XNAS:PROV Provident Financial Holdings Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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

FORM 10-Q

(Mark One)

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

 
For the quarterly period ended …………………………………….....  March 31, 2012

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

 
For the transition period from ________________ to _________________

Commission File Number 000-28304

PROVIDENT FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware                                                33-0704889
(State or other jurisdiction of  (I.R.S.  Employer 
incorporation or organization)  Identification No.) 

3756 Central Avenue, Riverside, California 92506
(Address of principal executive offices and zip code)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  X  .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 [ X ]
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  X  .

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
                               Title of class: As of May 1, 2012
   
             Common stock, $ 0.01 par value, per share 11,013,972 shares
 
 
 

 
 

PROVIDENT FINANCIAL HOLDINGS, INC.

Table of Contents

PART 1  -
FINANCIAL INFORMATION
 
       
  ITEM 1  -
Financial Statements.  The Unaudited Interim Condensed Consolidated Financial Statements of Provident Financial Holdings, Inc. filed as a part of the report are as follows:
 
     
Page
 
Condensed Consolidated Statements of Financial Condition
 
   
as of March 31, 2012 and June 30, 2011
1
 
Condensed Consolidated Statements of Operations
 
   
for the Quarters and Nine Months Ended March 31, 2012 and 2011
2
 
Condensed Consolidated Statements of Comprehensive Income
 
   
for the Quarters and Nine Months Ended March 31, 2012 and 2011
3
 
Condensed Consolidated Statements of Stockholders’ Equity
 
   
for the Quarters and Nine Months Ended March 31, 2012 and 2011
4
 
Condensed Consolidated Statements of Cash Flows
 
   
for the Nine Months Ended March 31, 2012 and 2011
6
 
Notes to Unaudited Interim Condensed Consolidated Financial Statements
7
       
  ITEM 2  -
Management’s Discussion and Analysis of Financial Condition and Results of
 
   
Operations:
 
       
 
General
  35
 
Safe-Harbor Statement
   36
 
Critical Accounting Policies
37
 
Executive Summary and Operating Strategy
39
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
40
 
Comparison of Financial Condition at March 31, 2012 and June 30, 2011
40
 
Comparison of Operating Results
 
   
for the Quarters and Nine Months Ended March 31, 2012 and 2011
42
 
Asset Quality
51
 
Loan Volume Activities
60
 
Liquidity and Capital Resources
61
 
Commitments and Derivative Financial Instruments
62
 
Supplemental Information
62
       
  ITEM 3  -
Quantitative and Qualitative Disclosures about Market Risk
63
       
  ITEM 4  -
Controls and Procedures
64
       
PART II  -
OTHER INFORMATION
 
       
  ITEM 1  -
Legal Proceedings
65
  ITEM 1A -
Risk Factors
65
  ITEM 2  -
Unregistered Sales of Equity Securities and Use of Proceeds
66
  ITEM 3  -
Defaults Upon Senior Securities
66
  ITEM 4  -
Mine Safety Disclosures
66
  ITEM 5  -
Other Information
66
  ITEM 6  -
Exhibits
66
       
SIGNATURES
68
   

 
 

 
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
In Thousands, Except Share Information

 
March 31,
 
 
June 30,
 
 
2012
   
2011
 
Assets
         
     Cash and cash equivalents
$    187,007 
   
$    142,550
 
     Investment securities – available for sale, at fair value
23,541 
   
26,193
 
     Loans held for investment, net of allowance for loan losses of
         
          $24,260 and $30,482, respectively
825,325 
   
881,610
 
     Loans held for sale, at fair value
182,624 
   
191,678
 
     Accrued interest receivable
3,316 
   
3,778
 
     Real estate owned, net
6,084 
   
8,329
 
     Federal Home Loan Bank (“FHLB”) – San Francisco stock
23,410 
   
26,976
 
     Premises and equipment, net
6,202 
   
4,805
 
     Prepaid expenses and other assets
29,454 
   
28,630
 
           
               Total assets
$ 1,286,963 
   
$ 1,314,549
 
 
 
       
Liabilities and Stockholders’ Equity
         
           
Commitments and Contingencies
         
           
Liabilities:
         
     Non interest-bearing deposits
$       56,121 
   
$      45,437
 
     Interest-bearing deposits
918,682 
   
900,330
 
               Total deposits
974,803 
   
945,767
 
           
     Borrowings
146,560 
   
206,598
 
     Accounts payable, accrued interest and other liabilities
22,281 
   
20,441
 
               Total liabilities
1,143,644 
   
1,172,806
 
           
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;
          17,619,865 and 17,610,865 shares issued; 11,013,972 and
          11,418,654 shares outstanding, respectively)
         
         
176 
   
176
 
     Additional paid-in capital
86,621 
   
85,432
 
     Retained earnings
153,517 
   
148,147
 
     Treasury stock at cost (6,605,893 and 6,192,211 shares,
          respectively)
         
(97,608)
 
 
(92,650
)
     Accumulated other comprehensive income, net of tax
613 
   
638
 
           
               Total stockholders’ equity
143,319 
   
141,743
 
           
               Total liabilities and stockholders’ equity
$ 1,286,963 
   
$ 1,314,549
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
1

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
In Thousands, Except Per Share Information
 
 
Quarter Ended
March 31,
 
Nine Months Ended
March 31,
   
 
2012
 
2011
 
2012
 
2011
Interest income:
                     
     Loans receivable, net
$ 12,205
   
$ 13,715 
   
$ 38,215 
   
$ 44,164 
 
     Investment securities
126
   
185 
   
407 
   
643 
 
     FHLB – San Francisco stock
30
   
22 
   
68 
   
88 
 
     Interest-earning deposits
93
   
104 
   
227 
   
234 
 
     Total interest income
12,454
   
14,026 
   
38,917 
   
45,129 
 
                       
Interest expense:
                     
