As used in this report, the terms “we,” “our,” “us,” and “Provident” refer to Provident Financial Holdings, Inc. and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to the “Bank” or “Provident Savings Bank” in this report, we are referring to Provident Savings Bank, F.S.B., a wholly owned subsidiary of Provident Financial Holdings, Inc.

Provident Financial Holdings, Inc. (the “Corporation”), 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 June 30, 2014,2017, the Corporation had consolidated total assets of $1.11$1.20 billion, total deposits of $897.9$926.5 million and stockholders’ equity of $145.9$128.2 million.  The Corporation has not engaged in any significant activity other than holding the stock of the Bank.  Accordingly, the information set forth in this Annual Report on Form 10-K (“Form 10-K”), including the audited consolidated financial statements and related data, relates primarily to the Bank and its subsidiaries.

The Bank, founded in 1956, is a federally chartered stock savings bank headquartered in Riverside, California.  Prior to July 21, 2011, theThe Bank wasis regulated by the Office of Thrift Supervision (“OTS”).  As a result of the enactment on July 21, 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Bank is now regulated by the Office of 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 (“FHLB”) – San Francisco since 1956.

The Bank 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 (“PBM”), a division of the Bank, and through its subsidiary, Provident Financial Corp.  The business activities of the Bank consist of community banking, mortgage banking, investment services and trustee services for real estate transactions.  Financial information regarding the Corporation’s two operating segments, Provident Bank and Provident Bank Mortgage, is contained in Note 17 to the Corporation’s audited consolidated financial statements included in Item 8 of this Form 10-K.

The Bank’s community banking operations primarily consist of accepting deposits from customers within the communities surrounding its full service offices and investing those funds in single-family, multi-family, commercial real estate, construction, commercial business, consumer and other mortgage loans.  The Bank's mortgage banking activities primarily consist of the origination, purchase and sale of single-family mortgage loans (including second mortgages and equity lines of credit).  Through its subsidiary, Provident Financial Corp, the Bank conducts trustee services for the Bank’s real estate transactions and in the past has held real estate for investment.  For additional information, see “Subsidiary Activities” in this Form 10-K.  The activities of Provident Financial Corp are included in the Bank's operating segment results.  The Bank’s revenues are derived principally from interest earned on its loan and investment portfolios, and fees generated through its community banking and mortgage banking activities.

On June 22, 2006, the Bank established the Provident Savings Bank Charitable Foundation (“Foundation”) in order to further its commitment to the local community.  The specific purpose of the Foundation is to promote and provide for the betterment of youth, education, housing and the arts in the Bank’s primary market areas of Riverside and San Bernardino counties.   The Foundation was funded with a $500,000 charitable contribution made by the Bank in the fourth quarter of fiscal 2006.  The Bank has contributed $40,000 annually to the Foundation in fiscal 2014, 20132017, 2016 and 2012.2015.

On July 22, 2014,31, 2017, the Corporation announced that the Corporation’s Board of Directors declared a cash dividend of $0.11$0.14 per share, reflecting a 10an eight percent increase from the $0.10$0.13 per share cash dividend paid on June 11, 2014.9, 2017.  Shareholders of the Corporation’s common stock at the close of business on August 12, 201421, 2017 were entitled to receive the cash dividend, which was paidpayable on September 3, 2014.11, 2017.

The Bank is headquartered in Riverside, California and operates 1413 full-service banking offices in Riverside County and one full-service banking office in San Bernardino County.  Management considers Riverside and Western San Bernardino counties to be the Bank’s primary market for deposits.  Through the operations of PBM, the Bank has expanded its mortgage lending market to include most of Southern California and some of Northern California.  The Bank is the largest independent community bank headquartered in Riverside County and it has the eighth largest deposit market share of all banks and the fourth largest of community banks in Riverside County. PBM operates two wholesale loan production offices located in Pleasanton and Rancho Cucamonga, California and 14nine retail loan production offices located in City of Industry, Elk Grove,Atascadero, Brea, Escondido, Glendora, Livermore, Rancho Cucamonga, Redding, Riverside (3), and Roseville, San Rafael, Santa Barbara and Westlake Village, California.

