PROVIDENT FINANCIAL HOLDINGS INC - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20170930x10qxex322.htm
EX-32.1 - EXHIBIT 32.1 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20170930x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20170930x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - PROVIDENT FINANCIAL HOLDINGS INC	prov-20170930x10qxex311.htm

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, 2017



[ ]	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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No 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 October 31, 2017
Common stock, $ 0.01 par value, per share		7,609,552 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, 2017 and June 30, 2017	1
	Condensed Consolidated Statements of Operations
		for the Quarters Ended September 30, 2017 and 2016	2
	Condensed Consolidated Statements of Comprehensive Income
		for the Quarters Ended September 30, 2017 and 2016	3
	Condensed Consolidated Statements of Stockholders’ Equity
		for the Quarters Ended September 30, 2017 and 2016	4
	Condensed Consolidated Statements of Cash Flows
		for the Three Months Ended September 30, 2017 and 2016	5
	Notes to Unaudited Interim Condensed Consolidated Financial Statements		6

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

	General		37
	Safe-Harbor Statement		38
	Critical Accounting Policies		39
	Executive Summary and Operating Strategy		39
	Off-Balance Sheet Financing Arrangements and Contractual Obligations		40
	Comparison of Financial Condition at September 30, 2017 and June 30, 2017		41
	Comparison of Operating Results
		for the Quarters Ended September 30, 2017 and 2016	43
	Asset Quality		48
	Loan Volume Activities		56
	Liquidity and Capital Resources		57
	Supplemental Information		59

ITEM 3 -	Quantitative and Qualitative Disclosures about Market Risk		59

ITEM 4 -	Controls and Procedures		62

PART II -	OTHER INFORMATION

ITEM 1 -	Legal Proceedings		63
ITEM 1A -	Risk Factors		64
ITEM 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		64
ITEM 3 -	Defaults Upon Senior Securities		65
ITEM 4 -	Mine Safety Disclosures		65
ITEM 5 -	Other Information		65
ITEM 6 -	Exhibits		65

SIGNATURES			67

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Financial Condition

(Unaudited)

In Thousands, Except Share Information



	September 30, 2017			June 30, 2017
Assets
Cash and cash equivalents	$	49,217		$	72,826
Investment securities – held to maturity, at cost	64,751			60,441
Investment securities – available for sale, at fair value	8,940			9,318
Loans held for investment, net of allowance for loan losses of $8,063 and $8,039, respectively; includes $6,924 and $6,445 at fair value, respectively	908,060			904,919
Loans held for sale, at fair value	127,234			116,548
Accrued interest receivable	2,989			2,915
Real estate owned, net	—			1,615
Federal Home Loan Bank (“FHLB”) – San Francisco stock	8,108			8,108
Premises and equipment, net	7,333			6,641
Prepaid expenses and other assets	17,154			17,302

Total assets	$	1,193,786		$	1,200,633

Liabilities and Stockholders’ Equity

Liabilities:
Non interest-bearing deposits	$	82,415		$	77,917
Interest-bearing deposits	844,601			848,604
Total deposits	927,016			926,521

Borrowings	121,206			126,226
Accounts payable, accrued interest and other liabilities	20,643			19,656
Total liabilities	1,068,865			1,072,403

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; 17,970,865 and 17,949,365 shares issued; 7,609,552 and 7,714,052 shares outstanding, respectively)	180			180
Additional paid-in capital	93,669			93,209
Retained earnings	191,451			192,754
Treasury stock at cost (10,361,313 and 10,235,313 shares, respectively)	(160,609		)	(158,142		)
Accumulated other comprehensive income, net of tax	230			229

Total stockholders’ equity	124,921			128,230

Total liabilities and stockholders’ equity	$	1,193,786		$	1,200,633

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

In Thousands, Except Per Share Information



	Quarter Ended September 30,
	2017			2016
Interest income:
Loans receivable, net	$	10,157		$	10,480
Investment securities	257			84
FHLB – San Francisco stock	141			185
Interest-earning deposits	190			55
Total interest income	10,745			10,804

Interest expense:
Checking and money market deposits	103			98
Savings deposits	149			144
Time deposits	639			772
Borrowings	736			702
Total interest expense	1,627			1,716

Net interest income	9,118			9,088
Provision (recovery) for loan losses	169			(150		)
Net interest income, after provision (recovery) for loan losses	8,949			9,238

Non-interest income:
Loan servicing and other fees	363			267
Gain on sale of loans, net	4,847			7,996
Deposit account fees	558			550
Loss on sale and operations of real estate owned acquired in the settlement of loans, net	(40		)	(103		)
Card and processing fees	381			364
Other	243			178
Total non-interest income	6,352			9,252

Non-interest expense:
Salaries and employee benefits	9,269			11,314
Premises and occupancy	1,314			1,289
Equipment	362			362
Professional expenses	520			505
Sales and marketing expenses	203			296
Deposit insurance premiums and regulatory assessments	184			248
Other⁽¹⁾	3,882			1,618
Total non-interest expense	15,734			15,632

(Loss) income before income taxes	(433		)	2,858
(Benefit) provision for income taxes	(208		)	1,264
Net (loss) income	$	(225	)	$	1,594

Basic (loss) earnings per share	$	(0.03	)	$	0.20
Diluted (loss) earnings per share	$	(0.03	)	$	0.20
Cash dividends per share	$	0.14		$	0.13

^.^.

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

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

In Thousands



	For the Quarters Ended September 30,
	2017			2016
Net (loss) income	$	(225	)	$	1,594

Change in unrealized holding gain (loss) on securities available for sale	2			(57		)
Reclassification of (gains) losses to net income	—			—
Other comprehensive income (loss), before income taxes	2			(57		)

Income tax provision (benefit)	1			(24		)
Other comprehensive income (loss)	1			(33		)

Total comprehensive (loss) income	$	(224	)	$	1,561

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

In Thousands, Except Share Information

For the Quarters Ended September 30, 2017 and 2016:



	Common Stock				Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income, Net of Tax
	Shares		Amount												Total
Balance at June 30, 2017	7,714,052		$	180	$	93,209	$	192,754		$	(158,142	)	$	229	$	128,230

Net loss							(225		)						(225		)
Other comprehensive income													1		1
Purchase of treasury stock	(126,000	)								(2,450		)			(2,450		)
Exercise of stock options	21,500				177										177
Amortization of restricted stock					149										149
Forfeiture of restricted stock					17					(17		)			—
Stock options expense					117										117
Cash dividends⁽¹⁾							(1,078		)						(1,078		)

Balance at September 30, 2017	7,609,552		$	180	$	93,669	$	191,451		$	(160,609	)	$	230	$	124,921

⁽¹⁾Cash dividends of $0.14 per share were paid in the quarter ended September 30, 2017.



	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.

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

PROVIDENT FINANCIAL HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In Thousands)



	Three Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net (loss) income	$	(225	)	$	1,594
Adjustments to reconcile net (loss) income to net cash used for operating activities:
Depreciation and amortization	664			697
Provision (recovery) for loan losses	169			(150		)
(Recovery) provision of losses on real estate owned	(552		)	100
Gain on sale of loans, net	(4,847		)	(7,996		)
Loss (gain) on sale of real estate owned, net	580			(54		)
Stock-based compensation	266			702
(Benefit) provision for deferred income taxes	(930		)	1,420
Tax effect from stock based compensation	—			(187		)
Increase in accounts payable, accrued interest and other liabilities	1,039			1,828
Decrease (increase) in prepaid expenses and other assets	617			(361		)
Loans originated for sale	(392,292		)	(647,342		)
Proceeds from sale of loans	386,799			579,698
Net cash used for operating activities	(8,712		)	(70,051		)

Cash flows from investing activities:
Increase in loans held for investment, net	(3,517		)	(15,097		)
Principal payments from investment securities held to maturity	5,570			3,481
Principal payments from investment securities available for sale	383			567
Purchase of investment securities held to maturity	(10,102		)	—
Proceeds from sale of real estate owned	1,587			307
Purchase of premises and equipment	(901		)	(78		)
Net cash used for investing activities	(6,980		)	(10,820		)

Cash flows from financing activities:
Increase in deposits, net	495			17,118
(Repayments) proceeds from short-term borrowings, net	(5,000		)	35,000
Proceeds from long-term borrowings	—			20,000
Repayments of long-term borrowings	(20		)	(18		)
Exercise of stock options	177			17
Withholding taxes on stock based compensation	(41		)	(501		)
Tax effect from stock based compensation	—			187
Cash dividends	(1,078		)	(1,033		)
Treasury stock purchases	(2,450		)	(1,662		)
Net cash (used for) provided by financing activities	(7,917		)	69,108

Net decrease in cash and cash equivalents	(23,609		)	(11,763		)
Cash and cash equivalents at beginning of period	72,826			51,206
Cash and cash equivalents at end of period	$	49,217		$	39,443
Supplemental information:
Cash paid for interest	$	1,606		$	1,671
Cash paid for income taxes	$	—		$	100
Transfer of loans held for sale to held for investment	$	521		$	760
Real estate acquired in the settlement of loans	$	—		$	1,298

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

PROVIDENT FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

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, 2017 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, 2017. The results of operations for the quarter and three months ended September 30, 2017 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2018.

Note 2: Accounting Standard Updates (“ASU”)

There have been no accounting standard updates or changes in the status of their adoption 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, 2017, except the adoption of ASU 2016-09 beginning in fiscal 2018 which did not have a material impact on its condensed consolidated financial statements.

Note 3: (Loss) Earnings Per Share

Basic (loss) 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, 2017 and 2016, there were outstanding options to purchase 591,250 shares and 932,000 shares of the Corporation’s common stock, respectively. Of those shares, as of September 30, 2017 and 2016, there were 591,250 shares and 200,000 shares, respectively, which were excluded from the diluted EPS computation as their effect was anti-dilutive. As of September 30, 2017, there were outstanding restricted stock awards of 109,000 shares with no dilutive effect in the first quarter of fiscal 2018; and as of September 30, 2016, there were outstanding restricted stock awards of 110,250 shares which had a dilutive effect in the first quarter of fiscal 2017.

The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2017 and 2016, respectively.



(In Thousands, Except Earnings Per Share)	For the Quarters Ended September 30,
	2017			2016
Numerator:
Net (loss) income – numerator for basic earnings per share and diluted earnings per share - available to common stockholders	$	(225	)	$	1,594

Denominator:
Denominator for basic earnings per share:
Weighted-average shares	7,694			7,948

Effect of dilutive shares:
Stock options	—			158
Restricted stock	—			48

Denominator for diluted earnings per share:
Adjusted weighted-average shares and assumed conversions	7,694			8,154

Basic (loss) earnings per share	$	(0.03	)	$	0.20
Diluted (loss) earnings per share	$	(0.03	)	$	0.20

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, 2017 and 2016, respectively.



	For the Quarter Ended September 30, 2017
(In Thousands)	Provident Bank			Provident Bank Mortgage			Consolidated Totals
Net interest income	$	8,550		$	568		$	9,118
Provision for loan losses	169			—			169
Net interest income, after provision for loan losses	8,381			568			8,949

Non-interest income:
Loan servicing and other fees ⁽¹⁾	47			316			363
Gain on sale of loans, net ⁽²⁾	—			4,847			4,847
Deposit account fees	558			—			558
Loss on sale and operations of real estate owned acquired in the settlement of loans, net	(40		)	—			(40		)
Card and processing fees	381			—			381
Other	243			—			243
Total non-interest income	1,189			5,163			6,352

Non-interest expense:
Salaries and employee benefits	4,502			4,767			9,269
Premises and occupancy	827			487			1,314
Operating and administrative expenses	2,251			2,900			5,151
Total non-interest expense	7,580			8,154			15,734
Income (loss) before income taxes	1,990			(2,423		)	(433		)
Provision (benefit) for income taxes	811			(1,019		)	(208		)
Net income (loss)	$	1,179		$	(1,404	)	$	(225	)
Total assets, end of period	$	1,066,294		$	127,492		$	1,193,786


⁽¹⁾	Includes an inter-company charge of $240 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.


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



	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.

Note 5: Investment Securities

The amortized cost and estimated fair value of investment securities as of September 30, 2017 and June 30, 2017 were as follows:



September 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value		Carrying Value
(In Thousands)
Held to maturity:
Certificates of deposit	$	600	$	—	$	—		$	600	$	600
U.S. government sponsored enterprise MBS ⁽¹⁾	64,151		205		(28		)	64,328		64,151
Total investment securities - held to maturity	$	64,751	$	205	$	(28	)	$	64,928	$	64,751

Available for sale:
U.S. government agency MBS	$	4,943	$	199	$	—		$	5,142	$	5,142
U.S. government sponsored enterprise MBS	3,186		164		—			3,350		3,350
Private issue CMO ⁽²⁾	442		6		—			448		448
Total investment securities - available for sale	$	8,571	$	369	$	—		$	8,940	$	8,940
Total investment securities	$	73,322	$	574	$	(28	)	$	73,868	$	73,691


⁽¹⁾	Mortgage-Backed Securities (“MBS”).