     Checking and money market deposits
147
   
225 
   
523 
   
801 
 
     Savings deposits
184
   
257 
   
600 
   
884 
 
     Time deposits
1,683
   
1,930 
   
5,413 
   
6,165 
 
     Borrowings
1,464
   
2,442 
   
5,101 
   
8,587 
 
     Total interest expense
3,478
   
4,854 
   
11,637 
   
16,437 
 
                       
Net interest income, before provision for loan losses
8,976
   
9,172 
   
27,280 
   
28,692 
 
Provision for loan losses
1,622
   
2,693 
   
3,726 
   
4,618 
 
Net interest income, after provision for loan losses
7,354
   
6,479 
   
23,554 
   
24,074 
 
                       
Non-interest income:
                     
     Loan servicing and other fees
256
   
298 
   
564 
   
697 
 
     Gain on sale of loans, net
10,138
   
6,680 
   
23,311 
   
25,459 
 
     Deposit account fees
609
   
633 
   
1,838 
   
1,933 
 
     Loss on sale and operations of real estate owned
       acquired in the settlement of loans, net
 
(215)
 
 
 
 
  (550)
 
 
 
 
  (106)
 
 
 
 
(1,608)
 
 
     Gain on sale of premises and equipment
-
   
1,086  
   
-  
   
1,086 
 
     Card and processing fees
306
   
312  
   
946 
   
940 
 
     Other
215
   
205  
   
617 
   
589 
 
     Total non-interest income
11,309
   
8,664  
   
27,170 
   
29,096 
 
                       
Non-interest expense:
                     
     Salaries and employee benefits
10,349
   
7,170  
   
27,583 
   
22,112 
 
     Premises and occupancy
915
   
786  
   
2,743 
   
2,410 
 
     Equipment
357
   
394  
   
1,081 
   
1,097 
 
     Professional expenses
540
   
356  
   
1,428 
   
1,157 
 
     Sales and marketing expenses
315
   
202  
   
692 
   
496 
 
     Deposit insurance premiums and regulatory
       assessments
 
364
   
 
695  
   
 
996 
   
 
2,040 
 
     Other
1,757
   
1,409  
   
4,851 
   
4,252 
 
     Total non-interest expense
14,597
   
11,012  
   
39,374 
   
33,564 
 
                       
Income before income taxes
4,066
   
4,131 
   
11,350 
   
19,606 
 
Provision for income taxes
1,734
   
1,796 
   
4,846 
   
8,487 
 
     Net income
$   2,332
   
$   2,335 
   
$  6,504 
   
$ 11,119 
 
                       
Basic earnings per share
$ 0.21
   
$ 0.20 
   
$ 0.57 
   
$ 0.98 
 
Diluted earnings per share
$ 0.21
   
$ 0.20 
   
$ 0.57 
   
$ 0.98 
 
Cash dividends per share
$ 0.04
   
$ 0.01 
   
$ 0.10 
   
$ 0.03 
 

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 and Nine Months Ended March 31, 2012 and 2011


 
 For the Quarters
Ended
March 31,
 
 For the Nine Months
Ended
March 31,
 
 
2012
 
2011
 
2012
 
2011
 
                 
Net income
$ 2,332
 
$ 2,335
 
$ 6,504
 
$ 11,119
 
                   
Change in unrealized holding gain (loss) on securities
  available for sale
 
103
 
 
214
 
 
(43
 
)
 
(5
 
)
Reclassification of (gains) losses to net income
-
 
-
 
-
 
-
 
Other comprehensive income (loss), before tax
103
 
214
 
(43
)
(5
)
Income tax (expense) benefit
(43
)
(90
)
18
 
2
 
Other comprehensive income (loss)
60
 
124
 
(25
)
(3
)
                 
Total comprehensive income
$ 2,392
 
$ 2,459
 
$ 6,479
 
$ 11,116
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 

 
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
In Thousands, Except Share Information
For the Quarters Ended March 31, 2012 and 2011


 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income,
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
Balance at January 1, 2012
11,175,761
 
$ 176
$ 86,265
 
$ 151,633
 
$ (95,757
)
$ -
 
$ 553
 
$ 142,870
 
                               
Net income
         
2,332
             
2,332
 
Other comprehensive income
                     
60
 
60
 
Purchase of treasury stock (1)
(181,989
)
         
(1,851
)
       
(1,851
)
Exercise of stock options
9,000
   
72
                 
72
 
Distribution of restricted stock
11,200
                       
-
 
Amortization of restricted stock
     
138
                 
138
 
Stock options expense
     
146
                 
146
 
Cash dividends
         
(448
)
           
(448
)
                               
Balance at March 31, 2012
11,013,972
 
$ 176
$ 86,621
 
$ 153,517
 
$ (97,608
)
$ -
 
$ 613
 
$ 143,319
 

(1)  
Includes the repurchase of 1,256 shares of distributed restricted stock.

 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income,
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
Balance at January 1, 2011
11,407,454
 
$ 176
$ 86,146
 
$ 143,939
 
$ (93,942
)
$   (68
)
$   540
 
$ 136,791
 
                               
Net income
         
2,335
             
2,335
 
Other comprehensive income
                     
124
 
124
 
Distribution of restricted stock
11,200
                           
Amortization of restricted stock
     
172
                 
172
 
Stock options expense
     
149
                 
149
 
Allocations of contribution to ESOP (1)
     
53
         
68
     
121
 
Cash dividends
         
(115
)
           
(115
)
                               
Balance at March 31, 2011
11,418,654
 
$ 176
$ 86,520
 
$ 146,159
 
$ (93,942
)
$      -
 
$   664
 
$ 139,577
 

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

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
In Thousands, Except Share Information
For the Nine Months Ended March 31, 2012 and 2011

 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
Balance at July 1, 2011
11,418,654
 
