1,159

2,858

Provision for income taxes
777

487

1,264

Net income
$
922

$
672

$
1,594

Total assets, end of period
$
977,964

$
264,550

$
1,242,514


(1) 
Includes an inter-company charge of $95 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
(2) 
Includes an inter-company charge of $59 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.

8




 
For the Quarter Ended September 30, 2015
(In Thousands)
Provident
Bank
Provident
Bank
Mortgage
Consolidated
Totals
Net interest income
$
6,903

$
1,163

$
8,066

Provision (recovery) for loan losses
12

(50
)
(38
)
Net interest income after provision (recovery) for loan losses
6,891

1,213

8,104

 
 
 
 
Non-interest income:
 
 
 
     Loan servicing and other fees (1)
144

(33
)
111

     Gain on sale of loans, net (2)
1

8,923

8,924

Deposit account fees
610


610

     Gain on sale and operations of real estate owned
        acquired in the settlement of loans, net
224

5

229

Card and processing fees
362


362

Other
213


213

Total non-interest income
1,554

8,895

10,449

 
 
 
 
Non-interest expense:
 
 
 
Salaries and employee benefits
4,553

6,239

10,792

Premises and occupancy
696

412

1,108

Operating and administrative expenses
989

1,471

2,460

Total non-interest expense
6,238

8,122

14,360

Income before income taxes
2,207

1,986

4,193

Provision for income taxes
915

835

1,750

Net income
$
1,292

$
1,151

$
2,443

Total assets, end of period
$
1,013,345

$
163,892

$
1,177,237


(1) 
Includes an inter-company charge of $65 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
(2) 
Includes an inter-company charge of $108 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.
 
 
 
 
 
 
 
 



9



Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 2016 and June 30, 2016 were as follows:
September 30, 2016
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
 
 
 
 
 
Held to maturity:
 
 
 
 
 
Certificates of deposit
$
800

$

$

$
800

$
800

U.S. government sponsored enterprise MBS (1)
35,490

459


35,949

35,490

Total investment securities - held to maturity
$
36,290

$
459

$

$
36,749

$
36,290

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
U.S. government agency MBS
$
5,906

$
225

$

$
6,131

$
6,131

U.S. government sponsored enterprise MBS
3,875

212


4,087

4,087

Private issue CMO (2)
556

4


560

560

Total investment securities - available for sale
$
10,337

$
441

$

$
10,778

$
10,778

Total investment securities
$
46,627

$
900

$

$
47,527

$
47,068


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

June 30, 2016
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
 
 
 
 
 
Held to maturity:
 
 
 
 
 
Certificates of deposit
$
800

$

$

$
800

$
800

U.S. government sponsored enterprise MBS
39,179

459


39,638

39,179

Total investment securities - held to maturity
$
39,979

$
459

$

$
40,438

$
39,979

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
U.S. government agency MBS
$
6,308

$
264

$

$
6,572

$
6,572

U.S. government sponsored enterprise MBS
3,998

225


4,223

4,223

Private issue CMO
598

4

(1
)
601

601

Common stock - community development financial institution
147



147

147

Total investment securities - available for sale
$
11,051

$
493

$
(1
)
$
11,543

$
11,543

Total investment securities
$
51,030

$
952

$
(1
)
$
51,981

$
51,522


In the first quarters of fiscal 2017 and 2016, the Corporation received MBS principal payments of $4.0 million and $650,000, respectively, and there were no sales of investment securities during these periods. The Corporation did not purchase any investment securities in the first quarter of fiscal 2017 and 2016. In the first quarter of fiscal 2017, the Corporation received the cash proceeds from its equity investment in a community development financial institution, consistent with the purchase agreement between the acquiring institution and the community development financial institution.
  

10



The Corporation held investments with an unrealized loss position of $0 at September 30, 2016 and $1,000 at June 30, 2016.
 
 
 
 
 
 
 
 
 
As of June 30, 2016
Unrealized Holding Losses
 
Unrealized Holding Losses
 
Unrealized Holding Losses
(In Thousands)
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Unrealized
 
Fair
Unrealized
 
Fair
Unrealized
Description of Securities
Value
Losses
 
Value
Losses
 
Value
Losses
Available for sale:
 
 
 
 
 
 
 
 
Private issue CMO
$
103

$
1

 
$

$

 
$
103

$
1

Total investment securities
$
103

$
1

 
$

$


$
103

$
1


The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value.  As of June 30, 2016, the unrealized holding loss was less than 12 months. The Corporation does not believe that there are any other-than-temporary impairments on the investment securities at September 30, 2016 and 2015; therefore, no impairment losses were recorded for the quarters ended September 30, 2016 and 2015.

Contractual maturities of investment securities as of September 30, 2016 and June 30, 2016 were as follows:
 
September 30, 2016
 
June 30, 2016
(In Thousands)
Amortized
Cost
Estimated
Fair
Value
 
Amortized
Cost
Estimated
Fair
Value
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
Due in one year or less
$
800

$
800

 
$
800

$
800

Due after one through five years


 


Due after five through ten years
17,384

17,702

 
18,904

19,203

Due after ten years
18,106

18,247

 
20,275

20,435

Total investment securities - held to maturity
$
36,290

$
36,749

 
$
39,979

$
40,438

 
 
 
 
 
 
Available for sale:
 
 
 
 
 
Due in one year or less
$

$

 
$

$

Due after one through five years


 


Due after five through ten years


 


Due after ten years
10,337

10,778

 
10,904

11,396

No stated maturity (common stock)


 
147

147

Total investment securities - available for sale
$
10,337

$
10,778

 
$
11,051

$
11,543

Total investment securities
$
46,627

$
47,527

 
$
51,030

$
51,981




11



Note 6: Loans Held for Investment
 
Loans held for investment, net of fair value adjustments, consisted of the following:
(In Thousands)
September 30,
2016
June 30,
2016
Mortgage loans:
 
 
Single-family
$
312,795

$
324,497

Multi-family
438,423

415,627

Commercial real estate
100,136

99,528

Construction
15,811

14,653

Other
331

332

Commercial business loans
624

636

Consumer loans
199

203

Total loans held for investment, gross
868,319

855,476

 
 
 
Undisbursed loan funds
(10,447
)
(11,258
)
Advance payments of escrows
23

56

Deferred loan costs, net
4,788

4,418

Allowance for loan losses
(8,725
)
(8,670
)
Total loans held for investment, net
$
853,958

$
840,022


As of September 30, 2016, the Corporation had $10.0 million in mortgage loans that are subject to negative amortization, consisting of $6.9 million in multi-family loans, $3.0 million in single-family loans and $155,000 in commercial real estate loans.  This compares to $10.2 million of negative amortization mortgage loans at June 30, 2016, consisting of $6.9 million in multi-family loans, $3.1 million in single-family loans and $170,000 in commercial real estate loans.  During the first quarters of fiscal 2017 and 2016, no loan interest income was added to the negative amortization loan balance.  Negative amortization involves a greater risk to the Corporation because the loan principal balance may increase by a range of 110% to 115% of the original loan amount during the period of negative amortization and because the loan payment may increase beyond the means of the borrower when loan principal amortization is required.  Also, the Corporation has originated interest-only ARM loans, which typically have a fixed interest rate for the first two to five years coupled with an interest only payment, followed by a periodic adjustable rate and a fully amortizing loan payment.  As of September 30, 2016 and June 30, 2016, the interest-only ARM loans were $53.7 million and $64.7 million, or 6.2% and 7.6% of loans held for investment, respectively. As of September 30, 2016, the Corporation had $5.5 million of single-family loans, 19 loans, held for investment which were originated for sale but were subsequently transferred to loans held for investment and are carried at fair value. This compares to $5.2 million of single-family loans, 18 loans, held for investment at June 30, 2016 which were originated for sale but were subsequently transferred to loans held for investment and are carried at fair value.

The following table sets forth information at September 30, 2016 regarding the dollar amount of loans held for investment that are contractually repricing during the periods indicated, segregated between adjustable rate loans and fixed rate loans.  Fixed-rate loans comprised 3% of loans held for investment at September 30, 2016 and June 30, 2016.  Adjustable rate loans having no stated repricing dates that reprice when the index they are tied to reprices (e.g. prime rate index) and checking account overdrafts are reported as repricing within one year.  The table does not include any estimate of prepayments which may cause the Corporation’s actual repricing experience to differ materially from that shown.


12



 
Adjustable Rate
 
 
(In Thousands)
Within One Year
After
One Year
Through 3 Years
After
3 Years
Through 5 Years
After
5 Years
Through 10 Years
Fixed Rate
Total
Mortgage loans:
 
 
 
 
 
 
Single-family
$
226,639

$
14,936

$
52,519

$
5,697

$
13,004

$
312,795

Multi-family
67,240

178,065

179,594

10,567

2,957

438,423

Commercial real estate
11,039

39,975

46,163


2,959

100,136

Construction
9,556




6,255

15,811

Other




331

331

Commercial business loans
107




517

624

Consumer loans
197




2

199

Total loans held for investment, gross
$
314,778

$
232,976

$
278,276

$
16,264

$
26,025

$
868,319


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

The Corporation categorizes all of the loans held for investment into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:
 
Pass - These loans range from minimal credit risk to average, but still acceptable, credit risk. The likelihood of loss is considered remote.
Special Mention - A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the bank is currently protected and loss is considered unlikely and not imminent.
Substandard - A substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful - A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.
Loss - A loss loan is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.


13



The following tables summarize gross loans held for investment, net of fair value adjustments, by loan types and risk category at the dates indicated:
 
 
September 30, 2016
(In Thousands)
Single-family
Multi-family
Commercial Real Estate
Construction
Other Mortgage
Commercial Business
Consumer
Total
 
 
 
 
 
 
 
 
 
 
Pass
$
298,937

$
432,567

$
100,136

$
15,811

$
331

$
530

$
199

$
848,511

Special Mention
3,879

5,013






8,892

Substandard
9,979

843




94


10,916

 
Total loans held for
   investment, gross
$
312,795

$
438,423

$
100,136

$
15,811

$
331

$
624

$
199

$
868,319


 
 
June 30, 2016
(In Thousands)
Single-family
Multi-family
Commercial Real Estate
Construction
Other Mortgage
Commercial Business
Consumer
Total
 
 
 
 
 
 
 
 
 
 
Pass
$
309,380

$
410,804

$
99,528

$
14,653

$
332

$
540

$
203

$
835,440

Special Mention
4,858

3,974






8,832

Substandard
10,259

849




96


11,204

 
Total loans held for
   investment, gross
$
324,497

$
415,627

$
99,528

$
14,653

$
332

$
636

$
203

$
855,476


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

Non-performing loans are charged-off to their fair market values in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 150 days delinquent for real estate secured first trust deed loans and 120 days delinquent for commercial business or real estate secured second trust deed loans.  For loans that were modified from their original terms, were re-underwritten and identified in the Corporation’s asset quality reports as troubled debt restructurings (“restructured loans”), the charge-off occurs when the loan becomes 90 days delinquent; and where borrowers file bankruptcy, the charge-off occurs when the loan becomes 60 days delinquent.  The amount of the charge-off is determined by comparing the loan balance to the estimated fair value of the underlying collateral, less disposition costs, with the loan balance in excess of the estimated fair value charged-off against the allowance for loan losses.  The allowance for loan losses for non-performing loans is determined by applying Accounting Standards Codification (“ASC”) 310, “Receivables.”  For restructured loans that are less than 90 days delinquent, the allowance for loan losses are segregated into (a) individually evaluated allowances for those loans with applicable discounted cash flow calculations still in their restructuring period, classified lower than pass, and containing an embedded loss component or (b) collectively evaluated allowances based on the aggregated pooling method.  For non-performing loans less than 60 days delinquent where the borrower has filed bankruptcy, the collectively evaluated allowances are assigned based on the aggregated pooling method. For non-performing commercial real estate loans, an individually evaluated allowance is derived based on the loan's discounted cash flow fair value (for restructured loans) or collateral fair value less estimated selling costs and if the fair value is higher than the loan balance, no allowance is required.


14



The following table summarizes the Corporation’s allowance for loan losses at September 30, 2016 and June 30, 2016:
(In Thousands)
September 30, 2016
June 30, 2016
Collectively evaluated for impairment:
 
 
Mortgage loans:
 
 
Single-family
$
4,575

$
4,933

Multi-family
3,186

2,800

Commercial real estate
854

848

Construction
53

31

Other
7

7

Commercial business loans
22

23

Consumer loans
8

8

Total collectively evaluated allowance
8,705

8,650

 
 
 
Individually evaluated for impairment:
 
 
Commercial business loans
20

20

Total individually evaluated allowance
20

20

Total loan loss allowance
$
8,725

$
8,670



15



The following table is provided to disclose additional details on the Corporation’s allowance for loan losses:
 
For the Quarters Ended
September 30,
(Dollars in Thousands)
2016
2015
 
 
 
Allowance at beginning of period
$
8,670

$
8,724

 
 
 
Recovery from the allowance for loan losses
(150
)
(38
)
 
 
 
Recoveries:
 

 

Mortgage loans:
 

 

Single-family
263

69

Multi-family
7

56

Commercial real estate

216

Commercial business loans

85

Consumer loans
1


Total recoveries
271

426

 
 
 
Charge-offs:
 

 

Mortgage loans:
 

 

Single-family
(66
)
(78
)
Total charge-offs
(66
)
(78
)
 
 
 
Net recoveries
205

348

Balance at end of period
$
8,725

$
9,034

 
 

 

Allowance for loan losses as a percentage of gross loans held for investment
1.01
 %
1.11
 %
Net recoveries as a percentage of average loans receivable, net, during the period (annualized)
(0.08
)%
(0.14
)%
Allowance for loan losses as a percentage of gross non-performing loans at the end of the period
79.93
 %
57.33
 %



16



The following tables denote the past due status of the Corporation's gross loans held for investment, net of fair value adjustments, at the dates indicated.
 
 
September 30, 2016
(In Thousands)
Current
30-89 Days Past Due
Non-Accrual (1)
Total Loans Held for Investment
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Single-family
$
301,433

$
1,383

$
9,979

$
312,795

 
Multi-family
437,580


843

438,423

 
Commercial real estate
100,136



100,136

 
Construction
15,811



15,811

 
Other
331



331

Commercial business loans
530


94

624

Consumer loans
197

2


199

 
Total loans held for investment, gross
$
856,018

$
1,385

$
10,916

$
868,319


(1) All loans 90 days or greater past due are placed on non-accrual status.
 