⁽²⁾	Collateralized Mortgage Obligations (“CMO”).



June 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value		Carrying Value
(In Thousands)
Held to maturity:
Certificates of deposit	$	600	$	—	$	—		$	600	$	600
U.S. government sponsored enterprise MBS	59,841		265		(77		)	60,029		59,841
Total investment securities - held to maturity	$	60,441	$	265	$	(77	)	$	60,629	$	60,441

Available for sale:
U.S. government agency MBS	$	5,197	$	186	$	—		$	5,383	$	5,383
U.S. government sponsored enterprise MBS	3,301		173		—			3,474		3,474
Private issue CMO	456		5		—			461		461
Total investment securities - available for sale	$	8,954	$	364	$	—		$	9,318	$	9,318
Total investment securities	$	69,395	$	629	$	(77	)	$	69,947	$	69,759

In the first quarters of fiscal 2018 and 2017, the Corporation received MBS principal payments of $6.0 million and $4.0 million, respectively, and there were no sales of investment securities during these periods. The Corporation purchased U.S. government sponsored enterprise MBS totaling $10.1 million, to be held to maturity, during the first quarter of fiscal 2018 and no purchases were made during the first quarter of fiscal 2017.

The Corporation held investments with an unrealized loss position of $28,000 at September 30, 2017 and $77,000 at June 30, 2017.



As of September 30, 2017	Unrealized Holding Losses				Unrealized Holding Losses				Unrealized Holding Losses
(In Thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Held to maturity:
U.S. government sponsored enterprise MBS	$	35,179	$	28	$	—	$	—	$	35,179	$	28
Total investment securities	$	35,179	$	28	$	—	$	—	$	35,179	$	28



As of June 30, 2017	Unrealized Holding Losses				Unrealized Holding Losses				Unrealized Holding Losses
(In Thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Held to maturity:
U.S. government sponsored enterprise MBS	$	28,722	$	77	$	—	$	—	$	28,722	$	77
Total investment securities	$	28,722	$	77	$	—	$	—	$	28,722	$	77

The Corporation evaluates individual investment securities quarterly for other-than-temporary declines in market value. As of September 30, 2017 and June 30, 2017, 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, 2017 and 2016; therefore, no impairment losses were recorded for the quarters ended September 30, 2017 and 2016.

Contractual maturities of investment securities as of September 30, 2017 and June 30, 2017 were as follows:



	September 30, 2017				June 30, 2017
(In Thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Held to maturity:
Due in one year or less	$	600	$	600	$	600	$	600
Due after one through five years	7,840		7,882		4,698		4,708
Due after five through ten years	44,245		44,236		41,404		41,374
Due after ten years	12,066		12,210		13,739		13,947
Total investment securities - held to maturity	$	64,751	$	64,928	$	60,441	$	60,629

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	8,571		8,940		8,954		9,318
Total investment securities - available for sale	$	8,571	$	8,940	$	8,954	$	9,318
Total investment securities	$	73,322	$	73,868	$	69,395	$	69,947

Note 6: Loans Held for Investment

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



(In Thousands)	September 30, 2017			June 30, 2017
Mortgage loans:
Single-family	$	322,363		$	322,197
Multi-family	482,617			479,959
Commercial real estate	96,863			97,562
Construction	16,290			16,009
Commercial business loans	466			576
Consumer loans	131			129
Total loans held for investment, gross	918,730			916,432

Undisbursed loan funds	(8,189		)	(9,015		)
Advance payments of escrows	24			61
Deferred loan costs, net	5,558			5,480
Allowance for loan losses	(8,063		)	(8,039		)
Total loans held for investment, net	$	908,060		$	904,919

The following table sets forth information at September 30, 2017 regarding the dollar amount of loans held for investment that are contractually repricing during the periods indicated, segregated between adjustable rate loans and fixed rate loans. Fixed-rate loans comprised 2% of loans held for investment at both September 30, 2017 and June 30, 2017. Adjustable rate loans having no stated repricing dates that reprice when the index they are tied to reprices (e.g. prime rate index) and checking account overdrafts are reported as repricing within one year. The table does not include any estimate of prepayments which may cause the Corporation’s actual repricing experience to differ materially from that shown.



	Adjustable Rate
(In Thousands)	Within One Year		After One Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		Fixed Rate		Total
Mortgage loans:
Single-family	$	161,098	$	21,404	$	77,223	$	48,293	$	14,345	$	322,363
Multi-family	111,180		174,809		179,602		14,441		2,585		482,617
Commercial real estate	23,134		40,725		32,377		—		627		96,863
Construction	15,861		—		—		—		429		16,290
Commercial business loans	61		—		—		—		405		466
Consumer loans	131		—		—		—		—		131
Total loans held for investment, gross	$	311,465	$	236,938	$	289,202	$	62,734	$	18,391	$	918,730

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.

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, 2017
(In Thousands)		Single-family		Multi-family		Commercial Real Estate		Construction		Commercial Business		Consumer		Total

Pass		$	309,744	$	482,617	$	96,863	$	15,364	$	387	$	131	$	905,106
Special Mention		4,267		—		—		926		—		—		5,193
Substandard		8,352		—		—		—		79		—		8,431
	Total loans held for investment, gross	$	322,363	$	482,617	$	96,863	$	16,290	$	466	$	131	$	918,730



		June 30, 2017
(In Thousands)		Single-family		Multi-family		Commercial Real Estate		Construction		Commercial Business		Consumer		Total

Pass		$	310,738	$	479,687	$	97,361	$	16,009	$	496	$	129	$	904,420
Special Mention		3,443		272		—		—		—		—		3,715
Substandard		8,016		—		201		—		80		—		8,297
	Total loans held for investment, gross	$	322,197	$	479,959	$	97,562	$	16,009	$	576	$	129	$	916,432

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loans held for investment and upon management’s continuing analysis of the factors underlying the quality of the loans held for investment. These factors include changes in the size and composition of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the realizable value of the collateral securing the loans. The provision (recovery) for (from) the allowance for loan losses is charged (credited) against operations on a quarterly basis, as necessary, to maintain the allowance at appropriate levels. Although management believes it uses the best information available to make such determinations, there can

be no assurance that regulators, in reviewing the Corporation’s loans held for investment, will not request a significant increase in its allowance for loan losses. Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected as a result of economic, operating, regulatory, and other conditions beyond the Corporation’s control.

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

The following table summarizes the Corporation’s allowance for loan losses at September 30, 2017 and June 30, 2017:



(In Thousands)	September 30, 2017		June 30, 2017
Collectively evaluated for impairment:
Mortgage loans:
Single-family	$	3,562	$	3,515
Multi-family	3,431		3,420
Commercial real estate	875		879
Construction	140		96
Commercial business loans	16		21
Consumer loans	7		7
Total collectively evaluated allowance	8,031		7,938

Individually evaluated for impairment:
Mortgage loans:
Single-family	17		86
Commercial business loans	15		15
Total individually evaluated allowance	32		101
Total loan loss allowance	$	8,063	$	8,039

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)	2017			2016

Allowance at beginning of period	$	8,039		$	8,670

Provision (recovery) for loan losses	169			(150		)

Recoveries:
Mortgage loans:
Single-family	84			263
Multi-family	—			7
Consumer loans	—			1
Total recoveries	84			271

Charge-offs:
Mortgage loans:
Single-family	(229		)	(66		)
Total charge-offs	(229		)	(66		)

Net (charge-offs) recoveries	(145		)	205
Balance at end of period	$	8,063		$	8,725

Allowance for loan losses as a percentage of gross loans held for investment at the end of the period	0.88		%	1.01		%
Net charge-offs (recoveries) as a percentage of average loans receivable, net, during the period (annualized)	0.06		%	(0.08		)%

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, 2017
(In Thousands)		Current		30-89 Days Past Due		Non-Accrual ⁽¹⁾		Total Loans Held for Investment

Mortgage loans:
	Single-family	$	312,499	$	1,512	$	8,352	$	322,363
	Multi-family	482,617		—		—		482,617
	Commercial real estate	96,863		—		—		96,863
	Construction	16,290		—		—		16,290
Commercial business loans		387		—		79		466
Consumer loans		131		—		—		131
	Total loans held for investment, gross	$	908,787	$	1,512	$	8,431	$	918,730

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



		June 30, 2017
(In Thousands)		Current		30-89 Days Past Due		Non-Accrual ⁽¹⁾		Total Loans Held for Investment

Mortgage loans:
	Single-family	$	313,146	$	1,035	$	8,016	$	322,197
	Multi-family	479,959		—		—		479,959
	Commercial real estate	97,361		—		201		97,562
	Construction	16,009		—		—		16,009
Commercial business loans		496		—		80		576
Consumer loans		129		—		—		129
	Total loans held for investment, gross	$	907,100	$	1,035	$	8,297	$	916,432

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

The following tables summarize the Corporation’s allowance for loan losses and recorded investment in gross loans, by portfolio type, at the dates and for the periods indicated.



		Quarter Ended September 30, 2017
(In Thousands)		Single-family			Multi-family			Commercial Real Estate			Construction			Commercial Business			Consumer			Total
Allowance for loan losses:
Allowance at beginning of period		$	3,601		$	3,420		$	879		$	96		$	36		$	7		$	8,039
Provision (recovery) for loan losses		123			11			(4		)	44			(5		)	—			169
Recoveries		84			—			—			—			—			—			84
Charge-offs		(229		)	—			—			—			—			—			(229		)
	Allowance for loan losses, end of period	$	3,579		$	3,431		$	875		$	140		$	31		$	7		$	8,063

Allowance for loan losses:
Individually evaluated for impairment		$	17		$	—		$	—		$	—		$	15		$	—		$	32
Collectively evaluated for impairment		3,562			3,431			875			140			16			7			8,031
	Allowance for loan losses, end of period	$	3,579		$	3,431		$	875		$	140		$	31		$	7		$	8,063

Loans held for investment:
Individually evaluated for impairment		$	6,239		$	—		$	—		$	—		$	79		$	—		$	6,318
Collectively evaluated for impairment		316,124			482,617			96,863			16,290			387			131			912,412
	Total loans held for investment, gross	$	322,363		$	482,617		$	96,863		$	16,290		$	466		$	131		$	918,730
Allowance for loan losses as a percentage of gross loans held for investment		1.11		%	0.71		%	0.90		%	0.86		%	6.65		%	5.34		%	0.88		%



		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		%

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, the borrower(s) has demonstrated sustained payment performance 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.



			At September 30, 2017
			Unpaid										Net
			Principal		Related			Recorded					Recorded
(In Thousands)			Balance		Charge-offs			Investment		Allowance⁽¹⁾			Investment

Mortgage loans:
	Single-family:
		With a related allowance	$	2,407	$	—		$	2,407	$	(463	)	$	1,944
		Without a related allowance⁽²⁾	7,013		(1,030		)	5,983		—			5,983
	Total single-family		9,420		(1,030		)	8,390		(463		)	7,927

Commercial business loans:
	With a related allowance		79		—			79		(15		)	64
Total commercial business loans			79		—			79		(15		)	64

Total non-performing loans			$	9,499	$	(1,030	)	$	8,469	$	(478	)	$	7,991

⁽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.



			At June 30, 2017
			Unpaid										Net
			Principal		Related			Recorded					Recorded
(In Thousands)			Balance		Charge-offs			Investment		Allowance⁽¹⁾			Investment

Mortgage loans:
	Single-family:
		With a related allowance	$	1,821	$	—		$	1,821	$	(325	)	$	1,496
		Without a related allowance⁽²⁾	7,119		(886		)	6,233		—			6,233
	Total single-family		8,940		(886		)	8,054		(325		)	7,729

	Commercial real estate:
		Without a related allowance⁽²⁾	201		—			201		—			201
	Total commercial real estate		201		—			201		—			201

Commercial business loans:
	With a related allowance		80		—			80		(15		)	65
Total commercial business loans			80		—			80		(15		)	65

Total non-performing loans			$	9,221	$	(886	)	$	8,335	$	(340	)	$	7,995

⁽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 both September 30, 2017 and June 30, 2017, there were no commitments to lend additional funds to those borrowers whose loans were classified as non-performing.

For the quarters ended September 30, 2017 and 2016, the Corporation’s average recorded investment in non-performing loans was $7.9 million and $11.5 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, 2017 and 2016, interest income of $160,000 and $69,000, respectively, was recognized, based on cash receipts from loan payments on non-performing loans and $94,000 and $67,000, respectively, was collected and applied to reduce the loan balances under the cost recovery method. Forgone interest income, which would have been recorded had the non-performing loans been current in accordance with their original terms, amounted to $49,000 and $39,000 for the quarters ended September 30, 2017 and 2016, respectively, and was not included in the results of operations.