The large geographic area encompassing Riverside and San Bernardino counties is referred to as the “Inland Empire.”  According to the 2010 Census Bureau population statistics, Riverside and San Bernardino Counties have the fourth and fifth largest populations in California, respectively.  The Bank’s market area consists primarily of suburban and urban communities.  Western Riverside and San Bernardino counties are relatively densely populated and are within the greater Los Angeles metropolitan area.  The unemployment rate in the Inland Empire in June 2014 was 8.4%, compared to 7.4% in California and 6.1% nationwide, accordingAccording to the United States of America (“U.S.”) Department of Labor, Bureau of Labor Statistics, the unemployment rate in the Inland Empire in June 2017 was 5.5%, compared to 4.7% in California and 4.4% nationwide, an improvement compared to the unemployment data reported in June 2013,2016, which was 10.2%6.6% in the Inland Empire, 8.5%5.4% in California and 7.6%4.9% nationwide. However, the current unemployment rate remains elevated when compared to historical data.

In 2017, the Inland Empire economy is estimated to gain 46,600 jobs (3.3%), after adding 47,500 in 2016 (3.5%). The expansion will continue partly because of the area’s traditional advantages for blue collar/technical sectors (available land, modestly priced labor, growing population), as well as continued growth in health care, and a small addition of jobs in higher paying sectors. As these sectors add workers, they should bring dollars to the area that circulate through its population serving sectors causing them to expand as well. In addition, 33.0% of growth is forecasted for lower paying sectors and 67.0% in moderate and better paying jobs. That is generally considered a good mix as 50% - 50% is a more normal distribution. If 2017 performs as forecasted, the share of lower paying jobs for the full 2011 - 2017 period shows the Inland Empire (40.0%) with a smaller share than California as a whole (45.7%). This is largely due to the importance of its blue collar/technical sectors in its job growth mix (Source: Inland Empire Quarterly Economic Reports - April 2017).

In the height of the spring home buying season, California’s housing market were not affected by housing shortages as sales and median home prices bound higher in June 2017. Existing single-family home sales totaled 443,150 in June 2017 on a seasonally adjusted annualized rate, up 3.3% from May 2017 and 2.4% from June 2016. California's median home price in June 2017 was $555,150, up 0.9% from May 2017 and up 7.0% from June 2016. The median number of days on the market fell to 22.4 days in June 2017 from 27.1 days a year ago, the fastest pace since May 2004, when it took 21.9 days to sell a home. At the regional level, the San Francisco Bay Area, Inland Empire, and Los Angeles metro area all registered year-to-year sales increases of 6.1%, 10.4%, and 8.3%, respectively (Source: California homes entering the formal foreclosure process last quarter dropped to the lowest level since late 2005, the resultAssociation of a stronger economy and higher home values, a real estate information service reported. A total of 17,524 Notices of Default ("NoD") were recorded at county recorders offices during April through June 2014, down 8.8 percent from 19,215 in the prior quarter, and down 31.9 percent from 25,747 in the second quarter of 2013. Last quarter's NoD tally was the lowest since fourth quarter 2005, when 15,337 NoDs were recorded. NoD filings peaked in the first quarter of 2009 at 135,431 (Source: DataQuick; DQNews.comRealtors – July 17, 20142017 News Release).

The Bank faces significant competition in its market area in originating real estate loans and attracting deposits.  The population growth in the Inland Empire has attracted numerous financial institutions to the Bank’s market area.  The Bank’s primary competitors are large national and regional commercial banks as well as other community-oriented banks and savings institutions.  The Bank also faces competition from credit unions and a large number of mortgage companies that operate within its market area.  Many of these institutions are significantly larger than the Bank and therefore have greater financial and marketing resources than the Bank.  The Bank’s mortgage banking operations also face competition from mortgage bankers, brokers and other financial institutions.  This competition may limit the Bank’s growth and profitability in the future.