 
June 30, 2016
(In Thousands)
Current
30-89 Days Past Due
Non-Accrual (1)
Total Loans Held for Investment
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Single-family
$
312,595

$
1,644

$
10,258

$
324,497

 
Multi-family
414,777


850

415,627

 
Commercial real estate
99,528



99,528

 
Construction
14,653



14,653

 
Other
332



332

Commercial business loans
540


96

636

Consumer loans
203



203

 
Total loans held for investment, gross
$
842,628

$
1,644

$
11,204

$
855,476

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



17



The following tables summarize the Corporation’s allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated.
 
 
Quarter Ended September 30, 2016
(In Thousands)
Single-family
Multi-family
Commercial Real Estate
Construction
Other Mortgage
Commercial Business
Consumer
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
Allowance at beginning of
  period
$
4,933

$
2,800

$
848

$
31

$
7

$
43

$
8

$
8,670

(Recovery) provision for
  loan losses
(555
)
379

6

22


(1
)
(1
)
(150
)
Recoveries
263

7





1

271

Charge-offs
(66
)






(66
)
 
Allowance for loan losses,
  end of period
$
4,575

$
3,186

$
854

$
53

$
7

$
42

$
8

$
8,725

 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for
  impairment
$

$

$

$

$

$
20

$

$
20

Collectively evaluated for
  impairment
4,575

3,186

854

53

7

22

8

8,705

 
Allowance for loan losses,
  end of period
$
4,575

$
3,186

$
854

$
53

$
7

$
42

$
8

$
8,725

 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
Individually evaluated for
  impairment
$
6,634

$
377

$

$

$

$
94

$

$
7,105

Collectively evaluated for
  impairment
306,161

438,046

100,136

15,811

331

530

199

861,214

 
Total loans held for
  investment, gross
$
312,795

$
438,423

$
100,136

$
15,811

$
331

$
624

$
199

$
868,319

Allowance for loan losses as
  a percentage of gross loans
  held for investment
1.46
%
0.73
%
0.85
%
0.34
%
2.11
%
6.73
%
4.02
%
1.01
%


18



 
 
Quarter Ended September 30, 2015
(In Thousands)
Single-family
Multi-family
Commercial Real Estate
Construction
Other Mortgage
Commercial Business
Consumer
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
Allowance at beginning of
  period
$
5,280

$
2,616

$
734

$
42

$

$
43

$
9

$
8,724

Provision (recovery) for
  loan losses
1,039

(729
)
(253
)
(2
)
2

(95
)

(38
)
Recoveries
69

56

216



85


426

Charge-offs
(78
)






(78
)
 
Allowance for loan losses,
  end of period
$
6,310

$
1,943

$
697

$
40

$
2

$
33

$
9

$
9,034

 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated for
  impairment
$
49

$

$

$

$

$
20

$

$
69

Collectively evaluated for
  impairment
6,261

1,943

697

40

2

13

9

8,965

 
Allowance for loan losses,
  end of period
$
6,310

$
1,943

$
697

$
40

$
2

$
33

$
9

$
9,034

 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
Individually evaluated for
  impairment
$
8,204

$
1,975

$
1,016

$

$

$
107

$

$
11,302

Collectively evaluated for
  impairment
348,759

353,467

93,564

6,185

72

292

243

802,582

 
Total loans held for
  investment, gross
$
356,963

$
355,442

$
94,580

$
6,185

$
72

$
399

$
243

$
813,884

Allowance for loan losses as
  a percentage of gross loans
  held for investment
1.77
%
0.55
%
0.74
%
0.65
%
2.78
%
8.27
%
3.70
%
1.11
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following tables identify the Corporation’s total recorded investment in non-performing loans by type at the dates and for the periods indicated. Generally, a loan is placed on non-accrual status when it becomes 90 days past due as to principal or interest or if the loan is deemed impaired, after considering economic and business conditions and collection efforts, where the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. In addition, interest income is not recognized on any loan where management has determined that collection is not reasonably assured. A non-performing 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 on a timely basis. Loans with a related allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals less costs to sell, to establish realizable value. This analysis may identify a specific impairment amount needed or may conclude that no reserve is needed. Loans that are not individually evaluated for impairment are included in pools of homogeneous loans for evaluation of related allowance reserves.

19



 
 
 
At September 30, 2016
 
 
 
Unpaid
 
 
 
Net
 
 
 
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance(1)
Investment
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
Single-family:
 
 
 
 
 
 
 
With a related allowance
$
3,383

$

$
3,383

$
(781
)
$
2,602

 
 
Without a related allowance(2)
7,708

(1,074
)
6,634


6,634

 
Total single-family
11,091

(1,074
)
10,017

(781
)
9,236

 
 
 
 
 
 
 
 
 
Multi-family:
 
 
 
 
 
 
 
With a related allowance
466


466

(140
)
326

 
 
Without a related allowance(2)
388

(11
)
377


377

 
Total multi-family
854

(11
)
843

(140
)
703

 
 
 
 
 
 
 
 
Commercial business loans:
 
 
 
 
 
 
With a related allowance
94


94

(20
)
74

Total commercial business loans
94


94

(20
)
74

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
Without a related allowance(2)
12

(12
)



Total consumer loans
12

(12
)



 
 
 
 
 
 
 
 
Total non-performing loans
$
12,051

$
(1,097
)
$
10,954

$
(941
)
$
10,013


(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan, and fair value credit adjustments.
(2) There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.

20



 
 
 
At June 30, 2016
 
 
 
Unpaid
 
 
 
Net
 
 
 
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance(1)
Investment
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
Single-family:
 
 
 
 
 
 
 
With a related allowance
$
3,328

$

$
3,328

$
(773
)
$
2,555

 
 
Without a related allowance(2)
8,339

(1,370
)
6,969


6,969

 
Total single-family
11,667

(1,370
)
10,297

(773
)
9,524

 
 
 
 
 
 
 
 
 
Multi-family:
 
 
 
 
 
 
 
With a related allowance
468


468

(141
)
327

 
 
Without a related allowance(2)
400

(18
)
382


382

 
Total multi-family
868

(18
)
850

(141
)
709

 
 
 
 
 
 
 
 
Commercial business loans:
 
 
 
 
 
 
With a related allowance
96


96

(20
)
76

Total commercial business loans
96


96

(20
)
76

 
 
 
 
 
 
 
 
Consumer loans:





 
Without a related allowance(2)
13

(13
)



Total consumer loans
13

(13
)



 
 
 
 
 
 
 
 
Total non-performing loans
$
12,644

$
(1,401
)
$
11,243

$
(934
)
$
10,309


(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2) There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.

At September 30, 2016 and June 30, 2016, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

For the quarters ended September 30, 2016 and 2015, the Corporation’s average recorded investment in non-performing loans was $11.5 million and $15.3 million, respectively.  The Corporation records payments on non-performing loans utilizing the cash basis or cost recovery method of accounting during the periods when the loans are on non-performing status.  For both quarters ended September 30, 2016 and 2015, interest income of $69,000 and $101,000, respectively, was recognized, based on cash receipts from loan payments on non-performing loans and $67,000 and $65,000, respectively, was collected and applied to reduce the loan balances under the cost recovery method. Foregone interest income, which would have been recorded had the non-performing loans been current in accordance with their original terms, amounted to $39,000 and $66,000 for the quarters ended September 30, 2016 and 2015, respectively, and was not included in the results of operations.  
 

21



The following table presents the average recorded investment in non-performing loans and the related interest income recognized for the quarters ended September 30, 2016 and 2015:
 
 
 
Quarter Ended September 30,
 
 
 
2016
 
2015
 
 
 
Average
Interest
 
Average
Interest
 
 
 
Recorded
Income
 
Recorded
Income
 
 
 
Investment
Recognized
 
Investment
Recognized
 
 
 
 
 
 
 
 
Without related allowances:
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
Single-family
$
7,310

$
35

 
$
8,032

$
3

 
 
Multi-family
379


 
2,065

66

 
 
Commercial real estate


 
1,322

18

 
 
 
7,689

35

 
11,419

87

 
 
 
 
 
 
 
 
With related allowances:
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
Single-family
3,230

27

 
3,801

12

 
 
Multi-family
467

5

 


 
Commercial business loans
94

2

 
107

2

 
 
3,791

34

 
3,908

14

 
 
 
 
 
 
 
 
Total
$
11,480

$
69

 
$
15,327

$
101

 
 
 
 
 
 
 
 

For the quarters ended September 30, 2016 and 2015, there were no loans that were newly modified from their original terms, re-underwritten or identified in the Corporation’s asset quality reports as restructured loans. During the quarters ended September 30, 2016 and 2015, no restructured loans were in default within a 12-month period subsequent to their original restructuring.  Additionally, during the quarters ended September 30, 2016 and 2015, there were no loans whose modification was extended beyond the initial maturity of the modification. At September 30, 2016 and June 30, 2016, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

As of September 30, 2016, the Corporation held 11 restructured loans with a net outstanding balance of $3.7 million: all were classified as substandard and non-accrual.  As of June 30, 2016, the Corporation held 13 restructured loans with a net outstanding balance of $4.6 million:  three were classified as special mention on accrual status ($1.3 million); and 10 were classified as substandard ($3.3 million, all on non-accrual status). Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.  Assets that do not currently expose the Corporation to sufficient risk to warrant adverse classification but possess weaknesses are designated as special mention and are closely monitored by the Corporation.  As of September 30, 2016 and June 30, 2016, $1.2 million or 31%, and $1.9 million or 41%, respectively, of the restructured loans were current with respect to their modified payment terms.

The Corporation upgrades restructured single-family loans to the pass category if the borrower has demonstrated satisfactory contractual payments for at least six consecutive months; 12 months for those loans that were restructured more than once; 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 described above, multi-family, commercial real estate, construction and commercial business loans (which are sometimes referred to in this report as “preferred loans”) must also demonstrate a combination of the following characteristics to be upgraded: 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 Corporation.  The Corporation re-underwrites the loan with the borrower’s updated financial information,

22



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.

The following table summarizes at the dates indicated the restructured loan balances, net of allowance for loan losses, by loan type and non-accrual versus accrual status:
 
At
At
(In Thousands)
September 30, 2016
June 30, 2016
Restructured loans on non-accrual status:
 
 
Mortgage loans:
 
 
Single-family
$
3,650

$
3,232

Commercial business loans
74

76

Total
3,724

3,308

 
 
 
Restructured loans on accrual status:
 

 

Mortgage loans:
 

 

Single-family

1,290

Total

1,290

 
 
 
Total restructured loans
$
3,724

$
4,598


The following tables identify the Corporation’s total recorded investment in restructured loans by type at the dates and for the periods indicated.
 
 
 
At September 30, 2016
 
 
 
Unpaid
 
 
 
Net
 
 
 
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance(1)
Investment
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
Single-family:
 
 
 
 
 
 
 
With a related allowance
$
1,489

$

$
1,489

$
(298
)
$
1,191

 
 
Without a related allowance(2)
3,026

(567
)
2,459


2,459

 
Total single-family
4,515

(567
)
3,948

(298
)
3,650

 
 
 
 
 
 
 
 
Commercial business loans:
 
 
 
 
 
 
With a related allowance
94


94

(20
)
74

Total commercial business loans
94


94

(20
)
74

 
 
 
 
 
 
 
 
Total restructured loans
$
4,609

$
(567
)
$
4,042

$
(318
)
$
3,724


(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2) There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.


23



 
 
 
At June 30, 2016
 
 
 
Unpaid
 
 
 
Net
 
 
 
Principal
Related
Recorded
 
Recorded
(In Thousands)
Balance
Charge-offs
Investment
Allowance(1)
Investment
 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
Single-family
 
 
 
 
 
 
 
With a related allowance
$
999

$

$
999

$
(200
)
$
799

 
 
Without a related allowance(2)
4,507

(784
)
3,723


3,723

 
Total single-family
5,506

(784
)
4,722

(200
)
4,522

 
 
 
 
 
 
 
 
Commercial business loans:
 
 
 
 
 
 
With a related allowance
96


96

(20
)
76

Total commercial business loans
96


96

(20
)
76

 
 
 
 
 
 
 
 
Total restructured loans
$
5,602

$
(784
)
$
4,818

$
(220
)
$
4,598


(1) Consists of collectively and individually evaluated allowances, specifically assigned to the individual loan.
(2) There was no related allowance for loan losses because the loans have been charged-off to their fair value or the fair value of the collateral is higher than the loan balance.

During the quarter ended September 30, 2016, three properties were acquired in the settlement of loans, while one previously foreclosed upon property was sold.  This compares to the quarter ended September 30, 2015 when two properties were acquired in the settlement of loans, while two previously foreclosed upon properties were sold. As of September 30, 2016, the net fair value of real estate owned was $3.5 million, comprised of five properties located in California and one property located in Arizona.  This compares to the real estate owned net fair value of $2.7 million at June 30, 2016, comprised of three properties located in California and one property located in Nevada.  A new appraisal was obtained on each of the properties at the time of foreclosure and fair value was derived by using the lower of the appraised value or the listing price of the property, net of selling costs.  Any initial loss was recorded as a charge to the allowance for loan losses before being transferred to real estate owned.  Subsequent to transfer to real estate owned, 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 records costs to carry real estate owned as real estate operating expenses as incurred.


Note 7: 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, loan sale commitments to third parties and option contracts.  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 September 30, 2016 and June 30, 2016, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $179.9 million and $191.7 million, respectively.


24



The following table provides information at the dates indicated regarding undisbursed funds to borrowers on existing lines of credit with the Corporation as well as commitments to originate loans to be held for investment at the dates indicated below.
Commitments
September 30, 2016
June 30, 2016
(In Thousands)
 
 
 
 
 
Undisbursed loan funds - Construction loans
$
10,447

$
11,258

Undisbursed lines of credit – Mortgage loans
20

20

Undisbursed lines of credit – Commercial business loans
778

821

Undisbursed lines of credit – Consumer loans
668

674

Commitments to extend credit on loans to be held for investment
5,946

9,955

Total
$
17,859

$
22,728


The following table provides information regarding the allowance for loan losses for the undisbursed funds and commitments to extend credit on loans to be held for investment for the quarters ended September 30, 2016 and 2015.
 