The following table presents the average recorded investment in non-performing loans and the related interest income recognized for the quarters ended September 30, 2017 and 2016:



			Quarter Ended September 30,
			2017				2016
			Average		Interest		Average		Interest
			Recorded		Income		Recorded		Income
(In Thousands)			Investment		Recognized		Investment		Recognized

Without related allowances:
	Mortgage loans:
		Single-family	$	6,167	$	135	$	7,310	$	35
		Multi-family	—		—		379		—
		Commercial real estate	67		13		—		—
			6,234		148		7,689		35

With related allowances:
	Mortgage loans:
		Single-family	1,609		11		3,230		27
		Multi-family	—		—		467		5
	Commercial business loans		79		1		94		2
			1,688		12		3,791		34

	Total		$	7,922	$	160	$	11,480	$	69

For the quarters ended September 30, 2017 and 2016, 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, 2017 and 2016, no restructured loans were in default within a 12-month period subsequent to their original restructuring. Additionally, during the quarters ended September 30, 2017 and 2016, there were no loans whose modification was extended beyond the initial maturity of the modification. At both September 30, 2017 and June 30, 2017, there were no commitments to lend additional funds to those borrowers whose loans were restructured.

As of September 30, 2017, the Corporation held 12 restructured loans with a net outstanding balance of $4.5 million: two were classified as special mention on accrual status ($996,000); and 10 were classified as substandard ($3.5 million, all on non-accrual status). As of June 30, 2017, the Corporation held 10 restructured loans with a net outstanding balance of $3.6 million: one was classified as special mention on accrual status ($506,000); and nine were classified as substandard ($3.1 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, 2017 and June 30, 2017, $1.4 million or 32%, and $1.7 million or 46%, 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, 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, 2017		June 30, 2017
Restructured loans on non-accrual status:
Mortgage loans:
Single-family	$	3,393	$	3,061
Commercial business loans	64		65
Total	3,457		3,126

Restructured loans on accrual status:
Mortgage loans:
Single-family	996		506
Total	996		506

Total restructured loans	$	4,453	$	3,632

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, 2017
			Unpaid										Net
			Principal		Related			Recorded					Recorded
(In Thousands)			Balance		Charge-offs			Investment		Allowance⁽¹⁾			Investment

Mortgage loans:
	Single-family:
		With a related allowance	$	482	$	—		$	482	$	(97	)	$	385
		Without a related allowance⁽²⁾	4,559		(555		)	4,004		—			4,004
	Total single-family		5,041		(555		)	4,486		(97		)	4,389

Commercial business loans:
	With a related allowance		79		—			79		(15		)	64
Total commercial business loans			79		—			79		(15		)	64

Total restructured loans			$	5,120	$	(555	)	$	4,565	$	(112	)	$	4,453

⁽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 June 30, 2017
			Unpaid										Net
			Principal		Related			Recorded					Recorded
(In Thousands)			Balance		Charge-offs			Investment		Allowance⁽¹⁾			Investment

Mortgage loans:
	Single-family
		With a related allowance	$	485	$	—		$	485	$	(97	)	$	388
		Without a related allowance⁽²⁾	3,618		(439		)	3,179		—			3,179
	Total single-family		4,103		(439		)	3,664		(97		)	3,567

Commercial business loans:
	With a related allowance		80		—			80		(15		)	65
Total commercial business loans			80		—			80		(15		)	65

Total restructured loans			$	4,183	$	(439	)	$	3,744	$	(112	)	$	3,632

⁽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, 2017, no properties were acquired in the settlement of loans, while two previously foreclosed upon properties were sold. This compares to the quarter ended September 30, 2016 when three properties were acquired in the settlement of loans, while one previously foreclosed upon property was sold. As of September 30, 2017, there was no outstanding real estate owned. This compares to the real estate owned net fair value of $1.6 million at June 30, 2017, comprised of one property located in California and one property located in Arizona. 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, 2017 and June 30, 2017, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $96.3 million and $111.8 million, respectively.

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, 2017		June 30, 2017
(In Thousands)

Undisbursed loan funds – Construction loans	$	8,189	$	9,015
Undisbursed lines of credit – Commercial business loans	674		646
Undisbursed lines of credit – Consumer loans	549		562
Commitments to extend credit on loans to be held for investment	4,276		19,119
Total	$	13,688	$	29,342

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, 2017 and 2016.



	For the Quarters Ended September 30,
(In Thousands)	2017			2016
Balance, beginning of the period	$	277		$	204
Recovery	(64		)	(31		)
Balance, end of the period	$	213		$	173

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, 2017, $1.1 million was included in other assets and $49,000 was included in other liabilities; at June 30, 2017, $1.5 million was included in other assets and $38,000 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 is recorded within the gain on sale of loans contained in the Condensed Consolidated Statements of Operations during the quarters ended September 30, 2017 and 2016 was as follows:



	For the Quarters Ended September 30,
Derivative Financial Instruments	2017			2016
(In Thousands)
Commitments to extend credit on loans to be held for sale	$	(122	)	$	(1,211	)
Mandatory loan sale commitments and TBAMBS trades	(209		)	1,797
Option contracts, net	(37		)	(22		)
Total net (loss) gain	$	(368	)	$	564

The outstanding derivative financial instruments and other loan sale agreements at the dates indicated were as follows:



	September 30, 2017					June 30, 2017
Derivative Financial Instruments	Amount			Fair Value		Amount			Fair Value
(In Thousands)
Commitments to extend credit on loans to be held for sale ⁽¹⁾	$	92,065		$	687	$	92,726		$	809
Best efforts loan sale commitments	(22,965		)	—		(17,225		)	—
Mandatory loan sale commitments and TBA MBS trades	(185,888		)	377		(179,777		)	586
Option contracts, net	—			—		(3,000		)	37
Total	$	(116,788	)	$	1,064	$	(107,276	)	$	1,432


⁽¹⁾	Net of 27.8% at September 30, 2017 and 25.7% at June 30, 2017 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, 2017:
Loans held for investment, at fair value	$	6,924	$	7,167	$	(243	)
Loans held for sale, at fair value	$	127,234	$	123,352	$	3,882

As of June 30, 2017:
Loans held for investment, at fair value	$	6,445	$	6,696	$	(251	)
Loans held for sale, at fair value	$	116,548	$	112,940	$	3,608

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.

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, and are then 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.

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, 2017 Using:
(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investment securities - available for sale:
U.S. government agency MBS	$	—	$	5,142	$	—	$	5,142
U.S. government sponsored enterprise MBS	—		3,350		—		3,350
Private issue CMO	—		—		448		448
Investment securities - available for sale	—		8,492		448		8,940

Loans held for investment, at fair value	—		—		6,924		6,924
Loans held for sale, at fair value	—		127,234		—		127,234
Interest-only strips	—		—		28		28

Derivative assets:
Commitments to extend credit on loans to be held for sale	—		—		726		726
Mandatory loan sale commitments	—		—		6		6
TBA MBS trades	—		381		—		381
Derivative assets	—		381		732		1,113
Total assets	$	—	$	136,107	$	8,132	$	144,239

Liabilities:
Derivative liabilities:
Commitments to extend credit on loans to be held for sale	$	—	$	—	$	39	$	39
Mandatory loan sale commitments	—		—		10		10
Derivative liabilities	—		—		49		49
Total liabilities	$	—	$	—	$	49	$	49



	Fair Value Measurement at June 30, 2017 Using:
(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investment securities - available for sale:
U.S. government agency MBS	$	—	$	5,383	$	—	$	5,383
U.S. government sponsored enterprise MBS	—		3,474		—		3,474
Private issue CMO	—		—		461		461
Investment securities - available for sale	—		8,857		461		9,318

Loans held for investment, at fair value	—		—		6,445		6,445
Loans held for sale, at fair value	—		116,548		—		116,548
Interest-only strips	—		—		31		31

Derivative assets:
Commitments to extend credit on loans to be held for sale	—		—		847		847
Mandatory loan sale commitments	—		—		47		47
TBAMBS trades	—		539		—		539
Option contracts	—		—		37		37
Derivative assets	—		539		931		1,470
Total assets	$	—	$	125,944	$	7,868	$	133,812

Liabilities:
Derivative liabilities:
Commitments to extend credit on loans to be held for sale	$	—	$	—	$	38	$	38
Derivative liabilities	—		—		38		38
Total liabilities	$	—	$	—	$	38	$	38

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, 2017
	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, 2017	$	461		$	6,445		$	31		$	809		$	47		$	37		$	7,830
Total gains or losses (realized/unrealized):
Included in earnings	—			8			—			(122		)	(53		)	(37		)	(204		)
Included in other comprehensive loss	1			—			(3		)	—			—			—			(2		)
Purchases	—			—			—			—			—			—			—
Issuances	—			—			—			—			—			—			—
Settlements	(14		)	(51		)	—			—			2			—			(63		)
Transfers in and/or out of Level 3	—			522			—			—			—			—			522
Ending balance at September 30, 2017	$	448		$	6,924		$	28		$	687		$	(4	)	$	—		$	8,083


⁽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, 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.

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, 2017 Using:
(In Thousands)	Level 1		Level 2		Level 3		Total
Non-performing loans	$	—	$	6,222	$	1,769	$	7,991
MSA	—		—		412		412
Real estate owned, net	—		—		—		—
Total	$	—	$	6,222	$	2,181	$	8,403



	Fair Value Measurement at June 30, 2017 Using:
(In Thousands)	Level 1		Level 2		Level 3		Total
Non-performing loans	$	—	$	7,049	$	946	$	7,995
MSA	—		—		407		407
Real estate owned, net	—		1,615		—		1,615
Total	$	—	$	8,664	$	1,353	$	10,017

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, 2017:



(Dollars In Thousands)	Fair Value As of September 30, 2017		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	$	448	Market comparable pricing	Comparability adjustment	0.5% – 1.7% (1.5%)	Increase

Loans held for investment, at fair value	$	6,924	Relative value analysis	Broker quotes Credit risk factors	98.4% – 105.3% (101.7%) of par 1.2% - 100.0% (5.0%)	Increase Decrease

Non-performing loans	$	64	Discounted cash flow	Default rates	5.0%	Decrease
Non-performing loans	$	1,705	Relative value analysis	Loss severity	20.0% - 30.0% (20.8%)	Decrease

MSA	$	412	Discounted cash flow	Prepayment speed (CPR) Discount rate	13.1% - 60.0% (23.1%) 9.0% - 10.5% (9.2%)	Decrease Decrease

Interest-only strips	$	28	Discounted cash flow	Prepayment speed (CPR) Discount rate	15.4% - 27.3% (25.7%) 9.0%	Decrease Decrease

Commitments to extend credit on loans to be held for sale	$	726	Relative value analysis	TBA-MBS broker quotes Fall-out ratio ⁽³⁾	98.9% – 104.6% (102.0%) of par 15.8% - 29.4% (27.8%)	Increase Decrease

Mandatory loan sale commitments	$	6	Relative value analysis	TBA MBS broker quotes Roll-forward costs ⁽⁴⁾	103.9% of par 0.008%	Decrease Decrease

Liabilities:

Commitments to extend credit on loans to be held for sale	$	39	Relative value analysis	TBA-MBS broker quotes Fall-out ratio ⁽³⁾	100.8% – 104.8% (102.4%) of par 15.8% - 29.4% (27.8%)	Increase Decrease

Mandatory loan sale commitments	$	10	Relative value analysis	TBA MBS broker quotes Roll-forward costs ⁽⁴⁾	101.3% - 103.9% (103.3%) of par 0.008%	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 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, 2017 and June 30, 2017 was as follows:



	September 30, 2017
(In Thousands)	Carrying Amount		Fair Value		Level 1	Level 2		Level 3
Financial assets:
Investment securities - held to maturity	$	64,751	$	64,928	—	$	64,928	$	—
Loans held for investment, not recorded at fair value	$	901,136	$	890,098	—	—		$	890,098
FHLB – San Francisco stock	$	8,108	$	8,108	—	$	8,108	—

Financial liabilities:
Deposits	$	927,016	$	895,912	—	—		$	895,912
Borrowings	$	121,206	$	122,147	—	—		$	122,147



	June 30, 2017
(In Thousands)	Carrying Amount		Fair Value		Level 1	Level 2		Level 3
Financial assets:
Investment securities - held to maturity	$	60,441	$	60,629	—	$	60,629	—
Loans held for investment, not recorded at fair value	$	898,474	$	885,650	—	—		$	885,650
FHLB – San Francisco stock	$	8,108	$	8,108	—	$	8,108	—

Financial liabilities:
Deposits	$	926,521	$	896,140	—	—		$	896,140
Borrowings	$	126,226	$	126,083	—	—		$	126,083

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 balances 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).

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.