$ 176
$ 85,432
 
$ 148,147
 
$ (92,650
)
$ -
 
$  638
 
$ 141,743
 
                               
Net income
         
6,504
             
6,504
 
Other comprehensive loss
                     
(25
)
(25
)
Purchase of treasury stock (1)
(525,182
)
         
(4,958
)
       
(4,958
)
Exercise of stock options
9,000
   
72
                 
72
 
Distribution of restricted stock
111,500
                           
Amortization of restricted stock
     
555
                 
555
 
Stock options expense
     
562
                 
562
 
Cash dividends
         
(1,134
)
           
(1,134
)
                               
Balance at March 31, 2012
11,013,972
 
$ 176
$ 86,621
 
$ 153,517
 
$ (97,608
)
$ -
 
$ 613
 
$ 143,319
 

(2)  
Includes the repurchase of 12,779 shares of distributed restricted stock.



 
 
 
Common
Stock
 
 
Additional
Paid-In
 
 
 
Retained
 
 
 
Treasury
 
 
Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Net of Tax
Total
Balance at July 1, 2010
11,406,654
 
$ 176
$ 85,663
 
$ 135,383
 
$ (93,942
)
$ (203
)
$  667
 
$ 127,744
 
                               
Net income
         
11,119
             
11,119
 
Other comprehensive loss
                     
(3
)
(3
)
Distribution of restricted stock
12,000
                           
Amortization of restricted stock
     
374
                 
374
 
Stock options expense
     
380
                 
380
 
Allocations of contribution to ESOP
     
103
         
203
     
306
 
Cash dividends
         
(343
)
           
(343
)
                               
Balance at March 31, 2011
11,418,654
 
$ 176
$ 86,520
 
$ 146,159
 
$ (93,942
)
$      -
 
$   664
 
$ 139,577
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
5

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Nine Months Ended
March 31,
 
 
 
2012
   
2011
 
Cash flows from operating activities:
         
   Net income
$        6,504
   
$      11,119
 
   Adjustments to reconcile net income to net cash provided by
         
    operating activities:
         
       Depreciation and amortization
1,122
   
1,027
 
       Provision for loan losses
3,726
   
4,618
 
       Recovery of losses on real estate owned
(580
)
 
(28
)
       Gain on sale of loans, net
(23,311
)
 
(25,459
)
       Loss on sale of real estate owned, net
12
   
187
 
       Gain on sale of premises and equipment, net
-
   
(1,080
)
       Stock-based compensation
1,117
   
754
 
       ESOP expense
-
   
304
 
       (Increase) decrease in current and deferred income taxes
(292
)
 
2,203
 
       Increase in cash surrender value of the bank owned life insurance
(142
)
 
(150
)
   Increase (decrease) in accounts payable and other liabilities
2,220
   
(1,197
)
   Decrease in prepaid expenses and other assets
906
   
2,906
 
   Loans originated for sale
(1,780,636
)
 
(1,693,902
)
   Proceeds from sale of loans
1,811,710
   
1,738,148
 
Net cash provided by operating activities
22,356
   
39,450
 
           
Cash flows from investing activities:
         
   Decrease in loans held for investment, net
39,101
   
61,950
 
   Maturity and call of investment securities available for sale
-
   
3,250
 
   Principal payments from investment securities available for sale
2,671
   
4,610
 
   Redemption of FHLB – San Francisco stock
3,566
   
3,610
 
   Proceeds from sale of real estate owned
15,769
   
28,963
 
   Proceeds from sale of premises and equipment
-
   
2,189
 
   Purchase of premises and equipment
(1,984
)
 
(491
)
Net cash provided by investing activities
59,123
   
104,081
 
           
Cash flows from financing activities:
         
   Increase in deposits, net
29,036
   
14,002
 
   Proceeds from long-term borrowings
-
   
30,000
 
   Repayments of long-term borrowings
(60,038
)
 
(108,036
)
   ESOP loan payment
-
   
2
 
   Exercise of stock options
72
   
-
 
   Cash dividends
(1,134
)
 
(343
)
   Treasury stock purchases
(4,958
)
 
-
 
Net cash used for financing activities
(37,022
)
 
(64,375
)
           
Net increase in cash and cash equivalents
44,457
   
79,156
 
Cash and cash equivalents at beginning of period
142,550
   
96,201
 
Cash and cash equivalents at end of period
$    187,007
   
$    175,357
 
Supplemental information:
         
  Cash paid for interest
$ 11,987
   
$ 17,007
 
  Cash paid for income taxes
$   5,110
   
$   6,280
 
  Transfer of loans held for sale to held for investment
$   1,545
   
$      163
 
  Real estate acquired in the settlement of loans
$ 19,327
   
$ 36,146
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6

 

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

March 31, 2012


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 statements of financial condition at June 30, 2011 are derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. and its wholly-owned subsidiary, Provident Savings Bank, F.S.B. (the “Bank”) (collectively, the “Corporation”).  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to interim financial reporting.  It is recommended that these unaudited interim condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended June 30, 2011.  The results of operations for the quarter ended March 31, 2012 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2012.


Note 2: Accounting Standard Updates (“ASU”)

ASU 2011-02:
In April 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”  This ASU provides additional guidance for creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.  The provisions of this standard were effective for the first interim or annual period beginning on or after June 15, 2011.  The Corporation’s adoption of this ASU did not have a material effect on its consolidated financial statements.

ASU 2011-03:
In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  The ASU amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and, as well, the collateral maintenance implementation guidance related to that criterion.  ASU No. 2011-03 was effective for the Corporation’s reporting period beginning on or after December 15, 2011. The guidance applies prospectively to transactions or modification of existing transactions that occur on or after the effective date.  The Corporation’s adoption of this ASU did not have a material effect on its consolidated financial statements.