For the Quarters
Ended
September 30,
(In Thousands)
2016
2015
Balance, beginning of the period
$
204

$
76

Recovery
(31
)
(11
)
Balance, end of the period
$
173

$
65


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, to be announced (“TBA”) MBS trades, put option contracts and call option contracts are recorded at fair value on the Condensed Consolidated Statements of Financial Condition.  At September 30, 2016, $2.6 million was included in other assets and $1.4 million was included in other liabilities; at June 30, 2016, $3.8 million was included in other assets and $3.2 million was included in other liabilities.  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 gain on sale of loans contained in the Condensed Consolidated Statements of Operations during the quarters ended September 30, 2016 and 2015 was as follows:
 
For the Quarters
Ended
September 30,
Derivative Financial Instruments
2016
2015
(In Thousands)
 
 
Commitments to extend credit on loans to be held for sale
$
(1,211
)
$
1,005

Mandatory loan sale commitments and TBA MBS trades
1,797

(2,433
)
Option contracts, net
(22
)
(88
)
Total net gain (loss)
$
564

$
(1,516
)


25



The outstanding derivative financial instruments and other loan sale agreements at the dates indicated were as follows:
 
September 30, 2016
 
June 30, 2016
Derivative Financial Instruments
Amount
Fair
Value
 
Amount
Fair
Value
(In Thousands)
 
 
 
 
 
Commitments to extend credit on loans to be held for sale (1)
$
173,937

$
2,574

 
$
181,780

$
3,785

Best efforts loan sale commitments
(31,761
)

 
(29,576
)

Mandatory loan sale commitments and TBA MBS trades
(372,758
)
(1,399
)
 
(302,727
)
(3,196
)
Option contracts, net
(5,000
)
22

 
(5,000
)

Total
$
(235,582
)
$
1,197

 
$
(155,523
)
$
589


(1) 
Net of 32.6% at September 30, 2016 and 37.5% at June 30, 2016 of commitments which management has estimated may not fund.


Note 8: Fair Value of Financial Instruments

The Corporation adopted ASC 820, “Fair Value Measurements and Disclosures,” and elected the fair value option pursuant to ASC 825, “Financial Instruments” 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 Fair Value Option is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

The following table describes the difference at the dates indicated between the aggregate fair value and the aggregate unpaid principal balance of loans held for investment at fair value and loans held for sale at fair value:
 
 
 
(In Thousands)
 
 
Aggregate
Fair Value
Aggregate
Unpaid
Principal
Balance
 
Net
Unrealized
(Loss) Gain
As of September 30, 2016:
 
 
 
Loans held for investment, at fair value
$
5,529

$
5,657

$
(128
)
Loans held for sale, at fair value
$
264,379

$
254,779

$
9,600

 
 
 
 
As of June 30, 2016:
 
 
 
Loans held for investment, at fair value
$
5,159

$
5,324

$
(165
)
Loans held for sale, at fair value
$
189,458

$
181,380

$
8,078


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,” 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.


26



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.
 
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 the 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 available for sale, loans held for investment at fair value, loans held for sale at fair value, interest-only strips and derivative financial instruments; while non-performing loans, mortgage servicing assets ("MSA") and real estate owned are measured at fair value on a nonrecurring basis.

Investment securities - available for sale are primarily comprised of U.S. government agency MBS and U.S. government sponsored enterprise MBS.  The Corporation utilizes quoted prices in active and less than active markets for similar securities for its fair value measurement of MBS and debt securities (Level 2) and broker price indications for similar securities in non-active markets for its fair value measurement of the CMO (Level 3).

Derivative financial instruments are comprised of commitments to extend credit on loans to be held for sale, mandatory loan sale commitments, TBA MBS trades and option contracts.  The fair value of TBA MBS trades is determined using quoted secondary-market prices (Level 2).  The fair values of other derivative financial instruments are determined by quoted prices for a similar commitment or commitments, adjusted for the specific attributes of each commitment (Level 3).

Loans held for investment at fair value are primarily single-family loans which have been transferred from loans held for sale.  The fair value is determined by the quoted secondary-market prices which account for interest rate characteristics, which are adjusted for management estimates of the specific credit risk attributes of each loan (Level 3).

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 (Level 2).

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 Corporation will sustain some loss if the deficiencies are not corrected.  The fair value of a non-performing loan is determined based on an observable market price or current appraised value of the underlying collateral.  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 restructured loans, the fair value is derived from discounted cash flow analysis (Level 3), except those which are in the process of foreclosure or 90 days delinquent for which the fair value is derived from the appraised value of its collateral (Level 2).  For other non-performing loans which are not restructured loans, other than non-performing commercial real estate loans, the fair value is derived from relative value analysis: historical experience and management estimates by loan type for which collectively evaluated allowances are assigned (Level 3); or the appraised value of its collateral for loans which are in the process of foreclosure or where borrowers file bankruptcy (Level 2).  For non-performing commercial real estate loans, the fair value is derived from the appraised value of its collateral (Level 2). Non-performing loans are reviewed and evaluated on at least a quarterly basis for additional allowance 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 (loss), but rather as a component in determining the overall adequacy of the allowance for loan losses.  These adjustments to the estimated fair value of non-performing loans may result in increases or decreases to the provision for loan losses recorded in current earnings.

27




The Corporation uses the amortization method for its MSA, which amortizes the MSA in proportion to and over the period of estimated net servicing income and assesses the MSA for impairment based on fair value at each reporting date.  The fair value of MSA is derived 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 (Level 3).

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 derived using the same assumptions that are used to value the related MSA (Level 3).

The fair value of real estate owned is derived from the lower of the appraised value or the listing price, net of estimated selling costs (Level 2).

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 tables present information at the dates indicated about the Corporation’s assets measured at fair value on a recurring basis:
 
Fair Value Measurement at September 30, 2016 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
 
 
 
 
Investment securities - available for sale:
 
 
 
 
U.S. government agency MBS
$

$
6,131

$

$
6,131

U.S. government sponsored enterprise MBS

4,087


4,087

Private issue CMO


560

560

Investment securities - available for sale

10,218

560

10,778

 
 
 
 
 
Loans held for investment, at fair value


5,529

5,529

Loans held for sale, at fair value

264,379


264,379

Interest-only strips


42

42

 
 
 
 
 
Derivative assets:
 
 
 
 
Commitments to extend credit on loans to be held for sale


2,598

2,598

Mandatory loan sale commitments


30

30

Option contracts


22

22

Derivative assets


2,650

2,650

Total assets
$

$
274,597

$
8,781

$
283,378

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative liabilities:
 
 
 
 
Commitments to extend credit on loans to be held for sale
$

$

$
24

$
24

Mandatory loan sale commitments


54

54

TBA MBS trades

1,375


1,375

Derivative liabilities

1,375

78

1,453

Total liabilities
$

$
1,375

$
78

$
1,453





28



 
Fair Value Measurement at June 30, 2016 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Assets:
 
 
 
 
Investment securities - available for sale:
 
 
 
 
U.S. government agency MBS
$

$
6,572

$

$
6,572

U.S. government sponsored enterprise MBS

4,223


4,223

Private issue CMO


601

601

Common stock - community development financial institution

147


147

Investment securities - available for sale

10,942

601

11,543

 
 
 
 
 
Loans held for investment, at fair value


5,159

5,159

Loans held for sale, at fair value

189,458


189,458

Interest-only strips


47

47

 
 
 
 
 
Derivative assets:
 
 
 
 
Commitments to extend credit on loans to be held for sale


3,788

3,788

Derivative assets


3,788

3,788

Total assets
$

$
200,400

$
9,595

$
209,995

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative liabilities:
 
 
 
 
Commitments to extend credit on loans to be held for sale
$

$

$
3

$
3

Mandatory loan sale commitments


31

31

TBA MBS trades

3,165


3,165

Derivative liabilities

3,165

34

3,199

Total liabilities
$

$
3,165

$
34

$
3,199



29



The following tables summarize reconciliations of the beginning and ending balances during the periods shown of recurring fair value measurements recognized in the Condensed Consolidated Statements of Financial Condition using Level 3 inputs:
 
For the Quarter Ended September 30, 2016
 
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
 
 
 
(In Thousands)
 
 
Private
Issue
CMO
Loans Held For Investment, at fair value (1)
 
 
Interest-
Only
Strips
Loan
Commit-
ments to
Originate (2)
Manda-
tory
Commit-
ments (3)
 
 
 
Option
Contracts
 
 
 
 
Total
Beginning balance at June 30, 2016
$
601

$
5,159

$
47

$
3,785

$
(31
)
$

$
9,561

Total gains or losses (realized/unrealized):
 

 
 
 
 
 
Included in earnings

38


(1,211
)
(5
)
(22
)
(1,200
)
Included in other comprehensive
 income (loss)
1


(5
)



(4
)
Purchases





44

44

Issuances







Settlements
(42
)
(428
)


12


(458
)
Transfers in and/or out of Level 3

760





760

Ending balance at September 30, 2016
$
560

$
5,529

$
42

$
2,574

$
(24
)
$
22

$
8,703


(1) 
The valuation of loans held for investment at fair value includes the management estimates of the specific credit risk attributes of each loan (Level 3), in addition to the quoted secondary-market prices which account for interest rate characteristics.
(2) 
Consists of commitments to extend credit on loans to be held for sale.
(3) 
Consists of mandatory loan sale commitments.

 
For the Quarter Ended September 30, 2015
 
Fair Value Measurement
Using Significant Other Unobservable Inputs
(Level 3)
 
 
 
 
(In Thousands)
 
 
Private
Issue
CMO
Common stock (1)
Loans Held For Investment, at fair value (2)
 
 
Interest-
Only
Strips
Loan
Commit-
ments to
 Originate (3)
Manda-
tory
Commit-
ments (4)
 
 
 
Option
Contracts
 
 
 
 
Total
Beginning balance at June 30, 2015
$
717

$
151

$

$
63

$
1,499

$
(71
)
$
192

$
2,551

Total gains or losses (realized/
   unrealized):
 


 
 
 
 
 
Included in earnings


(155
)

1,005

(96
)
(88
)
666

Included in other
  comprehensive (loss) income
(1
)


(3
)



(4
)
Purchases






89

89

Issuances








Settlements
(25
)

(638
)


17

(136
)
(782
)
Transfers in and/or out of Level 3


4,829





4,829

Ending balance at September 30, 2015
$
691

$
151

$
4,036

$
60

$
2,504

$
(150
)
$
57

$
7,349


(1) 
Common stock of a community development financial institution.
(2) 
The valuation of loans held for investment at fair value includes the management estimates of the specific credit risk attributes of each loan (Level 3), in addition to the quoted secondary-market prices which account for interest rate characteristics.
(3) 
Consists of commitments to extend credit on loans to be held for sale.
(4) 
Consists of mandatory loan sale commitments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

30



The following fair value hierarchy tables present information about the Corporation’s assets measured at fair value at the dates indicated on a nonrecurring basis:
 
Fair Value Measurement at September 30, 2016 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Non-performing loans 
$

$
7,012

$
3,001

$
10,013

MSA


588

588

Real estate owned, net 

3,496


3,496

Total
$

$
10,508

$
3,589

$
14,097


 
Fair Value Measurement at June 30, 2016 Using:
(In Thousands)
Level 1
Level 2
Level 3
Total
Non-performing loans 
$

$
7,350

$
2,959

$
10,309

MSA


627

627

Real estate owned, net 

2,706


2,706

Total
$

$
10,056

$
3,586

$
13,642



31



The following table presents additional information about valuation techniques and inputs used for assets and liabilities, including derivative financial instruments, which are measured at fair value and categorized within Level 3 as of September 30, 2016:
(Dollars In Thousands)
Fair Value
As of
September 30,
2016
Valuation
Techniques
Unobservable Inputs
Range (1)
(Weighted Average)
Impact to
Valuation
from an
Increase in
Inputs (2)
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Securities available - for sale: Private issue CMO
$
560

Market comparable pricing
Comparability adjustment
0% – 0.9% (0.7%)
Increase
 
 
 
 
 
 
Loans held for investment,
    at fair value
$
5,529

Relative value
analysis
Broker quotes

Credit risk factors
100.0% –  107.1%
(103.8%) of par
1.2% - 100.0% (5.9%)
Increase

Decrease
 
 
 
 
 
 
Non-performing loans
$
74

Discounted cash flow
Default rates
5.0%
Decrease
Non-performing loans
$
2,927

Relative value analysis
Loss severity
20.0% - 45.0% (22.9%)
Decrease
 
 
 
 
 
 
MSA
$
588

Discounted cash flow
Prepayment speed (CPR)
Discount rate
13.4% - 60.0% (19.7%)
9.0% - 10.5% (9.1%)
Decrease
Decrease
 
 
 
 
 
 
Interest-only strips
$
42

Discounted cash flow
Prepayment speed (CPR)
Discount rate
15.8% - 21.3% (20.5%)
9.0%
Decrease
Decrease
 
 
 
 
 
 
Commitments to extend credit on loans to be held for sale
$
2,598

Relative value analysis
TBA-MBS broker quotes
 
Fall-out ratio (3)
98.9% –  105.0%
(102.2%) of par
20.2% - 33.5% (32.6%)
Increase
 
Decrease
 
 
 
 
 
 
Mandatory loan sale commitments
$
30

Relative value analysis
TBA MBS broker quotes
 
Roll-forward costs (4)
104.8% - 106.2% (104.9%) of par
0.006%
Decrease 
 
Decrease
 
 
 
 
 
 
Option contracts
$
22

Relative value analysis
Broker quotes
 
131.1% of par
Increase
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit on loans to be held for sale
$
24

Relative value analysis
TBA-MBS broker quotes
 
Fall-out ratio (3)
100.4% –  103.0%
(100.7%) of par
20.2% - 33.5% (32.6%)
Increase
 
Decrease
 
 
 
 
 
 
Mandatory loan sale commitments
$
54

Relative value analysis
TBA MBS broker quotes 

Roll-forward costs (4)
100.7% - 107.1%
(104.2%) of par
0.006%
Decrease 
 
Decrease
 
 
 
 
 
 
(1) 
The range is based on the estimated fair values and management estimates.
(2) 
Unless otherwise noted, this column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.
(3) 
The percentage of commitments to extend credit on loans to be held for sale which management has estimated may not fund.
(4) 
An estimated cost to roll forward the mandatory loan sale commitments which management has estimated may not be delivered to the corresponding investors in a timely manner.

The significant unobservable inputs used in the fair value measurement of the Corporation’s assets and liabilities include the following: prepayment speeds, discount rates, MBS – TBA quotes, fallout ratios, broker quotes and roll-forward costs, among

32



others.  Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement. The various unobservable inputs used to determine valuations may have similar or diverging impacts on valuation.