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 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, 2017, 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: Incentive Plans

As of September 30, 2017, the Corporation had two active share-based compensation plans, which are described below. These plans are the 2013 Equity Incentive Plan (“2013 Plan”) and the 2010 Equity Incentive Plan (“2010 Plan”). Additionally, the Corporation had one inactive share-based compensation plan - the 2006 Equity Incentive Plan (“2006 Plan”) where no new awards can be granted but outstanding grants remain eligible for exercise.

For the quarters ended September 30, 2017 and 2016, the compensation cost for these plans was $266,000 and $702,000, respectively. The income tax benefit recognized in the Condensed Consolidated Statements of Operations per adoption of ASU 2016-09 for share-based compensation plans for the quarter ended September 30, 2017 was $27,000; while the income tax benefit recognized in the Condensed Consolidated Statements of Stockholders' Equity for share-based compensation plans for the quarter ended September 30, 2016 was $187,000.

Equity Incentive Plans. The Corporation established and the shareholders approved the 2013 Plan, the 2010 Plan and the 2006 Plan (collectively, "the Plans") for directors, advisory directors, directors emeriti, officers and employees of the Corporation and its subsidiary. The 2013 Plan authorizes 300,000 stock options and 300,000 shares of restricted stock. The 2013 Plan also provides that no person may be granted more than 60,000 stock options or 45,000 shares of restricted stock in any one year. The 2010 Plan authorizes 586,250 stock options and 288,750 shares of restricted stock. The 2010 Plan also provides that no person may be granted more than 117,250 stock options or 43,312 shares of restricted stock in any one year. The 2006 Plan authorized 365,000 stock options and 185,000 shares of restricted stock. The 2006 Plan also provided that no person was granted more than 73,000 stock options or 27,750 shares of restricted stock in any one year.

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

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

During the first quarter of fiscal 2018, no options were granted, while 21,500 options were exercised and 2,500 options were forfeited. This compares to the first quarter of fiscal 2017 when 20,000 options were granted, while 15,000 options were exercised and 16,000 options were forfeited. As of September 30, 2017 and 2016, there were 147,500 and 131,750 stock options available for future grants under the Plans, respectively.

The following table summarizes the stock option activity in the Plans for the quarter ended September 30, 2017.



	For the Quarter Ended September 30, 2017
Options	Shares		Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value ($000)
Outstanding at June 30, 2017	615,250		$12.14
Granted	—		$—
Exercised	(21,500	)	$8.23
Forfeited	(2,500	)	$14.59
Outstanding at September 30, 2017	591,250		$12.27	5.56	$4,337
Vested and expected to vest at September 30, 2017	553,100		$12.05	5.43	$4,163
Exercisable at September 30, 2017	390,500		$10.73	4.69	$3,463

As of September 30, 2017 and 2016, there was $777,000 and $1.3 million of unrecognized compensation expense, respectively, related to unvested share-based compensation arrangements under the Plans. The expense is expected to be recognized over a weighted-average period of 1.3 years and 2.1 years, respectively. The forfeiture rate during the first three months of fiscal 2018 and 2017 was 20 percent for both periods, and was calculated by using the historical forfeiture experience of stock option grants and is reviewed annually.

Equity Incentive Plans – Restricted Stock. The Corporation used 300,000 shares, 288,750 shares and 185,000 shares of its treasury stock to fund the 2013 Plan, the 2010 Plan and the 2006 Plan, respectively. Awarded shares typically vest over a five-year or shorter period as long as the director, advisory director, director emeriti, officer or employee remains in service to the Corporation. Once vested, a recipient of restricted stock will have all rights of a shareholder, including the power to vote and the right to receive dividends. The Corporation recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

There was no restricted stock activity in the first quarter of fiscal 2018, other than the forfeiture of 2,000 shares of restricted stock. This compares to the award of 15,000 shares, the forfeiture of 7,000 shares and the vesting of 87,750 shares of restricted stock in the first quarter of fiscal 2017. As of September 30, 2017 and 2016, there were 267,750 shares and 268,850 shares of restricted stock, respectively available for future awards under the Plans.

The following table summarizes the unvested restricted stock activity in the quarter ended September 30, 2017.



	For the Quarter Ended September 30, 2017
Unvested Shares	Shares		Weighted-Average Award Date Fair Value
Unvested at June 30, 2017	111,000		$14.16
Granted	—		$—
Vested	—		$—
Forfeited	(2,000	)	$13.30
Unvested at September 30, 2017	109,000		$14.45
Expected to vest at September 30, 2017	87,200		$14.45

As of September 30, 2017 and 2016, the unrecognized compensation expense was $1.0 million and $1.8 million, respectively, related to unvested share-based compensation arrangements under the Plans, and reported as a reduction to stockholders’ equity. This expense is expected to be recognized over a weighted-average period of 1.5 years and 2.3 years, respectively. Similar to stock options, a forfeiture rate of 20 percent has been applied for the restricted stock compensation expense calculations in the first three months of fiscal 2018 and 2017.

Stock Option Plan. The Corporation established the Stock Option Plan for key employees and eligible directors under which options to acquire up to 352,500 shares of common stock may be granted. Under the Stock Option Plan, stock options may not be granted at a price less than the fair market value at the date of the grant. Stock options typically vest over a five-year period on a pro-rata basis as long as the employee or director remains in service to the Corporation. The stock options are exercisable after vesting for up to the remaining term of the original grant. The maximum term of the stock options granted is 10 years. As of September 30, 2017, no stock options remain available for future grants under the Stock Option Plan, which expired in November 2013.

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

For the first quarter of fiscal 2018 and 2017, there was no activity in the Stock Option Plan, except forfeitures of 50,000 shares and 12,500 shares, respectively. As of September 30, 2017 and 2016, there were no stock options available for future grants under the Stock Option Plan.

The following table summarizes the activity in the Stock Option Plan for the quarter ended September 30, 2017.



	For the Quarter Ended September 30, 2017
Options	Shares		Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value ($000)
Outstanding at June 30, 2017	50,000		$19.92
Granted	—		$—
Exercised	—		$—
Forfeited	(50,000	)	$19.92
Outstanding at September 30, 2017	—		$—	0	$—
Vested and expected to vest at September 30, 2017	—		$—	0	$—
Exercisable at September 30, 2017	—		$—	0	$—

As of September 30, 2017 and 2016, there was no unrecognized compensation expense at either date, related to unvested share-based compensation arrangements under the Stock Option Plan.

Note 10: Reclassification adjustment of Accumulated Other Comprehensive Income ("AOCI")

The following tables provide the changes in AOCI by component for the quarters ended September 30, 2017 and 2016.



	For the Quarter Ended September 30, 2017
	Unrealized gains and losses on
(In Thousands)	Investment securities available for sale		Interest-only strips			Total

Beginning balance at June 30, 2017	$	211	$	18		$	229

Other comprehensive income (loss) before reclassifications	3		(2		)	1
Amount reclassified from accumulated other comprehensive income	—		—			—
Net other comprehensive income (loss)	3		(2		)	1

Ending balance at September 30, 2017	$	214	$	16		$	230



	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

Note 11: 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. 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, 2017:



			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	$	387	$	—	$	387	$	—	$	—	$	387
Total	$	387	$	—	$	387	$	—	$	—	$	387



			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	$	10	$	—	$	10	$	—	$	—	$	10
Total	$	10	$	—	$	10	$	—	$	—	$	10

As of June 30, 2017:



			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	$	623	$	—	$	623	$	—	$	—	$	623
Total	$	623	$	—	$	623	$	—	$	—	$	623

Gross

Net

Amount

Offset in the

of Liabilities in

Gross Amount Not Offset in

Condensed

the Condensed

the Condensed Consolidated

Gross

Consolidated

Statements of Financial Condition

Amount of

Statements

Cash

Recognized

of Financial

Financial

Collateral

Net

(In Thousands)

Liabilities

Condition

Instruments

Received

Amount

Liabilities

Derivatives

—

Total

—

Note 12: Subsequent Event

On October 24, 2017, the Corporation announced that the Corporation’s Board of Directors declared a quarterly cash dividend of $0.14 per share. Shareholders of the Corporation’s common stock at the close of business on November 14, 2017 will be entitled to receive the cash dividend. The cash dividend will be payable on December 5, 2017.

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, 2017, the Corporation had total assets of $1.19 billion, total deposits of $927.0 million and total stockholders’ equity of $124.9 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.

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 nine 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 31, 2017, the Corporation declared a quarterly cash dividend of $0.14 per share for the Corporation’s shareholders of record at the close of business on August 21, 2017, which was paid on September 11, 2017. 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 12 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 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, 2017. 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 2017 Annual Report on Form 10-K for the year ended June 30, 2017 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 during the three months ended September 30, 2017 to the critical accounting policies as described in the Corporation's 2017 Annual Report on Form 10-K for the period ended June 30, 2017.

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, wire transfer fees and overdraft protection fees, among others. Community banking operations also

includes providing investment services which primarily consist of selling alternative investment products such as annuities and mutual funds to the Bank’s depositors.

During the next three years, subject to market conditions, the Corporation intends to improve its community banking business by moderately increasing total assets; by increasing single-family mortgage loans and 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 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, changes to 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. 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.

Contractual Obligations. The following table summarizes the Corporation’s contractual obligations at September 30, 2017 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	$	2,618	$	3,372	$	1,527	$	990	$	8,507
Pension benefits	241		482		483		6,655		7,861
Time deposits	109,339		115,561		31,616		7,254		263,770
FHLB – San Francisco advances	22,642		14,890		44,276		52,009		133,817
FHLB – San Francisco letter of credit	7,000		—		—		—		7,000
FHLB – San Francisco MPF credit enhancement ⁽¹⁾	—		—		—		2,458		2,458
Total	$	141,840	$	134,305	$	77,902	$	69,366	$	423,413


⁽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, 2017, the Bank serviced $14.1 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, 2017 and June 30, 2017

Total assets decreased $6.8 million, or one percent, to $1.19 billion at September 30, 2017 from $1.20 billion at June 30, 2017. The decrease was primarily attributable to decreases in cash and cash equivalents, partly offset by increases in loans held for investment, loans held for sale and investment securities held to maturity.

Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of San Francisco, decreased $23.6 million, or 32 percent, to $49.2 million at September 30, 2017 from $72.8 million at June 30, 2017. The decrease in the total cash and cash equivalents was primarily attributable to the utilization of cash to fund the increases in loans held for sale, loans held for investment, investment securities held to maturity and to payoff short-term borrowings that matured during the first three months of fiscal 2018.

Investment securities (held to maturity and available for sale) increased $3.9 million, or six percent, to $73.7 million at September 30, 2017 from $69.8 million at June 30, 2017. The increase was primarily the result of purchases of mortgage-backed securities held to maturity, partly offset by scheduled and accelerated principal payments on mortgage-backed securities during the first three months of fiscal 2018. For further analysis on investment securities, see Note 5 of the Notes to Unaudited Interim Condensed Consolidated Financial Statements of this Form 10-Q.

Loans held for investment increased $3.2 million to $908.1 million at September 30, 2017 from $904.9 million at June 30, 2017. During the first three months of fiscal 2018, the Corporation originated $45.0 million of loans held for investment, consisting primarily of single-family and multi-family loans. During the first three months of fiscal 2018, the Corporation did not purchase any loans held for investment. Total loan principal payments during the first three months of fiscal 2018 were $43.4 million, down 14 percent from $50.5 million during the comparable period in fiscal 2017, due primarily to lower loan refinance activity. The balance of preferred loans increased $2.9 million, or one percent, to $588.0 million at September 30, 2017, compared to $585.1 million at June 30, 2017, net of undisbursed loan funds of $8.2 million and $9.0 million, respectively, and represented 65 percent and 64 percent of loans held for investment, respectively. The balance of single-family loans held for investment increased slightly to $322.4 million at September 30, 2017, compared to $322.2 million at June 30, 2017, and represented approximately 35 percent of loans held for investment for both dates.

The tables below describe the geographic dispersion of gross real estate secured loans held for investment at September 30, 2017 and June 30, 2017, as a percentage of the total dollar amount outstanding:

As of September 30, 2017



(Dollars In Thousands)	Inland Empire				Southern California ⁽¹⁾				Other California				Other States				Total
Loan Category	Balance		%		Balance		%		Balance		%		Balance		%		Balance		%
Single-family	$	104,237	32	%	$	153,972	48	%	$	63,007	20	%	$	1,147	—	%	$	322,363	100	%
Multi-family	81,896		17	%	284,778		59	%	113,199		23	%	2,744		1	%	482,617		100	%
Commercial real estate	31,111		32	%	41,822		43	%	23,930		25	%	—		—	%	96,863		100	%
Construction	3,537		22	%	10,613		65	%	2,140		13	%	—		—	%	16,290		100	%
Total	$	220,781	24	%	$	491,185	53	%	$	202,276	22	%	$	3,891	1	%	$	918,133	100	%


⁽¹⁾	Other than the Inland Empire.