Scheduled contractual principal payments of loans do not reflect the actual life of such assets.  The average life of loans is generally substantially less than their contractual terms because of prepayments.  In addition, due-on-sale clauses generally give the Bank the right to declare loans immediately due and payable in the event, among other things, the borrower sells the real property that secures the loan.  The average life of mortgage loans tends to increase, however, when current market interest rates are substantially higher than the interest rates on existing loans held for investment and, conversely, decrease when the interest rates on existing loans held for investment are substantially higher than current market interest rates, as borrowers are generally less inclined to refinance their loans when market rates increase and more inclined to refinance their loans when market rates decrease.

The Bank’s residential mortgage loans are generally underwritten and documented in accordance with guidelines established by institutional loan buyers, Freddie Mac, Fannie Mae and the Federal Housing Administration (“FHA”) (collectively, “the secondary market”).  All conforming agency loans are generally underwritten and documented in accordance with the guidelines established by these secondary market purchasers, as well as the Department of Housing and Urban Development (“HUD”), FHA and the Veterans’ Administration (“VA”).  Loans are normally classified as either conforming (meeting agency criteria) or non-conforming (meeting an institutional investor’s criteria).  Non-conforming loans are typically those that exceed agency loan limits but closely mirror agency underwriting criteria. The non-conforming loans are underwritten to expanded guidelines allowing a borrower with good credit a broader range of product choices.  Given the recent market environment, PBM has expanded the production of FHA, VA, Freddie Mac and Fannie Mae loans.

In fiscal 2009, theThe Bank implemented tighterhas underwriting standards commensurate with the decline in real estate market conditions.  These standards remain in place today.  The Bank requiresthat require verified documentation of income and assets from borrowers and our underwriting conforms to agency mandated credit score requirements.  Generally, mortgage insurance is required on all loans exceeding 80% loan-to-value based on the lower of purchase price or appraised value.  Loan-to-value (“LTV”) is the ratio calculatedderived by dividing the original loan balance by the lower of the original appraised value or purchase price of the real estate collateral. The maximum allowable loan-to-value is 97% on a purchase transaction for conventional financing with mortgage insurance and 96.5% loan-to-value for FHA financing with mortgage insurance.  Second home purchases and rate and term refinance transactions are capped at 90% loan-to-value with mortgage insurance.  Non-owner occupied purchase and rate and term refinance transactions are capped at 80% loan-to-value while non-owner occupied refinance cash-out transactions are capped at 75% loan-to-value.  We manage our underwriting standards, loan-to-value ratios and credit standards to the currently required agency and investor policies and guidelines.  These standards may change at any time, given changes in real estate market conditions, secondary mortgage market requirements and changes to investor policies and guidelines.

The Bank offers closed-end, fixed-rate home equity loans that are secured by the borrower’s primary residence.  These loans do not exceed 80% of the appraised value of the residence and have terms of up to 15 years requiring monthly payments of principal

The following table summarizes the amortization schedule of the Bank’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 June 30, 2014:2017:

A decline in real estate values subsequent to the time of origination of our 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 Bank’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 other natural disasters particular to California where substantially all of our real estate collateral is located.  If real estate values decline from the levels at the time of loan origination, the value of our real estate collateral securing the loans could be significantly reduced.  The Bank’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.  Additionally, the Bank does not periodically update the LTV ratios on its loans held for investment by obtaining new appraisals or broker price opinions unless a specific loan has demonstrated deterioration or the Bank receives a loan modification request from a borrower.  Therefore, it is reasonable to assume that the LTV ratios disclosed in the following table may (particularly for loans originated prior to 2010) be understated in comparison to the current LTV ratios as a result of the year of origination, the subsequent general decline in real estate values that may have occurred prior to 2012 to the extent not fully recovered and the specific location of the individual properties. The Bank cannot quantify the current LTV ratios on its loans held for investment or quantify the impact of the decline in real estate values to the original LTV ratios on its loans held for investment by loan type, geography, or other subsets.