The carrying amount and fair value of the Corporation’s other financial instruments as of September 30, 2016 and June 30, 2016 was as follows:
 
September 30, 2016
(In Thousands)
Carrying
Amount
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
Investment securities - held to maturity
$
36,290

$
36,749


$
36,749

$

Loans held for investment, not recorded at fair value
$
848,429

$
854,095



$
854,095

FHLB – San Francisco stock
$
8,094

$
8,094


$
8,094


 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
Deposits
$
943,502

$
910,815



$
910,815

Borrowings
$
146,281

$
149,528



$
149,528


 
June 30, 2016
(In Thousands)
Carrying
Amount
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
Investment securities - held to maturity
$
39,979

$
40,438


$
40,438


Loans held for investment, not recorded at fair value
$
834,863

$
844,124



$
844,124

FHLB – San Francisco stock
$
8,094

$
8,094


$
8,094


 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
Deposits
$
926,384

$
896,033



$
896,033

Borrowings
$
91,299

$
95,898



$
95,898


Loans held for investment, not recorded at fair value: For loans that reprice frequently at market rates, the carrying amount approximates the fair value.  For fixed-rate loans, the fair value is determined by either (i) discounting the estimated future cash flows of such loans over their estimated remaining contractual maturities using a current interest rate at which such loans would be made to borrowers, or (ii) quoted market prices. The allowance for loan losses is subtracted as an estimate of the underlying credit risk.

Investment securities - held to maturity: The investment securities - held to maturity consist of time deposits at CRA qualified minority financial institutions and U.S. government sponsored enterprise MBS. Due to the short-term nature of the time deposits, the principal balance approximated fair value (Level 2). For the MBS, the Corporation utilizes quoted prices in active and less than active markets for similar securities for its fair value measurement of MBS and debt securities (Level 2).

FHLB – San Francisco stock: The carrying amount reported for FHLB – San Francisco stock approximates fair value. When redeemed, the Corporation will receive an amount equal to the par value of the stock.

Deposits: The fair value of time deposits is estimated using a discounted cash flow calculation. The discount rate is based upon rates currently offered for deposits of similar remaining maturities.  The fair value of transaction accounts (checking, money market and savings accounts) is estimated using a discounted cash flow calculation and management estimates of current market conditions.

Borrowings: The fair value of borrowings has been estimated using a discounted cash flow calculation.  The discount rate on such borrowings is based upon rates currently offered for borrowings of similar remaining maturities.

The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated.  The Corporation generally determines fair value of their Level 3 assets and liabilities by using internally developed models which primarily utilize discounted cash flow techniques and prices obtained from independent management services or brokers.  The Corporation performs

33



due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.  The fair values of investment securities, commitments to extend credit on loans held for sale, mandatory commitments and option contracts are determined from the independent management services or brokers; while the fair value of MSA and interest-only strips are determined using the internally developed models which are based on discounted cash flow analysis.  The fair value of non-performing loans is determined by calculating discounted cash flows, relative value analysis or collateral value, less selling costs.

While the Corporation believes its valuation methods 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.  During the quarter ended September 30, 2016, there were no significant changes to the Corporation’s valuation techniques that had, or are expected to have, a material impact on its consolidated financial position or results of operations.


Note 9: Reclassification adjustment of Accumulated Other Comprehensive Income ("AOCI")

The following tables provide the changes in AOCI by component for the quarters ended September 30, 2016 and 2015.
 
For the Quarter Ended September 30, 2016
 
Unrealized gains and losses on
 
(In Thousands)
Investment securities available for sale
Interest-only strips
Total
 
 
 
 
Beginning balance at June 30, 2016
$
286

$
27

$
313

 
 
 
 
Other comprehensive loss before reclassifications
(30
)
(3
)
(33
)
Amount reclassified from accumulated other comprehensive income



Net other comprehensive loss
(30
)
(3
)
(33
)
 
 
 
 
Ending balance at September 30, 2016
$
256

$
24

$
280


 
For the Quarter Ended September 30, 2015
 
Unrealized gains and losses on
 
(In Thousands)
Investment securities available for sale
Interest-only strips
Total
 
 
 
 
Beginning balance at June 30, 2015
$
294

$
37

$
331

 
 
 
 
Other comprehensive loss before reclassifications
(29
)
(2
)
(31
)
Amount reclassified from accumulated other comprehensive income



Net other comprehensive loss
(29
)
(2
)
(31
)
 
 
 
 
Ending balance at September 30, 2015
$
265

$
35

$
300

 
 
 
 
 
 
 
 
There were no significant items reclassified out of AOCI for the quarters ended September 30, 2016 and 2015.



34



Note 10: Offsetting Derivative and Other Financial Instruments

The Corporation’s derivative transactions are generally governed by International Swaps and Derivatives Association Master Agreements and similar arrangements, which include provisions governing the setoff of assets and liabilities between the parties. When the Corporation has more than one outstanding derivative transaction with a single counterparty, the setoff provisions contained within these agreements generally allow the non-defaulting party the right to reduce its liability to the defaulting party by amounts eligible for setoff, including the collateral received as well as eligible offsetting transactions with that counterparty, irrespective of the currency, place of payment, or booking office. The Corporation’s policy is to present its derivative assets and derivative liabilities on the Condensed Consolidated Statements of Financial Condition on a net basis for each type of derivative. The derivative assets and liabilities are comprised of mandatory loan sale commitments, TBA MBS trades and option contracts.

The following tables present the gross and net amounts of derivative assets and liabilities and other financial instruments as reported in the Corporation’s Condensed Consolidated Statement of Financial Condition, and the gross amount not offset in the Corporation’s Condensed Consolidated Statement of Financial Condition as of the dates indicated.

As of September 30, 2016:
 
 
Gross
Net
 
 
 
 
 
Amount
Amount
 
 
 
 
 
Offset in the
of Assets in
Gross Amount Not Offset in
 
 
 
Condensed
the Condensed
the Condensed Consolidated
 
 
Gross
Consolidated
Consolidated
Statements of Financial Condition
 
 
Amount of
Statements
Statements
 
Cash
 
 
Recognized
of Financial
of Financial
Financial
Collateral
Net
(In Thousands)
Assets
Condition
Condition
Instruments
Received
Amount
Assets
 
 
 
 
 
 
   Derivatives
$
51

$
21

$
30

$

$

$
30

Total
$
51

$
21

$
30

$

$

$
30


 
 
Gross
Net
 
 
 
 
 
Amount
Amount
 
 
 
 
 
Offset in the
of Liabilities in
Gross Amount Not Offset in
 
 
 
Condensed
the Condensed
the Condensed Consolidated
 
 
Gross
Consolidated
Consolidated
Statements of Financial Condition
 
 
Amount of
Statements
Statements
 
Cash
 
 
Recognized
of Financial
of Financial
Financial
Collateral
Net
(In Thousands)
Liabilities
Condition
Condition
Instruments
Received
Amount
Liabilities
 
 
 
 
 
 
   Derivatives
$
1,428

$
21

$
1,407

$

$

$
1,407

Total
$
1,428

$
21

$
1,407

$

$

$
1,407



35



As of June 30, 2016:
 
 
Gross
Net
 
 
 
 
 
Amount
Amount
 
 
 
 
 
Offset in the
of Assets in
Gross Amount Not Offset in
 
 
 
Condensed
the Condensed
the Condensed Consolidated
 
 
Gross
Consolidated
Consolidated
Statements of Financial Condition
 
 
Amount of
Statements
Statements
 
Cash
 
 
Recognized
of Financial
of Financial
Financial
Collateral
Net
(In Thousands)
Assets
Condition
Condition
Instruments
Received
Amount
Assets
 
 
 
 
 
 
   Derivatives
$

$

$

$

$

$

Total
$

$

$

$

$

$


 
 
Gross
Net
 
 
 
 
 
Amount
Amount
 
 
 
 
 
Offset in the
of Liabilities in
Gross Amount Not Offset in
 
 
 
Condensed
the Condensed
the Condensed Consolidated
 
 
Gross
Consolidated
Consolidated
Statements of Financial Condition
 
 
Amount of
Statements
Statements
 
Cash
 
 
Recognized
of Financial
of Financial
Financial
Collateral
Net
(In Thousands)
Liabilities
Condition
Condition
Instruments
Received
Amount
Liabilities
 
 
 
 
 
 
   Derivatives
$
3,196

$

$
3,196

$

$

$
3,196

Total
$
3,196

$

$
3,196

$

$

$
3,196



Note 11: Subsequent Events

On October 25, 2016, the Corporation announced that the Corporation’s Board of Directors declared a quarterly cash dividend of $0.13 per share.  Shareholders of the Corporation’s common stock at the close of business on November 15, 2016 will be entitled to receive the cash dividend.  The cash dividend will be payable on December 6, 2016.


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. ("the Bank") upon the Bank’s conversion from a federal mutual to a federal stock savings bank (“Conversion”).  The Conversion was completed on June 27, 1996.  The Corporation is regulated by the Federal Reserve Board (“FRB”).  At September 30, 2016, the Corporation had total assets of $1.24 billion, total deposits of $943.5 million and total stockholders’ equity of $133.2 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.  As used in this report, the terms “we,” “our,” “us,” and “Corporation” refer to Provident Financial Holdings, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.

The Bank, founded in 1956, is a federally chartered stock savings bank headquartered in Riverside, California.  The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”), 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.


36



The Corporation’s business consists of community banking activities and mortgage banking activities, conducted by Provident Bank and Provident Bank Mortgage ("PBM"), 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, purchase and sale of mortgage 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 two wholesale loan production offices: one in Pleasanton and one in Rancho Cucamonga, California; and 14 retail loan production offices located throughout California.  The Corporation’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 Corporation’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 December 31, 2002.  On July 25, 2016, the Corporation declared a quarterly cash dividend of $0.13 per share for the Corporation’s shareholders of record at the close of business on August 15, 2016, which was paid on September 5, 2016.  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. For further discussion, see Note 11 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.

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

Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  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.  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.  There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements.  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 residential and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserve; 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 the Corporation by the FRB or of the Bank by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal 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, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd Frank Act") and the implementing regulations; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; our ability to attract and retain deposits; 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

37



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 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; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; 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; the 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 Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; war or terrorist activities; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed in this report and in the Corporation’s other reports filed with or furnished to the SEC, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2016. These developments could have an adverse impact on our financial position and our results of operations.  Forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements. 


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 condensed consolidated financial statements.  Actual results may differ from these estimates under different assumptions or conditions.

The Corporation's critical accounting policies are described in the Corporation's 2016 Annual Report on Form 10-K ended June 30, 2016 in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 - Organization and Significant Accounting Policies. There have been no significant changes to the critical accounting policies as described in the Corporation's 2016 Annual Report on Form 10-K for the period ended June 30, 2016.


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 Corporation’s full service offices and investing those funds in single-family, multi-family and commercial real estate loans.  Also, to a lesser extent, the Corporation makes construction, commercial business, consumer and other mortgage 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, wire transfer fees and overdraft protection fees, among others.

During the next three years, subject to market conditions, the Corporation intends to improve its 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 preferred loans (i.e., multi-family, commercial real estate, construction and commercial business loans).  In addition, the Corporation intends to decrease the percentage of time deposits in its deposit base

38



and to increase the percentage of lower cost checking and savings accounts.  This strategy is 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 recognizes that growth may not occur as a result of weaknesses in general economic conditions.

Mortgage banking operations primarily consist of the origination, purchase 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, including the number of mortgage banking personnel, in response to the rapidly changing mortgage banking environment.  Changes may 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, laws, regulation, 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 California economic environment presents heightened risk for the Corporation primarily with respect to real estate values and loan delinquencies. 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 also inhibit the Corporation’s ability to recover on defaulted loans by selling the underlying real estate.  In addition, the Corporation’s operating costs may increase significantly as a result of the Dodd-Frank Act.   Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Corporation.


Off-Balance Sheet Financing Arrangements and Contractual Obligations

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, loan sale agreements to third parties and option contracts.  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 7 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.


39



Contractual Obligations. The following table summarizes the Corporation’s contractual obligations at September 30, 2016 and the effect these obligations are expected to have on the Corporation’s liquidity and cash flows in future periods:

 
Payments Due by Period
(In Thousands)
Less than
1 year
1 to less
than  3 years
3 to
5 years
Over
5 years
Total
Operating obligations
$
2,181

$
2,918

$
721

$
1,180

$
7,000

Pension benefits
235

470

470

6,774

7,949

Time deposits
149,641

103,036

46,127

9,950

308,754

FHLB – San Francisco advances
37,854

25,170

35,451

63,282

161,757

FHLB – San Francisco letter of credit
4,000




4,000

FHLB – San Francisco MPF credit enhancement (1)
31

62

62

2,303

2,458

Total
$
193,942

$
131,656

$
82,831

$
83,489

$
491,918


(1) 
Represents the potential future obligation for loans previously sold by the Bank to the FHLB – San Francisco under its Mortgage Partnership Finance (“MPF”) program.  As of September 30, 2016, the Bank serviced $19.0 million of loans under this program. The estimated amounts by period are based on historical loss experience.

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 7 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.
 
Comparison of Financial Condition at September 30, 2016 and June 30, 2016

Total assets increased $71.1 million, or six percent, to $1.24 billion at September 30, 2016 from $1.17 billion at June 30, 2016.  The increase was primarily attributable to an increase in loans held for sale and loans held for investment, partly offset by a decrease in cash and cash equivalents.

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, decreased $11.8 million, or 23 percent, to $39.4 million at September 30, 2016 from $51.2 million at June 30, 2016.  The decrease in the total cash and cash equivalents was primarily attributable to the deployment of excess cash to fund loans held for sale and loans held for investment.

Total investment securities decreased $4.4 million, or nine percent, to $47.1 million at September 30, 2016 from $51.5 million at June 30, 2016.  The decrease was primarily due to scheduled and accelerated principal payments on mortgage-backed securities.  For further analysis on investment securities, see Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.

Loans held for investment increased $14.0 million, or two percent, to $854.0 million at September 30, 2016 from $840.0 million at June 30, 2016.  During the first three months of fiscal 2017, the Corporation originated $35.3 million of loans held for investment, consisting primarily of single-family and multi-family loans.  During the first three months of fiscal 2017, the Corporation also purchased $23.0 million of loans to be held for investment, primarily multi-family loans. Total loan principal payments during the first three months of fiscal 2017 were $50.5 million, up 10 percent from $45.8 million during the comparable period in fiscal 2016, due primarily to higher loan refinance activity.  In addition, real estate owned acquired in the settlement of loans in the first three months of fiscal 2017 and 2016 was $1.3 million and $1.0 million, respectively.  The balance of preferred loans increased $25.3 million, or five percent, to $544.5 million at September 30, 2016, compared to $519.2 million at June 30, 2016, net of undisbursed loan funds of $10.4 million and $11.3 million, respectively, and represented 63 percent and 61 percent of loans held for investment, respectively.  The balance of single-family loans held for investment decreased $11.7 million, or four percent, to $312.8 million at September 30, 2016, compared to $324.5 million at June 30, 2016, and represented approximately 36 percent and 38 percent of loans held for investment, respectively. The change in the mix between the preferred loans and single-family loans was consistent with the Corporation’s strategy to increase the average loan yield.