ASU 2011-04:
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in GAAP and International Financial Reporting Standards.” ASU 2011-04 developed common requirements between GAAP and IFRSs for measuring fair value and for disclosing information about fair value measurements.  The effective date of ASU 2011-04 commenced during interim or annual periods beginning after December 15, 2011 and this ASU is applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  The Corporation’s adoption of this ASU did not have a material effect on its consolidated financial statements.

ASU 2011-05:
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.”  ASU 2011-05 attempts to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The effective date of ASU 2011-05 was the first interim or fiscal period beginning after December 15, 2011 and this ASU is
 
 
7

 
 
applied retrospectively to transactions or modifications of existing transactions that occur on or after the effective date.  The Corporation’s adoption of this ASU did not have a material effect on its consolidated financial statements.

ASU 2011-10:
In December 2011, the FASB issued ASU 2011-10, “Property, Plant, and Equipment (Topic 360) - Derecognition of in Substance Real Estate.”  The amendments in this ASU clarify the scope of current GAAP.  The amendments will resolve the diversity in practice about whether the guidance in Subtopic 360-20 applies to the derecognition of in substance real estate when the parent ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate because of a default by the subsidiary on its nonrecourse debt.  That guidance will improve current GAAP by eliminating the diversity in practice and emphasizing that the accounting for such transactions is based on their substance rather than their form.  The amendments in this ASU should be applied on a prospective basis to deconsolidation events occurring after the effective date.  Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities.  For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012.  Early adoption is permitted.  The Corporation has not determined the impact of this ASU on the Corporation’s consolidated financial statements.

ASU 2011-11:
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU will enhance disclosures required by GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.  This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this ASU.  An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  The Corporation has not determined the impact of this ASU on the Corporation’s consolidated financial statements.

ASU 2011-12:
In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05.”  While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassification out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. The amendments in this ASU are effective at the same time as the amendments in ASU 2011-05 so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that this ASU is deferring.  For this reason, the transition guidance in paragraph 220-10-65-2 is consistent with that for ASU 2011-05.  The amendments in this ASU were effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Corporation has not determined the impact of this ASU on the Corporation’s consolidated financial statements.
 
 
Note 3: Earnings Per Share

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

As of March 31, 2012 and 2011, there were outstanding options to purchase 1,178,000 shares and 837,700 shares of the Corporation’s common stock, respectively, of which 584,000 shares and 656,700 shares, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive.

The following table provides the basic and diluted EPS computations for the quarters and nine months ended March 31, 2012 and 2011, respectively.

 
 
8

 
 
             
 
(In Thousands, Except Earnings Per Share)
 
  For the Quarter
Ended
March 31,
   
For the Nine Months
Ended
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Numerator:
                       
     Net income – numerator for basic earnings
        per share and diluted earnings
        per share - available to common stockholders
  $ 2,332     $ 2,335     $ 6,504     $ 11,119  
                                 
Denominator:
                               
     Denominator for basic earnings per share:
         Weighted-average shares
                               
    11,130       11,399       11,318       11,379  
                                 
     Effect of dilutive securities
    64       36       47       15  
                                 
     Denominator for diluted earnings per share:
                               
         Adjusted weighted-average shares
         and assumed conversions
    11,194       11,435       11,365       11,394  
                                 
Basic earnings per share
  $ 0.21     $ 0.20     $ 0.57     $ 0.98  
Diluted earnings per share
  $ 0.21     $ 0.20     $ 0.57     $ 0.98  


Note 4: Operating Segment Reports

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

The following tables set forth condensed consolidated statements of operations and total assets for the Corporation’s operating segments for the quarters ended March 31, 2012 and 2011, respectively (in thousands).


 
For the Quarter Ended March 31, 2012
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, before provision for loan losses
$        7,505
 
$     1,471
 
$        8,976
 
Provision (recovery) for loan losses
1,763
 
(141
)
1,622
 
Net interest income, after provision for loan losses
5,742
 
1,612
 
7,354
 
             
Non-interest income:
           
     Loan servicing and other fees
196
 
60
 
256
 
     (Loss) gain on sale of loans, net
(412
)
10,550
 
10,138
 
     Deposit account fees
609
 
-
 
609
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
(215
 
)
 
-
 
 
(215
 
)
     Card and processing fees
306
 
-
 
306
 
     Other
215
 
-
 
215
 
          Total non-interest income
699
 
10,610
 
11,309
 
             
Non-interest expense:
           
     Salaries and employee benefits
4,155
 
6,194
 
10,349
 
     Premises and occupancy
557
 
358
 
915
 
     Operating and administrative expenses
1,456
 
1,877
 
3,333
 
          Total non-interest expense
6,168
 
8,429
 
14,597
 
Income before income taxes
273
 
3,793
 
4,066
 
Provision for income taxes
139
 
1,595
 
1,734
 
Net income
$           134
 
$     2,198
 
$        2,332
 
Total assets, end of period
$ 1,106,673
 
$ 180,290
 
$ 1,286,963
 

 
9

 

 
For the Quarter Ended March 31, 2011
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, before provision for loan losses
$        8,266
 
$        906
 
$        9,172
 
Provision for loan losses
1,080
 
1,613
 
2,693
 
Net interest income (expense), after provision for
   loan losses
 
7,186
 
 
(707
 
)
 
6,479
 
             
Non-interest income:
           
     Loan servicing and other fees  
283
 
15
 
298
 
     Gain on sale of loans, net
4
 
6,676
 
6,680
 
     Deposit account fees
633
 
-
 
633
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
(501
 
)
 
(49
 
)
 
(550
 
)
     Gain on sale of premises and equipment
1,086
 
-
 
1,086
 
     Card and processing fees
312
 
-
 
312
 
     Other
205
 
-
 
205
 
          Total non-interest income
2,022
 
6,642
 
8,664
 
             
Non-interest expense:
           
     Salaries and employee benefits
3,636
 
3,534
 
7,170
 
     Premises and occupancy
546
 
240
 
786
 
     Operating and administrative expenses
1,586
 
1,470
 
3,056
 
          Total non-interest expense
5,768
 
5,244
 
11,012
 
Income before income taxes
3,440
 
691
 
4,131
 
Provision for income taxes
1,505
 
291
 
1,796
 
Net income
$        1,935
 
$        400
 
$        2,335
 
Total assets, end of period
$ 1,194,594
 
$ 144,437
 
$ 1,339,031
 
 
 
10

 

 
The following tables set forth condensed consolidated statements of operations and total assets for the Corporation’s operating segments for the nine months ended March 31, 2012 and 2011, respectively (in thousands).