The following table provides a detailed breakdown of the Bank’s single-family, first trust deed, mortgage loans held for investment by the calendar year of origination and geographic location as of June 30, 2014:2017:

Multi-family mortgage loans originated by the Bank are predominately adjustable rate loans, including 1/1, 3/1, 5/1 and 7/1 hybrids, with a term to maturity of 10 to 30 years and a 25 to 30 year amortization schedule.  Commercial real estate loans originated by the Bank are also predominately adjustable rate loans, including 1/1, 3/1, 5/1 and 5/7/1 hybrids, with a term to maturity of 10 years and a 25 year amortization schedule.  Rates on multi-family and commercial real estate ARM loans generally adjust monthly, quarterly, semi-annually or annually at a specific margin over the respective interest rate index, subject to annual interest rate caps and life-of-loan interest rate caps.  At June 30, 2014, $251.22017, $427.7 million, or 83.4%89.1%, of the Bank’s multi-family loans were secured by five to 36 unit projects.  The Bank’s commercial real estate loan portfolio generally consists of loans secured by small office buildings, light industrial centers, warehouses and small retail centers.  Properties securing multi-family and commercial real estate loans are primarily located in Los Angeles, Orange, Riverside, San Bernardino, and San Diego, San Francisco and Alameda counties.  The Bank originates multi-family and commercial real estate loans in amounts typically ranging from $350,000 to $4.0$6.0 million.  At June 30, 2014,2017, the Bank had 5566 commercial real estate and multi-family loans with principal balances greater than $1.5 million totaling $137.2 million, of which one loan with a balance of $1.5 million, net of charge-offs, was in non-performing status.$158.1 million.  The Bank obtains appraisals on all properties that secure multi-family and commercial real estate loans.  Underwriting of multi-family and commercial real estate loans includes, among other considerations, a thorough analysis of the cash flows generated by the property to support the debt service and the financial resources, experience and the income level of the borrowers and guarantors.

Multi-family and commercial real estate loans afford the Bank an opportunity to price the loans with higher interest rates than those generally available from single-family mortgage loans.  However, loans secured by such properties are generally greater in amount, more difficult to evaluate and monitor and are more susceptible to default as a result of general economic conditions and, therefore, involve a greater degree of risk than single-family residential mortgage loans.  Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation and management of the properties, repayment of such loans may be impacted by adverse conditions in the real estate market or the economy.  At June 30, 2014,During fiscal 2017, the Bank had $3.1 million, net recoveries of charge-offs and collectively evaluated allowances, of$18,000 in non-performing multi-family loans and $2.4 million of non-performing commercial real estate loans.  At June 30, 2014, the Bank had no multi-family or commercial real estate loans, whichas compared to net recoveries of $1.4 million during fiscal 2016. At June 30, 2017, total non-performing multi-family and commercial real estate loans were $201,000, net of allowances and charge-offs, and none were past due 30 to 89 days.  Non-performing loans andand/or delinquent loans may increase asif there is a result of the general decline in Southern California real estate markets and in the event poor general economic conditions.conditions prevail.

The following table summarizes the interest rate reset or maturity schedule of the Bank’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 June 30, 2014:2017:

The following table provides a detailed breakdown of the Bank’s multi-family mortgage loans held for investment by the calendar year of origination and geographic location as of June 30, 2014:2017: 

The composition of the Bank’s construction loan portfolio is as follows:

Short-term construction loans include three types of loans: custom construction, tract construction, and speculative construction. Additionally, from time to time, the Bank makes short-term (18 to 36 month) lot loans to facilitate land acquisition prior to the start of construction. For additional information on lot loans, see “Other mortgage loans”Mortgage Loans” below. The Bank provides construction financing for single-family, multi-family and commercial real estate properties. Custom construction loans are made to individuals

at the completion of construction.