40



The tables below describe the geographic dispersion of gross real estate secured loans held for investment at September 30, 2016 and June 30, 2016, as a percentage of the total dollar amount outstanding:

As of September 30, 2016
(Dollars In Thousands)
Inland
Empire
Southern
California (1)
Other
California
Other
States
 
Total
Loan Category
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
Single-family
$
98,223

31
%
$
160,350

51
%
$
52,740

17
%
$
1,482

1
%
$
312,795

100
%
Multi-family
74,976

17
%
252,897

58
%
107,727

24
%
2,823

1
%
438,423

100
%
Commercial real estate
34,056

34
%
40,930

41
%
25,150

25
%

%
100,136

100
%
Construction
1,458

9
%
10,036

64
%
4,317

27
%

%
15,811

100
%
Other
260

78
%
71

22
%

%

%
331

100
%
Total
$
208,973

24
%
$
464,284

53
%
$
189,934

22
%
$
4,305

1
%
$
867,496

100
%

(1) 
Other than the Inland Empire.

As of June 30, 2016
(Dollars In Thousands)
Inland
Empire
Southern
California (1)
Other
California
Other
States
 
Total
Loan Category
Balance

%
Balance

%
Balance

%
Balance

%
Balance

%
Single-family
$
100,148

31
%
$
167,574

51
%
$
55,277

17
%
$
1,498

1
%
$
324,497

100
%
Multi-family
77,075

18
%
245,301

59
%
90,409

22
%
2,842

1
%
415,627

100
%
Commercial real estate
34,162

34
%
40,066

40
%
25,300

26
%

%
99,528

100
%
Construction
1,457

10
%
10,514

72
%
2,682

18
%

%
14,653

100
%
Other
260

78
%
72

22
%

%

%
332

100
%
Total
$
213,102

25
%
$
463,527

54
%
$
173,668

20
%
$
4,340

1
%
$
854,637

100
%

(1) 
Other than the Inland Empire.

Loans held for sale increased $74.9 million, or 40 percent, to $264.4 million at September 30, 2016 from $189.5 million at June 30, 2016.  The increase was primarily due to the higher volume of loans originated and purchased for sale, $647.3 million during the quarter ended September 30, 2016 as compared to $557.2 million during the quarter ended June 30, 2016 and the timing difference between loan fundings and loan sale settlements.

Total deposits increased by $17.1 million, or two percent, to $943.5 million at September 30, 2016 from $926.4 million at June 30, 2016.  Transaction accounts increased $24.1 million, or four percent, to $641.6 million at September 30, 2016 from $617.5 million at June 30, 2016, while time deposits decreased $7.0 million, or two percent, to $301.9 million at September 30, 2016 from $308.9 million at June 30, 2016. The change in deposit mix was consistent with the Corporation’s marketing strategy to promote transaction accounts and the strategic decision to increase the percentage of lower cost transaction accounts in its deposit base and decrease the percentage of time deposits by competing less aggressively for time deposits.

Total borrowings increased $55.0 million to $146.3 million, or 60 percent, at September 30, 2016 as compared to $91.3 million at June 30, 2016, primarily due to borrowing short-term FHLB advances to fund increased mortgage banking activity.
 
Total stockholders’ equity decreased $228,000 to $133.2 million at September 30, 2016 from $133.5 million at June 30, 2016, primarily as a result of stock repurchases totaling $1.7 million (see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”) and $1.0 million of quarterly cash dividends paid, partly offset by net income of $1.6 million during the first three months of fiscal 2017.



41



Comparison of Operating Results for the Quarters Ended September 30, 2016 and 2015

The Corporation’s net income for the first quarter of fiscal 2017 was $1.6 million, a decrease of $849,000, or 35 percent, as compared to the same period of fiscal 2016. The decrease in net income for the first quarter of fiscal 2017 was primarily attributable to a decrease in non-interest income and an increase in non-interest expense, partly offset by an increase in net interest income, compared to the same period one year ago.
 
The Corporation’s efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, deteriorated to 85 percent for the first quarter of fiscal 2017 from 78 percent for the same period of fiscal 2016.  Return on average assets declined 30 basis points to 0.53 percent in the first quarter of fiscal 2017 from 0.83 percent in the same period last year; and return on average equity decreased to 4.79 percent in the first quarter of fiscal 2017 from 6.96 percent in the same period last year.

Diluted earnings per share for the first quarter of fiscal 2017 were $0.20, a 29 percent decrease from $0.28 in the same period last year. The lower percentage decrease in the diluted earnings per share in comparison to the percentage decrease in the net income was primarily attributable to stock repurchases during the last 12 months.
 
Net Interest Income:

For the Quarters Ended September 30, 2016 and 2015.  Net interest income increased $1.0 million, or 12 percent, to $9.1 million for the first quarter of fiscal 2017 from $8.1 million for the comparable period in fiscal 2016, due to a higher net interest margin and a higher average earning asset balance.  The net interest margin was 3.08 percent in the first quarter of fiscal 2017, a 26 basis points increase from 2.82 percent in the same period of fiscal 2016, primarily due to an increase in the average yield on interest-earning assets and a decrease in the average cost of interest-bearing liabilities. The weighted-average yield on interest-earning assets increased by 22 basis points to 3.67 percent from 3.45 percent in the same quarter last year, while the weighted-average cost of interest-bearing liabilities decreased by six basis points to 0.64 percent for the first quarter of fiscal 2017 as compared to 0.70 percent in the same quarter last year. The increase in the average yield of interest-earning assets was primarily due to the utilization of interest-earning deposits earning a nominal yield to fund higher balances of loans receivable and investment securities, which earned a significantly higher yield. The average balance of interest-earning assets increased $35.9 million, or three percent, to $1.18 billion in the first quarter of fiscal 2017 from $1.14 billion in the comparable period of fiscal 2016, primarily reflecting increases in average loans receivable and investment securities, partly offset by a decrease in average interest-earning deposits. The decrease in average interest-earning deposits was primarily due to the deployment of excess cash to fund loans held for sale and loans held for investment.

Interest Income:

For the Quarters Ended September 30, 2016 and 2015.  Total interest income increased by $947,000, or 10 percent, to $10.8 million for the first quarter of fiscal 2017 from $9.9 million in the same quarter of fiscal 2016.  This increase was primarily due to the higher average balance of loans receivable.

Interest income on loans receivable increased $990,000, or 10 percent, to $10.5 million in the first quarter of fiscal 2017 from $9.5 million for the same quarter of fiscal 2016.  This increase was attributable to a higher average loan balance, partly offset by a lower average loan yield.  The average balance of loans receivable, including loans held for sale, increased by $115.4 million, or 12 percent, to $1.08 billion for the first quarter of fiscal 2017 from $962.6 million in the same quarter of fiscal 2016.  The average balance of loans held for sale increased $80.3 million, or 53 percent, to $231.1 million during the first quarter of fiscal 2017 from $150.8 million in the same quarter of fiscal 2016. The average yield on the loans held for sale decreased by 27 basis points to 3.59 percent in the first quarter of fiscal 2017 from 3.86 percent in the same quarter of fiscal 2016. The average loan yield, including loans held for sale, during the first quarter of fiscal 2017 decreased five basis points to 3.89 percent from 3.94 percent during the same quarter last year, primarily due to the decrease in the average yield of loans held for sale.
 
Interest income from investment securities increased $17,000, or 25 percent, to $84,000 in the first quarter of fiscal 2017 from $67,000 for the same quarter of fiscal 2016. This increase was attributable to a higher average balance, partly offset by a lower average yield. The average balance of investment securities increased $35.0 million, or 240 percent, to $49.6 million in the first quarter of fiscal 2017 from $14.6 million in the same quarter of fiscal 2016. The increase in average balance of investment securities was primarily the result of purchases of mortgage-backed securities during fiscal 2016, partly offset by scheduled and accelerated principal payments on mortgage-backed securities. The average investment securities yield decreased 115 basis points to 0.68% in the first quarter of fiscal 2017 from 1.83% in the same quarter of fiscal 2016. The decrease in the average investment securities yield was primarily attributable to the purchases of investment securities which had lower average yields than the existing portfolio and accelerated amortization of purchase premiums resulting from accelerated principal payments.

42




The FHLB – San Francisco cash dividend received in the first quarter of fiscal 2017 was $185,000, down eight percent from $200,000 in the same quarter of fiscal 2016. The average yield decreased 74 basis points to 9.14% in the first quarter of fiscal 2017 from 9.88% in the comparable quarter last year.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $55,000 in the first quarter of fiscal 2017, down 45 percent from $100,000 in the same quarter of fiscal 2016.  The decrease was due to a lower average balance, partly offset by a higher average yield in the first quarter of fiscal 2017, as compared to the same quarter last year.  The average balance of the interest-earning deposits in the first quarter of fiscal 2017 was $43.3 million, a decrease of $114.5 million or 73 percent, from $157.8 million in the same quarter of fiscal 2016. The decrease in interest-earning deposits was primarily due to the deployment of excess cash to fund the increase in loans held for sale and loans held for investment, consistent with the Corporation’s interest rate risk management strategy. The average yield increased 25 basis points to 0.50% in the first quarter of fiscal 2017 from 0.25% in the comparable quarter last year, due primarily to the increase in the federal funds rate from 0.25% to 0.50% effective December 17, 2015.  

Interest Expense:

For the Quarters Ended September 30, 2016 and 2015.  Total interest expense for the first quarter of fiscal 2017 was $1.7 million as compared to $1.8 million for the same period last year, a decrease of $75,000, or four percent.  This decrease was attributable to a lower average cost of interest-bearing liabilities, partly offset by a higher average balance of interest-bearing liabilities.

Interest expense on deposits for the first quarter of fiscal 2017 was $1.0 million as compared to $1.1 million for the same period last year, a decrease of $129,000, or 11 percent.  The decrease in interest expense on deposits was primarily attributable to a lower average cost of deposits, partly offset by a slightly higher average balance.  The average cost of deposits decreased six basis points to 0.43 percent during the first quarter of fiscal 2017 from 0.49 percent during the same quarter last year.  The decrease in the average cost of deposits was attributable primarily to a lower average cost of transaction accounts and a lower percentage of time deposits to the total deposit balance. The average balance of deposits increased $6.3 million, or one percent, to $932.8 million during the quarter ended September 30, 2016 from $926.5 million during the same period last year.  The increase in the average balance was primarily attributable to an increase in transaction accounts, partly offset by a decrease in time deposits.  Strategically, the Corporation has been promoting transaction accounts and competing less aggressively for time deposits.  The Corporation believes 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 current low interest rate environment.  The average balance of transaction accounts to total deposits in the first quarter of fiscal 2017 was 67 percent, compared to 63 percent in the same period of fiscal 2016.

Interest expense on borrowings, consisting of FHLB – San Francisco advances, for the first quarter of fiscal 2017 increased $54,000, or eight percent, to $702,000 from $648,000 for the same period last year.  The increase in interest expense on borrowings was the result of a higher average balance, partly offset by a lower average cost.  The average balance of borrowings increased $35.5 million, or 39 percent, to $126.9 million during the quarter ended September 30, 2016 from $91.4 million during the same period last year. The average cost of borrowings decreased 62 basis points to 2.19 percent for the quarter ended September 30, 2016 from 2.81 percent in the same quarter last year.  The decrease in average cost of advances was primarily due to the increased utilization of overnight borrowings and short-term advances with a much lower average cost than long-term FHLB advances.
  

43



The following tables present the average balance sheets for the quarters ended September 30, 2016 and 2015, respectively:

Average Balance Sheets
 
Quarter Ended
September 30, 2016
 
Quarter Ended
September 30, 2015
(Dollars In Thousands)
Average
Balance
Interest
Yield/
Cost
 
Average
Balance
Interest
Yield/
Cost
Interest-earning assets:
 
 
 
 
 
 
 
Loans receivable, net (1)
$
1,078,082

$
10,480

3.89
%
 
$
962,635

$
9,490

3.94
%
Investment securities
49,597

84

0.68
%
 
14,648

67

1.83
%
FHLB – San Francisco stock
8,094

185

9.14
%
 
8,094

200

9.88
%
Interest-earning deposits
43,309

55

0.50
%
 
157,784

100

0.25
%
 
 
 
 
 
 
 
 
Total interest-earning assets
1,179,082

10,804

3.67
%
 
1,143,161

9,857

3.45
%
 
 
 
 
 
 
 
 
Non interest-earning assets
31,568

 
 
 
31,973

 
 
 
 
 
 
 
 
 
 
Total assets
$
1,210,650

 
 
 
$
1,175,134

 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
Checking and money market accounts (2)
$
350,692

98

0.11
%
 
$
328,574

117

0.14
%
Savings accounts
276,787

144

0.21
%
 
256,911

168

0.26
%
Time deposits
305,355

772

1.00
%
 
340,997

858

1.00
%
 
 
 
 
 
 
 
 
Total deposits
932,834

1,014

0.43
%
 
926,482

1,143

0.49
%
 
 
 
 
 
 
 
 
Borrowings
126,940

702

2.19
%
 
91,357

648

2.81
%
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
1,059,774

1,716

0.64
%
 
1,017,839

1,791

0.70
%
 
 
 
 
 
 
 
 
Non interest-bearing liabilities
17,701

 
 
 
16,799

 
 
 
 
 
 
 
 
 
 
Total liabilities
1,077,475

 
 
 
1,034,638

 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
133,175

 
 
 
140,496

 
 
Total liabilities and stockholders’ equity
$
1,210,650

 
 
 
$
1,175,134

 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
9,088

 
 
 
$
8,066

 
 
 
 
 
 
 
 
 
Interest rate spread (3)
 
 
3.03
%
 
 
 
2.75
%
Net interest margin (4)
 
 
3.08
%
 
 
 
2.82
%
Ratio of average interest-earning assets to
   average interest-bearing liabilities
 
 
111.26
%
 
 
 
112.31
%
Return on average assets
 
 
0.53
%
 
 
 
0.83
%
Return on average equity
 
 
4.79
%
 
 
 
6.96
%
 
(1) 
Includes loans held for sale and non-performing loans, as well as net deferred loan cost amortization of $168 and $61 for the quarters ended September 30, 2016 and 2015, respectively.
(2) 
Includes the average balance of non interest-bearing checking accounts of $70.6 million and $65.7 million during the quarters ended September 30, 2016 and 2015, 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.
 