 
For the Nine Months Ended March 31, 2012
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, before provision for loan losses
$      22,703
 
$     4,577
 
$      27,280
 
Provision for loan losses
3,554
 
172
 
3,726
 
Net interest income, after provision for loan losses
19,149
 
4,405
 
23,554
 
             
Non-interest income:
           
     Loan servicing and other fees
475
 
89
 
564
 
     (Loss) gain on sale of loans, net
(1,031
)
24,342
 
23,311
 
     Deposit account fees
1,838
 
-
 
1,838
 
     (Loss) gain on sale and operations of real estate
        owned acquired in the settlement of loans, net
 
(178
 
)
 
72
 
 
(106
 
)
     Card and processing fees
946
 
-
 
946
 
     Other
617
 
-
 
617
 
          Total non-interest income
2,667
 
24,503
 
27,170
 
             
Non-interest expense:
           
     Salaries and employee benefits
11,608
 
15,975
 
27,583
 
     Premises and occupancy
1,830
 
913
 
2,743
 
     Operating and administrative expenses
3,813
 
5,235
 
9,048
 
          Total non-interest expense
17,251
 
22,123
 
39,374
 
Income before taxes
4,565
 
6,785
 
11,350
 
Provision for income taxes
1,993
 
2,853
 
4,846
 
Net income
$        2,572
 
$     3,932
 
$        6,504
 
Total assets, end of period
$ 1,106,673
 
$ 180,290
 
$ 1,286,963
 

 
For the Nine Months Ended March 31, 2011
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, before provision for loan losses
$      25,590
 
$     3,102
 
$      28,692
 
Provision for loan losses
2,273
 
2,345
 
4,618
 
Net interest income, after provision for loan losses
23,317
 
757
 
24,074
 
             
Non-interest income:
           
     Loan servicing and other fees
657
 
40
 
697
 
     (Loss) gain on sale of loans, net
(117
)
25,576
 
25,459
 
     Deposit account fees
1,933
 
-
 
1,933
 
     Loss on sale and operations of real estate owned
        acquired in the settlement of loans, net
 
(1,522
 
)
 
(86
 
)
 
(1,608
 
)
     Gain on sale of premises and equipment
1,086
 
-
 
1,086
 
     Card and processing fees
940
 
-
 
940
 
     Other
587
 
2
 
589
 
          Total non-interest income
3,564
 
25,532
 
29,096
 
             
Non-interest expense:
           
     Salaries and employee benefits
10,112
 
12,000
 
22,112
 
     Premises and occupancy
1,702
 
708
 
2,410
 
     Operating and administrative expenses
4,796
 
4,246
 
9,042
 
          Total non-interest expense
16,610
 
16,954
 
33,564
 
Income before taxes
10,271
 
9,335
 
19,606
 
Provision for income taxes
4,562
 
3,925
 
8,487
 
Net income
$        5,709
 
$     5,410
 
$      11,119
 
Total assets, end of period
$ 1,194,594
 
$ 144,437
 
$ 1,339,031
 

 
11

 

Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of March 31, 2012 and June 30, 2011 were as follows:

 
 
March 31, 2012
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
                 
Available for sale
                 
 
U.S. government agency MBS (1)
$ 12,210
 
$ 455
 
$   -
 
$ 12,665
 
$ 12,665
 
U.S. government sponsored
  enterprise MBS
 
9,119
 
 
466
 
 
-
 
 
9,585
 
 
9,585
 
Private issue CMO (2)
1,288
 
6
 
(3
)
1,291
 
1,291
Total investment securities
$ 22,617
 
$ 927
 
$ (3
)
$ 23,541
 
$ 23,541

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


 
 
June 30, 2011
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated
Fair
Value
 
Carrying
Value
(In Thousands)
                 
Available for sale
                 
 
U.S. government agency MBS
$ 13,935
 
$ 474
 
$     -
 
$ 14,409
 
$ 14,409
 
U.S. government sponsored
  enterprise MBS
 
9,960
 
 
457
 
 
-
 
 
10,417
 
 
10,417
 
Private issue CMO
1,396
 
-
 
(29
)
1,367
 
1,367
Total investment securities
$ 25,291
 
$ 931
 
$ (29
)
$ 26,193
 
$ 26,193

In the third quarter of fiscal 2012 and 2011, the Bank received MBS principal payments of $688,000 and $885,000, respectively, and did not purchase or sell investment securities.  For the first nine months of fiscal 2012 and 2011, the Bank received MBS principal payments of $2.7 million and $4.6 million, respectively, and did not purchase or sell investment securities.

The Bank evaluates individual investment securities quarterly for other-than-temporary declines in market value.  As of March 31, 2012, the gross unrealized holding losses relate to one adjustable rate private issue CMO which has been in an unrealized loss position for more than 12 months; while as of June 30, 2011, the gross unrealized holding losses relate to two adjustable rate private issue CMO.  The unrealized holding losses are primarily the result of perceived credit and liquidity concerns of privately issued CMO investment securities.  Based on the nature of the investments, management concluded that such unrealized losses were not other than temporary as of June 30, 2011.  The Bank does not believe that there are any other-than-temporary impairments at March 31, 2012 or June 30, 2011; therefore, no impairment losses have been recorded for the quarter ended March 31, 2012.  The Bank intends and has the ability to hold these CMO investment securities until maturity and will not likely be required to sell the CMO investment securities before realizing a full recovery.
 