As of June 30, 2017



(Dollars In Thousands)	Inland Empire				Southern California ⁽¹⁾				Other California				Other States				Total
Loan Category	Balance		%		Balance		%		Balance		%		Balance		%		Balance		%
Single-family	$	102,686	32	%	$	156,045	49	%	$	62,249	19	%	$	1,217	—	%	$	322,197	100	%
Multi-family	80,861		17	%	282,871		59	%	113,459		24	%	2,768		—	%	479,959		100	%
Commercial real estate	31,497		32	%	42,192		43	%	23,873		25	%	—		—	%	97,562		100	%
Construction	3,760		24	%	10,614		66	%	1,635		10	%	—		—	%	16,009		100	%
Total	$	218,804	24	%	$	491,722	54	%	$	201,216	22	%	$	3,985	—	%	$	915,727	100	%


⁽¹⁾	Other than the Inland Empire.

Loans held for sale increased $10.7 million, or nine percent, to $127.2 million at September 30, 2017 from $116.5 million at June 30, 2017. The increase was primarily due to the timing difference between loan fundings and loan sale settlements. Total loans originated and purchased for sale during the quarter ended September 30, 2017 was $392.3 million as compared to $405.9 million during the quarter ended June 30, 2017.

Total deposits increased slightly to $927.0 million at September 30, 2017 from $926.5 million at June 30, 2017. Transaction accounts increased $10.2 million, or two percent, to $668.8 million at September 30, 2017 from $658.6 million at June 30, 2017, while time deposits decreased $9.6 million, or four percent, to $258.3 million at September 30, 2017 from $267.9 million at June 30, 2017. 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 checking and savings accounts in its deposit base and decrease the percentage of time deposits by competing less aggressively for time deposits.

Total borrowings decreased $5.0 million, or four percent, to $121.2 million at September 30, 2017 as compared to $126.2 million at June 30, 2017, due to the maturity of short-term borrowings. The borrowings were primarily comprised of long-term FHLB - San Francisco advances for interest rate risk management purposes.

Total stockholders’ equity decreased $3.3 million, or three percent, to $124.9 million at September 30, 2017 from $128.2 million at June 30, 2017, primarily as a result of stock repurchases totaling $2.4 million (see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”), $1.1 million of quarterly cash dividends paid to shareholders and a net loss of $225,000, partly offset by the amortization of stock-based compensation benefits during the first three months of fiscal 2018.

Comparison of Operating Results for the Quarters Ended September 30, 2017 and 2016

The Corporation’s net loss for the first quarter of fiscal 2018 was $225,000, a decrease of $1.8 million, or 114 percent, as compared to the net income of $1.6 million in the same period of fiscal 2017. The decrease in the net result for the first quarter of fiscal 2018 was primarily attributable to a decrease in the gain on sale of loans and an increase in other non-interest expense, partly offset by a decrease in salaries and employee benefits expense, compared to the same period one year ago. The current quarter results were affected by $2.75 million of litigation-related expenses, including settlement costs, which, net of tax benefit, reduced net income by approximately $0.20 per diluted share.

The Corporation’s efficiency ratio, defined as non-interest expense divided by the sum of net interest income and non-interest income, increased to 102 percent for the first quarter of fiscal 2018 from 85 percent in the same period of fiscal 2017.

Return on average assets decreased 61 basis points to (0.08) percent in the first quarter of fiscal 2018 from 0.53 percent in the same period last year; and return on average equity decreased to (0.70) percent in the first quarter of fiscal 2018 from 4.79 percent in the same period last year.

Diluted (loss) earnings per share for the first quarter of fiscal 2018 were $(0.03), a 115 percent decrease from $0.20 in the same period last year. The higher percentage decrease in the diluted earnings per share in comparison to the percentage decrease in the net income between each period was primarily attributable to stock repurchases during the prior 12 months.

Net Interest Income:

For the Quarters Ended September 30, 2017 and 2016. Net interest income increased by $30,000 to $9.1 million for the first quarter of fiscal 2018 as compared to the comparable period in fiscal 2017, as a result of a higher net interest margin, partly offset by a lower average earning asset balance. The net interest margin increased nine basis points to 3.17 percent in the first quarter of fiscal 2018 from 3.08 percent in the same period of fiscal 2017, primarily due to an increase in the average yield on interest-earning assets and a small decrease in the average cost of interest-bearing liabilities. The weighted-average yield on interest-earning assets increased by seven basis points to 3.74 percent from 3.67 percent in the same quarter last year, while the weighted-average cost of interest-bearing liabilities decreased by two basis points to 0.62 percent for the first quarter of fiscal 2018 as compared to 0.64 percent in the same quarter last year. The increase in the average yield of interest-earning assets was primarily due to an increase in the average yield of loans held for investment and an increase in the average yield of loans held for sale. The average balance of interest-earning assets decreased $28.5 million, or two percent, to $1.15 billion in the first quarter of fiscal 2018 from $1.18 billion in the comparable period of fiscal 2017, primarily reflecting a decrease in average loans held for sale, partly offset by increases in average loans held for investment and investment securities.

Interest Income:

For the Quarters Ended September 30, 2017 and 2016. Total interest income decreased by $59,000, or one percent, to $10.7 million for the first quarter of fiscal 2018 from $10.8 million in the same quarter of fiscal 2017. The decrease was primarily due to lower interest income on loans receivable, partly offset by higher interest income on investment securities and interest-earning deposits.

Interest income on loans receivable decreased $323,000, or three percent, to $10.2 million in the first quarter of fiscal 2018 from $10.5 million for the same quarter of fiscal 2017. This decrease was attributable to a lower average loan balance, partly offset by a higher average loan yield. The average balance of loans receivable, including loans held for sale, decreased by $70.5 million, or seven percent, to $1.01 billion for the first quarter of fiscal 2018 from $1.08 billion in the same quarter of fiscal 2017, primarily due to a decrease in average loans held for sale attributable to a decrease in mortgage banking activity which was partly offset by an increase in average loans held for investment. The average loan yield, including loans held for sale, during the first quarter of fiscal 2018 increased 14 basis points to 4.03 percent from 3.89 percent during the same quarter last year, primarily due to an increase in the average yield of loans held for investment and an increase in the average yield of loans held for sale with a lower percentage of loans held for sale to total loans receivable.

Loans receivable is comprised of loans held for investment and loans held for sale. The average balance of loans held for investment increased $60.9 million, or seven percent, to $907.9 million during the first quarter of fiscal 2018 from $847.0 million in the same quarter of fiscal 2017. The average yield on the loans held for investment increased by seven basis points to 4.04 percent in the first quarter of fiscal 2018 from 3.97 percent in the same quarter of fiscal 2017. The average balance of loans held for sale, however, decreased $131.4 million, or 57 percent, to $99.7 million during the first quarter of fiscal 2018 from $231.1 million in the same

quarter of fiscal 2017. The average yield on the loans held for sale increased by 34 basis points to 3.93 percent in the first quarter of fiscal 2018 from 3.59 percent in the same quarter of fiscal 2017.

Interest income from investment securities increased $173,000, or 206 percent, to $257,000 in the first quarter of fiscal 2018 from $84,000 for the same quarter of fiscal 2017. This increase was attributable to a higher average yield and, to a lesser extent, a higher average balance. The average investment securities yield increased 68 basis points to 1.36 percent in the first quarter of fiscal 2018 from 0.68 percent in the same quarter of fiscal 2017. The increase in the average investment securities yield was primarily attributable to the purchases of investment securities which had higher average yields than the existing portfolio, partly offset by accelerated amortization of purchase premiums resulting from accelerated principal payments. The average balance of investment securities increased $25.9 million, or 52 percent, to $75.5 million in the first quarter of fiscal 2018 from $49.6 million in the same quarter of fiscal 2017. The increase in average balance of investment securities was primarily the result of purchases of mortgage-backed securities, partly offset by scheduled and accelerated principal payments on mortgage-backed securities.

The FHLB – San Francisco cash dividend received in the first quarter of fiscal 2018 was $141,000, down 24 percent from $185,000 in the same quarter of fiscal 2017. The average yield decreased 218 basis points to 6.96 percent in the first quarter of fiscal 2018 as compared to 9.14 percent in the comparable quarter last year.

Interest income from interest-earning deposits, primarily cash deposited at the Federal Reserve Bank of San Francisco, was $190,000 in the first quarter of fiscal 2018, up 245 percent from $55,000 in the same quarter of fiscal 2017. The increase was due to a higher average yield, and to a lesser extent, a higher average balance in the first quarter of fiscal 2018 as compared to the same quarter last year. The average yield earned on interest-earning deposits increased 75 basis points to 1.25 percent in the first quarter of fiscal 2018 from 0.50 percent in the comparable quarter last year, due primarily to the increases in the federal funds rate over the last year. The average balance of the interest-earning deposits in the first quarter of fiscal 2018 was $59.4 million, an increase of $16.1 million or 37 percent, from $43.3 million in the same quarter of fiscal 2017. The increase in interest-earning deposits was primarily due to the decline in the average balance of loans held for sale, partly offset by the increases in loans held for investment and investment securities, consistent with the Corporation’s interest rate risk management strategy.

Interest Expense:

For the Quarters Ended September 30, 2017 and 2016. Total interest expense for the first quarter of fiscal 2018 was $1.6 million as compared to $1.7 million for the same period last year, a decrease of $89,000, or five percent. This decrease was attributable to a lower interest expense on deposits, partly offset by a higher interest expense on borrowings.

Interest expense on deposits for the first quarter of fiscal 2018 was $891,000 as compared to $1.0 million for the same period last year, a decrease of $123,000, or 12 percent. The decrease in interest expense on deposits was primarily attributable to a lower average balance, and to a lesser extent, a lower average cost of deposits. The average balance of deposits decreased $9.8 million, or one percent, to $923.0 million during the quarter ended September 30, 2017 from $932.8 million during the same period last year. The decrease in the average balance was primarily attributable to a decrease in time deposits, partly offset by an increase in transaction accounts. The average cost of deposits decreased five basis points to 0.38 percent during the first quarter of fiscal 2018 from 0.43 percent during the same quarter last year. The decrease in the average cost of deposits was attributable primarily to a lower average cost of time deposits and a lower percentage of time deposits to the total deposit balance. 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 anticipation of higher interest rates. The average balance of transaction accounts to total deposits in the first quarter of fiscal 2018 was 71 percent, compared to 67 percent in the same period of fiscal 2017.

Interest expense on borrowings, consisting of FHLB – San Francisco advances, for the first quarter of fiscal 2018 increased $34,000, or five percent, to $736,000 from $702,000 for the same period last year. The increase in interest expense on borrowings was the result of a higher average cost, partly offset by a lower average balance. The average cost of borrowings increased 37 basis points to 2.56 percent for the quarter ended September 30, 2017 from 2.19 percent in the same quarter last year. The increase in the average cost of advances was primarily due to the maturities of short-term borrowings with an average cost below the existing borrowings in the first quarter of fiscal 2017. The average balance of borrowings decreased $12.8 million, or 10 percent, to $114.1 million during the quarter ended September 30, 2017 from $126.9 million during the same period last year.

The following tables present the average balance sheets for the quarters ended September 30, 2017 and 2016, respectively:

Average Balance Sheets



	Quarter Ended September 30, 2017						Quarter Ended September 30, 2016
(Dollars In Thousands)	Average Balance		Interest		Yield/ Cost		Average Balance		Interest		Yield/ Cost
Interest-earning assets:
Loans receivable, net ⁽¹⁾	$	1,007,579	$	10,157	4.03	%	$	1,078,082	$	10,480	3.89	%
Investment securities	75,470		257		1.36	%	49,597		84		0.68	%
FHLB – San Francisco stock	8,108		141		6.96	%	8,094		185		9.14	%
Interest-earning deposits	59,445		190		1.25	%	43,309		55		0.50	%

Total interest-earning assets	1,150,602		10,745		3.74	%	1,179,082		10,804		3.67	%

Non interest-earning assets	31,528						31,568

Total assets	$	1,182,130					$	1,210,650

Interest-bearing liabilities:
Checking and money market accounts ⁽²⁾	$	373,217	103		0.11	%	$	350,692	98		0.11	%
Savings accounts	286,705		149		0.21	%	276,787		144		0.21	%
Time deposits	263,123		639		0.96	%	305,355		772		1.00	%

Total deposits	923,045		891		0.38	%	932,834		1,014		0.43	%

Borrowings	114,148		736		2.56	%	126,940		702		2.19	%

Total interest-bearing liabilities	1,037,193		1,627		0.62	%	1,059,774		1,716		0.64	%

Non interest-bearing liabilities	16,883						17,701

Total liabilities	1,054,076						1,077,475

Stockholders’ equity	128,054						133,175
Total liabilities and stockholders’ equity	$	1,182,130					$	1,210,650

Net interest income			$	9,118					$	9,088

Interest rate spread ⁽³⁾					3.12	%					3.03	%
Net interest margin ⁽⁴⁾					3.17	%					3.08	%
Ratio of average interest-earning assets to average interest-bearing liabilities					110.93	%					111.26	%
Return on average assets					(0.08	)%					0.53	%
Return on average equity					(0.70	)%					4.79	%


⁽¹⁾	Includes loans held for sale and non-performing loans, as well as net deferred loan cost amortization of $207 and $168 for the quarters ended September 30, 2017 and 2016, respectively.