 
 
 
 
 
 
 

44



The following tables provide the rate/volume variances for the quarters ended September 30, 2016 and 2015, respectively:

Rate/Volume Variance
 
Quarter Ended September 30, 2016 Compared
To Quarter Ended September 30, 2015
Increase (Decrease) Due to
(In Thousands)
Rate
Volume
Rate/
Volume
Net
Interest-earning assets:
 
 
 
 
     Loans receivable (1)
$
(120
)
$
1,124

$
(14
)
$
990

Investment securities
(43
)
160

(100
)
17

FHLB – San Francisco stock
(15
)


(15
)
Interest-bearing deposits
98

(72
)
(71
)
(45
)
Total net change in income on interest-earning assets
(80
)
1,212

(185
)
947

 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
Checking and money market accounts
(25
)
8

(2
)
(19
)
Savings accounts
(34
)
13

(3
)
(24
)
Time deposits

(86
)

(86
)
Borrowings
(142
)
252

(56
)
54

Total net change in expense on interest-bearing liabilities
(201
)
187

(61
)
(75
)
Net increase (decrease) in net interest income
$
121

$
1,025

$
(124
)
$
1,022

 
(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.
 
 
 
 
 
Recovery from the Allowance for Loan Losses:

For the Quarters Ended September 30, 2016 and 2015.  During the first quarter of fiscal 2017, the Corporation recorded a recovery from the allowance for loan losses of $150,000, a 295 percent increase from the $38,000 recovery from the allowance for loan losses in the same period of fiscal 2016.  The increase in the recovery was primarily attributable to further improvement in credit quality, partly offset by an increase of the outstanding balance of loans held for investment. Non-performing loans decreased $296,000, or three percent, to $10.0 million at September 30, 2016 as compared to $10.3 million at June 30, 2016 and were $14.8 million at September 30, 2015.  Net recoveries in the first quarter of fiscal 2017 were $205,000 or 0.08 percent (annualized) of average loans receivable, compared to net recoveries of $348,000 or 0.14 percent (annualized) of average loans receivable in the same quarter of fiscal 2016.  Total classified loans, consisting of special mention and substandard loans, were $18.9 million at September 30, 2016 as compared to $19.2 million at June 30, 2016 and to $25.6 million at September 30, 2015.

The allowance for loan losses was determined through quantitative and qualitative adjustments including the Bank's charge-off experience and reflects the impact on loans held for investment from the current general economic conditions of the U.S. and California economies such as the improving unemployment rate and higher home prices in California.  See related discussion of “Asset Quality” below.

At September 30, 2016, the allowance for loan losses was $8.7 million, comprised of collectively evaluated allowances of $8.7 million and individually evaluated allowances of $20,000; in comparison to the allowance for loan losses of $8.7 million at June 30, 2016, comprised of collectively evaluated allowances of $8.7 million and individually evaluated allowances of $20,000.  The allowance for loan losses as a percentage of gross loans held for investment was 1.01 percent at September 30, 2016 compared to 1.02 percent at June 30, 2016.  Management considers, based on currently available information, the allowance for loan losses sufficient to absorb potential losses inherent in loans held for investment.  For further analysis on the allowance for loan losses, see Note 6 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.


45



Non-Interest Income:

For the Quarters Ended September 30, 2016 and 2015.  Total non-interest income decreased $1.2 million, or 11 percent, to $9.3 million for the quarter ended September 30, 2016 from $10.5 million for the same period last year.  The decrease was primarily attributable to a decrease in the net gain on sale of loans and losses on the sale and operations of real estate owned during the current quarter as compared to the comparable period last year.

The net gain on sale of loans decreased $928,000, or 10 percent, to $8.0 million for the first quarter of fiscal 2017 from $8.9 million in the same quarter of fiscal 2016 reflecting the impact of a lower average loan sale margin, partly offset by a higher loan sale volume.  The average loan sale margin for PBM decreased to 1.25 percent in the first quarter of fiscal 2017, down 40 basis points from 1.65 percent in the same period of fiscal 2016.  The decrease in the average loan sale margin for the quarter ended September 30, 2016 was primarily attributable to volatility in loan servicing premiums in the cash markets. Additionally, product composition was less favorable with a higher percentage of loan sales comprised of lower margin products. Refinance transactions rose as a percentage of total volume, particularly from the wholesale channel, and volume also consisted of higher percentage of conventional high balance product. Total loan sale volume, which includes the net change in commitments to extend credit on loans to be held for sale, increased $100.7 million or 19 percent to $640.3 million in the quarter ended September 30, 2016 from $539.6 million in the comparable quarter last year. The increase in loan sale volume was attributable to the increase in the refinance market as compared to the same period last year. The total refinance loans as percentage of total loans originated by PBM during the first quarter of fiscal 2017 was 58 percent, up from 43 percent in the same quarter of fiscal 2016. The gain on sale of loans includes a favorable fair-value adjustment on loans held for sale and derivative financial instruments (commitments to extend credit, commitments to sell loans, commitments to sell mortgage-backed securities, and option contracts) pursuant to ASC 815 and ASC 825 that amounted to a net gain of $2.1 million in the first quarter of fiscal 2017 as compared to an unfavorable fair-value adjustment net loss of $345,000 in the same period last year.  The fair-value adjustment on loans held for sale and derivative financial instruments is consistent with the Bank's mortgage banking activity and the volatility of mortgage interest rates. As of September 30, 2016, the fair value of derivative financial instruments pursuant to ASC 815 and ASC 825 was $10.8 million, compared to $8.7 million at June 30, 2016 and $7.6 million at September 30, 2015.  

Non-Interest Expense:

For the Quarters Ended September 30, 2016 and 2015.  Total non-interest expense in the quarter ended September 30, 2016 was $15.6 million, an increase of $1.2 million, or eight percent, as compared to $14.4 million in the quarter ended September 30, 2015.  The increase in non-interest expense was primarily due to increases in salaries and employee benefits, premises and occupancy expenses and other operating expenses primarily related to mortgage banking operations.

Total salaries and employee benefits expense increased $522,000, or five percent, to $11.3 million in the first quarter of fiscal 2017 from $10.8 million in the same period of fiscal 2016.  The increase was primarily attributable to higher incentive compensation costs related to higher loan originations. Total loan originations and purchases (including loans originated and purchased for investment and loans originated and purchased for sale) increased $130.1 million, or 23 percent, to $705.6 million in the first quarter of fiscal 2017 from $575.5 million in the comparable quarter in fiscal 2016.

Provision for Income Taxes:

The income tax provision reflects 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, among others.  Therefore, there are fluctuations in the effective income tax rate from period to period based on the relationship of net permanent differences to income before tax.

For the Quarters Ended September 30, 2016 and 2015.  The income tax provision was $1.3 million for the quarter ended September 30, 2016 as compared to $1.8 million for the same quarter last year.  The effective income tax rate for the quarter ended September 30, 2016 was 44.2 percent as compared to 41.7 percent in the same quarter last year.  The increase in the effective tax rate for the first quarter of fiscal 2017 was due primarily to lower tax benefits related to deferred compensation, as compared to the same quarter last year. The Corporation believes that the effective income tax rate applied in the first quarter of fiscal 2017 reflects its current income tax obligations.



46



Asset Quality

Non-performing loans, net of the allowance for loan losses and fair value adjustments, consisting of loans with collateral primarily located in California, decreased $296,000, or three percent, to $10.0 million at September 30, 2016 from $10.3 million at June 30, 2016.  Non-performing loans as a percentage of loans held for investment improved to 1.17 percent at September 30, 2016 from 1.23 percent at June 30, 2016.  The non-performing loans at September 30, 2016 were primarily comprised of 34 single-family loans ($9.2 million); two multi-family loans ($703,000); one commercial business loan ($74,000); and one consumer loan (fully reserved).  This compares to the $10.3 million of non-performing loans at June 30, 2016 which were primarily comprised of 35 single-family loans ($9.5 million); two multi-family loans ($709,000); one commercial business loan ($76,000); and one consumer loan (fully reserved). No interest accruals were made for loans that were past due 90 days or more or if the loans were deemed non-performing.

As of September 30, 2016, total restructured loans decreased $874,000, or 19 percent, to $3.7 million from $4.6 million at June 30, 2016.  At September 30, 2016 and June 30, 2016, $3.7 million and $3.3 million, respectively, of these restructured loans were classified as non-performing.  As of September 30, 2016, $1.2 million, or 31 percent, of the restructured loans have a current payment status, consistent with their modified payment terms; this compares to $1.9 million, or 41 percent, of restructured loans that had a current payment status, consistent with their modified payment terms as of June 30, 2016.

Real estate owned was $3.5 million at September 30, 2016, an increase of $790,000 or 29 percent from $2.7 million at June 30, 2016.  Real estate owned at September 30, 2016 was comprised of six single-family properties, five of which are located in California and one is located in Arizona.  The Corporation has not suspended foreclosure activity at any time through the most recent credit cycle because, to date, the Corporation has not been in a situation where its foreclosure documentation, process or legal standing has been challenged by a court.  The Corporation maintains the original promissory note and deed of trust for loans held for investment.  As a result, the Corporation does not rely on lost-note affidavits to fulfill foreclosure filing requirements.

Non-performing assets, which includes non-performing loans and real estate owned, decreased $494,000, or four percent, to $13.5 million or 1.09 percent of total assets at September 30, 2016 from $13.0 million or 1.11 percent of total assets at June 30, 2016.  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.  For further analysis on non-performing loans and restructured loans, see Note 6 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements.

Occasionally, the Corporation is required to repurchase loans sold to Freddie Mac, Fannie Mae or other institutional investors if it is determined that such loans do not meet the credit requirements of the investor, or if one of the parties involved in the loan misrepresented pertinent facts, committed fraud, or if such loans were 90-days past due within 120 days of the loan funding date. During the first three months of fiscal 2017, the Corporation repurchased one loan of $389,000 from an investor pursuant to the recourse/repurchase covenants contained in the loan sale agreement, which was subsequently paid off.  This compares to the first three months of fiscal 2016 when the Corporation repurchased four loans, totaling $1.2 million, from investors pursuant to the recourse/repurchase covenants contained in the loan sale agreements, while additional repurchase requests were settled that did not result in the repurchase of the loan itself.  The primary reasons for honoring the repurchase requests are borrower fraud, undisclosed liabilities on borrower applications, and documentation, verification and appraisal disputes.  For the first three months of fiscal 2017, the Corporation did not record a recourse provision and did not settle any claims.  This compares to the first three months of fiscal 2016 when the Corporation had a recourse provision of $3,000 and settled claims for $3,000. As of September 30, 2016, the total recourse reserve for loans sold that are subject to repurchase was $453,000, unchanged from June 30, 2016 and down from $768,000 at September 30, 2015.
  
Beginning in 2008, in connection with the down turn in the real estate market, the Corporation implemented tighter underwriting standards to reduce potential loan repurchase requests, including requiring higher credit scores, generally lower debt-to-income ratios, and verification of income and assets, among other criteria.  Despite management’s diligent estimate of the recourse reserve, the Corporation is still subject to risks and uncertainties associated with potentially higher loan repurchase claims from investors, and there are no assurances that the current recourse reserve will be sufficient to cover all future recourse claims.


47



The following table shows the summary of the recourse liability for the quarters ended September 30, 2016 and 2015:
 
For the Quarters Ended September 30,
Recourse Liability
2016
2015
(In Thousands)
 
 
 
 
 
Balance, beginning of the period
$
453

$
768

Provision for recourse liability

3

Net settlements in lieu of loan repurchases

(3
)
Balance, end of the period
$
453

$
768


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 decline from the levels described in the following tables (which were derived at the time of loan origination), the value of the real estate collateral securing the Corporation’s loans as set forth in the table could be significantly overstated.  The Corporation’s ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and it would be more likely to suffer losses on defaulted loans.  The Corporation generally does not 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 individually evaluated allowances are established, if required).  Therefore, it is reasonable to assume that the LTV ratios disclosed in the following tables may be understated or overstated in comparison to their current LTV ratios as a result of their year of origination, the subsequent general decline or improvement in real estate values that occurred and the specific location of the individual properties.  The Corporation has not quantified the current LTVs of its loans held for investment nor the impact the decline in real estate values has had on the original LTVs of its loans held for investment.

The following table describes certain credit risk characteristics of the Corporation’s single-family, first trust deed, mortgage loans held for investment as of September 30, 2016:
(Dollars In Thousands)
Outstanding
Balance (1)
Weighted-
Average
FICO (2)
Weighted-
Average
LTV (3)
Weighted-
Average
Seasoning (4)
Interest only
$
53,659

730
73%
9.29 years
Stated income (5)
$
126,061

729
64%
10.73 years
FICO less than or equal to 660
$
9,307

645
62%
9.68 years
Over 30-year amortization
$
11,750

733
64%
10.91 years

(1) 
The outstanding balance presented on this table may overlap more than one category.  Of the outstanding balance, $452,000 of “interest only,” $6.5 million of “stated income,” $578,000 of “FICO less than or equal to 660,” and $223,000 of “over 30-year amortization” balances were non-performing.
(2) 
Based on borrower's FICO scores at the time of loan origination.  The FICO score represents the creditworthiness of a borrower based on the borrower’s credit history, as reported by an independent third party.  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 derived by dividing the current loan balance by the lower of the original appraised value or purchase price 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 stated income on his/her loan application which was not subject to verification during the loan origination process.


48



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 September 30, 2016:
(Dollars In Thousands)
 
Balance
 
Non-Performing (1)
30 - 89 Days
Delinquent (1)
Fully amortize in the next 12 months
$
35,549

1%
—%
Fully amortize between 1 year and 5 years
18,110

—%
3%
Fully amortize after 5 years

—%
—%
Total
$
53,659

1%
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 September 30, 2016:
(Dollars In Thousands)
 
Balance (1)

 
Non-Performing (1)
30 - 89 Days
Delinquent (1)
Interest rate reset in the next 12 months
$
124,662

5%
—%
Interest rate reset between 1 year and 5 years
1,399

48%
—%
Interest rate reset after 5 years

—%
—%
Total
$
126,061

5%
—%

(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.