 
12

 
 
Contractual maturities of investment securities as of March 31, 2012 and June 30, 2011 were as follows:

 
 
 
(In Thousands)
March 31, 2012
June 30, 2011
   
Estimated
     
Estimated
Amortized
 
Fair
 
Amortized
 
Fair
Cost
 
Value
 
Cost
 
Value
Available for sale
             
Due in one year or less
$           -
 
$           -
 
$           -
 
$           -
Due after one through five years
-
 
-
 
-
 
-
Due after five through ten years
-
 
-
 
-
 
-
Due after ten years
22,617
 
23,541
 
25,291
 
26,193
Total investment securities
 $ 22,617
 
 $ 23,541
 
 $ 25,291
 
 $ 26,193


Note 6: Loans Held for Investment

Loans held for investment consisted of the following:

 
March 31,
2012
 
June 30,
2011
 
         
Mortgage loans:
       
 
Single-family
$ 452,936
 
$ 494,192
 
 
Multi-family
     291,205
 
304,808
 
 
Commercial real estate
98,642
 
103,637
 
 
Other
       756
 
1,530
 
Commercial business loans
3,284
 
4,526
 
Consumer loans
590
 
750
 
 
Total loans held for investment, gross
847,413
 
909,443
 
         
Deferred loan costs, net
2,172
 
2,649
 
Allowance for loan losses
(24,260
)
(30,482
)
 
Total loans held for investment, net
$ 825,325
 
$ 881,610
 

As of March 31, 2012, the Bank had $45.2 million in mortgage loans that are subject to negative amortization, consisting of $27.9 million in multi-family loans, $10.8 million in commercial real estate loans and $6.5 million in single-family loans.  This compares to $50.4 million of negative amortization mortgage loans at June 30, 2011, consisting of $31.3 million in multi-family loans, $11.5 million in commercial real estate loans and $7.6 million in single-family loans.  During the third quarter of fiscal 2012, no loan interest income was added to the negative amortization loan balance, as compared to $11,000 of loan interest income in the comparable period of fiscal 2011.  For the first nine months of fiscal 2012, $13,000 of loan interest income was added to the negative amortization loan balance, down from $38,000 of loan interest income in the comparable nine-month period of fiscal 2011.  Negative amortization involves a greater risk to the Bank 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 Bank 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 March 31, 2012 and June 30, 2011, the interest-only ARM loans were $223.6 million and $247.8 million, or 26.3% and 27.2% of loans held for investment, respectively.

The following table sets forth information at March 31, 2012 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 5% of loans held for investment at March 31, 2012, unchanged from June 30, 2011.  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 Bank’s actual repricing experience to differ materially from that shown.
 
 
13

 

   
Adjustable Rate
   
     
After
After
After
   
     
One Year
3 Years
5 Years
   
   
Within
Through
Through
Through
Fixed
 
(In Thousands)
One Year
3 Years
5 Years
10 Years
Rate
Total
             
Mortgage loans:
           
 
Single-family
 $ 424,446
 $ 16,433
 $   4,377
 $   1,465
$   6,215
 $ 452,936
 
Multi-family
209,716
13,237
42,866
 12,105
13,281
291,205
 
Commercial real estate
66,938
6,601
6,171
 1,846
17,086
98,642
 
Other
522
 -
 -
 -
234
756
Commercial business loans
1,647
 -
 -
 -
1,637
3,284
Consumer loans
567
 -
 -
 -
23
590
 
Total loans held for investment, gross
 $ 703,836
 $ 36,271
 $ 53,414
 $ 15,416
$ 38,476
$ 847,413

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

In compliance with the Office of the Comptroller of the Currency’s regulatory reporting requirements, the Corporation modified its charge-off policy on impaired loans during the quarter ended March 31, 2012.  Historically, the Corporation established a specific valuation allowance for impaired loans at the time of impairment based upon the estimated fair value of the underlying collateral, less disposition costs, in comparison to the loan balance.  The actual loan charge-off was not recorded until the foreclosure process was complete.  Under the modified policy, losses on loans are charged-off in the period the loans, or portion thereof, are deemed uncollectible, generally after the loan becomes 180 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.  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.  Both methods are acceptable under GAAP.  The modification to the charge-off policy resulted in $990,000 of additional charge-offs in the third quarter of fiscal 2012, however there was no impact on the allowance for loans losses or provision for loan losses because these charge-offs were timely identified in previous periods and were included in the Corporation’s loss experience as part of the evaluation of the allowance for loan losses in those prior periods.  The Corporation still records reserves for individually impaired assets under ASC 310-40.
 
 
14

 

 
The following tables summarize the Corporation’s allowance for loan losses at March 31, 2012 and June 30, 2011:

(In Thousands)
March 31, 2012
 
June 30,  2011 (1)
       
Collectively evaluated for impairment:
     
 
Mortgage loans:
     
   
Single-family
$ 10,628
 
$ 11,561
   
Multi-family
2,353
 
2,810
   
Commercial real estate
1,581
 
1,796
   
Other
7
 
5
 
Commercial business loans
124
 
178
 
Consumer loans
14
 
16
   
Total collectively evaluated allowance
14,707
 
16,366
         
Individually evaluated for impairment:
     
 
Mortgage loans:
     
   
Single-family
8,980
 
12,654
   
Multi-family
250
 
581
   
Commercial real estate
214
 
231
   
Other
-
 
321
 
Commercial business loans
109
 
329
   
Total individually evaluated allowance
9,553
 
14,116
Total loan loss allowance
$ 24,260
 
$ 30,482

(1)
The presentation for the June 30, 2011 data was changed to conform to the current reporting requirement, specifically the collectively evaluated allowance was previously described as general valuation allowance and the individually evaluated allowance was previously described as a specific valuation allowance.
 