⁽²⁾	Includes the average balance of non interest-bearing checking accounts of $79.7 million and $70.6 million during the quarters ended September 30, 2017 and 2016, 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.

The following tables set forth the effects of changing rates and volumes on interest income and expense for the quarters ended September 30, 2017 and 2016, respectively. Information is provided with respect to the effects attributable to changes in volume (changes in volume multiplied by prior rate), the effects attributable to changes in rate (changes in rate multiplied by prior volume) and the effects attributable to changes that cannot be allocated between rate and volume.

Rate/Volume Variance



	Quarter Ended September 30, 2017 Compared To Quarter Ended September 30, 2016 Increase (Decrease) Due to
(In Thousands)	Rate			Volume			Rate/ Volume			Net
Interest-earning assets:
Loans receivable ⁽¹⁾	$	388		$	(686	)	$	(25	)	$	(323	)
Investment securities	85			44			44			173
FHLB – San Francisco stock	(44		)	—			—			(44		)
Interest-bearing deposits	85			20			30			135
Total net change in income on interest-earning assets	514			(622		)	49			(59		)

Interest-bearing liabilities:
Checking and money market accounts	—			5			—			5
Savings accounts	—			5			—			5
Time deposits	(31		)	(106		)	4			(133		)
Borrowings	117			(71		)	(12		)	34
Total net change in expense on interest-bearing liabilities	86			(167		)	(8		)	(89		)
Net increase (decrease) in net interest income	$	428		$	(455	)	$	57		$	30


⁽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.

Provision (Recovery) for Loan Losses:

For the Quarters Ended September 30, 2017 and 2016. During the first quarter of fiscal 2018, the Corporation recorded a provision for loan losses of $169,000, as compared to a $150,000 recovery from the allowance for loan losses in the same period of fiscal 2017. The provision recorded in the first quarter of fiscal 2018 was primarily attributable to the increase in loans held for investment and net charge-offs during the first quarter of fiscal 2018. Non-performing loans, net of the allowance for loan losses and fair value adjustments, was virtually unchanged at $8.0 million at both September 30, 2017 and June 30, 2017 and were $10.0 million at September 30, 2016. Net charge-offs in the first quarter of fiscal 2018 were $145,000 or 0.06 percent (annualized) of average loans receivable, compared to net recoveries of $205,000 or 0.08 percent (annualized) of average loans receivable in the same quarter of fiscal 2017. Total classified loans, net of the allowance for loan losses and fair value adjustments, consisting of special mention and substandard loans, were $12.9 million at September 30, 2017 as compared to $11.7 million at June 30, 2017 and $18.9 million at September 30, 2016.

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, 2017, the allowance for loan losses was $8.1 million, comprised of collectively evaluated allowances of $8.0 million and individually evaluated allowances of $32,000; in comparison to the allowance for loan losses of $8.0 million at June 30, 2017, comprised of collectively evaluated allowances of $7.9 million and individually evaluated allowances of $101,000. The allowance for loan losses as a percentage of gross loans held for investment was 0.88 percent at September 30, 2017, unchanged from June 30, 2017. 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.

Non-Interest Income:

For the Quarters Ended September 30, 2017 and 2016. Total non-interest income decreased $2.9 million, or 31 percent, to $6.4 million for the quarter ended September 30, 2017 from $9.3 million for the same period last year. The decrease was primarily attributable to a decrease in the net gain on sale of loans during the current quarter as compared to the comparable period last year.

The net gain on sale of loans decreased $3.2 million, or 40 percent, to $4.8 million for the first quarter of fiscal 2018 from $8.0 million in the same quarter of fiscal 2017 reflecting the impact of a lower loan sale volume and a slightly lower average loan sale margin. Total loan sale volume, which includes the net change in commitments to extend credit on loans to be held for sale, decreased $248.1 million or 39 percent to $392.2 million in the quarter ended September 30, 2017 from $640.3 million in the comparable quarter last year. The decrease in loan sale volume was attributable to the decrease in refinance activity as compared to the same period last year. The total refinance loans as a percentage of total loans originated by PBM during the first quarter of fiscal 2018 was 42 percent, down from 58 percent in the same quarter of fiscal 2017. The average loan sale margin for PBM decreased one basis point to 1.24 percent in the first quarter of fiscal 2018 from 1.25 percent in the same period of fiscal 2017. The gain on sale of loans includes an unfavorable 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 loss of $94,000 in the first quarter of fiscal 2018 as compared to a favorable fair-value adjustment net gain of $2.1 million 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, 2017, the fair value of derivative financial instruments pursuant to ASC 815 and ASC 825 was $4.9 million, compared to $5.0 million at June 30, 2017 and $10.8 million at September 30, 2016.

Non-Interest Expense:

For the Quarters Ended September 30, 2017 and 2016. Total non-interest expense in the quarter ended September 30, 2017 was $15.7 million, an increase of $102,000, or one percent, as compared to $15.6 million in the quarter ended September 30, 2016. The increase was primarily a result of an increase in other non-interest expense, partly offset by a decrease in salaries and employee benefits expense. The increase in other non-interest expenses was primarily attributable to a previously disclosed $2.75 million litigation settlement related to a class action lawsuit involving claims by non-exempt employees under California law. The decrease in salaries and employee benefits expense was primarily related to lower variable compensation resulting from lower mortgage banking loan originations.

Total salaries and employee benefits expense decreased $2.0 million, or 18 percent, to $9.3 million in the first quarter of fiscal 2018 from $11.3 million in the same period of fiscal 2017. The decrease was primarily attributable to lower incentive compensation costs related to lower mortgage banking loan originations. Total loan originations and purchases (including loans originated and purchased for investment and loans originated and purchased for sale) decreased $268.4 million, or 38 percent, to $437.2 million in the first quarter of fiscal 2018 from $705.6 million in the comparable quarter of fiscal 2017.

Total other non-interest expenses increased $2.26 million, or 140 percent, to $3.9 million in the first quarter of fiscal 2018 from $1.6 million in the same period of fiscal 2017. The increase was primarily attributable to a $2.75 million litigation settlement regarding the lawsuit known as "Cannon versus Provident Savings Bank, F.S.B." which was settled on September 12, 2017. No additional contingencies exist regarding this matter although the settlement agreement remains subject to court approval and other customary conditions.

Provision (Benefit) 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, 2017 and 2016. The Corporation’s income tax benefit was $208,000 for the first quarter of fiscal 2018, as compared to a $1.26 million provision for income taxes in the same quarter last year, as a result of the pre-tax

loss in the current quarter. The effective income tax rate for the quarter ended September 30, 2017 was 48.0 percent, up from 44.2 percent in the same quarter last year. The increase in the effective tax rate was attributable to the tax effect of stock-based compensation in the first quarter of fiscal 2018. The Corporation believes that the effective income tax rate applied in the first quarter of fiscal 2018 reflects its current income tax obligations.

Asset Quality

Non-performing loans, net of the allowance for loan losses and fair value adjustments, consisting of loans with collateral located in California, at September 30, 2017 were unchanged from June 30, 2017 at $8.0 million. Non-performing loans as a percentage of loans held for investment at September 30, 2017 was also unchanged from June 30, 2017 at 0.88 percent. The non-performing loans at September 30, 2017 were primarily comprised of 29 single-family loans ($7.9 million) and one commercial business loan ($64,000). This compares to the $8.0 million of non-performing loans at June 30, 2017 which were primarily comprised of 27 single-family loans ($7.7 million); one commercial real estate loan ($201,000) and one commercial business loan ($65,000). 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, 2017, total restructured loans increased $821,000, or 23 percent, to $4.5 million from $3.6 million at June 30, 2017. At September 30, 2017 and June 30, 2017, $3.5 million and $3.1 million, respectively, of these restructured loans were classified as non-performing. As of September 30, 2017, $1.4 million, or 32 percent, of the restructured loans have a current payment status, consistent with their modified payment terms; this compares to $1.7 million, or 46 percent, of restructured loans that had a current payment status, consistent with their modified payment terms as of June 30, 2017.

No real estate owned was outstanding at September 30, 2017, as compared to $1.6 million at June 30, 2017.

Non-performing assets, which includes non-performing loans and real estate owned, decreased $1.6 million or 17 percent to $8.0 million or 0.67 percent of total assets at September 30, 2017 from $9.6 million or 0.80 percent of total assets at June 30, 2017. 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 2018, the Corporation did not repurchase any loans from an investor pursuant to the recourse/repurchase covenants contained in the loan sale agreement. This compares to the first three months of fiscal 2017 when the Corporation repurchased one loan, totaling $389,000, from investors pursuant to the recourse/repurchase covenants contained in the loan sale agreements, which was subsequently paid off. Additional repurchase requests may have been 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 2018 and 2017, the Corporation did not record a recourse provision and did not settle any claims. As of September 30, 2017, the total recourse reserve for loans sold that are subject to repurchase was $305,000, unchanged from June 30, 2017 but down from $453,000 at September 30, 2016.

Beginning in 2008, in connection with the downturn 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.

The following table shows the summary of the recourse liability for the quarters ended September 30, 2017 and 2016:



	For the Quarters Ended September 30,
Recourse Liability	2017		2016
(In Thousands)

Balance, beginning of the period	$	305	$	453
Provision for recourse liability	—		—
Net settlements in lieu of loan repurchases	—		—
Balance, end of the period	$	305	$	453

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 has occurred and the specific location and condition of the individual properties. The Corporation has not quantified the current LTVs of its loans held for investment nor the impact the decline or improvement 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, 2017:



(Dollars In Thousands)	Outstanding Balance ⁽¹⁾		Weighted- Average FICO ⁽²⁾	Weighted- Average LTV ⁽³⁾	Weighted- Average Seasoning ⁽⁴⁾
Interest only	$	9,277	736	77%	9.61 years
Stated income ⁽⁵⁾	$	92,990	730	62%	11.75 years
FICO less than or equal to 660	$	8,071	643	63%	8.76 years
Over 30-year amortization	$	9,770	729	64%	12.05 years


⁽¹⁾	The outstanding balance presented on this table may overlap more than one category. Of the outstanding balance, $4.9 million of “stated income,” $337,000 of “FICO less than or equal to 660,” and $219,000 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.

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, 2017:



(Dollars In Thousands)	Balance		Non-Performing ⁽¹⁾	30 - 89 Days Delinquent ⁽¹⁾
Fully amortize in the next 12 months	$	9,277	—%	—%
Fully amortize between 1 year and 5 years	—		—%	—%
Fully amortize after 5 years	—		—%	—%
Total	$	9,277	—%	—%


⁽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, 2017:



(Dollars In Thousands)	Balance ⁽¹⁾		Non-Performing ⁽¹⁾	30 - 89 Days Delinquent ⁽¹⁾
Interest rate reset in the next 12 months	$	92,320	5%	—%
Interest rate reset between 1 year and 5 years	670		—%	—%
Interest rate reset after 5 years	—		—%	—%
Total	$	92,990	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 adjust 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.

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, 2017:



	Calendar Year of Origination
(Dollars In Thousands)	2009 & Prior	2010	2011	2012	2013	2014	2015	2016	YTD 2017	Total
Loan balance (in thousands)	$159,819	$117	$957	$3,061	$2,650	$9,169	$14,312	$38,810	$78,701	$307,596
Weighted-average LTV ⁽¹⁾	62%	66%	61%	57%	45%	66%	69%	66%	74%	66%
Weighted-average age (in years)	11.83	6.87	6.17	5.19	4.25	3.10	2.30	1.19	0.51	6.74
Weighted-average FICO ⁽²⁾	730	700	711	740	755	753	744	743	739	735
Number of loans	537	1	4	14	22	23	21	70	117	809

Geographic breakdown (%)
Inland Empire	35%	100%	57%	11%	43%	45%	22%	27%	31%	32%
Southern California ⁽³⁾	53%	—%	43%	38%	27%	30%	48%	40%	47%	49%
Other California ⁽⁴⁾	11%	—%	—%	51%	30%	25%	30%	33%	22%	19%
Other States	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.

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, 2017:



	Calendar Year of Origination
(Dollars In Thousands)	2009 & Prior	2010	2011	2012	2013	2014	2015	2016	YTD 2017	Total
Loan balance (in thousands)	$23,328	$—	$6,783	$19,812	$68,599	$80,329	$84,316	$132,242	$67,208	$482,617
Weighted-average LTV ⁽¹⁾	41%	—%	52%	52%	54%	54%	54%	49%	52%	52%
Weighted-average DCR ⁽²⁾	1.58x	—	1.57x	1.78x	1.67x	1.66x	1.62x	1.67x	1.61x	1.65x
Weighted-average age (in years)	12.37	—	5.99	5.05	4.16	3.21	2.25	1.24	0.39	2.80
Weighted-average FICO ⁽³⁾	696	—	768	721	764	764	757	756	751	753
Number of loans	53	—	9	22	91	98	123	152	101	649

Geographic breakdown (%)
Inland Empire	33%	—%	7%	18%	31%	12%	16%	10%	19%	17%
Southern California ⁽⁴⁾	46%	—%	78%	46%	49%	53%	64%	64%	66%	59%
Other California ⁽⁵⁾	9%	—%	15%	36%	20%	35%	20%	26%	15%	23%
Other States	12%	—%	—%	—%	—%	—%	—%	—%	—%	1%
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⁾	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, 2017:



(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	$	112,263	—%	—%	6%
Interest rate reset or mature between 1 year and 5 years	355,679		—%	—%	5%
Interest rate reset or mature after 5 years	14,675		—%	—%	—%
Total	$	482,617	—%	—%	5%


⁽¹⁾	As a percentage of each category.

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, 2017:



	Calendar Year of Origination
(Dollars In Thousands)	2009 & Prior	2010	2011	2012	2013	2014	2015	2016	YTD 2017	Total ⁽⁵⁾⁽⁶⁾
Loan balance (in thousands)	$1,251	$339	$—	$10,962	$13,133	$21,372	$21,545	$17,625	$10,636	$96,863
Weighted-average LTV ⁽¹⁾	25%	54%	—%	45%	46%	45%	42%	50%	41%	45%
Weighted-average DCR ⁽²⁾	1.47x	1.25x	—	1.92x	1.66x	1.93x	1.79x	1.58x	1.59x	1.75x
Weighted-average age (in years)	16.38	7.35	—	5.03	4.18	3.14	2.22	1.36	0.39	2.85
Weighted-average FICO ⁽²⁾	708	703	—	743	759	752	754	759	757	754
Number of loans	6	2	—	10	19	26	27	23	16	129

Geographic breakdown (%):
Inland Empire	73%	49%	—%	69%	23%	38%	29%	11%	30%	32%
Southern California ⁽³⁾	27%	51%	—%	31%	47%	43%	33%	62%	44%	43%
Other California ⁽⁴⁾	—%	—%	—%	—%	30%	19%	38%	27%	26%	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: $42.1 million in Mixed Use; $16.7 million in Retail; $10.4 million in Mobile Home Parks; $8.2 million in Office; $5.3 million in Warehouse; $4.9 million in Medical/Dental Office; $3.6 million in Mini-Storage; $2.6 million in Restaurant/Fast Food; $1.6 million in Automotive – Non Gasoline and $1.5 million in Light Industrial/Manufacturing.


⁽⁶⁾	Consisting of $90.9 million or 93.8 percent in investment properties and $6.0 million or 6.2 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, 2017:



(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	$	23,761	—%	—%	67%
Interest rate reset or mature between 1 year and 5 years	73,102		—%	—%	89%
Interest rate reset or mature after 5 years	—		—%	—%	—%
Total	$	96,863	—%	—%	83%


⁽¹⁾	As a percentage of each category.

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, 2017			At June 30, 2017
Loans on non-accrual status (excluding restructured loans):
Mortgage loans:
Single-family	$	4,534		$	4,668
Commercial real estate	—			201
Total	4,534			4,869

Accruing loans past due 90 days or more	—			—

Restructured loans on non-accrual status:
Mortgage loans:
Single-family	3,393			3,061
Commercial business loans	64			65
Total	3,457			3,126

Total non-performing loans	7,991			7,995

Real estate owned, net	—			1,615
Total non-performing assets	$	7,991		$	9,610

Non-performing loans as a percentage of loans held for investment, net of allowance for loan losses	0.88		%	0.88		%

Non-performing loans as a percentage of total assets	0.67		%	0.67		%

Non-performing assets as a percentage of total assets	0.67		%	0.80		%

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, 2017:



		Calendar Year of Origination
(In Thousands)		2009 & Prior		2010		2011		2012		2013		2014		2015		2016		YTD 2017		Total
Mortgage loans:
	Single-family	$	7,839	$	—	$	—	$	88	$	—	$	—	$	—	$	—	$	—	$	7,927
Commercial business loans		64		—		—		—		—		—		—		—		—		64
Total		$	7,903	$	—	$	—	$	88	$	—	$	—	$	—	$	—	$	—	$	7,991

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, 2017:



(In Thousands)		Inland Empire		Southern California ⁽¹⁾		Other California ⁽²⁾		Other States		Total
Mortgage loans:
	Single-family	$	2,787	$	3,681	$	1,459	$	—	$	7,927
Commercial business loans		64		—		—		—		64
Total		$	2,851	$	3,681	$	1,459	$	—	$	7,991


⁽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, 2017			At June 30, 2017
(Dollars In Thousands)	Balance		Count	Balance		Count
Special mention loans:
Mortgage loans:
Single-family	$	4,267	10	$	3,443	9
Multi-family	—		—	272		1
Construction	611		1	—		—
Total special mention loans	4,878		11	3,715		10

Substandard loans:
Mortgage loans:
Single-family	7,927		31	7,729		29
Commercial real estate	—		—	201		1
Commercial business loans	64		1	65		1
Total substandard loans	7,991		32	7,995		31

Total classified loans	12,869		43	11,710		41

Real estate owned:
Single-family	—		—	1,615		2
Total real estate owned	—		—	1,615		2

Total classified assets	$	12,869	43	$	13,325	43

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)	2017			2016
Loans originated and purchased for sale:
Retail originations	$	213,301		$	318,970
Wholesale originations and purchases	178,991			328,372
Total loans originated and purchased for sale ⁽¹⁾	392,292			647,342

Loans sold:
Servicing released	(373,463		)	(559,013		)
Servicing retained	(7,588		)	(9,301		)
Total loans sold ⁽²⁾	(381,051		)	(568,314		)

Loans originated for investment:
Mortgage loans:
Single-family	27,336			11,830
Multi-family	12,194			19,041
Commercial real estate	4,492			2,827
Construction	934			1,635
Consumer loans	1			—
Total loans originated for investment ⁽³⁾	44,957			35,333

Loans purchased for investment:
Mortgage loans:
Single-family	—			50
Multi-family	—			22,906
Total loans purchased for investment ⁽³⁾	—			22,956

Mortgage loan principal payments	(43,361		)	(50,542		)
Real estate acquired in settlement of loans	—			(1,298		)
Increase in other items, net ⁽⁴⁾	990			3,380

Net increase in loans held for investment and loans held for sale at fair value	$	13,827		$	88,857


⁽¹⁾	Includes PBM loans originated and purchased for sale during the quarters ended September 30, 2017 and 2016 totaling $392.3 million and $647.3 million, respectively.


⁽²⁾	Includes PBM loans sold during the quarters ended September 30, 2017 and 2016 totaling $381.1 million and $568.3 million, respectively.


⁽³⁾	Includes PBM loans originated and purchased for investment during the quarters ended September 30, 2017 and 2016 totaling $25.4 million and $11.2 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 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 2018 and 2017, the Corporation originated and purchased $437.2 million and $705.6 million of loans, respectively. The total loans sold in the first three months of fiscal 2018 and 2017 were $381.1 million and $568.3 million, respectively. At September 30, 2017, the Corporation had loan origination commitments totaling $96.3 million, undisbursed lines of credit totaling $1.2 million and undisbursed construction loan funds totaling $8.2 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 2018, the net increase in deposits was $495,000, primarily due to the increase in transaction accounts, partly offset by non-renewing 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, 2017, total deposits were $927.0 million. At September 30, 2017, time deposits scheduled to mature in one year or less were $107.5 million and total time deposits with a principal amount of $100,000 or higher were $128.3 million. Historically, the Corporation has been able to retain a significant percentage of its time deposits as they mature.

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, 2017, total cash and cash equivalents were $49.2 million, or four 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, 2017, total borrowings were $121.2 million and the financing availability at FHLB – San Francisco was limited to 35 percent of total assets; the remaining borrowing facility was $289.5 million and the remaining available collateral was $519.3 million. In addition, the Bank has secured a $67.1 million discount window facility at the Federal Reserve Bank of San Francisco, collateralized by investment securities with a fair market value of $71.4 million. As of September 30, 2017, the Bank also has a borrowing arrangement in the form of a federal funds facility with its correspondent bank for $17.0 million that matures on June 30, 2018 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, 2017.

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, 2017 decreased to 18.6 percent from 22.1 percent for the quarter ended June 30, 2017.

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, 2017, Provident Financial Holdings, Inc. and the Bank each exceeded all regulatory capital requirements. The Bank was categorized "well-capitalized" at September 30, 2017 under the regulations of the OCC.

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, 2017
Tier 1 leverage capital (to adjusted average assets)	$	124,651	10.55	%	$	47,272	4.00	%	$	59,090	5.00	%
Common Equity Tier 1 ("CET1") capital (to risk- weighted assets)	$	124,651	17.46	%	$	41,047	5.75	%	$	46,401	6.50	%
Tier 1 capital (to risk-weighted assets)	$	124,651	17.46	%	$	51,755	7.25	%	$	57,109	8.00	%
Total capital (to risk-weighted assets)	$	132,927	18.62	%	$	66,032	9.25	%	$	71,386	10.00	%

As of June 30, 2017
Tier 1 leverage capital (to adjusted assets)	$	127,956	10.77	%	$	47,506	4.00	%	$	59,383	5.00	%
CET1 capital (to risk-weighted assets)	$	127,956	17.57	%	$	41,885	5.75	%	$	47,348	6.50	%
Tier 1 capital (to risk-weighted assets)	$	127,956	17.57	%	$	52,811	7.25	%	$	58,274	8.00	%
Total capital (to risk-weighted assets)	$	136,271	18.71	%	$	67,380	9.25	%	$	72,843	10.00	%

Provident Savings Bank, F.S.B.:

As of September 30, 2017
Tier 1 leverage capital (to adjusted average assets)	$	112,722	9.54	%	$	47,272	4.00	%	$	59,090	5.00	%
CET1 capital (to risk-weighted assets)	$	112,722	15.79	%	$	41,041	5.75	%	$	46,394	6.50	%
Tier 1 capital (to risk-weighted assets)	$	112,722	15.79	%	$	51,747	7.25	%	$	57,100	8.00	%
Total capital (to risk-weighted assets)	$	120,998	16.95	%	$	66,022	9.25	%	$	71,375	10.00	%

As of June 30, 2017
Tier 1 leverage capital (to adjusted assets)	$	117,530	9.90	%	$	47,503	4.00	%	$	59,379	5.00	%
CET1 capital (to risk-weighted assets)	$	117,530	16.14	%	$	41,877	5.75	%	$	47,339	6.50	%
Tier 1 capital (to risk-weighted assets)	$	117,530	16.14	%	$	52,801	7.25	%	$	58,263	8.00	%
Total capital (to risk-weighted assets)	$	125,845	17.28	%	$	67,367	9.25	%	$	72,829	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 requirement began to be phased in on January 1, 2016 at 0.625 percent of risk-weighted assets and will increase each year to an amount equal to 2.5 percent of risk-weighted assets when fully implemented in January 2019. As of September 30, 2017, the conservation buffer was 1.25%.

The ability of the Corporation to pay dividends to stockholders depends primarily on the ability of the Bank to pay dividends to the Corporation. The Bank may not declare or pay a cash dividend if the effect thereof would cause its net worth to be reduced below the regulatory capital requirements imposed by federal regulation. In the first three months of fiscal 2018, the Bank paid a cash dividend of $5.0 million to the Corporation; while the Corporation paid $1.1 million of cash dividends to its shareholders.

Supplemental Information



	At September 30, 2017	At June 30, 2017	At September 30, 2016

Loans serviced for others (in thousands)	$122,585	$119,304	$105,548

Book value per share	$16.42	$16.62	$16.70

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 or have a relatively short-average life. 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 1.25 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, 2017 (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	$	266,418	$	129,801		$	1,318,495	20.21%	+899 bp
+300 bp	$	240,483	$	103,866		$	1,299,436	18.51%	+729 bp
+200 bp	$	210,419	$	73,802		$	1,276,512	16.48%	+526 bp
+100 bp	$	175,536	$	38,919		$	1,249,394	14.05%	+283 bp
0 bp	$	136,617	$	—		$	1,217,881	11.22%	0 bp
-100 bp	$	119,324	$	(17,293	)	$	1,206,746	9.89%	-133 bp


⁽¹⁾	Represents the increase (decrease) of the NPV at the indicated interest rate change in comparison to the NPV at September 30, 2017 (“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).

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, 2017 and June 30, 2017.



	At September 30, 2017	At June 30, 2017
	(-100 bp rate shock)	(-100 bp rate shock)
Pre-Shock NPV Ratio: NPV as a % of PV Assets	11.22%	11.49%
Post-Shock NPV Ratio: NPV as a % of PV Assets	9.89%	10.16%
Sensitivity Measure: Change in NPV Ratio	-133 bp	-133 bp

The pre-shock NPV ratio declined 27 basis points to 11.22 percent at September 30, 2017 from 11.49 percent at June 30, 2017 and the post-shock NPV ratio declined 27 basis points to 9.89 percent at September 30, 2017 from 10.16 percent at June 30, 2017. The decline of the NPV ratios was primarily attributable to a $5.0 million cash dividend distribution from the Bank to the Corporation in September 2017 and the net loss in the first three months of fiscal 2018.

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 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 measures and evaluates the potential effects of interest rate movements through an interest rate sensitivity "gap" analysis. Interest rate sensitivity reflects the potential effect on net interest income when there is movement in interest rates. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows. For transaction accounts (checking, money market and savings deposits) that have no contractual maturity, the table presents principal cash flows and, as applicable, the Corporation's historical experience, management's judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors.

The following table represents the interest rate gap analysis of the Corporation's assets and liabilities as of September 30, 2017:



			Term to Repricing, Migration, or Maturity⁽¹⁾
			As of September 30, 2017
			12 months or less			Greater than 1 year to 3 years			Greater than 3 years to 5 years			Greater than 5 years or non sensitive			Total
			(Dollars In thousands)
Repricing Assets:
	Cash and cash equivalents		$	46,389		$	—		$	—		$	2,828		$	49,217
	Investment securities		21,606			—			—			52,085			73,691
	Loans held for investment		301,795			236,862			289,209			80,194			908,060
	Loans held for sale		127,234			—			—			—			127,234
	FHLB - San Francisco stock		8,108			—			—			—			8,108
	Other assets		—			—			—			27,476			27,476
		Total assets	505,132			236,862			289,209			162,583			1,193,786

Repricing Liabilities and Equity:
	Checking deposits - non-interest bearing		—			—			—			82,415			82,415
	Checking deposits - interest bearing		39,145			78,291			78,291			65,242			260,969
	Savings deposits		57,672			115,343			115,343			—			288,358
	Money market deposits		18,508			18,507			—			—			37,015
	Time deposits		107,467			112,662			30,933			7,197			258,259
	FHLB - San Francisco borrowings		20,004			10,000			41,202			50,000			121,206
	Other liabilities		—			—			—			20,643			20,643
	Stockholders' equity		—			—			—			124,921			124,921
		Total liabilities and stockholders' equity	242,796			334,803			265,769			350,418			1,193,786

Repricing gap positive (negative)			$	262,336		$	(97,941	)	$	23,440		$	(187,835	)	$	—
Cumulative repricing gap:
	Dollar amount		$	262,336		$	164,395		$	187,835		$	—		$	—
	Percent of total assets		22		%	14		%	16		%	—		%	—		%

⁽¹⁾ Cash and cash equivalents are presented as migration; investment securities and loans held for investment are presented as contractual maturities or contractual repricing (without consideration for prepayments); loans held for sale and transaction accounts are presented as migration; FHLB - San Francisco stock is presented as repricing; while time deposits (without consideration for early withdrawals) and FHLB - San Francisco borrowings are presented as contractual maturities.

The static gap analysis shows a positive position in the "12 months or less" category and the "Greater than 3 years to 5 years" category, indicating more assets are sensitive to repricing than liabilities; while the gap analysis shows a negative position in the "Greater than 1 year to 3 years" category and the "Greater than 5 years or non sensitive" category, indicating more liabilities are sensitive to repricing than assets. Non-maturity checking deposits are available for immediate withdrawal and are therefore assumed to be inherently sensitive to changes in interest rates. Management views non-interest bearing deposits to be the least sensitive to changes in market interest rates and these accounts are therefore characterized as long-term funding. Interest-bearing checking deposits are considered more sensitive, followed by increased sensitivity for savings and money market deposits. For the purpose of calculating gap, a portion of these interest-bearing deposit balances are assumed to be subject to repricing or migration as follows: interest-bearing checking deposits at 15% per year, savings deposits at 20% per year and money market deposits at 50% in the first and second years.

The gap results presented above could vary substantially if different assumptions are used or if actual experience differs from the assumptions used in the preparation of the gap analysis. Furthermore, the gap analysis provides a static view of interest rate risk

exposure at a specific point in time without taking into account redirection of cash flows activity, deposit fluctuations, and repricing.

The extent to which the net interest margin will be impacted by changes in prevailing interest rates will depend on a number of factors, including how quickly interest-earning assets and interest-bearing liabilities react to interest rate changes. It is not uncommon for rates on certain assets or liabilities to lag behind changes in the market rates of interest. Additionally, prepayments of loans and early withdrawals of certificates of deposit could cause interest sensitivities to vary. As a result, the relationship between interest-earning assets and interest-bearing liabilities, as shown in the previous table, is only a general indicator of interest rate sensitivity and the effect of changing rates of interest on net interest income is likely to be different from that predicted solely on the basis of the interest rate sensitivity analysis set forth in the previous table.

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, among other items:


•	The Corporation’s current balance sheet and repricing characteristics;


•	Forecasted balance sheet growth consistent with the business plan;


•	Current interest rates and yield curves and management estimates of projected interest rates;


•	Embedded options, interest rate floors, periodic caps and lifetime caps;


•	Repricing characteristics for market rate sensitive instruments;


•	Loan, investment, deposit and borrowing cash flows;


•	Loan prepayment estimates for each type of loan; 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, 2017 and June 30, 2017.



At September 30, 2017		At June 30, 2017
Basis Point (bp) Change in Rates	Change in Net Interest Income	Basis Point (bp) Change in Rates	Change in Net Interest Income
+400 bp	14.72%	+400 bp	16.70%
+300 bp	12.52%	+300 bp	14.23%
+200 bp	10.16%	+200 bp	11.62%
+100 bp	7.34%	+100 bp	8.29%
-100 bp	(3.97)%	-100 bp	(3.68)%

At both September 30, 2017 and June 30, 2017, the Corporation was asset sensitive as its interest-earning assets are expected to reprice more quickly than its interest-bearing liabilities during the subsequent 12-month period. Therefore at September 30, 2017 and June 30, 2017, in a rising interest rate environment, the model forecasts an increase in net interest income over the subsequent 12-month period. In a falling interest rate environment, the model forecasts 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 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, 2017 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, 2017, 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.

Periodically, there have been various claims and lawsuits involving the Corporation, such as claims to enforce liens, condemnation proceedings on properties in which the Corporation holds security interests, claims involving the making and servicing of real property loans, employment matters and other issues in the ordinary course of and incident to the Corporation’s business. The Corporation is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition, operations or cash flows of the Corporation, except as set forth below. Additionally, in some actions, it is difficult to assess potential exposure because the Corporation is still in the early stages of the litigation.

On December 17, 2012, a class and collective action lawsuit, by Gina McKeen-Chaplin, individually and on behalf of eight others similarly situated against the Bank was filed in the United States District Court for the Eastern District of California (the “Court”) claiming damages, restitution and injunctive relief for alleged misclassification of certain employees as exempt rather than non-exempt, resulting in a failure to pay appropriate overtime compensation, to provide meal and rest periods, to pay waiting time penalties and to provide accurate wage statements. The plaintiffs seek unspecified monetary relief.

On August 12, 2015, the Court issued an order denying the plaintiffs' motion for summary judgment and granting the Bank's motion for summary judgment affirming that the plaintiffs were properly classified as exempt employees and denying the federal claims. On August 18, 2015, the plaintiffs filed an appeal to the order. On July 5, 2017, the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) reversed the Court’s ruling granting the Bank's motion for summary judgment, instead ruling the plaintiffs were improperly classified as exempt employees and were entitled to overtime compensation. The Ninth Circuit remanded the case back to the Court with instructions to enter summary judgement in favor of the plaintiffs. On September 7, 2017, the Bank filed a petition for writ of certiorari with the United States Supreme Court. As a result of the Ninth Circuit’s unfavorable ruling, the Corporation recorded an additional litigation accrual of $1.0 million in the Corporation’s Consolidated Statements of Operations for the fiscal year ended June 30, 2017. It is reasonably possible the Management estimate of this litigation accrual could change as more information becomes available during litigation of this matter.

On May 22, 2013, counsel in the McKeen-Chaplin matter filed another class action called Neal versus Provident Savings Bank, F.S.B. in California Superior Court in Alameda County (the "State Court"). The Neal class action is virtually identical to the McKeen-Chaplin class action alleging that mortgage underwriters were misclassified as exempt employees. The plaintiffs in the

Neal case filed a motion for class certification on March 12, 2015. The Bank filed an opposition to the motion and the hearing on the motion was held on July 17, 2015. The State Court denied the motion for class certification. The plaintiffs appealed that ruling. The appeal is fully briefed and the Bank is waiting for the California First District Court of Appeal to schedule oral argument. Presently, the Bank cannot assess the potential exposure in the Neal class action because the Bank is still in the early stages of the litigation and the class certification decision is on appeal. The Bank intends to defend this case vigorously.

On August 6, 2015, a former employee, Christina Cannon, filed a lawsuit called Cannon versus Provident Savings Bank, F.S.B. in the California Superior Court for the County of San Bernardino. Cannon seeks to represent a class of all non-exempt employees in a class action lawsuit brought under California’s Unfair Competition Law, Business & Professions Code section 17200. The underlying claims include unpaid overtime (including off-the-clock work), meal and rest period violations, minimum wage violations, and failure to reimburse business expenses. On September 8, 2017, the attorneys for the plaintiffs in the Cannon Lawsuit sent notification to the Bank and to the California Labor & Workforce Development Agency informing them of their intent to bring a claim under the Private Attorneys’ General Act of 2004 (“PAGA”) on behalf of all non-exempt employees and covering a variety of alleged wage and hour violations. On September 12, 2017, the Bank, the wholly-owned subsidiary of Provident Financial Holdings, Inc., entered into a Memorandum of Understanding with the plaintiffs’ representatives to memorialize an agreement in principle to settle the pending Cannon Lawsuit. The Memorandum of Understanding assumes class certification for purposes of the settlement only and provides for an aggregate settlement payment by the Bank of $2.75 million, which includes all settlement funds, the class representative enhancement award, settlement administrator’s expenses, any employer-side payroll taxes, and class counsel’s attorneys’ fees and costs. The Bank’s decision to settle this matter was the result of the significant legal costs, distraction from day-to-day operating activities and substantial resources that would be required to defend the Bank in protracted litigation. In addition, the Bank determined that the settlement would reduce the Bank’s potential exposure to damages, penalties, fines and plaintiffs’ legal fees in the event of an unfavorable outcome in a court trial. The settlement includes the dismissal of all claims against the Bank and related parties in the Cannon Lawsuit and claim under the PAGA, without any admission of liability or wrongdoing attributed to the Bank. The settlement described in the Memorandum of Understanding remains subject to court approval and other customary conditions. Because of the uncertainty surrounding this litigation, no litigation reserve had been previously established by the Bank resulting in the full $2.75 million settlement expense being recognized in the first quarter of fiscal 2018.

The Corporation is not a party to any other pending legal proceedings that it believes would have a material adverse effect on the financial condition, operations and cash flows of the Corporation.

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, 2017.

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 2018.



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, 2017	1,500	$18.92	1,500	383,700
August 1 – 31, 2017	33,800	$19.11	33,800	349,900
September 1 – 30, 2017	90,700	$19.58	90,700	259,200
Total	126,000	$19.44	126,000	259,200


⁽¹⁾	Represents the remaining shares available for future purchases under the June 2017 stock repurchase plan.

During the quarter ended September 30, 2017, the Corporation purchased 126,000 shares of the Corporation’s common stock at an average cost of $19.44 per share. As of September 30, 2017, a total of 126,000 shares or 33 percent of the shares authorized in

the June 2017 stock repurchase plan have been purchased at an average cost of $19.44 per share, leaving 259,200 shares available for future purchases. During the quarter ended September 30, 2017, 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))

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 10.1 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 10.2 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013)

10.15	Form of Non-Qualified Stock Option Agreement for options granted under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 2013)

10.16	Form of Restricted Stock Agreement for restricted shares awarded under the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 in the Corporation’s Registration Statement on Form S-8 (333-192727) dated December 9, 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, 2017, 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.

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, 2017	/s/ Craig G. Blunden
	Craig G. Blunden
	Chairman and Chief Executive Officer (Principal Executive Officer)



Date: November 7, 2017	/s/ Donavon P. Ternes
	Donavon P. Ternes
	President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer)

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, 2017, 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.

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PROVIDENT FINANCIAL HOLDINGS INC Reports