The reset of payment terms on adjustable rate mortgage loans (primarily interest only single-family loans) to a fully amortizing status from their interest-only period has started to accelerate and may create a payment shock for some of the Corporation’s borrowers as the loans reprice to a higher monthly payment consisting of both principal and interest, which may result in an increase in non-performing loans. To date, the Corporation has not experienced an elevated level of delinquencies or defaults related to payment shocks.
 

49



The following table describes certain credit risk characteristics, geographic locations and the calendar year of loan origination of the Corporation’s single-family, first trust deed, mortgage loans held for investment, at September 30, 2016:
 
Calendar Year of Origination
 
(Dollars In Thousands)
2008 &
Prior
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
YTD
2016
 
Total
Loan balance (in thousands)
$225,544
$859
$120
$1,005
$3,838
$3,232
$17,506
$20,131
$29,262
$301,497
Weighted-average LTV (1)
65%
50%
67%
63%
57%
49%
65%
70%
73%
66%
Weighted-average age (in years)
10.77
7.15
5.87
5.17
4.18
3.28
2.16
1.29
0.36
8.43
Weighted-average FICO (2)
730
750
700
711
740
748
746
748
747
734
Number of loans
699
3
1
4
19
23
34
30
50
863
 
 
 
 
 
 
 
 
 
 
 
Geographic breakdown (%)
 
 
 
 
 
 
 
 
 
 
Inland Empire
31%
100%
100%
58%
11%
47%
36%
26%
28%
31%
Southern California (3)
55%
—%
—%
42%
41%
27%
36%
46%
49%
52%
Other California (4)
13%
—%
—%
—%
48%
26%
28%
28%
23%
16%
Other States
1%
—%
—%
—%
—%
—%
—%
—%
—%
1%
Total
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

(1) 
LTV is the ratio derived by dividing the current loan balance by the lower of the original appraised value or purchase price 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.


50



The following table describes certain credit risk characteristics, geographic locations and the calendar year of loan origination of the Corporation’s multi-family loans held for investment, at September 30, 2016:
 
Calendar Year of Origination
 
(Dollars In Thousands)
2008 &
Prior
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
YTD
2016
 
Total
Loan balance (in thousands)
$33,670
$—
$—
$8,000
$24,396
$73,579
$87,154
$95,552
$116,072
$438,423
Weighted-average LTV (1)
44%
—%
—%
53%
54%
56%
55%
54%
50%
52%
Weighted-average DCR (2)
1.55x
1.54x
1.75x
1.70x
1.66x
1.62x
1.71x
1.66x
Weighted-average age (in years)
11.05
4.96
4.09
3.15
2.22
1.22
0.29
2.48
Weighted-average FICO (3)
694
761
722
758
765
758
759
752
Number of loans
68
11
28
102
105
134
126
574
 
 
 
 
 
 
 
 
 
 
 
Geographic breakdown (%)
 
 
 
 
 
 
 
 
 
 
Inland Empire
25%
—%
—%
10%
16%
34%
12%
17%
9%
17%
Southern California (4)
50%
—%
—%
77%
50%
46%
55%
65%
63%
58%
Other California (5)
17%
—%
—%
13%
34%
20%
33%
18%
28%
24%
Other States
8%
—%
—%
—%
—%
—%
—%
—%
—%
1%
Total
100%
—%
—%
100%
100%
100%
100%
100%
100%
100%

(1) 
LTV is the ratio derived by dividing the current loan balance by the lower of the original appraised value or purchase price 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.

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 September 30, 2016:
(Dollars In Thousands)
 
 
Balance
 
Non-
Performing (1)
 
30 - 89 Days
Delinquent
Percentage
Not Fully
Amortizing (1)
Interest rate reset or mature in the next 12 months
$
67,240

1%
—%
17%
Interest rate reset or mature between 1 year and 5 years
360,358

—%
—%
5%
Interest rate reset or mature after 5 years
10,825

—%
—%
—%
Total
$
438,423

—%
—%
7%

(1) 
As a percentage of each category.


51



The following table describes certain credit risk characteristics, geographic locations and the calendar year of loan origination of the Corporation’s commercial real estate loans held for investment, at September 30, 2016:
 
Calendar Year of Origination
 
(Dollars In Thousands)
2008 &
Prior
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
YTD
2016
Total (5)(6)
Loan balance (in thousands)
$6,897
$—
$349
$738
$13,114
$17,085
$23,738
$21,618
$16,597
$100,136
Weighted-average LTV (1)
40%
—%
55%
59%
48%
47%
46%
43%
53%
47%
Weighted-average DCR (2)
1.60x
1.26x
1.47x
1.89x
1.77x
1.93x
1.78x
1.61x
1.78x
Weighted-average age (in years)
10.82
6.35
4.77
3.99
3.14
2.17
1.23
0.40
2.71
Weighted-average FICO (2)
707
704
770
752
758
756
751
760
753
Number of loans
13
2
1
11
21
29
27
20
124
 
 
 
 
 
 
 
 
 
 
 
Geographic breakdown (%):
 
 
 
 
 
 
 
 
 
 
Inland Empire
48%
—%
50%
—%
74%
31%
35%
25%
10%
34%
Southern California (3)
28%
—%
50%
100%
26%
37%
47%
33%
61%
41%
Other California (4)
24%
—%
—%
—%
—%
32%
18%
42%
29%
25%
Other States
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
Total
100%
—%
100%
100%
100%
100%
100%
100%
100%
100%

(1) 
LTV is the ratio derived by dividing the current loan balance by the lower of the original appraised value or purchase price 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: $38.1 million in Mixed Use; $13.7 million in Retail; $13.3 million in Office; $11.4 million in Mobile Home Park; $6.1 million in Warehouse; $5.1 million in Medical/Dental Office; $4.1 million in Mini-Storage; $3.3 million in Restaurant/Fast Food; $1.8 million in Light Industrial/Manufacturing; $1.6 million in Hotel and Motel and $1.6 million in Automotive – Non Gasoline.
(6) 
Consisting of $90.7 million or 90.6 percent in investment properties and $9.4 million or 9.4 percent 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 September 30, 2016:
(Dollars In Thousands)
 
 
Balance
 
Non-
Performing (1)
 
30 - 89 Days
Delinquent
Percentage
Not Fully
Amortizing (1)
Interest rate reset or mature in the next 12 months
$
13,213

—%
—%
81%
Interest rate reset or mature between 1 year and 5 years
86,923

—%
—%
82%
Interest rate reset or mature after 5 years

—%
—%
—%
Total
$
100,136

—%
—%
82%

(1) 
As a percentage of each category.


52



The following table sets forth information with respect to the Corporation’s non-performing assets, net of allowance for loan losses and fair value adjustments, at the dates indicated:
(In Thousands)
At September 30,
2016
At June 30,
2016
Loans on non-accrual status (excluding restructured loans):
 
 
Mortgage loans:
 
 
Single-family
$
5,586

$
6,292

Multi-family
703

709

Total
6,289

7,001

 
 
 
Accruing loans past due 90 days or more


 
 
 
Restructured loans on non-accrual status:
 
 
Mortgage loans:
 
 
Single-family
3,650

3,232

Commercial business loans
74

76

Total
3,724

3,308

 
 
 
Total non-performing loans
10,013

10,309

 
 
 
Real estate owned, net
3,496

2,706

Total non-performing assets
$
13,509

$
13,015

 
 
 
Non-performing loans as a percentage of loans held for investment, net
   of allowance for loan losses
1.17
%
1.23
%
 
 
 
Non-performing loans as a percentage of total assets
0.81
%
0.88
%
 
 
 
Non-performing assets as a percentage of total assets
1.09
%
1.11
%

The following table describes the non-performing loans, net of allowance for loan losses and fair value adjustments, by the calendar year of origination as of September 30, 2016:
 
Calendar Year of Origination
 
(In Thousands)
2008 &
Prior
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
YTD
2016
 
Total
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
Single-family
$
9,146

$

$

$

$
90

$

$

$

$

$
9,236

 
Multi-family
703









703

Commercial business loans

74








74

Total
$
9,849

$
74

$

$

$
90

$

$

$

$

$
10,013



53



The following table describes the non-performing loans, net of allowance for loan losses and fair value adjustments, by the geographic location as of September 30, 2016:
(In Thousands)
 
Inland Empire
Southern
California (1)
Other
California (2)
 
Other States
 
Total
Mortgage loans:
 
 
 
 
 
 
Single-family
$
2,495

$
5,093

$
1,648

$

$
9,236

 
Multi-family

326


377

703

Commercial business loans

74



74

Total
$
2,495

$
5,493

$
1,648

$
377

$
10,013


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

The following table summarizes classified assets, which is comprised of classified loans, net of allowance for loan losses and fair value adjustments, and real estate owned at the dates indicated:
 
At September 30,
2016
 
At June 30,
2016
(Dollars In Thousands)
Balance
Count
 
Balance
Count
Special mention loans:
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Single-family
$
3,879

9

 
$
4,896

14

Multi-family
5,013

6

 
3,974

4

Total special mention loans
8,892

15

 
8,870

18

 
 
 
 
 
 
Substandard loans:
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
Single-family
9,236

36

 
9,524

37

Multi-family
703

2

 
709

2

Commercial business loans
74

1

 
76

1

Consumer loans

1

 

1

Total substandard loans
10,013

40

 
10,309

41

 
 
 
 
 
 
Total classified loans
18,905

55

 
19,179

59

 
 
 
 
 
 
Real estate owned:
 
 
 
 
 
Single-family
3,496

6

 
2,706

4

Total real estate owned
3,496

6

 
2,706

4

 
 
 
 
 
 
Total classified assets
$
22,401

61

 
$
21,885

63




54



Loan Volume Activities

The following table is provided to disclose details related to the volume of loans originated, purchased and sold for the quarters indicated:
 
For the Quarters Ended
September 30,
(In Thousands)
2016
2015
Loans originated and purchased for sale:
 
 
Retail originations
$
318,970

$
275,098

Wholesale originations and purchases
328,372

265,191

        Total loans originated and purchased for sale (1)
647,342

540,289

 
 
 
Loans sold:
 
 
Servicing released
(559,013
)
(589,590
)
Servicing retained
(9,301
)
(11,421
)
        Total loans sold (2)
(568,314
)
(601,011
)
 
 
 
Loans originated for investment:
 
 
Mortgage loans:
 
 
Single-family
11,830

5,430

Multi-family
19,041

22,703

Commercial real estate
2,827

6,444

Construction
1,635

382

Other

72

        Total loans originated for investment  (3)
35,333

35,031

 
 
 
Loans purchased for investment:
 
 
Mortgage loans:
 
 
Single-family
50

193

Multi-family
22,906


Total loans purchased for investment (3)
22,956

193

 
 
 
Mortgage loan principal payments
(50,542
)
(45,847
)
Real estate acquired in settlement of loans
(1,298
)
(1,006
)
Increase in other items, net (4)
3,380

2,732

 
 
 
Net increase (decrease) in loans held for investment and loans held for sale at fair value
$
88,857

$
(69,619
)

(1) 
Includes PBM loans originated and purchased for sale during the quarters ended September 30, 2016 and 2015 totaling $647.3 million and $540.3 million, respectively.
(2) 
Includes PBM loans sold during the quarters ended September 30, 2016 and 2015 totaling $568.3 million and $601.0 million, respectively.
(3) 
Includes PBM loans originated and purchased for investment during the quarters ended September 30, 2016 and 2015 totaling $11.2 million and $5.6 million, respectively.
(4) 
Includes net changes in undisbursed loan funds, deferred loan fees or costs, allowance for loan losses, fair vale of loans held for investment, fair value of loans held for sale, advance payments of escrows and repurchases.

Loans that the Corporation has originated for sale are primarily sold on a servicing released basis.  Clear ownership is conveyed to the investor by endorsing the original note in favor of the investor; transferring the servicing to a new servicer consistent with investor instructions; communicating the servicing transfer to the borrower as required by law; and sending the loan file and collateral instruments electronically to the investor contemporaneous with receiving the cash proceeds from the sale of the loan.  Additionally, the Corporation registers the change of ownership in the mortgage electronic registration system known as MERS as required by the contractual terms of the loan sale agreement.  The Corporation does not believe that completing this

55



additional registration clouds ownership of the note since the steps previously described have also been taken.  Also, the Corporation retains an imaged copy of the entire loan file and collateral instruments as an abundance of caution in the event questions arise that can only be answered by reviewing the loan file.  Additionally, the Corporation does not originate or sponsor mortgage-backed securities.


Liquidity and Capital Resources

The Corporation’s primary sources of funds are deposits, proceeds from the sale of loans originated and purchased for sale, proceeds from principal and interest payments on loans, proceeds from the maturity and sale of investment securities, FHLB – San Francisco advances, access to the discount window facility at the Federal Reserve Bank of San Francisco and access to a federal funds facility with its correspondent bank.  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 Corporation is the origination and purchase of loans held for investment and loans held for sale.  During the first three months of fiscal 2017 and 2016, the Corporation originated and purchased $705.6 million and $575.5 million of loans, respectively.  The total loans sold in the first three months of fiscal 2017 and 2016 were $568.3 million and $601.0 million, respectively.  At September 30, 2016, the Corporation had loan origination commitments totaling $179.9 million, undisbursed lines of credit totaling $1.5 million and undisbursed construction loan funds totaling $10.4 million.  The Corporation anticipates that it will have sufficient funds available to meet its current loan commitments.

The Corporation’s primary financing activity is gathering deposits.  During the first three months of fiscal 2017, the net increase in deposits was $17.1 million or two percent, primarily due to the increase in transaction accounts, partly offset by scheduled maturities in time deposits. The increase in transaction accounts and the decrease in time deposits were consistent with the Corporation's operating strategy. As of September 30, 2016, total deposits were $943.5 million. At September 30, 2016, time deposits scheduled to mature in one year or less were $147.5 million and total time deposits with a principal amount of $100,000 or higher were $152.2 million.   Historically, the Corporation has been able to retain a significant percentage of its time deposits as they mature by adjusting deposit rates to the current interest rate environment.