 
15

 
 
The following table is provided to disclose additional details on the Corporation’s allowance for loan losses (dollars in thousands):

 
For the Quarter Ended
 
For the Nine Months Ended
 
March 31,
 
March 31,
 
2012
 
2011
 
2012
 
2011
                       
Allowance at beginning of period
$ 26,901
   
$ 36,925
   
$  30,482
   
$ 43,501
 
                       
Provision for loan losses
1,622
   
2,693
   
3,726
   
4,618
 
                       
Recoveries:
                     
Mortgage loans:
                     
 
Single-family
33
   
-
   
337
   
1
 
 
Construction
28
   
-
   
28
   
-
 
Consumer loans
-
   
1
   
-
   
1
 
     Total recoveries
61
   
1
   
365
   
2
 
                       
Charge-offs:
                     
Mortgage loans:
                     
 
Single-family
(3,081
)
 
(4,937
)
 
(9,043
)
 
(13,427
)
 
Multi-family
(534
)
 
(201
)
 
(534
)
 
(204
)
 
Commercial real estate
(49
)
 
-
   
(49
)
 
-
 
 
Other
(400
)
 
-
   
(400
)
 
-
 
Commercial business loans
(256
)
 
-
   
(256
)
 
-
 
Consumer loans
(4
)
 
(3
)
 
(31
)
 
(12
)
     Total charge-offs
(4,324
)
 
(5,141
)
 
(10,313
)
 
(13,643
)
                       
     Net charge-offs
(4,263
)
 
(5,140
)
 
(9,948
)
 
(13,641
)
          Balance at end of period
$ 24,260
   
$ 34,478
   
$  24,260
   
$ 34,478
 
                       
Allowance for loan losses as a
     percentage of gross loans held for
     investment
                     
 
2.86%
 
3.64%
   
 
2.86%
   
 
3.64%
 
                       
Net charge-offs as a percentage of
     average loans outstanding during
     the period (annualized)
                     
 
1.64%
 
1.94%
   
 
1.23%
   
 
1.62%
 
                       
Allowance for loan losses as a
     percentage of gross non-performing
     loans at the end of the period
                     
 
57.34%
 
54.19%
   
 
57.34%
   
 
54.19%
 


 
16

 

The following tables identify the Corporation’s total recorded investment in non-performing loans by type, net of individually evaluated allowances at March 31, 2012 and June 30, 2011:

 
 
 
(In Thousands)
March 31, 2012
 
Recorded
Investment
Individually
Evaluated
Allowance
 
Net
Investment
           
Mortgage loans:
         
 
Single-family:
         
 
     With a related allowance
 $ 35,145
 
 $ (8,980
)
 $ 26,165
 
     Without a related allowance
656
 
-
 
 656
 
Total single-family loans
35,801
 
 (8,980
)
26,821
 
 
Multi-family:
         
 
     With a related allowance
516
 
 (250
)
 266
 
     Without a related allowance
1,022
 
-
 
 1,022
 
Total multi-family loans
1,538
 
(250
)
1,288
           
 
Commercial real estate:
         
 
     With a related allowance
1,133
 
 (214
)
 919
 
     Without a related allowance
2,373
 
-
 
2,373
 
Total commercial real estate loans
3,506
 
(214
)
3,292
           
 
Other:
         
 
     Without a related allowance
522
 
-
 
522
 
Total other loans
522
 
-
 
522
           
Commercial business loans:
         
 
     With a related allowance
224
 
(109
)
115
 
     Without a related allowance
103
 
-
 
103
 
Total commercial business loans
327
 
 (109
)
218
           
Total non-performing loans
 $ 41,694
 
 $ (9,553
)
 $ 32,141
 
 

 
 
17

 

 
 
 
(In Thousands)
June 30, 2011
 
Recorded
Investment
Individually
Evaluated
Allowance (1)
 
Net
Investment
           
Mortgage loans:
         
 
Single-family:
         
 
     With a related allowance
$ 42,957
 
 $ (12,654
)
$ 30,303
 
     Without a related allowance
1,535
 
-
 
1,535
 
Total single-family loans
44,492
 
 (12,654
)
31,838
 
 
Multi-family:
         
 
     With a related allowance
2,534
 
 (581
)
1,953
 
Total multi-family loans
2,534
 
(581
)
1,953
           
 
Commercial real estate:
         
 
     With a related allowance
2,451
 
 (231
)
2,220
 
Total commercial real estate loans
2,451
 
(231
)
2,220
           
 
Other:
         
 
     With a related allowance
1,293
 
(321
)
972
 
Total other loans
1,293
 
(321
)
972
           
Commercial business loans:
         
 
     With a related allowance
331
 
(329
)
2
 
     Without a related allowance
141
 
-
 
141
 
Total commercial business loans
472
 
 (329
)
143
           
Total non-performing loans
 $ 51,242
 
 $ (14,116
)
 $ 37,126

(1) 
The presentation for the June 30, 2011 data was changed to conform to the current reporting requirement, specifically the individually evaluated allowance was previously described as a specific valuation allowance.

At March 31, 2012 and June 30, 2011, there were no commitments to lend additional funds to those borrowers whose loans were classified as impaired.