  

The Bank makes tract construction loans to subdivision builders. These subdivisions are usually financed and built in phases. A thorough analysis of market trends and demand within the area are reviewed for feasibility. Generally, significant presales are required prior to commencement of construction. Tract construction may include the building and financing of model homes under a separate loan. The terms for tract construction loans are generally 12 months with interest rates fixed at 2.0%a margin above the prime lending rate. The Bank does not allow interest reserves as part of the loan amount. At June 30, 2014,2017, there were no tract construction loans.

Speculative construction loans are made to home builders and are termed “speculative” because the home builder does not have, at the time of loan origination, a signed sale contract with a home buyer who has a commitment for permanent financing with either the Bank or another lender for the finished home. The home buyer may be identified during or after the construction period. The builder may be required to debt service the speculative construction loan for a significant period of time after the completion of construction until the homebuyer is identified. At June 30, 2014,2017, there was one multi-familywere six single-family speculative construction loanloans of $1.5$5.4 million with no$2.6 million of undisbursed funds.

Construction/permanent loans automatically roll from the construction to the permanent phase. The construction phase of a construction/permanent loan generally lasts nine to 12 months and the interest rate charged is generally fixed at a margin above prime rate and with a loan-to-value ratio of up to 75% of the appraised value of the completed property. At June 30, 2014,2017, there was one single-family custom construction loan of $1.4 million, of which $1.1 million was undisbursed.were no construction/permanent loans.

 

The construction loan documents require that construction loan proceeds be disbursed in increments as construction progresses. Disbursements are based on periodic on-site inspections by independent fee inspectors and Bank personnel. At inception, the Bank also requires borrowers to deposit funds into the loan-in-process account covering the difference between the actual cost of construction and the loan amount. The Bank regularly monitors the construction loan portfolio, economic conditions and housing inventory. The Bank’s property inspectors perform periodic inspections. The Bank believes that the internal monitoring system helps reduce many of the risks inherent in its construction loans.

Construction loans afford the Bank the opportunity to achieve higher interest rates and fees with shorter terms to maturity than its single-family mortgage loans. Construction loans, however, are generally considered to involve a higher degree of risk than single-family mortgage loans because of the inherent difficulty in estimating both a property’s value at completion of the project and the cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, the Bank may be confronted with a project whose value is insufficient to assure full repayment. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry additional risk because the payoff for the loan depends on the builder’s ability to sell the property prior to the time that the construction loan matures. The Bank has sought to address these risks by adhering to strict underwriting policies, disbursement procedures and monitoring practices. In addition, because the Bank’s construction lending is in its primary market area, changes in the local or regional economy and real estate market could adversely affect the Bank’s construction loans held for investment.

approximates the expense the Bank would incur if the Bank were to service the loan.  All properties serving as collateral for loan participations are inspected by an employee of the Bank or a third party inspection service prior to being approved by the Loan Committee and the Bank relies upon the same underwriting criteria required for those loans originated by the Bank.  The Bank purchased $61.7 million of loans to be held for investment (primarily multi-family loans) in fiscal 2017, compared to $45.9 million of purchased loans to be held for investment (primarily multi-family loans) in fiscal 2016. As of June 30, 2014,2017, total loans serviced by other financial institutions were $12.0$23.3 million, down 21% from $15.1 millionas compared to $807,000 at June 30, 2013.2016.  As of June 30, 2014,2017, all loans serviced by others were performing according to their contractual agreements.payment terms.

The Bank also sells participating interests in loans when it has been determined that it is beneficial to diversify the Bank’s risk.  Participation sales enable the Bank to maintain acceptable loan concentrations and comply with the Bank’s loans to one borrower policy.  Generally, selling a participating interest in a loan increases the yield to the Bank on the portion of the loan that is retained.  TheIn fiscal 2017, the Bank did not sell anysold one construction loan participation interestsinterest of $2.57 million, where $206,000 was disbursed in fiscal 2014 or 2013.2017 and none were sold in fiscal 2016.

Commercial business loans are generally made to customers who are well known to the Bank and are generally secured by accounts receivable, inventory, business equipment and/or other assets.  The Bank’s commercial business loans may be structured as term loans or as lines of credit.  Lines of credit are made at variable rates of interest equal to a negotiated margin above the prime rate and term loans are at a fixed or variable rate.  The Bank may also require personal guarantees from financially capable parties associated with the business based on a review of personal financial statements.  Commercial business term loans are generally made to finance the purchase of assets and have maturities of five years or less.  Commercial lines of credit are typically made for the purpose of providing working capital and are usually approved with a term of one year or less.

Commercial business loans involve greater risk than residential mortgage loans and involve risks that are different from those associated with residential and commercial real estate loans.  Real estate loans are generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral value and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default.  Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets including real estate, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may not be collectible and inventories and equipment may be obsolete or of limited use.  Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is secondary and oftentimes an insufficient source of repayment.  At June 30, 2014,2017, the Bank had $92,000$65,000 of non-performing commercial business loans, net of allowances and charge-offs, down 29%14% from $130,000$76,000 at June 30, 2013.2016.  During fiscal 2014,2017, the Bank had a $75,000 net charge-offs of $9,000recovery on commercial business loans, as compared to no recoveries or charge-offsan $85,000 net recovery during fiscal 2013.2016.

Consumer loans potentially have a greater risk than residential mortgage loans, particularly in the case of loans that are unsecured.  Consumer loan collections are dependent on the borrower’s ongoing financial stability, and thus are more likely to be adversely affected by job loss, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.  The Bank had no consumer loans accounted forat June 30, 2017 as compared to one consumer loan on a non-performing basis that was fully reserved at June 30, 2014 or 2013.2016. During fiscal 2017, the Bank had $10,000 of net recoveries on consumer loans, as compared to net charge-offs of $1,000 during fiscal 2016.

PBM’s retail loan production operations utilize loan officers, underwriters and processors.  PBM’s loan officers generate retail loan originations primarily through referrals from realtors, builders, employees and customers.  As of June 30, 2014,2017, PBM operated 14nine stand-alone retail loan production offices in City of Industry, Elk Grove,Atascadero, Brea, Escondido, Glendora, Livermore, Rancho Cucamonga, Redding, Riverside (3), and Roseville, San Rafael, Santa Barbara and Westlake Village, California.  Generally, the cost of retail operations exceeds the cost of wholesale operations as a result of the additional employees needed for retail operations.  The revenue per mortgage for retail originations is, however, generally higher since the origination fees are retained by the Bank instead of the wholesale loan broker.  Retail loans originated and purchased for sale in fiscal 2014, 20132017, 2016 and 20122015 were $983.5$997.1 million, $1.70$1.02 billion and $1.01$1.18 billion, respectively.

The Bank requires evidence of marketable title, lien position, loan-to-value, title insurance and appraisals on all properties.  The Bank also requires evidence of fire and casualty insurance on the value of improvements.  As stipulated by federal regulations, the Bank requires flood insurance to protect the property securing its interest if such property is located in a designated flood area.

are intended for eventual sale into the secondary market.  As such, these loans must meet the origination and underwriting criteria established by secondary market investors.  The Bank sells a large percentage of the mortgage loans that it originates as whole loans to investors.  The Bank also sells conforming whole loans to Fannie Mae and Freddie Mac. For additional information, see “Derivative Activities” below.on the following page.

The following table shows the Bank’s loan originations, purchases, sales and principal repayments during the periods indicated:

Mortgage loans sold to investors generally are sold without recourse other than standard representations and warranties.  Generally, mortgage loans sold to Fannie Mae and Freddie Mac are sold on a non-recourse basis and foreclosure losses are generally the responsibility of the purchaser and not the Bank, except in the case of FHA and VA loans used to form Government National Mortgage Association pools, which are subject to limitations on the FHA’s and VA’s loan guarantees.

Loans previously sold by the Bank to the FHLB – San Francisco under its Mortgage Partnership Finance (“MPF”) program have a recourse provision.  The FHLB – San Francisco absorbs the first four basis points of loss, and a credit scoring process is used to calculate the credit enhancement or recourse amount to the Bank once the first four basis points is exhausted.  All losses above this calculated recourse amount are the responsibility of the FHLB – San Francisco in addition to the first four basis points of loss.  The FHLB – San Francisco pays the Bank a credit enhancement fee on a monthly basis to compensate the Bank for accepting the recourse obligation.  The MPF program was discontinued by the FHLB - San Francisco on October 6, 2006.  As of June 30, 20142017 and 2013,2016, the Bank serviced $38.6$15.1 million and $52.1$20.4 million, respectively, of loans under this program and has established a recourse liability of $274,000$105,000 and $746,000,$242,000, respectively.  In fiscal 2014, 20132017, 2016 and 2012,2015, a net recourse(recovery) loss of $139,000, $194,000$0, $(15,000) and $439,000,$32,000, respectively, was recognizedrealized under this program.

Occasionally, the Bank is required to repurchase loans sold to Fannie Mae, Freddie Mac or other 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 30 days past due within 120 days of the loan funding date.  During fiscal 2014, 20132017, 2016 and 2012,2015, the Bank repurchased $437,000, $1.4$1.7 million, $1.7 million and $1.6 million of single-family mortgage loans, respectively.  However, additional repurchase requests were settled for an aggregate of $666,000, $5.6 million$11,000, $470,000 and $439,000$22,000 in fiscal 2014, 20132017, 2016 and 2012,2015, respectively, that did not result in the repurchase of the loan itself. The repurchase settlement inIn fiscal 2013 was due primarily to2016, the Bank entered into a global settlement with one of the Bank’s largest legacy loan investor,investors, which eliminated all past, current and future repurchase claims from this particular investor.investor, in exchange for a one-time $400,000 payment.

Under mandatory loan sale commitments, usually with Fannie Mae, Freddie Mac or other investors, the Bank is obligated to sell certain dollar amounts of mortgage loans that meet specific underwriting and legal criteria before the expiration of the commitment period.  These terms include the maturity of the individual loans, the yield to the purchaser, the servicing spread to the Bank (if servicing is retained) and the maximum principal amount of the individual loans.  The mandatory loan sale commitments protect loan sale prices from interest rate fluctuations that may occur from the time the interest rate of the loan is established to the time of its sale.  The amount of and delivery date of the loan sale commitments are based upon management’s estimates as to the volume of loans that will close and the length of the origination commitments.  The mandatory loan sale commitments do not provide complete interest-rate protection, however, because of the possibility of loans which may not fund during the origination process.  Differences between the estimated volume and timing of loan originations and the actual volume and timing of loan originations can expose the Bank to significant losses.  If the Bank is not ableunable to deliver the mortgage loans during the appropriate delivery period, the Bank may be required to pay a non-delivery fee or repurchase the commitments at current market prices.  Similarly, if the Bank has too many loans to deliver, the Bank must execute additional loan sale commitments at current market prices, which may be unfavorable to the Bank.  Generally, the Bank seeks to maintain loan sale commitments equal to the funded loans held for sale at fair value, plus those applications that the Bank has rate locked and/or committed to close, adjusted

The activities described above are managed continually as markets change; however, there can be no assurance that the Bank will be successful in its effort to eliminate the risk of interest rate fluctuations between the time origination commitments are issued and the ultimate sale of the loan.  The Bank completes a daily analysis, which reports the Bank’s interest rate risk position with respect to its loan origination and sale activities.  The Bank’s interest rate risk management activities are conducted in accordance with a written policy that has been approved by the Bank’s Board of Directors which covers objectives, functions, instruments to

be used, monitoring and internal controls.  The Bank does not enter into option positions for trading or speculative purposes and does not enter into option contracts that could generate a financial obligation beyond the initial premium paid.  The Bank does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings.

At June 30, 2014 and 2013,2017, the Bank had call and put option contracts outstanding with a notional value of $10.0$2.0 million and $5.0 million, respectively.  This compares to put option contracts outstanding with a notional value of $5.0 million and no call option contracts outstanding at both dates.June 30, 2016. At June 30, 20142017 and 2013,2016, the Bank had outstanding mandatory loan sale commitments of $35.0$21.8 million and $48.9$4.7 million, respectively; outstanding TBA MBS trades of $223.0$158.0 million and $362.0$298.0 million, respectively; outstanding best-efforts loan sale commitments of $18.1$17.2 million and $29.8$29.6 million, respectively; and commitments to originate loans to be held for sale of $132.6$92.7 million and $255.6$181.8 million, respectively. For additional information, see Note 15 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.  Additionally, as of June 30, 20142017 and 2013,2016, the Bank’s loans held for sale at fair value were $158.9$116.5 million and $188.1$189.5 million, respectively, which were also covered by the loan sale commitments described above.  For fiscal 20142017 and 2013, respectively,2016, the Bank had a net gainloss of $2.5$3.4 million and a net loss $(8.0) million,gain of $742,000, respectively, attributable to the underlying derivative financial instruments used to mitigate the interest rate risk of its mortgage banking activities and the fair-value adjustment on loans held for sale.

The Bank receives fees from a variety of investors in return for performing the traditional services of collecting individual loan payments on loans sold by the Bank to such investors.  At June 30, 2014,2017, the Bank was servicing $82.7$119.3 million of loans for others, a declinean increase from $92.2$105.5 million at June 30, 2013.2016.  The decreaseincrease was primarily attributable to loans sold with servicing retained during fiscal 2017, partly offset by loan prepayments.  Loan servicing includes processing payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such as private mortgage insurance. After the Bank receives the gross mortgage payment from individual borrowers, it remits to the investor a predetermined net amount based on the loan sale agreement for that mortgage.

Servicing assets are amortized in proportion to and over the period of the estimated net servicing income and are carried at the lower of cost or fair value.  The fair value of servicing assets is determined by calculating the present value of the estimated net future cash flows consistent with contractually specified servicing fees.  The Bank periodically evaluates servicing assets for impairment, which is measured as the excess of cost over fair value.  This review is performed on a disaggregated basis, based on loan type and interest rate.  Generally, loan servicing becomes more valuable when interest rates rise (as prepayments typically decrease) and less valuable when interest rates decline (as prepayments typically increase).  In estimating fair values at June 30, 20142017 and 2013,2016, the Bank used a weighted average Constant Prepayment Rate (“CPR”) of 38.24%17.02% and 24.90%19.68%, respectively, and a weighted-average discount rate of 9.14%9.11% and 9.11%9.07%, respectively.  The required impairment reserve against servicing assets at June 30, 20142017 and 20132016 was $259,000$158,000 and $200,000,$168,000, respectively.  In aggregate, servicing assets had a carrying value of $295,000$739,000 and a fair value of $357,000$811,000 at June 30, 2014,2017, compared to a carrying value of $334,000$627,000 and a fair value of $395,000$627,000 at June 30, 2013.2016.

Rights to future income from serviced loans that exceed contractually specified servicing fees are recorded as interest-only strips.  Interest-only strips are carried at fair value, utilizing the same assumptions used to calculate the value of the underlying servicing assets, with any unrealized gain or loss, net of tax, recorded as a component of accumulated other comprehensive income (loss).  Interest-only strips had a fair value of $62,000,$31,000, gross unrealized gains of $61,000$31,000 and anno amortized cost of $1,000 at June 30, 2014,2017, compared to a fair value of $98,000,$47,000, gross unrealized gains of $96,000$47,000 and anno amortized cost of $2,000 at June 30, 2013.2016.