The Corporation 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 Corporation generally maintains sufficient cash and cash equivalents to meet short-term liquidity needs.  At September 30, 2016, total cash and cash equivalents were $39.4 million, or three percent of total assets.  Depending on market conditions and the pricing of deposit products and FHLB – San Francisco advances, the Bank may rely on FHLB – San Francisco advances for part of its liquidity needs.  As of September 30, 2016, total borrowings were $146.3 million and the financing availability at FHLB – San Francisco was limited to 35 percent of total assets; the remaining borrowing facility was $257.2 million and the remaining available collateral was $607.9 million.  In addition, the Bank has secured a $42.5 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $45.2 million.  As of September 30, 2016, the Bank also has a borrowing arrangement in the form of a federal funds facility with its correspondent bank for $17.0 million which matures on June 30, 2017 which the Bank intends to renew upon maturity. The Bank had no advances under its correspondent bank or discount window facility as of September 30, 2016.

Regulations require 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 September 30, 2016 decreased to 29.9 percent from 31.2 percent for the quarter ended June 30, 2016.

The Bank, as a federally-chartered, federally insured savings bank, is subject to the capital requirements established by the OCC. Under the OCC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. In addition, Provident Financial Holdings, Inc. as a savings and loan holding company registered with the FRB, is required by the FRB to maintain capital adequacy that generally parallels the OCC requirements.

At September 30, 2016, Provident Financial Holdings, Inc. and the Bank each exceeded all regulatory capital requirements. The Bank was categorized "well-capitalized" at September 30, 2016 under the regulations of the OCC.


56



Provident Financial Holdings, Inc. and the Bank's actual and required minimum capital amounts and ratios at the dates indicated are as follows (dollars in thousands):
 
 
 
Regulatory Requirements
 
Actual
 
Minimum for Capital
Adequacy Purposes
 
Minimum to Be
Well Capitalized
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
 
 
 
 
 
 
 
 
 
 
Provident Financial Holdings, Inc.:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage capital (to adjusted average assets)
$
132,889
 
 
10.98
%
 
 
$
48,411
 
 
4.00
%
 
 
$
60,514
 
 
5.00
%
 
Common Equity Tier 1 ("CET1") capital (to risk-
  weighted assets) (1)
$
132,889
 
 
17.00
%
 
 
$
40,064
 
 
5.13
%
 
 
$
50,813
 
 
6.50
%
 
Tier 1 capital (to risk-weighted assets)
$
132,889
 
 
17.00
%
 
 
$
51,790
 
 
6.63
%
 
 
$
62,539
 
 
8.00
%
 
Total capital (to risk-weighted assets)
$
141,787
 
 
18.14
%
 
 
$
67,425
 
 
8.63
%
 
 
$
78,174
 
 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage capital (to adjusted assets)
$
133,081
 
 
11.40
%
 
 
$
46,706
 
 
4.00
%
 
 
$
58,382
 
 
5.00
%
 
CET1 capital (to risk-weighted assets)
$
133,081
 
 
17.89
%
 
 
$
38,117
 
 
5.13
%
 
 
$
48,343
 
 
6.50
%
 
Tier 1 capital (to risk-weighted assets)
$
133,081
 
 
17.89
%
 
 
$
49,273
 
 
6.63
%
 
 
$
59,500
 
 
8.00
%
 
Total capital (to risk-weighted assets)
$
141,955
 
 
19.09
%
 
 
$
64,148
 
 
8.63
%
 
 
$
74,375
 
 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Provident Savings Bank, F.S.B.:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage capital (to adjusted average assets)
$
112,827
 
 
9.32
%
 
 
$
48,411
 
 
4.00
%
 
 
$
60,514
 
 
5.00
%
 
CET1 capital (to risk-weighted assets)
$
112,827
 
 
14.44
%
 
 
$
40,058
 
 
5.13
%
 
 
$
50,805
 
 
6.50
%
 
Tier 1 capital (to risk-weighted assets)
$
112,827
 
 
14.44
%
 
 
$
51,782
 
 
6.63
%
 
 
$
62,529
 
 
8.00
%
 
Total capital (to risk-weighted assets)
$
121,725
 
 
15.57
%
 
 
$
67,414
 
 
8.63
%
 
 
$
78,161
 
 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage capital (to adjusted assets)
$
120,192
 
 
10.29
%

 
$
46,706
 
 
4.00
%

 
$
58,382
 
 
5.00
%
 
CET1 capital (to risk-weighted assets)
$
120,192
 
 
16.16
%

 
$
38,112
 
 
5.13
%

 
$
48,337
 
 
6.50
%
 
Tier 1 capital (to risk-weighted assets)
$
120,192
 
 
16.16
%

 
$
49,266
 
 
6.63
%

 
$
59,491
 
 
8.00
%
 
Total capital (to risk-weighted assets)
$
129,066
 
 
17.36
%

 
$
64,139
 
 
8.63
%

 
$
74,364
 
 
10.00
%
 

In addition to the minimum CET1, Tier 1 and total capital ratios, Provident Financial Holdings, Inc. and the Bank will have to maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new requirement began to be phased on January 1, 2016 at 0.625% of risk-weighted assets and will increase each year to an amount equal to 2.5% of risk-weighted assets when fully implemented in January 2019.

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 regulation.  In the first three months of fiscal 2017, the Bank paid a cash dividend of $10.0 million to the Corporation; while the Corporation paid $1.0 million of cash dividends to its shareholders.



57



Supplemental Information
 
At
September 30,
2016
At
June 30,
2016
At
September 30,
2015
 
 
 
 
Loans serviced for others (in thousands)
$105,548
$105,469
$86,658
 
 
 
 
Book value per share
$16.70
$16.73
$16.52


ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk.

One of the Corporation’s principal financial objectives 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, reduces 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 seven years.

Through the use of an internal interest rate risk model, the Corporation 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, +300 and +400 basis points (“bp”) with no effect given to steps that management might take to counter the effect of the interest rate movement. The current federal funds rate is 0.50 percent making an immediate change of -200 and -300 basis points improbable.

The following table is derived from the internal interest rate risk model and represents the NPV based on the indicated changes in interest rates as of September 30, 2016 (dollars in thousands).
Basis Points ("bp")
Change in Rates
Net
Portfolio
Value
NPV
Change(1)
Portfolio
Value of
Assets
NPV as Percentage
of Portfolio Value
Assets(2)
Sensitivity
Measure(3)
+400 bp
$
234,423

$
81,315

$
1,338,216

17.52%
+558 bp
+300 bp
$
219,792

$
66,684

$
1,330,219

16.52%
+458 bp
+200 bp
$
201,980

$
48,872

$
1,318,194

15.32%
+338 bp
+100 bp
$
177,362

$
24,254

$
1,301,885

13.62%
+168 bp
      0 bp
$
153,108

$

$
1,282,547

11.94%
0 bp
-100 bp
$
132,477

$
(20,631
)
$
1,274,284

10.40%
-154 bp

(1) 
Represents the increase (decrease) of the NPV at the indicated interest rate change in comparison to the NPV at September 30, 2016 (“base case”).
(2) 
Derived as the NPV divided by the portfolio value of total assets.
(3) 
Derived as the change in the NPV ratio from the base case amount assuming the indicated change in interest rates (expressed in basis points).


58



The following table is derived from the internal interest rate risk model and represents the change in the NPV at a -100 basis point rate shock at September 30, 2016 and June 30, 2016.
 
At September 30, 2016
At June 30, 2016
 
(-100 bp rate shock)
(-100 bp rate shock)
Pre-Shock NPV Ratio: NPV as a % of PV Assets
11.94%
13.28%
Post-Shock NPV Ratio: NPV as a % of PV Assets
10.40%
11.59%
Sensitivity Measure: Change in NPV Ratio
-154 bp
-169 bp.

The pre-shock NPV ratio declined 134 basis points to 11.94% at September 30, 2016 from 13.28% at June 30, 2016 and the post-shock NPV ratio declined 119 basis points to 10.40% at September 30, 2016 from 11.59% at June 30, 2016. The decline of the NPV ratios was primarily attributable to a $10.0 million cash dividend distribution from the Bank to the Corporation in September 2016, partly offset by the net income in the first three months of fiscal 2017.

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 Corporation, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Corporation.

The Corporation 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 Corporation’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 400, 300, 200 and 100 and minus 100 basis points.  The following table describes the results of the analysis at September 30, 2016 and June 30, 2016.
At September 30, 2016
 
At June 30, 2016
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
 
Basis Point (bp)
Change in Rates
Change in
Net Interest Income
+400 bp
(5.49)%
 
+400 bp
(5.20)%
+300 bp
3.10%
 
+300 bp
4.00%
+200 bp
1.19%
 
+200 bp
2.05%
+100 bp
(2.47)%
 
+100 bp
(1.48)%
-100 bp
(18.57)%
 
-100 bp
(16.10)%

At both September 30, 2016 and June 30, 2016, the Corporation was partially 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 at September 30, 2016, in a rising interest rate environment, the model projects an increase in net interest income over the subsequent 12-month period, except under plus 100 basis point and plus 400 basis point scenarios.  In a falling interest rate environment, the results project a decrease 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

59



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.


ITEM 4 – Controls and Procedures.

a) An evaluation of the Corporation’s disclosure controls and procedures (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.  Also, 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.  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 is also 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 September 30, 2016 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 September 30, 2016, 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 is also 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, except as previously disclosed in Part I, Item 3 of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2016 and the matter described below.

A wrongful termination lawsuit has been filed by an ex-employee of the Bank and on November 4, 2016 the jury awarded approximately $173,000 of damages to the ex-employee.  The Bank previously established a litigation reserve which is sufficient to cover the damages that were awarded.  However, in addition to the general damages awarded, the jury will also consider, and
may award, punitive damages which cannot be estimated, and therefore are not accrued, at the time of the filing of this Form 10-Q.  The Bank has not determined if it will file an appeal regarding this matter.



60



Item 1A.  Risk Factors.

There have been no material changes in the risk factors previously disclosed in Part I, Item 1A of the Corporation's Annual Report on Form 10-K for the year ended June 30, 2016.


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

The table below represents the Corporation’s purchases of its equity securities for the first quarter of fiscal 2017.
 
 
 
 
Period
 
 
(a) Total
Number of
Shares Purchased
 
 
(b) Average
Price Paid
per Share
 
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plan (1)
July 1 – 31, 2016
799

$
18.86

799

27,551

August 1 – 31, 2016
49,537

19.29

49,537

375,014

September 1 – 30, 2016
35,498

19.46

9,900

365,114

Total
85,834

$
19.36

60,236

365,114


(1) 
Represents the remaining shares available for future purchases under the May 2016 stock repurchase plan which became effective upon the completion of the October 2015 stock repurchase plan.

During the quarter ended September 30, 2016, the Corporation purchased 85,834 shares of the Corporation’s common stock at an average cost of $19.36 per share, including the repurchase of 25,598 shares of distributed restricted stock at an average cost of $19.56 per share to cover employee withholding tax obligations, consistent with the distribution. As of September 30, 2016, a total of 31,886 shares or eight percent of the shares authorized in the May 2016 stock repurchase plan have been purchased at an average cost of $19.26 per share, leaving 365,114 shares available for future purchases. During the quarter ended September 30, 2016, the Corporation did not sell any securities that were not registered under the Securities Act of 1933.

The Corporation is subject to regulatory capital requirements adopted by the Federal Reserve Board, which generally are the same as the capital requirements for the Bank. These capital requirements include provisions that limit the ability of the Corporation to pay dividends to its stockholders or repurchase its shares.


Item 3.  Defaults Upon Senior Securities.

Not applicable.


Item 4.  Mine Safety Disclosures.

Not applicable.


Item 5.  Other Information.

Not applicable.


Item 6.  Exhibits.

Exhibits:     
3.1 (a)
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. 333-2230))
 
 

61



3.1 (b)
Certificate of Amendment to Certificate of Incorporation of Provident Financial Holdings, Inc. as filed with the Delaware Secretary of State on November 24, 2009 (incorporated by reference to Exhibit 3.1 to the Corporation's Quarterly Report on Form 10-Q filed on November 9, 2010)
 
 
3.1 (c)
Amended and Restated Bylaws of Provident Financial Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed on December 1, 2014)
 
 
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
Post-Retirement Compensation Agreement with Donavon P. Ternes (incorporated by reference to Exhibit 10.13 to the Corporation’s Form 8-K dated July 7, 2009)
 
 
10.4
Form of Severance Agreement with Deborah L. Hill, Robert "Scott" Ritter, Lilian Salter, Donavon P. Ternes, David S. Weiant and Gwendolyn L. Wertz (incorporated by reference to Exhibit 10.1 in the Corporation’s Form 8-K dated February 24, 2012)
 
 
10.5
2006 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 12, 2006)
 
 
10.6
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 for the quarter ended December 31, 2006)
 
 
10.7
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 for the quarter ended December 31, 2006)
 
 
10.8
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 for the quarter ended December 31, 2006)
 
 
10.9
2010 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 28, 2010)
 
 
10.10
Form of Incentive Stock Option Agreement for options granted under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 in the Corporation’s Form 8-K dated November 30, 2010)
 
 
10.11
Form of Non-Qualified Stock Option Agreement for options granted under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 in the Corporation’s Form 8-K dated November 30, 2010)
 
 
10.12
Form of Restricted Stock Agreement for restricted shares awarded under the 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation’s Form 8-K dated November 30, 2010)
 
 
10.13
2013 Equity Incentive Plan (incorporated by reference to Exhibit A to the Corporation’s proxy statement dated October 24, 2013)
 
 
10.14
Form of Incentive Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 in the Corporation’s Form 8-K dated November 30, 2013)
 
 
10.15
Form of Non-Qualified Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 in the Corporation’s Form 8-K dated November 30, 2013)
 
 

62



10.16
Form of Restricted Stock Agreement for restricted shares awarded under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation’s Form 8-K dated November 30, 2013)
 
 
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
 
 
101
The following materials from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Operations; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Stockholders’ Equity; (5) Condensed Consolidated Statements of Cash Flows; and (6) Selected Notes to Condensed Consolidated Financial Statements.
 
 




63



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. 
 
 
 
 
 
 
Date: November 7, 2016
/s/ Craig G. Blunden                                        
 
Craig G. Blunden
 
Chairman and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
Date: November 7, 2016
/s/ Donavon P. Ternes                                       
 
Donavon P. Ternes 
 
President, Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer)


































64



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
 
 
101
The following materials from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language (XBRL): (1) Condensed Consolidated Statements of Financial Condition; (2) Condensed Consolidated Statements of Operations; (3) Condensed Consolidated Statements of Comprehensive Income; (4) Condensed Consolidated Statements of Stockholders’ Equity; (5) Condensed Consolidated Statements of Cash Flows; and (6) Selected Notes to Condensed Consolidated Financial Statements.
 
 


65