The following table describes the aging analysis (length of time on non-performing status) of non-performing loans, net of individually evaluated allowances, as of March 31, 2012:

 
(In Thousands)
3 Months or
Less
Over 3 to
6 Months
Over 6 to
12 Months
Over 12
Months
 
Total
Mortgage loans:
         
 
Single-family
$   9,074
$ 4,827
$ 3,712
$ 9,208
$ 26,821
 
Multi-family
669
353
-
266
1,288
 
Commercial real estate
2,373
-
919
-
3,292
 
Other
-
-
-
522
522
Commercial business loans
218
-
-
-
218
 
Total
$ 12,334
$ 5,180
$ 4,631
$ 9,996
$ 32,141

During the quarters ended March 31, 2012 and 2011, the Corporation’s average investment in non-performing loans was $33.1 million and $47.8 million, respectively.  Interest income of $1.7 million was recognized, based on cash receipts, on non-performing loans during both quarters ended March 31, 2012 and 2011, respectively.  The Corporation records interest on non-performing loans utilizing the cash basis method of accounting during the periods when the loans are on non-performing status.  Foregone interest income, which would have been recorded had the non-performing loans been current in accordance with their original terms, amounted to $132,000 and $354,000 for the quarters ended March 31, 2012 and 2011, respectively, and was not included in the results of operations.
 
 
18

 
 
For the nine months ended March 31, 2012 and 2011, the Corporation’s average investment in non-performing loans was $35.1 million and $52.8 million, respectively.  Interest income of $4.8 million and $5.2 million was recognized, based on cash receipts, on non-performing loans during the nine months ended March 31, 2012 and 2011, respectively.  The foregone interest income amounted to $706,000 and $995,000 and was not included in the results of operations for the nine months ended March 31, 2012 and 2011, respectively.

For the quarter ended March 31, 2012, six loans for $3.1 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as troubled debt restructurings (“restructured loans”). This compares to eight loans for $3.6 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the quarter ended March 31, 2011.  During the quarter ended March 31, 2012, no restructured loans were in default within a 12-month period subsequent to their original restructuring.  This compares to two restructured loans with a total balance of $737,000 during the quarter ended March 31, 2011 that was in default within a 12-month period subsequent to its original restructuring and required an additional provision of $327,000.  Additionally, for the quarter ended March 31, 2012 and 2011, three loans for $1.0 million and three loans for $2.0 million, respectively, had their modification terms extended beyond the initial maturity of the modification.

For the nine months ended March 31, 2012, twenty-two loans for $8.9 million were modified from their original terms, were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans. This compares to 37 loans for $17.8 million that were re-underwritten and were identified in the Corporation’s asset quality reports as restructured loans during the nine months ended March 31, 2011.  For the first nine months ended March 31, 2012, two restructured loans with a total loan balance of $771,000 were in default within a 12-month period subsequent to their original restructuring and required a $200,000 additional individually evaluated allowance.  This compares to three restructured loans with a total loan balance of $1.0 million that was in default within a 12-month period subsequent to its original restructuring and required an additional individually evaluated allowance of $460,000 in the first nine months ended March 31, 2011.  Additionally, for the nine months ended March 31, 2012 and 2011, eight loans for $4.3 million and 16 loans for $7.0 million, respectively, had their modification terms extended beyond the initial maturity of the modification.

As of March 31, 2012, the net outstanding balance of the 69 restructured loans was $28.5 million:  20 were classified in accordance with the Bank’s risk rating system as pass and remain on accrual status ($8.3 million); four were classified as special mention and remain on accrual status ($4.9 million); and 45 were classified as substandard ($15.3 million total, with 43 of the 45 loans or $14.5 million on non-accrual status).  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  Assets that do not currently expose the Bank to sufficient risk to warrant adverse classification but possess weaknesses are designated as special mention and are closely monitored by the Bank.  As of March 31, 2012, $22.9 million, or 80 percent, of the restructured loans are current with respect to their payment status.

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; 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, such as: satisfactory cash flow, satisfactory guarantor support, and additional collateral support, among others.

To qualify for restructuring, a borrower must provide evidence of their creditworthiness such as, current financial statements, their most recent income tax returns, current paystubs, current W-2s, and most recent bank statements, among other documents, which are then verified by the Bank.  The Bank re-underwrites the loan with the borrower’s updated financial information, new credit report, current loan balance, new interest rate, remaining loan term, updated property value and modified payment schedule, among other considerations, to determine if the borrower qualifies.
 
 
19

 
 
The following table summarizes at the dates indicated the restructured loan balances, net of individually evaluated allowances, by loan type and non-accrual versus accrual status:

(In Thousands)
March 31, 2012
 
June 30, 2011
 
Restructured loans on non-accrual status:
       
 
Mortgage loans:
       
   
Single-family
$ 10,213
 
$ 15,133
 
   
Multi-family
776
 
490
 
   
Commercial real estate
2,739
 
1,660
 
   
Other
522
 
972
 
 
Commercial business loans
218
 
143
 
   
Total
14,468
 
18,398
 
           
Restructured loans on accrual status:
       
 
Mortgage loans:
       
   
Single-family
9,505
 
15,589
 
   
Multi-family
3,653
 
3,665
 
   
Commercial real estate
880
 
1,142
 
 
    Other
-
 
237
 
 
Commercial business loans
35
 
125
 
   
Total
14,073
 
20,758
 
   
Total restructured loans
$ 28,541
 
$ 39,156
 

The following table shows the restructured loans by type, net of individually evaluated allowances at March 31, 2012 and June 30, 2011:

 
 
 
(In Thousands)
March 31, 2012
 
Recorded
Investment
Individually
Evaluated
Allowance
 
Net
Investment
           
Mortgage loans:
         
 
Single-family:
         
   
With a related allowance
 $ 12,321
 
 $ (2,108
)
$ 10,213
   
Without a related allowance
9,505
 
-
 
 9,505
 
Total single-family loans
21,826
 
 (2,108
)
19,718
           
 
Multi-family:
         
   
With a related allowance
516
 
(250
)
266
   
Without a related allowance
4,163
 
-
 
 4,163
 
Total multi-family loans
4,679
 
(250
)
4,429
           
 
Commercial real estate: